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

Management’s discussion and analysis should be read in conjunction with the Company’s audited Consolidated Financial Statements, including the Notes thereto, in Item 8 of this Annual Report.

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

When the Company uses in this Annual Report the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe” and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Annual Report. Should one or more of these risks or uncertainties materialize, or

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should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. See also the discussion of risk factors in Item 1A, “Risk Factors.”

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

INTRODUCTION

Central Valley Community Bancorp (NASDAQ: CVCY) (the Company) was incorporated on February 7, 2000. The formation of the holding company offered the Company more flexibility in meeting the long-term needs of customers, shareholders, and the communities it serves. The Company currently has one bank subsidiary, Central Valley Community Bank (the Bank) and one business trust subsidiary, Service 1st Capital Trust 1. The Company’s market area includes the central valley area from Sacramento, California to Bakersfield, California.

During 2020, we focused on managing the COVID-19 affects on businesses, customers and employees. We also focused on assuring that competitive products and services were made available to our clients while adjusting to the many new laws and regulations that affect the banking industry.

As of December 31, 2020, the Bank operated 20 full-service offices. Additionally, the Bank maintains a Commercial Real Estate Division, an Agribusiness Center and a SBA Lending Division. The Real Estate Division processes or assists in processing the majority of the Bank’s real estate related transactions, including interim construction loans for single family residences and commercial buildings. We offer permanent single family residential loans through our mortgage broker services.

ECONOMIC CONDITIONS

For the years leading up to 2020, the economy, as evidenced by the California, Central Valley, and Greater Sacrament Region unemployment rates, and housing prices, were showing moderate and steady improvement.

During 2020, the outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in California, including our primary market area. As a result, the demand for our products and services has been and may continue to be significantly impacted. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience an adverse effect on its business, financial condition and results of operations.

Agriculture and agricultural-related businesses remain a critical part of the Central Valley’s economy. The Valley’s agricultural production is widely diversified, producing nuts, vegetables, fruit, cattle, dairy products, and cotton. The continued future success of agriculture related businesses is highly dependent on the availability of water and is subject to fluctuation in worldwide commodity prices, currency exchanges, and demand. From time to time, California experiences severe droughts or adverse weather issues, which could significantly harm the business of our customers and the credit quality of the loans to those customers. We closely monitor the water resources and the related issues affecting our customers, and will remain vigilant for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate any losses.

OVERVIEW

Diluted earnings per share (EPS) for the year ended December 31, 2020 was $1.62 compared to $1.59 and $1.54 for the years ended December 31, 2019 and 2018, respectively. Net income for 2020 was $20,347,000 compared to $21,443,000 and $21,289,000 for the years ended December 31, 2019 and 2018, respectively. The decrease in net income for 2020

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compared to 2019 was primarily due to an increase in provision for credit losses, a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and an increase in non-interest expense, partially offset by an increase in net interest income, an increase in loan placement fees, and a decrease in the provision for income taxes. Total assets at December 31, 2020 were $2,004,096,000 compared to $1,596,755,000 at December 31, 2019.

Return on average equity (“ROE”) for 2020 was 8.85% compared to 9.39% and 10.07% for 2019 and 2018, respectively. Return on average assets (“ROA”) for 2020 was 1.11% compared to 1.36% and 1.35% for 2019 and 2018, respectively. Total equity was $245,021,000 at December 31, 2020 compared to $228,128,000 at December 31, 2019. The increase in shareholders’ equity is the result of an increase in retained earnings from our net income of $20,347,000, the exercise of stock options in the amount of $279,000, the effect of share-based compensation expense of $470,000, stock issued under our employee stock purchase plan of $199,000, and an increase in accumulated other comprehensive income (AOCI) of $12,039,000, partially offset by the payment of common stock cash dividends of $5,530,000 and the repurchase and retirement of common stock of $11,052,000.

Average total loans increased $124,829,000 or 13.41% to $1,055,712,000 in 2020 compared to $930,883,000 in 2019. In 2020, we recorded a provision for credit losses of $3,275,000 compared to a provision of $1,025,000 in 2019 and a provision of $50,000 in 2018. The Company had nonperforming assets consisting of $3,278,000 in nonaccrual loans at December 31, 2020. At December 31, 2019, nonperforming assets totaled $1,693,000. Net loan loss recoveries for 2020 were $510,000 compared to net loan loss charge-offs in the amount of $999,000 for 2019 and net loan loss recoveries of $276,000 for 2018. Refer to “Asset Quality” below for further information.

Dividend Declared

The Company declared a $0.11 per common share cash dividend, payable on February 26, 2021 to shareholders of record on February 12, 2021.

Key Factors in Evaluating Financial Condition and Operating Performance

In evaluating our financial condition and operating performance, we focus on several key factors including:

•Return to our shareholders;

•Return on average assets;

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

•Asset quality;

•Asset growth;

•Capital adequacy;

•Operating efficiency; and

•Liquidity.

Return to Our Shareholders

One measure of our return to our shareholders is the return on average equity (ROE), which is a ratio that measures net income divided by average shareholders’ equity. Our ROE was 8.85% for the year ended 2020 compared to 9.39% and 10.07% for the years ended 2019 and 2018, respectively.

Our net income for the year ended December 31, 2020 decreased $1,096,000 compared to 2019 and increased $154,000 in 2019 compared to 2018. Contributing to the decrease during 2020 compared to 2019 was an increase in provision for credit losses, a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and an increase in non-interest expense, partially offset by an increase in net interest income, an increase in loan placement fees, and a decrease in the provision for income taxes. During 2019, net income compared to 2018 was positively impacted by an increase in net interest income and an increase in net realized gains on sales and calls of investment securities. During 2018 net income was positively impacted by the decrease in tax expense.

Net interest income increased primarily because of increases in loan and fee income, decreases in interest expense, partially offset by decreases in interest income on investments. The impact to interest income from the accretion of the loan marks on acquired loans was an increase of $1,321,000 and $989,000 for the year ended December 31, 2020 and 2019, respectively. For 2020, our net interest margin (NIM) decreased 64 basis points to 3.87% compared to 2019 as a result of yield changes and asset mix changes. The decrease in net interest margin in the period-to-period comparison resulted primarily from the decrease in the effective yield on interest-earning deposits in other banks and Federal Funds sold, the decrease in the effective yield on average investment securities, and the decrease in the yield on the Company’s loan portfolio. The decrease in the loan yield was impacted by the Company’s issuance of low-interest PPP loans. Net interest income during 2020 was positively impacted by from the accretion of the loan marks on acquired loans in the amount of $1,321,000 and $989,000 for the year ended December 31, 2020 and 2019, respectively. In addition, net interest income before the provision for credit losses

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for the year ended December 31, 2020 benefited by approximately $805,000 in nonrecurring income from prepayment penalties and payoff of loans, as compared to $619,000 in nonrecurring income for the year ended December 31, 2019. Excluding these reversals and benefits, net interest income for the year ended December 31, 2020 decreased by $133,000 compared to the year ended December 31, 2019.

Non-interest income increased 3.70% in 2020 compared to 2019 primarily due to an increase in loan placement fees of $1,313,000, an increase of $1,059,000 in other income, partially offset by a $947,000 decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income of $685,000, and a $132,000 decrease in Federal Home Loan Bank dividends. The increase in other income resulted from a $1,167,000 gain related to the collection of tax-exempt life insurance proceeds.

Non-interest expenses increased $1,584,000 or 3.44% to $47,684,000 in 2020 compared to $46,100,000 in 2019. The net increase year over year resulted from increases in salaries and employee benefits of $1,949,000, professional services of $1,093,000, data processing of $489,000, regulatory assessments of $239,000, and operating losses of $40,000, offset by decreases in occupancy and equipment expenses of $813,000, information technology of $220,000, amortization of software of $227,000, internet banking of $166,000, credit card expenses of $114,000, and directors’ expenses of $95,000, in 2020 compared to 2019. The Company recorded an income tax provision of $6,914,000 for the year ended December 31, 2020, compared to $8,509,000 for the year ended December 31, 2019, and $6,620,000 for the year ended December 31, 2018. Basic EPS was $1.62 for 2020 compared to $1.60 and $1.55 for 2019 and 2018, respectively. Diluted EPS was $1.62 for 2020 compared to $1.59 and $1.54 for 2019 and 2018, respectively.

Return on Average Assets

Our ROA is a ratio that measures our performance compared with other banks and bank holding companies. Our ROA for the year ended 2020 was 1.11% compared to 1.36% and 1.35% for the years ended December 31, 2019 and 2018, respectively. The 2020 decrease in ROA is primarily due to the decrease in net income and an increase in average assets. Annualized ROA for our peer group was 1.06% at December 31, 2020. Peer group information from S&P Global Market Intelligence data includes bank holding companies in central California with assets from $1 billion to $3.5 billion.

Development of Revenue Streams

Over the past several years, we have focused on not only our net income, but improving the consistency of our revenue streams in order to create more predictable future earnings and reduce the effect of changes in our operating environment on our net income. Specifically, we have focused on net interest income through a variety of strategies, including increases in average interest earning assets, and minimizing the effects of the recent interest rate changes on our net interest margin by focusing on core deposits and managing our cost of funds. Our net interest margin (fully tax equivalent basis) was 3.87% for the year ended December 31, 2020, compared to 4.51% and 4.44% for the years ended December 31, 2019 and 2018, respectively. The decrease in 2020 net interest margin compared to 2019, resulted from the decrease in the effective yield on interest earning deposits in other banks and Federal Funds sold, the decrease in the effective yield on average investment securities, and the decrease in the yield on the Company’s loan portfolio. The effective tax equivalent yield on total earning assets decreased 72 basis points, while the cost of total interest-bearing liabilities decrease 15 basis points to 0.19% for the year ended December 31, 2020. Our cost of total deposits in 2020 and 2019 was 0.09% and 0.15%, respectively, compared to 0.09% for the same period in 2018. Our net interest income before provision for credit losses increased $651,000 or 1.02% to $64,423,000 for the year ended 2020 compared to $63,772,000 and $62,703,000 for the years ended 2019 and 2018, respectively.

Our non-interest income is generally made up of service charges and fees on deposit accounts, fee income from loan placements, appreciation in cash surrender value of bank-owned life insurance, and net gains from sales and calls of investment securities. Non-interest income in 2020 increased $492,000 or 3.70% to $13,797,000 compared to $13,305,000 in 2019 and $10,324,000 in 2018. The increase resulted primarily from an increase in loan placement fees, and an increase in other income, partially offset by a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and a decrease in FHLB dividends compared to 2019. Further detail on non-interest income is provided below.

Asset Quality

For all banks and bank holding companies, asset quality has a significant impact on the overall financial condition and results of operations. Asset quality is measured in terms of classified and nonperforming loans, and is a key element in estimating the future earnings of a company. Total nonperforming assets were $3,278,000 and $1,693,000 at December 31, 2020 and 2019, respectively. Nonperforming assets totaled 0.30% of gross loans as of December 31, 2020 and 0.18% of gross loans as of December 31, 2019. Nonperforming loans were $3,278,000 and $1,693,000 at December 31, 2020 and 2019, respectively. The Company had no other real estate owned at December 31, 2020, or December 31, 2019. No foreclosed

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assets were recorded at December 31, 2020 or December 31, 2019. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods.

The ratio of nonperforming loans to total loans was 0.30% as of December 31, 2020 and 0.18% as of December 31, 2019. The allowance for credit losses as a percentage of outstanding loan balance was 1.17% as of December 31, 2020 and 0.97% as of December 31, 2019. The ratio of net recoveries (charge-offs) to average loans was 0.05% as of December 31, 2020 and (0.11)% as of December 31, 2019.

Asset Growth

As revenues from both net interest income and non-interest income are a function of asset size, the continued growth in assets has a direct impact in increasing net income and therefore ROE and ROA. The majority of our assets are loans and investment securities, and the majority of our liabilities are deposits, and therefore the ability to generate deposits as a funding source for loans and investments is fundamental to our asset growth. Total assets increased 25.51% during 2020 to $2,004,096,000 as of December 31, 2020 from $1,596,755,000 as of December 31, 2019. Total gross loans increased 16.85% to $1,102,347,000 as of December 31, 2020, compared to $943,380,000 at December 31, 2019. Total investment securities increased 50.08% to $717,726,000 as of December 31, 2020 compared to $478,218,000 as of December 31, 2019. Total deposits increased 29.21% to $1,722,710,000 as of December 31, 2020 compared to $1,333,285,000 as of December 31, 2019. Our loan to deposit ratio at December 31, 2020 was 63.99% compared to 70.76% at December 31, 2019. The loan to deposit ratio of our peers was 80.00% at December 31, 2020. Peer group information from S&P Global Market Intelligence data includes bank holding companies in central California with assets from $1 billion to $3.5 billion.

Capital Adequacy

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

Operating Efficiency

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

Liquidity

Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers’ credit needs, funding of securities purchases, and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors’ Asset/Liability Committee. This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flows for off-balance sheet commitments. Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco. We have available unsecured lines of credit with correspondent banks totaling approximately $110,000,000 and secured borrowing lines of approximately $235,371,000

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with the Federal Home Loan Bank. These funding sources are augmented by collection of principal and interest on loans, the routine maturities and pay downs of securities from our investment securities portfolio, the stability of our core deposits, and the ability to sell investment securities. Primary uses of funds include origination and purchases of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and payment of operating expenses.

We had liquid assets (cash and due from banks, interest-earning deposits in other banks, Federal funds sold, equity securities, and available-for-sale securities) totaling $788,004,000 or 39.32% of total assets at December 31, 2020 and $530,792,000 or 33.24% of total assets as of December 31, 2019.

RESULTS OF OPERATIONS

Net Income

Net income was $20,347,000 in 2020 compared to $21,443,000 and $21,289,000 in 2019 and 2018, respectively. Basic earnings per share was $1.62, $1.60, and $1.55 for 2020, 2019, and 2018, respectively. Diluted earnings per share was $1.62, $1.59, and $1.54 for 2020, 2019, and 2018, respectively. ROE was 8.85% for 2020 compared to 9.39% for 2019 and 10.07% for 2018. ROA for 2020 was 1.11% compared to 1.36% for 2019 and 1.35% for 2018.

The decrease in net income for 2020 compared to 2019 was primarily due to an increase in provision for credit losses, a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and an increase in non-interest expense, partially offset by an increase in net interest income, an increase in loan placement fees, and a decrease in the provision for income taxes. The increase in net income for 2019 compared to 2018 was primarily due to an increase in net interest income and an increase in net realized gains on sales and calls of investment securities, partially offset by an increase in non-interest expense, an increase in the provision for credit losses, and an increase in the provision for income taxes.

Interest Income and Expense

Net interest income is the most significant component of our income from operations. Net interest income (the interest rate spread) is the difference between the gross interest and fees earned on the loan and investment portfolios and the interest paid on deposits and other borrowings. Net interest income depends on the volume of and interest rate earned on interest-earning assets and the volume of and interest rate paid on interest-bearing liabilities.

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

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SCHEDULE OF AVERAGE BALANCES, AVERAGE YIELDS AND RATES

ASSETS

Securities

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing liabilities:

(1)Interest income is calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $523, $344, and $940 in 2020, 2019, and 2018, respectively.

(2)Loan interest income includes loan fees of $2,234 in 2020, $164 in 2019, and $397 in 2018.

(3)Average loans do not include nonaccrual loans.

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

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The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. The change in interest due to both rate and volume has been allocated to the change in rate.

(In thousands) Volume Rate Net Volume Rate Net

Increase (decrease) due to changes in:

Interest income:

Investment securities:

Interest expense:

Deposits:

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

Interest and fee income from loans increased $602,000 or 1.17% in 2020 compared to 2019. Interest and fee income from loans increased $1,528,000 or 3.06% in 2019 compared to 2018. The increase in 2020 is primarily attributable to an increase in average total loans outstanding, offset by a decrease in the yield on loans of 60 basis points. The decrease in the loan yield was impacted by the Company’s issuance of low-interest PPP loans.

Average total loans for 2020 increased $124,829,000 to $1,055,712,000 compared to $930,883,000 for 2019 and $912,128,000 for 2018. The yield on loans for 2020 was 4.94% compared to 5.54% and 5.50% for 2019 and 2018, respectively. The impact to interest income from the accretion of the loan marks on acquired loans was an increase of $1,321,000 and $989,000 for the years ended December 31, 2020 and 2019, respectively.

Interest income from total investments on a non tax-equivalent basis, (total investments include investment securities, Federal funds sold, interest-bearing deposits in other banks, and other securities), decreased $915,000 or 6.15% in 2020 compared to 2019. The yield on average investments decreased 76 basis points to 2.32% for the year ended December 31, 2020 from 3.08% for the year ended December 31, 2019. Average total investments increased $128,662,000 to $623,117,000 in 2020 compared to $494,455,000 in 2019. In 2019, total investment income on a non tax-equivalent basis increased $616,000 or 4.32% compared to 2018.

Our investment portfolio consists primarily of securities issued by U.S. Government sponsored entities and agencies collateralized by mortgage backed obligations and obligations of states and political subdivision securities. However, a significant portion of the investment portfolio is mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs). At December 31, 2020, we held $299,806,000 or 42.22% of the total market value of the investment portfolio in MBS and CMOs with an average yield of 2.15%. We invest in CMOs and MBS as part of our overall strategy to increase our net interest margin. CMOs and MBS by their nature are affected by prepayments which are impacted by changes in interest rates. In a normal declining rate environment, prepayments from MBS and CMOs would be expected to increase and the expected life of the investment would be expected to shorten. Conversely, if interest rates increase, prepayments normally would be expected to decline and the average life of the MBS and CMOs would be expected to extend. Premium amortization and discount accretion of these investments affects our net interest income. Our management monitors the prepayment trends of these investments and adjusts premium amortization and discount accretion based on several factors. These factors include the type of investment, the investment structure, interest rates, interest rates on new mortgage loans, expectation of interest rate changes, current economic conditions, the level of principal remaining on the bond, the bond coupon rate, the bond origination date, and volume of available bonds in market. The calculation of premium amortization and discount accretion is by nature inexact, and represents management’s best estimate of principal pay downs inherent in the total investment portfolio.

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The cumulative net-of-tax effect of the change in market value of the available-for-sale investment portfolio as of December 31, 2020 was an unrealized gain of $14,856,000 and is reflected in the Company’s equity. At December 31, 2020, the effective duration of the investment portfolio was 4.65 years and the market value reflected a pre-tax unrealized gain of $21,091,000. Management reviews market value declines on individual investment securities to determine whether they represent other-than-temporary impairment (OTTI). For the years ended December 31, 2020, 2019, and 2018, no OTTI was recorded. Future deterioration in the market values of our investment securities may require the Company to recognize additional OTTI losses.

A component of the Company’s strategic plan has been to use its investment portfolio to offset, in part, its interest rate risk relating to variable rate loans. Measured at December 31, 2020, an immediate rate increase of 200 basis points would result in an estimated decrease in the market value of the investment portfolio by approximately $72,000,000. Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio would be $66,000,000. The modeling environment assumes management would take no action during an immediate shock of 200 basis points. However, the Company uses those increments to measure its interest rate risk in accordance with regulatory requirements and to measure the possible future risk in the investment portfolio. For further discussion of the Company’s market risk, refer to Quantitative and Qualitative Disclosures about Market Risk.

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

Total interest income in 2020 decreased $313,000 to $66,018,000 compared to $66,331,000 in 2019 and $64,187,000 in 2018, respectively. The decrease in 2020 was the result of yield changes, decrease in interest rates, and asset mix changes. The tax-equivalent yield on interest earning assets decreased to 3.97% for the year ended December 31, 2020 from 4.69% for the year ended December 31, 2019. Average interest earning assets increased to $1,676,567,000 for the year ended December 31, 2020 compared to $1,423,015,000 for the year ended December 31, 2019. Average interest-earning deposits in other banks increased $59,031,000 in 2020 compared to 2019. Average yield on these deposits was 0.32% compared to 2.10% on December 31, 2020 and December 31, 2019 respectively. Average investments and interest-earning deposits increased $128,662,000 but the tax equivalent yield on those assets decreased 76 basis points. Average total loans increased $124,829,000 and the yield on average loans decreased 60 basis points.

The increase in total interest income for 2019 was the result of yield changes and asset mix changes. The tax-equivalent yield on interest-earning assets increased to 4.69% for the year ended December 31, 2019 from 4.54% for the year ended December 31, 2018. Average interest-earning assets decrease to $1,423,015,000 for the year ended December 31, 2019 compared to $1,435,025,000 for the year ended December 31, 2018. Average total loans increased and the yield on average loans increased four basis points.

Interest expense on deposits in 2020 decreased $463,000 or 24.01% to $1,465,000 compared to $1,928,000 in 2019 and increased $312,000 as compared to 2018. The yield on interest-bearing deposits decreased 8 basis points to 0.18% in 2020 from 0.26% in 2019. The yield on interest-bearing deposits increased 11 basis points to 0.26% in 2019 from 0.15% in 2018. Average interest-bearing deposits were $823,955,000 for 2020 compared to $738,432,000 and $780,449,000 for 2019 and 2018, respectively.

Average other borrowings were $5,155,000 with an effective rate of 2.52% for 2020 compared to $21,943,000 with an effective rate of 2.88% for 2019. In 2018, the average other borrowings were $12,180,000 with an effective rate of 2.72%. Included in other borrowings are the junior subordinated deferrable interest debentures acquired from Service 1st, advances on lines of credit, advances from the Federal Home Loan Bank (FHLB), and overnight borrowings. The debentures carry a floating rate based on the three month LIBOR plus a margin of 1.60%. The rate was 1.84% for 2020, 3.59% for 2019, and 4.04% for 2018.

The cost of all interest-bearing liabilities was 0.19% and 0.34% basis points for 2020 and 2019, respectively, compared to 0.19% for 2018. The cost of total deposits decreased to 0.09% for the year ended December 31, 2020, compared to 0.15% and 0.09% for the years ended December 31, 2019 and 2018, respectively. Average demand deposits increased 33.53% to $744,239,000 in 2020 compared to $557,348,000 for 2019 and $553,305,000 for 2018. The ratio of average non-interest demand deposits to average total deposits increased to 47.46% for 2020 compared to 43.01% and 41.48% for 2019 and 2018, respectively.

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Net Interest Income before Provision for Credit Losses

Net interest income before provision for credit losses for 2020 increased $651,000 or 1.02% to $64,423,000 compared to $63,772,000 for 2019 and $62,703,000 for 2018. The increase in 2020 was a result of yield changes, asset mix changes, and an increase in average earning assets, offset by an increase in average interest bearing liabilities. Our net interest margin (NIM) decreased 64 basis points. Yield on interest earning assets decreased 72 basis points. The decrease in net interest margin in the period-to-period comparison resulted primarily from the decrease in the effective yield on interest earning deposits in other banks and Federal Funds sold, the decrease in the effective yield on average investment securities, and the decrease in the yield on the Company’s loan portfolio. Net interest income before provision for credit losses increased $1,069,000 in 2019 compared to 2018, primarily due to the increase in average earning assets, asset mix changes, and a decrease in average interest bearing liabilities. Average interest-earning assets were $1,676,567,000 for the year ended December 31, 2020 with a NIM of 3.87% compared to $1,423,015,000 with a NIM of 4.51% in 2019, and $1,435,025,000 with a NIM of 4.44% in 2018. For a discussion of the repricing of our assets and liabilities, refer to Quantitative and Qualitative Disclosure about Market Risk.

Provision for Credit Losses

Credit risk is inherent in the business of making loans. The Company establishes an allowance for credit losses on loans through charges to earnings, which are presented in the statements of income as the provision for credit losses on loans. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance.

The provision for credit losses on loans is determined by conducting a quarterly evaluation of the adequacy of the Company’s allowance for credit losses on loans and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to the Company’s earnings. The provision for credit losses on loans and level of allowance for each period are dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in the Company’s market area.

The establishment of an adequate credit allowance is based on an allowance model that utilizes qualitative and quantitative factors, historical losses, loan level risk ratings and portfolio management tools. The Board of Directors has established initial responsibility for the accuracy of credit risk ratings with the individual credit officer and oversight from Credit Administration who ensures the accuracy of the risk ratings. Quarterly, the credit officers must certify the current risk ratings of the loans in their portfolio. Credit Administration reviews the certifications and reports to the Board of Directors Audit Committee. At least annually the loan portfolio, including risk ratings, is reviewed by a third party credit reviewer. Regulatory agencies also review the loan portfolio on a periodic basis. See “Allowance for Credit Losses” for more information on the Company’s Allowance for Loan Loss.

During the year ended December 31, 2020, the Company recorded a provision for credit losses of $3,275,000 compared to a provision of $1,025,000 and $50,000 for the same periods in 2019 and 2018, respectively. The recorded provisions to the allowance for credit losses are primarily the result of our assessment of the overall adequacy of the allowance for credit losses considering a number of factors as discussed in the “Allowance for Credit Losses” section.

During the years ended December 31, 2020, 2019 and 2018 the Company had net charge-offs (recoveries) totaling $(510,000), $999,000, and $(276,000), respectively. The net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans, was (0.05)%, 0.11% and (0.03)% for 2020, 2019, and 2018, respectively.

Economic pressures may negatively impact the financial condition of borrowers to whom the Company has extended credit and as a result when negative economic conditions are anticipated, we may be required to make significant provisions to the allowance for credit losses. The Bank conducts banking operation principally in California’s Central Valley. The Central Valley is largely dependent on agriculture. The agricultural economy in the Central Valley is therefore important to our business, financial performance and results of operations. We are also dependent in a large part upon the business activity, population growth, income levels and real estate activity in this market area. A downturn in agriculture and the agricultural related businesses could have a material adverse effect our business, results of operations and financial condition. The agricultural industry has been affected by declines in prices and the changes in yields on various crops and other agricultural commodities. Similarly, weaker prices could reduce the cash flows generated by farms and the value of agricultural land in our local markets and thereby increase the risk of default by our borrowers or reduce the foreclosure value of agricultural land and equipment that serve as collateral of our loans. Further declines in commodity prices or collateral values may increase the incidence of default by our borrowers. Moreover, weaker prices might threaten farming operations in the Central Valley, reducing market demand for agricultural lending. In particular, farm income has seen recent declines, and in line with the downturn in farm income, farmland prices are coming under pressure.

We have been and will continue to be proactive in looking for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate losses. As of December 31, 2020, there were $36.1 million in classified loans of which $1.2 million related to agricultural real estate, $10.4 million to commercial and industrial loans, $7.3 million to real estate owner occupied, $3.3 million to agricultural production, $3.2 million to real estate

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construction, and $9.6 million to commercial real estate. This compares to $33.8 million in classified loans as of December 31, 2019 of which $7.3 million related to agricultural real estate, $1.6 million to real estate construction, $13.2 million to commercial and industrial, $4.3 million to agricultural production, $1.1 million to commercial real estate, and $4.7 million to real estate owner occupied.

As of December 31, 2020, we believe, based on all current and available information, the allowance for credit losses is adequate to absorb probable incurred losses within the loan portfolio; however, no assurance can be given that we may not sustain charge-offs which are in excess of the allowance in any given period. Refer to “Allowance for Credit Losses” below for further information.

Net Interest Income after Provision for Credit Losses

Net interest income, after the provision for credit losses was $61,148,000 for 2020 compared to $62,747,000 and $62,653,000 for 2019 and 2018, respectively.

Non-Interest Income

Non-interest income is comprised of customer service charges, gains on sales and calls of investment securities, income from appreciation in cash surrender value of bank owned life insurance, loan placement fees, Federal Home Loan Bank dividends, and other income. Non-interest income was $13,797,000 in 2020 compared to $13,305,000 and $10,324,000 in 2019 and 2018, respectively. The $492,000 or 3.70% increase in non-interest income in 2020 primarily driven by an increase in loan placement fees, and an increase in other income, partially offset by a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and a decrease in FHLB dividends. The $2,981,000 or 28.87% increase in non-interest income in 2019 resulted primarily from increases in net realized gains on sales and calls of investment securities, loan placement fees, appreciation in cash surrender value of the bank owned life insurance, partially offset by a decrease in service charge income, net gain on the sale of the Company’s credit card portfolio, interchange fees, and Federal Home Loan bank dividends compared to 2018.

Customer service charges decreased $685,000 to $2,071,000 in 2020 compared to $2,756,000 in 2019 and $2,986,000 in 2018. The decreases in 2020 and 2019 resulted from decreases in our NSF fees and lower analysis service charge income.

During the year ended December 31, 2020, we realized net gains on sales and calls of investment securities of $4,252,000, compared to $5,199,000 in 2019 and $1,314,000 in 2018. The net gains in 2020, 2019, and 2018 were the results of partial restructuring of the investment portfolio designed to improve the future performance of the portfolio. See Note 3 to the audited Consolidated Financial Statements for more detail.

Income from the appreciation in cash surrender value of bank owned life insurance (BOLI) totaled $711,000 in 2020 compared to $728,000 and $695,000 in 2019 and 2018, respectively. The Bank’s salary continuation and deferred compensation plans and the related BOLI are used as retention tools for directors and key executives of the Bank.

Interchange fees totaled $1,347,000 in 2020 compared to $1,446,000 and $1,462,000 in 2019 and 2018, respectively.

We earn loan placement fees from the brokerage of single-family residential mortgage loans provided for the convenience of our customers. Loan placement fees increased $1,313,000 in 2020 to $2,291,000 compared to $978,000 in 2019 and $708,000 in 2018.

The Bank holds stock from the Federal Home Loan Bank in relationship with its borrowing capacity and generally receives quarterly dividends. As of December 31, 2020 and 2019, we held FHLB stock totaling $5,595,000 and $6,062,000, respectively. Dividends in 2020 decreased to $323,000 compared to $455,000 in 2019 and $590,000 in 2018.

Other income increased to $2,802,000 in 2020 compared to $1,743,000 and $2,107,000 in 2019 and 2018, respectively. The increase in other income during the year ended December 31, 2020 resulted from a $1,167,000 gain related to the collection of tax-exempt life insurance proceeds. A net gain of $462,000 on the sale of the Company’s credit card portfolio was recorded during the year ended December 31, 2018.

Non-Interest Expenses

Salaries and employee benefits, occupancy and equipment, regulatory assessments, acquisition and integration-related expenses, data processing expenses, ATM/Debit card expenses, license and maintenance contract expenses, information technology, and professional services (consisting of audit, accounting, consulting and legal fees) are the major categories of non-interest expenses. Non-interest expenses increased $1,584,000 or 3.44% to $47,684,000 in 2020 compared to $46,100,000 in 2019, and $45,068,000 in 2018.

Our efficiency ratio, measured as the percentage of non-interest expenses (exclusive of amortization of core deposit intangibles, other real estate owned, and repossessed asset expenses) to net interest income before provision for credit losses plus non-interest income (exclusive of realized gains or losses on sale and calls of investments) was 64.08% for 2020 compared to 62.77% for 2019 and 61.23% for 2018. The increase in the efficiency ratio in 2020 and 2019 was due to the growth in non-interest expense outpacing the growth in non-interest income.

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Salaries and employee benefits increased $1,949,000 or 7.31% to $28,603,000 in 2020 compared to $26,654,000 in 2019 and $26,221,000 in 2018. Full time equivalents were 273 for the year ended December 31, 2020 compared to 281 for the year ended December 31, 2019. The increase in salaries and employee benefits in 2020 compared to 2019 was the result of an increase of $2,426,000 in salaries and benefits (of which $525,000 related to the payment of employee incentive compensation), as well as an increase of $185,000 for directors’ and officers’ expenses related to the change in the discount rate used to calculate the liability for salary continuation, deferred compensation, and split-dollar plans; offset by higher loan origination costs of approximately $913,000 relating to the PPP loans processed during the second quarter of 2020.

For the years ended December 31, 2020, 2019, and 2018, the compensation cost recognized for equity-based compensation was $470,000, $555,000 and $482,000, respectively. As of December 31, 2020, there was $225,000 of total unrecognized compensation cost related to non-vested equity-based compensation arrangements granted under all plans. The cost is expected to be recognized over a weighted average period of 0.85 years. See Notes 1and 14 to the audited Consolidated Financial Statements for more detail. No options to purchase shares of the Company’s common stock were issued during the years ending December 31, 2020 and 2019. Restricted common stock awards of 21,397 and 25,420 shares were awarded in 2020 and 2019, respectively.

Occupancy and equipment expense decreased $813,000 or 14.95% to $4,626,000 in 2020 compared to $5,439,000 in 2019 and $5,972,000 in 2018. The Company made no changes in its depreciation expense methodology. The Company operated 20 full-service offices at December 31,2020 and at December 31, 2019. The Company closed two banking offices, one in Rancho Cordova and one in Fair Oaks, and consolidated both branches into a newly opened banking office in Gold River during the second quarter of 2019.

Regulatory assessments were $490,000 in 2020 compared to $251,000 and $619,000 in 2019 and 2018, respectively. The assessment base for calculating the amount owed is based on the formula of average assets minus average tangible equity. The 2019 lower assessments were the result of the Company receiving its small business bank credit.

Information technology expense decreased $220,000 to $2,391,000 for the year ended December 31, 2020 compared to $2,611,000 and $1,113,000 in 2019 and 2018, respectively. Data processing expenses were $2,046,000 in 2020 compared to $1,557,000 in 2019 and $1,666,000 in 2018. No acquisition and integration expenses related to the Folsom Lake Bank (“FLB”) and Sierra Vista Bank (“SVB”) mergers were recorded in 2020 or 2019, compared to $217,000 in 2018. Professional services increased $1,093,000 in 2020 compared to 2019 due to higher legal expenses and consulting fees.

Amortization of core deposit intangibles was $695,000 for 2020, $695,000 for 2019, and $455,000 for 2018. During 2020, amortization expense related to FLB core deposit intangibles (“CDI”) was $423,000, amortization expense related to SVB CDI was $135,000, and amortization expense related to Visalia Community Bank (“VCB”) CDI was $137,000. During 2019, amortization expense related to FLB CDI was $423,000, amortization expense related to SVB CDI was $135,000, and amortization expense related to VCB CDI was $137,000. During 2018, amortization expense related to FLB CDI was $247,000, amortization expense related to SVB CDI was $72,000, and amortization expense related to VCB CDI was $136,000.

ATM/Debit card expenses decreased $101,000 to $819,000 for the year ended December 31, 2020 compared to $920,000 in 2019 and $739,000 in 2018. Other non-interest expenses decreased $698,000 or 15.91% to $3,688,000 in 2020 compared to $4,386,000 in 2019 and $4,636,000 in 2018.

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The following table describes significant components of other non-interest expense as a percentage of average assets.

Loan related expenses 58 — % 52 — % 77 — %

Provision for Income Taxes

Our effective income tax rate was 25.4% for 2020 compared to 28.4% for 2019 and 23.7% for 2018. The Company reported an income tax provision of $6,914,000, $8,509,000, and $6,620,000 for the years ended December 31, 2020, 2019, and 2018, respectively. With the Tax Cuts and Jobs Act (the “Act”) enacted on December 22, 2017, the Company’s federal income tax rate changed from 35% to 21% effective as of the beginning of 2018. The decrease in the 2018 effective tax rate was the result of the change in the federal rate offset by a sizable decrease in tax-exempt interest. As part of the Act for tax years beginning after December 31, 2017, alternative minimum tax credit carryforwards are refundable and are expected to be fully refunded by 2022. As such, they are not dependent on future taxable income to be realized and have been classified as an other receivable.

Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles leading to timing differences between the Company’s actual tax liability, and the amount accrued for this liability based on book income. These temporary differences comprise the “deferred” portion of the Company’s tax expense or benefit, which is accumulated on the Company’s books as a deferred tax asset or deferred tax liability until such time as they reverse.

Realization of the Company’s deferred tax assets is primarily dependent upon the Company generating sufficient future taxable income to obtain benefit from the reversal of net deductible temporary differences and the utilization of tax credit carryforwards and the net operating loss carryforwards for Federal and California state income tax purposes. The amount of deferred tax assets considered realizable is subject to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax assets will not be realized. The determination of the realization of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax-planning strategies, and assessments of current and future economic and business conditions.

The Company had the net deferred tax assets of $4.74 million and $8.74 million at December 31, 2020 and 2019, respectively. After consideration of the matters in the preceding paragraph, the Company determined that it is more likely than not that the net deferred tax assets at December 31, 2020 and 2019 will be fully realized in future years.

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FINANCIAL CONDITION

Summary of Changes in Consolidated Balance Sheets

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

Fair Value

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

See Note 2 of the Notes to Consolidated Financial Statements for additional information about the level of pricing transparency associated with financial instruments carried at fair value.

Investments

The following table reflects the balances for each category of securities at year end:

Available-for-Sale Securities Amortized Cost at December 31,

Our investment portfolio consists primarily of U.S. Government sponsored entities and agencies collateralized by mortgage backed obligations and obligations of states and political subdivision securities and are classified at the date of acquisition as available-for-sale or held-to-maturity. As of December 31, 2020, investment securities with a fair value of $185,053,000, or 26.06% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes. Our investment policies are established by the Board of Directors and implemented by our Investment/Asset Liability Committee. They are designed primarily to provide and maintain liquidity, to enable us to meet our pledging requirements for public money and borrowing arrangements, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement our lending activities.

Our investment portfolio as a percentage of total assets is generally higher than our peers due primarily to our comparatively low loan-to-deposit ratio. Our loan-to-deposit ratio at December 31, 2020 was 63.99% compared to 70.76% at December 31, 2019. The loan to deposit ratio of our peers was 80.00% at December 31, 2020. Peer group information from S&P Global Market Intelligence data includes bank holding companies in central California with assets from $1 billion to $3.5 billion. The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, increased 48.80% or $247,232,000 to $753,829,000 at December 31, 2020, from $506,597,000 at December 31, 2019. The market value

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of the portfolio reflected an unrealized gain of $21,091,000 at December 31, 2020, compared to an unrealized gain of $3,999,000 at December 31, 2019.

Losses recognized in 2020, 2019, and 2018 were incurred in order to reposition the investment securities portfolio based on the current rate environment. As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using proceeds to purchase securities that fit with the Company’s current risk profile is appropriate and beneficial to the Company.

The Board and management have had periodic discussions about our strategy for risk management in dealing with potential losses should interest rates begin to rise. We have been managing the portfolio with an objective of optimizing risk and return in various interest rate scenarios. We do not attempt to predict future interest rates, but we analyze the cash flows of our investment portfolio in different interest rate scenarios in connection with the rest of our balance sheet to design an investment portfolio that optimizes performance.

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

As of December 31, 2020, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all investment securities with an unrealized loss at December 31, 2020, and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at December 31, 2020 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000. Management also analyzed any securities that may have been downgraded by credit rating agencies.

For those bonds that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds. For those bonds that were obligations of states and political subdivisions with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded that no credit related impairment existed. There were no OTTI losses recorded during the twelve months ended December 31, 2020, 2019, or 2018.

At December 31, 2020, the Company had a total of 31 Private Label Mortgage and Asset Backed Securities (PLMBS) with a remaining principal balance of $82,413,000 and a net unrealized gain of approximately $1,095,000. Seven of these PLMBS with a remaining principal balance of $812,000 had credit ratings below investment grade. The Company continues to monitor these securities for changes in credit ratings or other indications of credit deterioration. No credit related OTTI charges related to PLMBS were recorded during the years ended December 31, 2020 or December 31, 2019.

The amortized cost, maturities and weighted average yield of investment securities at December 31, 2020 are summarized in the following table.

Debt securities(1)

U.S. Government agencies $ — — $ — — $ — — $ 651 4.25 % $ 651 4.25 %

(1)Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties. Expected maturities will also differ from contractual maturities due to unscheduled principal pay downs.

(2)Not computed on a tax equivalent basis.

Loans

Total gross loans increased $158,967,000 or 16.85% to $1,102,347,000 as of December 31, 2020, compared to $943,380,000 as of December 31, 2019.

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The following table sets forth information concerning the composition of our loan portfolio as of December 31, 2020, 2019, 2018, 2017, and 2016.

Commercial:

Real estate:

Consumer:

At December 31, 2020, loans acquired in the FLB, SVB and VCB acquisitions had a balance of $127,186,000, of which $2,529,000 were commercial loans, $110,616,000 were real estate loans, and $14,041,000 were consumer loans, and at December 31, 2019, the acquired loans had a balance of $152,735,000, of which $4,009,000 were commercial loans, $130,656,000 were real estate loans, and $18,070,000 were consumer loans.

At December 31, 2020, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 96.7% of total loans of which 26.9% were commercial and 69.8% were real-estate-related. This level of concentration is consistent with 95.5% at December 31, 2019. Although we believe the loans within this concentration have no more than the normal risk of collectability, a substantial decline in the performance of the economy in general or a decline in real estate values in our primary market areas, in particular, could have an adverse impact on collectability, increase the level of real estate-related nonperforming loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on our business, financial condition, results of operations and cash flows. The Company was not involved in any sub-prime mortgage lending activities during the years ended December 31, 2020 and 2019.

We believe that our commercial real estate loan underwriting policies and practices result in prudent extensions of credit, but recognize that our lending activities result in relatively high reported commercial real estate lending levels. Commercial real estate loans include certain loans which represent low to moderate risk and certain loans with higher risks. Contributing to the commercial and industrial loan growth was the issuance of PPP loans. As of December 31, 2020, gross loans included $192,916,000 in PPP loans which are fully guaranteed by the SBA.

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

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Loan Maturities

The following table presents information concerning loan maturities and sensitivity to changes in interest rates of the indicated categories of our loan portfolio, as well as loans in those categories maturing after one year that have fixed or floating interest rates at December 31, 2020.

Loan Maturities:

Sensitivity to Changes in Interest Rates:

Nonperforming Assets

Nonperforming assets consist of nonperforming loans, other real estate owned (OREO), and repossessed assets. Nonperforming loans are those loans which have (i) been placed on nonaccrual status; (ii) been classified as doubtful under our asset classification system; or (iii) become contractually past due 90 days or more with respect to principal or interest and have not been restructured or otherwise placed on nonaccrual status. A loan is classified as nonaccrual when 1) it is maintained on a cost recovery method because of deterioration in the financial condition of the borrower; 2) payment in full of principal or interest under the original contractual terms is not expected; or 3) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection. We measure all loans placed on nonaccrual status for impairment based on the fair value of the underlying collateral or the net present value of the expected cash flows.

Our consolidated financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on loans. Interest income from nonaccrual loans is recorded only if collection of principal in full is not in doubt and when cash payments, if any, are received.

Loans are placed on nonaccrual status and any accrued but unpaid interest income is reversed and charged against income when the payment of interest or principal is 90 days or more past due. Loans in the nonaccrual category are treated as nonaccrual loans even though we may ultimately recover all or a portion of the interest due. These loans return to accrual status when the loan becomes contractually current, future collectability of amounts due is reasonably assured, and a minimum of six months of satisfactory principal repayment performance has occurred. See Note 4 of the Company’s audited Consolidated Financial Statements in Item 8 of this Annual Report.

At December 31, 2020, total nonperforming assets totaled $3,278,000, or 0.16% of total assets, compared to $1,693,000, or 0.11% of total assets at December 31, 2019. Nonperforming assets totaled 0.30% of gross loans as of December 31, 2020 and 0.18% of gross loans as of December 31, 2019. Total nonperforming assets at December 31, 2020, included nonaccrual loans totaling $3,278,000, no OREO, and no repossessed assets. Nonperforming assets at December 31, 2019 consisted of $1,693,000 in nonaccrual loans, no OREO, and no repossessed assets. At December 31, 2020, we had no loan considered a troubled debt restructuring (“TDR”) included in nonaccrual loans compared to one TDR totaling $322,000 at December 31, 2019. See Note 4 of the Company’s audited Consolidated Financial Statements in Item 8 of this Annual Report concerning our recorded investment in loans for which impairment has been recognized.

A summary of nonaccrual, restructured, and past due loans at December 31, 2020, 2019, 2018, 2017, and 2016 is set forth below. The Company had no loans past due more than 90 days and still accruing interest at December 31, 2020 and 2019. Management is not aware of any potential problem loans, which were current and accruing at December 31, 2020, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms. Management can give no assurance that nonaccrual and other nonperforming loans will not increase in the future.

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Composition of Nonaccrual, Past Due and Restructured Loans

Nonaccrual Loans:

Real estate construction and other land loans 1,556 — 1,439 1,397 —

Agricultural real estate — 321 — — —

Consumer and installment 88 — — — 18

Restructured loans (non-accruing):

Owner occupied — — — — 20

Equity loans and line of credit — 322 50 59 —

Accruing loans past due 90 days or more — — — — —

Accruing loans past due 90 days or more $ — $ — $ — $ — $ —

Related allowance for credit losses on impaired loans $ 631 $ 40 $ 90 $ 36 $ 307

As of December 31, 2020 and 2019, we had impaired loans totaling $11,186,000 and $3,734,000, respectively. We measure our impaired loans by using the fair value of the collateral if the loan is collateral dependent and the present value of the expected future cash flows discounted at the loan’s original contractual interest rate if the loan is not collateral dependent. Impaired loans are identified from internal credit review reports, past due reports, overdraft listings, and third party reports of examination. Borrowers experiencing problems such as operating losses, marginal working capital, inadequate cash flow or business interruptions which jeopardize collection of the loan are also reviewed for possible impairment classification. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For collateral dependent loans secured by real estate, we obtain external appraisals which are updated periodically, but generally no less than annually to determine the fair value of the collateral, and we record an immediate charge-off for the difference between the book value of the loan and the net realizable value, which is generally defined as appraised value less costs to dispose of the collateral. We perform quarterly internal reviews on all criticized and classified loans.

We place loans on nonaccrual status and classify them as impaired when it becomes probable that we will not receive the full amount of interest and principal under the original contractual terms, or when loans are delinquent 90 days or more, unless the loan is both well secured and in the process of collection. Management maintains certain loans that have been

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brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods. Foregone interest on nonaccrual loans totaled $177,000 for the year ended December 31, 2020 of which none was attributable to troubled debt restructurings. Foregone interest on nonaccrual loans totaled $85,000 for the year ended December 31, 2019 of which none was attributable to troubled debt restructurings. Foregone interest on nonaccrual loans totaled $267,000 for the year ended December 31, 2018, of which $4,000 was attributable to troubled debt restructurings.

The following table provides a reconciliation of the change in non-accrual loans for the year ended December 31, 2020.

Non-accrual loans:

Real estate construction and other land loans — 1,769 (213) — — — 1,556

Agricultural real estate 321 — (321) — — — —

Equity loans and lines of credit 66 — (24) — (42) — —

Consumer — 95 (7) — — — 88

Restructured loans (non-accruing):

Equity loans and lines of credit 322 — (322) — — — —

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

Allowance for Credit Losses

We have established a methodology for determining the adequacy of the allowance for credit losses made up of general and specific allocations. The methodology is set forth in a formal policy and takes into consideration the need for an overall allowance for credit losses as well as specific allowances that are tied to individual loans. The allowance for credit losses is an estimate of probable incurred credit losses in the Company’s loan portfolio. The allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired.

For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management including, but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 48 quarters, and qualitative and quantitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses incurred in the portfolio taken as a whole. Management has determined that the most recent 48 quarters was an appropriate look-back period based on several factors including the current global economic uncertainty and various national and local economic indicators, and a time period sufficient to capture enough data due to the size of the portfolio to produce statistically accurate historical loss calculations. We believe this period is an appropriate look-back period.

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

The allowance for credit losses is maintained to cover probable incurred credit losses in the loan portfolio. The responsibility for the review of our assets and the determination of the adequacy lies with management and our Audit/Compliance Committee. They delegate the authority to the Chief Credit Officer (CCO) to determine the loss reserve ratio for each type of asset and to review, at least quarterly, the adequacy of the allowance based on an evaluation of the portfolio, past

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experience, prevailing market conditions, amount of government guarantees, concentration in loan types and other relevant factors.

The allowance for credit losses is an estimate of the probable incurred credit losses in our loan and lease portfolio. The allowance is based on principles of accounting: (1) losses accrued for on loans when they are probable of occurring and can be reasonably estimated and (2) losses accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

Management adheres to an internal review system and loss allowance methodology designed to provide for timely recognition of problem assets and adequate valuation allowances to cover probable incurred losses. The Bank’s asset monitoring process includes the use of asset classifications to segregate the assets, largely loans and real estate, into various risk categories. The Bank uses the various asset classifications as a means of measuring risk and determining the adequacy of valuation allowances by using a nine-grade system to classify assets. In general, all credit facilities exceeding 90 days of delinquency require classification and are placed on nonaccrual.

The following table summarizes the Company’s loan loss experience, as well as provisions and recoveries (charge-offs) to the allowance and certain pertinent ratios for the periods indicated:

Allowance for credit losses:

Deduct loans charged off:

Agricultural production — — — (10) —

Owner occupied — — — (22) —

Add recoveries of loans previously charged off:

Agricultural production — — — 10 1,631

Owner occupied — — 21 49 —

Real estate construction and other land loans — — — — 702

Commercial real estate — — 81 17 283

Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate our losses. Our management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary.

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

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The allocation of the allowance for credit losses is set forth below:

Commercial:

Real estate:

Consumer:

Loans are charged to the allowance for credit losses when the loans are deemed uncollectible. It is the policy of management to make additions to the allowance so that it remains adequate to cover all probable loan charge-offs that exist in the portfolio at that time. We assign qualitative and quantitative factors (Q factors) to each loan category. Q factors include reserves held for the effects of lending policies, experience, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio.

As of December 31, 2020, the allowance for credit losses (ALLL) was $12,915,000, compared to $9,130,000 at December 31, 2019, a net increase of $3,785,000. The net increase in the ALLL reflected the provisioning and net recoveries during the year ended December 31, 2020 which was necessitated by management’s observations and assumptions about the existing credit quality of the loan portfolio. Net recoveries totaled $510,000 while the provision for credit losses was $3,275,000 for the year ended December 31, 2020. The Company’s provision for credit losses during the year ended December 31, 2020 is primarily due to an increase in qualitative factors related to the economic uncertainties caused by the COVID-19 pandemic. The balance of classified loans and loans graded special mention, totaled $36,136,000 and $36,406,000 at December 31, 2020 and $33,838,000 and $28,183,000 at December 31, 2019, respectively. The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was $326,179,000 as of December 31, 2020, compared to $291,182,000 as of December 31, 2019. At December 31, 2020 and 2019, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $250,000. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using appropriate, systematic, and consistently applied processes. While related to credit losses, this allocation is not a part of ALLL and is considered separately as a liability for accounting and regulatory reporting purposes. Risks and uncertainties exist in all lending transactions and our management and Directors’ Loan Committee have established reserve levels based on economic uncertainties and other risks that exist as of each reporting period.

The ALLL as a percentage of total loans was 1.17% at December 31, 2020, and 0.97% at December 31, 2019. Total loans include FLB, SVB and VCB loans that were recorded at fair value in connection with the acquisitions of $127,186,000 at December 31, 2020 and $152,735,000 at December 31, 2019. Excluding these acquired loans from the calculation, the ALLL to total gross loans was 1.32% and 1.15% as of December 31, 2020 and 2019, respectively, and general reserves associated with non-impaired loans to total non-impaired loans was 1.59% and 1.16%, respectively. The loan portfolio acquired in the mergers was booked at fair value with no associated allocation in the ALLL. The size of the fair value discount remains adequate for all non-impaired acquired loans; therefore, there is no associated allocation in the ALLL.

The Company’s loan portfolio balances in 2020 increased from 2019 through organic growth and through participation in the PPP loan program. The PPP loans held in the loan portfolio are backed by the SBA at 100%; thus, no allowance is required. Management believes that the change in the allowance for credit losses to total loans ratios is directionally consistent with the composition of loans and the level of nonperforming and classified loans, and by the general economic conditions

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

Assumptions regarding the collateral value of various under-performing loans may affect the level and allocation of the allowance for credit losses in future periods. The allowance may also be affected by trends in the amount of charge-offs experienced or expected trends within different loan portfolios. However, the total reserve rates on non-impaired loans include qualitative and quantitative factors which are systematically derived and consistently applied to reflect conservatively estimated losses from loss contingencies at the date of the financial statements. Based on the above considerations and given recent changes in historical charge-off rates included in the ALLL modeling and the changes in other factors, management determined that the ALLL was appropriate as of December 31, 2020.

Non-performing loans totaled $3,278,000 as of December 31, 2020, and $1,693,000 as of December 31, 2019. Nonperforming loans as a percentage of total loans were 0.30% at December 31, 2020 compared to 0.18% at December 31, 2019. The Company had no other real estate owned at December 31, 2020, December 31, 2019, and December 31, 2018. No foreclosed assets were recorded at December 31, 2020, December 31, 2019, and December 31, 2018. The allowance for credit losses as a percentage of nonperforming loans was 393.99% and 539.28% as of December 31, 2020 and December 31, 2019, respectively. In addition, management believes that the likelihood of recoveries on previously charged-off loans continues to improve based on the collection efforts of management combined with improvements in the value of real estate which serves as the primary source of collateral for loans. Management believes the allowance at December 31, 2020 is adequate based upon its ongoing analysis of the loan portfolio, historical loss trends and other factors. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period.

Goodwill and Intangible Assets

Business combinations involving the Bank’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Total goodwill at December 31, 2020 was $53,777,000 consisting of $13,466,000, $10,394,000, $6,340,000, $14,643,000 and $8,934,000 representing the excess of the cost of FLB, SVB, VCB, Service 1st Bancorp, and Bank of Madera County, respectively, over the net amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability. A significant decline in net earnings, among other factors, could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed at least annually for impairment.

During March 2020, the COVID-19 pandemic emerged and began impacting the state and local economies in our market due to local shelter-in-place orders and restrictions on businesses which caused many nonessential businesses to close and workers to be temporarily unemployed. Goodwill is assessed for impairment between annual tests if a triggering event occurs or circumstances change that may cause the fair value of a reporting unit to decline below its carrying amount. Management considers the entire Company to be one reporting unit. Management considered the COVID-19 related economic downturn to be such a triggering event and therefore performed qualitative assessments at the end of the first and second quarters of 2020. Based upon this assessment, it was determined that it was more likely than not that the fair value of the Company was more than its carrying value and therefore no quantitative impairment test was required. Given the continued economic impact of the pandemic, management determined it appropriate to perform a quantitative test as of September 30, 2020. Management engaged a third party valuation specialist to assist with the performance of the quantitative goodwill impairment test in the third quarter of 2020. The third party specialist estimated the fair value of the reporting unit by weighting results from various market approaches and the income approach. Significant assumptions inherent in the valuation methodologies for goodwill that were employed included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value as of September 30, 2020. Therefore, there was no impairment of goodwill recorded during the nine months ended September 30, 2020. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material adverse impact on the Company’s operating results.

Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. With the economic risks and uncertainties associated with the COVID-19 pandemic continuing during the fourth quarter of 2020, management assessed qualitative factors including performance trends and noted no factors indicating goodwill impairment as of December 31, 2020.

The intangible assets at December 31, 2020 represent the estimated fair value of the core deposit relationships acquired in the 2017 acquisition of FLB of $1,879,000, the 2016 acquisition of SVB of $508,000 and the 2013 acquisition of VCB of $1,365,000. Core deposit intangibles are being amortized using the straight-line method over an estimated life of five to ten years from the date of acquisition. The carrying value of intangible assets at December 31, 2020 was $1,183,000, net of $2,569,000 in accumulated amortization expense. The carrying value at December 31, 2019 was $1,878,000, net of $1,874,000 in accumulated amortization expense. Management evaluates the remaining useful lives quarterly to determine whether events

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or circumstances warrant a revision to the remaining periods of amortization. Based on the evaluation, no changes to the remaining useful lives was required. Management performed an annual impairment test on core deposit intangibles as of September 30, 2020 and determined no impairment was necessary. In addition, management determined that no events had occurred between the annual evaluation date and December 31, 2020 which would necessitate further analysis. Amortization expense recognized was $695,000 for 2020, $695,000 for 2019 and $455,000 for 2018.

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

Years Ending December 31, Estimated Core Deposit Intangible Amortization

Thereafter —

Deposits and Borrowings

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

Total deposits increased $389,425,000 or 29.21% to $1,722,710,000 as of December 31, 2020, compared to $1,333,285,000 as of December 31, 2019. Interest-bearing deposits increased $159,163,000 or 21.55% to $897,821,000 as of December 31, 2020, compared to $738,658,000 as of December 31, 2019. Non-interest bearing deposits increased $230,262,000 or 38.72% to $824,889,000 as of December 31, 2020, compared to $594,627,000 as of December 31, 2019. The Company’s deposit balances for the year ended December 31, 2020 increased through organic growth and PPP loan proceeds retained in customer deposit accounts. Average non-interest bearing deposits to average total deposits was 47.46% for the year ended December 31, 2020 compared to 43.01% for the same period in 2019. Based on FDIC deposit market share information published as of June 2020, our total market share of deposits in Fresno, Madera, San Joaquin, and Tulare counties was 3.40% in 2020 compared to 3.31% in 2019. Our total market share in the other counties we operate in (El Dorado, Merced, Placer, Sacramento, and Stanislaus), was less than 1.00% in 2020 and 2019.

The composition of the deposits and average interest rates paid at December 31, 2020 and December 31, 2019 is summarized in the table below.

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We have no known foreign deposits. The following table sets forth the average amount of and the average rate paid on certain deposit categories which were in excess of 10% of average total deposits for the years ended December 31, 2020, 2019, and 2018.

(Dollars in thousands) Balance Rate Balance Rate Balance Rate

The following table sets forth the maturity of time certificates of deposit and other time deposits of $100,000 or more at December 31, 2020.

(In thousands)

Three months or less $ 28,113

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

Capital Resources

Capital serves as a source of funds and helps protect depositors and shareholders against potential losses. Historically, the primary sources of capital for the Company have been internally generated capital through retained earnings and the issuance of common and preferred stock.

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

Our shareholders’ equity was $245,021,000 as of December 31, 2020, compared to $228,128,000 as of December 31, 2019. The increase in shareholders’ equity is the result of an increase in retained earnings from our net income of $20,347,000, the exercise of stock options in the amount of $279,000, the effect of share-based compensation expense of $470,000, stock issued under our employee stock purchase plan of $199,000, and an increase in accumulated other comprehensive income (AOCI) of $12,039,000, partially offset by the payment of common stock cash dividends of $5,530,000 and the repurchase and retirement of common stock of $11,052,000.

During 2020, the Bank declared and paid cash dividends to the Company in the amount of $15,622,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $5,530,000 or $0.44 per common share cash dividend to shareholders of record during the year ended December 31, 2020. During the year ended December 31, 2020, the Company repurchased and retired common stock in the amount of $11,052,000.

During 2019, the Bank declared and paid cash dividends to the Company in the amount of $20,100,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $5,805,000 or $0.43 per common share cash dividend to shareholders of record during the year ended December 31, 2019. During the year ended December 31, 2019, the Company repurchased and retired common stock in the amount of $15,619,000.

During 2018 the Bank declared and paid cash dividends to the Company in the amount of $2,850,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $4,270,000 or $0.31 per common share cash dividend to shareholders of record during the year

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ended December 31, 2018. During the year ended December 31, 2018, the Company repurchased and retired common stock in the amount of $894,000.

The following table sets forth certain financial ratios for the years ended December 31, 2020, 2019, and 2018.

Net income:

To average shareholders’ equity 8.85 % 9.39 % 10.07 %

Dividends declared per share to net income per share 26.99 % 26.22 % 20.00 %

Average shareholders’ equity to average assets 12.54 % 14.51 % 13.40 %

Management considers capital requirements as part of its strategic planning process. The strategic plan calls for continuing increases in assets and liabilities, and the capital required may therefore be in excess of retained earnings. The ability to obtain capital is dependent upon the capital markets as well as our performance. Management regularly evaluates sources of capital and the timing required to meet its strategic objectives.

The Board of Governors, the FDIC and other federal banking agencies have issued risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off-balance-sheet items.

The following table presents the Company’s regulatory capital ratios as of December 31, 2020 and December 31, 2019.

(Dollars in thousands) Actual Ratio

The following table presents the Bank’s regulatory capital ratios as of December 31, 2020 and December 31, 2019

December 31, 2020 Amount Ratio Amount Ratio Amount Ratio

The Company succeeded to all of the rights and obligations of the Service 1st Capital Trust I, a Delaware business

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trust, in connection with the acquisition of Service 1st as of November 12, 2008. The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st. Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis. At December 31, 2020, all of the trust preferred securities that have been issued qualify as Tier 1 capital. The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option beginning five years after issuance, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three-month LIBOR plus 1.60%.

The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes). The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities. The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 on or after October 7, 2012 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes (ii) in the event the Trust is deemed an investment company or (iii) upon the occurrence of certain adverse tax events. In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest.

The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods. Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security. For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%. As of December 31, 2020, the rate was 1.84%. Interest expense recognized by the Company for the years ended December 31, 2020, 2019, and 2018 was $130,000, $210,000 and $199,000, respectively.

LIQUIDITY

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

Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco (FHLB). These funding sources are augmented by payments of principal and interest on loans, the routine maturities and pay downs of securities from the securities portfolio, the stability of our core deposits and the ability to sell investment securities. As of December 31, 2020, the Company had unpledged securities totaling $532,673,000 available as a secondary source of liquidity and total cash and cash equivalents of $70,278,000. Cash and cash equivalents at December 31, 2020 increased 33.67% compared to December 31, 2019. Primary uses of funds include withdrawal of and interest payments on deposits, origination and purchases of loans, purchases of investment securities, and payment of operating expenses.

To augment our liquidity, we have established Federal funds lines with various correspondent banks. At December 31, 2020, our available borrowing capacity includes approximately $110,000,000 in Federal funds lines with our correspondent banks and $235,371,000 in unused FHLB advances. At December 31, 2020, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position.

The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at December 31, 2020 and 2019:

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Credit Lines (In thousands) December 31, 2020 December 31, 2019

Unsecured Credit Lines (interest rate varies with market):

Balance outstanding $ — $ —

Federal Home Loan Bank (interest rate at prevailing interest rate):

Balance outstanding $ — $ —

Federal Reserve Bank (interest rate at prevailing discount interest rate):

Balance outstanding $ — $ —

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

OFF-BALANCE SHEET ITEMS

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

Contractual Obligations

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

Deposits represent both non-interest bearing and interest bearing deposits. Interest bearing deposits include interest bearing transaction accounts, money market and savings deposits and certificates of deposit. Deposits with indeterminate maturities, such as demand, savings and money market accounts are reflected as obligations due in less than one year.

Subordinated notes issued to a capital trust which was formed solely for the purpose of issuing trust preferred securities. These subordinated notes were acquired as a part of the merger with Service 1st. All of these securities are variable rate instruments. The trust preferred securities mature on October 7, 2036, and are redeemable quarterly at the Company’s option. See “Capital Resources.”

In the ordinary course of business, the Company is party to various operating leases. For operating leases, the dollar balances reflected in the table above are categorized by the due date of the lease payments. Operating leases represent the total minimum lease payments under non-cancelable operating leases. see Note 9 - Leases in the financial statements included in this Form 10‐K.

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CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with the accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expense in the financial statements. Various elements of our accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and assumptions. Some of these policies and estimates relate to matters that are highly complex and contain inherent uncertainties. It is possible that, in some instances, different estimates and assumptions could reasonably have been made and used by management, instead of those we applied, which might have produced different results that could have had a material effect on the financial statements.

We have identified the following accounting policies and estimates that, due to the inherent judgments and assumptions and the potential sensitivity of the financial statements to those judgments and assumptions, are critical to an understanding of our financial statements. We believe that the judgments, estimates and assumptions used in the preparation of the Company’s financial statements are appropriate. For a further description of our accounting policies, see Note 1 - Summary of Significant Accounting Policies in the financial statements included in this Form 10‐K.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Allowance for Credit Losses

Our allowance for credit losses is an estimate of probable incurred losses in the loan portfolio. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. Management’s methodology for estimating the allowance balance consists of several key elements, which include specific allowances on individual impaired loans and the formula driven allowances on pools of loans with similar risks. The allowance is only an estimate of the inherent loss in the loan portfolio and may not represent actual losses realized over time, either of losses in excess of the allowance or of losses less than the allowance. Our accounting for estimated loan losses is discussed and disclosed primarily in Note 1 and 4 to the consolidated financial statements under the heading “Allowance for Credit Losses”.

Goodwill

For acquisitions, we are required to record the assets acquired, including identified intangible assets such as goodwill, and the liabilities assumed at their fair value. The carrying value of goodwill recorded must be reviewed for impairment at the reporting unit level, on an annual basis, as well as on an interim basis if events or changes indicate that the asset might be impaired. Management has determined that the Company has one reporting unit. An impairment loss must be recognized for any excess of carrying value over fair value of the goodwill. The determination of fair values is based on valuations using management’s assumptions of future growth rates, future attrition, discount rates, multiples of earnings or other relevant factors. Changes in these factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the carrying value of goodwill and could result in impairment losses affecting our financial statements as a whole and our banking subsidiary in which the goodwill resides. The Company performs its annual evaluation of goodwill impairment in the third quarter of each year and may elect to perform a quantitative impairment analysis or first conduct a qualitative analysis to determine if a quantitative analysis is necessary. Additionally, the Company evaluates goodwill impairment on an interim basis if events or changes in circumstances between annual tests indicate additional testing may be warranted to determine if goodwill might be impaired.

A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate could adversely affect our operations. In the third quarter 2020, the Company engaged a third party valuation specialist to assist with the performance of the quantitative goodwill impairment test in response to continued macroeconomic deterioration and the ongoing impacts to the banking industry and markets in which the Company operates. The third party specialist estimated the fair value of the reporting unit by weighting results from various market approaches and the income approach. Significant assumptions inherent in the valuation methodologies for goodwill that were employed included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value.

As of December 31, 2020, based on our qualitative assessment, it was determined that it was more likely than not that the fair value of the reporting unit exceeded its carrying amount, including goodwill.

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See Note 6 “Goodwill and Intangible Assets” in the financial statements in this Form 10‐K for further discussion.

INFLATION

The impact of inflation on a financial institution differs significantly from that exerted on other industries primarily because the assets and liabilities of financial institutions consist largely of monetary items. However, financial institutions are affected by inflation in part through non-interest expenses, such as salaries and occupancy expenses, and to some extent by changes in interest rates.

At December 31, 2020, we do not believe that inflation will have a material impact on our consolidated financial position or results of operations. However, if inflation concerns cause short term rates to rise in the near future, we may benefit by immediate repricing of a portion of our loan portfolio. Refer to Quantitative and Qualitative Disclosures About Market Risk for further discussion.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk (IRR) and credit risk constitute the two greatest sources of financial exposure for insured financial institutions that operate like we do. IRR represents the impact that changes in absolute and relative levels of market interest rates may have upon our net interest income (NII). Changes in the NII are the result of changes in the net interest spread between interest-earning assets and interest-bearing liabilities (timing risk), the relationship between various rates (basis risk), and changes in the shape of the yield curve.

We realize income principally from the differential or spread between the interest earned on loans, investments, other interest-earning assets and the interest incurred on deposits and borrowings. The volumes and yields on loans, deposits and borrowings are affected by market interest rates. As of December 31, 2020, 74.00% of our loan portfolio was tied to adjustable-rate indices. The majority of our adjustable rate loans are tied to prime and reprice within 90 days. Several of our loans, tied to prime, are at their floors and will not reprice until prime plus the factor is greater than the floor. The majority of our time deposits have a fixed rate of interest. As of December 31, 2020, 86.06% of our time deposits mature within one year or less.

Changes in the market level of interest rates directly and immediately affect our interest spread, and therefore profitability. Sharp and significant changes to market rates can cause the interest spread to shrink or expand significantly in the near term, principally because of the timing differences between the adjustable rate loans and the maturities (and therefore repricing) of the deposits and borrowings.

Our management and Board of Directors’ Asset/Liability Committees (ALCO) are responsible for managing our assets and liabilities in a manner that balances profitability, IRR and various other risks including liquidity. The ALCO operates under policies and within risk limits prescribed, reviewed, and approved by the Board of Directors.

The ALCO seeks to stabilize our NII by matching rate-sensitive assets and liabilities through maintaining the maturity and repricing of these assets and liabilities at appropriate levels given the interest rate environment. When the amount of rate-sensitive liabilities exceeds rate-sensitive assets within specified time periods, NII generally will be negatively impacted by an increasing interest rate environment and positively impacted by a decreasing interest rate environment. Conversely, when the amount of rate-sensitive assets exceeds the amount of rate-sensitive liabilities within specified time periods, net interest income will generally be positively impacted by an increasing interest rate environment and negatively impacted by a decreasing interest rate environment. Our mix of assets consists primarily of loans and securities, none of which are held for trading purposes. The value of these securities is subject to interest rate risk, which we must monitor and manage successfully in order to prevent declines in value of these assets if interest rates rise in the future. The speed and velocity of the repricing of assets and liabilities will also contribute to the effects on our NII, as will the presence or absence of periodic and lifetime interest rate caps and floors.

Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes. Earnings simulations are produced using a software model that is based on actual cash flows and repricing characteristics for all of our financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on current volumes of applicable financial instruments.

Interest rate simulations provide us with an estimate of both the dollar amount and percentage change in NII under various rate scenarios. All assets and liabilities are normally subjected to up to 400 basis point increases and decreases in interest rates in 100 basis point increments. Under each interest rate scenario, we project our net interest income. From these results, we can then develop alternatives in dealing with the tolerance thresholds.

The assets and liabilities of a financial institution are primarily monetary in nature. As such they represent obligations to pay or receive fixed and determinable amounts of money that are not affected by future changes in prices. Generally, the impact of inflation on a financial institution is reflected by fluctuations in interest rates, the ability of customers to repay their obligations and upward pressure on operating expenses. Although inflationary pressures are not considered to be of any particular hindrance in the current economic environment, they may have an impact on the company’s future earnings in the event those pressures become more prevalent.

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As a financial institution, the Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of interest income and interest expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest earning assets and interest bearing liabilities, other than those which possess a short term to maturity. Virtually all of the Company’s interest earning assets and interest bearing liabilities are located at the Bank level. Thus, virtually all of the Company’s interest rate risk exposure lies at the Bank level other than $5.2 million in subordinated notes issued by the Company’s subsidiary, Service 1st Capital Trust I. As a result, all significant interest rate risk procedures are performed at the Bank level.

The fundamental objective of the Company’s management of its assets and liabilities is to maximize the Company’s economic value while maintaining adequate liquidity and an exposure to interest rate risk deemed by management to be acceptable. Management believes an acceptable degree of exposure to interest rate risk results from the management of assets and liabilities through maturities, pricing and mix to attempt to neutralize the potential impact of changes in market interest rates. The Company’s profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest earning assets, such as loans and investments, and its interest expense on interest bearing liabilities, such as deposits and borrowings. The Company is subject to interest rate risk to the degree that its interest earning assets re-price differently than its interest bearing liabilities. The Company manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds.

The Company seeks to control interest rate risk exposure in a manner that will allow for adequate levels of earnings and capital over a range of possible interest rate environments. The Company has adopted formal policies and practices to monitor and manage interest rate risk exposure. Management believes historically it has effectively managed the effect of changes in interest rates on its operating results and believes that it can continue to manage the short-term effects of interest rate changes under various interest rate scenarios.

Management employs asset and liability management software and engages consultants to measure the Company’s exposure to future changes in interest rates. The software measures the expected cash flows and re-pricing of each financial asset/liability separately in measuring the Company’s interest rate sensitivity. Based on the results of the software’s output, management believes the Company’s balance sheet is evenly matched over the short term and slightly asset sensitive over the longer term as of December 31, 2020. This means that the Company would expect (all other things being equal) to experience a limited change in its net interest income if rates rise or fall. The level of potential or expected change indicated by the tables below is considered acceptable by management and is compliant with the Company’s ALCO policies. Management will continue to perform this analysis each quarter.

The hypothetical impacts of sudden interest rate movements applied to the Company’s asset and liability balances are modeled quarterly. The results of these models indicate how much of the Company’s net interest income is “at risk” from various rate changes over a one year horizon. This exercise is valuable in identifying risk exposures. Management believes the results for the Company’s December 31, 2020 balances indicate that the net interest income at risk over a one year time horizon for a 100 basis points (“bps”), 200 bps, 300 bps, and 400 bps rate increase and a 100 bps decrease is acceptable to management and within policy guidelines at this time. Given the low interest rate environment, 200 bps, 300 bps, and 400 bps decreases are not considered a realistic possibility and are therefore not modeled.

The results in the table below indicate the change in net interest income the Company would expect to see as of December 31, 2020, if interest rates were to change in the amounts set forth:

Sensitivity Analysis of Impact of Rate Changes on Interest Income

It is important to note that the above table is a summary of several forecasts and actual results may vary from any of the forecasted amounts and such difference may be material and adverse. The forecasts are based on estimates and assumptions made by management, and that may turn out to be different, and may change over time. Factors affecting these estimates and assumptions include, but are not limited to: 1) competitor behavior, 2) economic conditions both locally and nationally, 3) actions taken by the Federal Reserve Board, 4) customer behavior and 5) management’s responses to each of the foregoing. Factors that vary significantly from the assumptions and estimates may have material and adverse effects on the Company’s net interest income; therefore, the results of this analysis should not be relied upon as indicative of actual future results.

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The following table shows management’s estimates of how the loan portfolio is segregated between variable-daily, variable other than daily, and fixed rate loans, and estimates of re-pricing opportunities for the entire loan portfolio at December 31, 2020 and 2019:

Approximately 74.00% of our loan portfolio is tied to adjustable rate indices and 32.79% of our loan portfolio reprices within 90 days. As of December 31, 2020, we had 1,702 commercial and real estate loans totaling $527,265,000 with floors ranging from 3.25% to 6.75% and ceilings ranging from 5.00% to 25.00%.

The following table shows the repricing categories of the Company’s loan portfolio at December 31, 2020 and 2019:

Assumptions are inherently uncertain, and, consequently, the model cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and management strategies which might moderate the negative consequences of interest rate deviations.

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ITEM 8 -FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Shareholders and Board of Directors

Central Valley Community Bancorp and Subsidiary

Fresno, California

Opinions on the Financial Statements and Internal Control over Financial Reporting

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

Basis for Opinions

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

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

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

Critical Audit Matters

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

Allowance for Credit Losses – Qualitative Factors and General Reserve Allocation

As described in Notes 1 – Summary of Significant Accounting Policies and 4 – Loans and Allowance for Credit Losses to the consolidated financial statements, the allowance for credit losses is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. At December 31, 2020, the allowance for credit losses was $12.9 million, which consists of two primary components, $0.6 million of specific reserves related to impaired loans and $12.3 million of general reserves for probable incurred losses related to loans that are not impaired. The determination of the allowance for credit losses involves significant assumptions which require a high degree of judgment relating to the Company’s loan portfolio and the evaluation of the general economic conditions and other qualitative factors, and how those assumptions impact the probable

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incurred losses within the loan portfolio. Changes in these assumptions could have a material effect on the Company’s financial results. The qualitative factors for the general reserve allocation include consideration of economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

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

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

•Evaluation of the completeness and accuracy of data inputs used as a basis for the adjustments relating to qualitative general reserve factors.

•Evaluation of the reasonableness of management’s judgments related to the data and assumptions used in the determination of qualitative factors.

•Analytically evaluating the qualitative factors year over year for directional consistency and testing for reasonableness.

•Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.

•Analytical evaluation of the overall adequacy of the allowance for credit losses, including the qualitative factors.

Goodwill Impairment Evaluation

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

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

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

•Testing the completeness and accuracy of data inputs used in, and the mathematical accuracy of, the valuation analysis.

•Utilization of Crowe LLP employed valuation specialists to assist in the evaluation of the appropriateness of the methodologies and assumptions utilized in management’s valuation, including the reasonableness of significant assumptions, weighting allocation and the reasonableness of the overall fair value.

•Evaluating the sensitivity of the fair value based on various forecasted scenarios.

•Evaluating the knowledge, skill and ability of the Company’s specialist related to the analysis performed.

/s/ Crowe LLP

We have served as the Company’s auditor since 2011.

Sacramento, California

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, 2020 and 2019

(In thousands, except share amounts) 2020 2019

ASSETS

Interest-earning deposits in other banks 36,103 28,379

Bank premises and equipment, net 8,228 7,618

Accrued interest receivable and other assets 29,164 32,148

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits:

Junior subordinated deferrable interest debentures 5,155 5,155

Accrued interest payable and other liabilities 31,210 30,187

Commitments and contingencies (Note 12)

Shareholders’ equity:

Accumulated other comprehensive income, net of tax 14,856 2,817

The accompanying notes are an integral part of these consolidated financial statements.

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2020, 2019, and 2018

Interest income:

Interest on deposits in other banks 246 375 459

Interest and dividends on investment securities:

Interest expense:

Interest on junior subordinated deferrable interest debentures 130 210 199

Non-interest income:

Appreciation in cash surrender value of bank owned life insurance 711 728 695

Net realized gain on sale of credit card portfolio — — 462

Net realized gains on sales and calls of investment securities 4,252 5,199 1,314

Non-interest expenses:

Acquisition and integration expenses — — 217

Amortization of core deposit intangibles 695 695 455

Basic earnings per common share $ 1.62 $ 1.60 $ 1.55

Diluted earnings per common share $ 1.62 $ 1.59 $ 1.54

Cash dividends per common share $ 0.44 $ 0.43 $ 0.31

The accompanying notes are an integral part of these consolidated financial statements.

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, 2020, 2019, and 2018

Other Comprehensive Income (Loss):

Unrealized gains (losses) on securities:

The accompanying notes are an integral part of these consolidated financial statements.

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Years Ended December 31, 2020, 2019, and 2018

Common Stock Retained Earnings

(In thousands, except share amounts) Shares Amount

Other comprehensive loss — — — (7,377) (7,377)

Restricted stock granted net of forfeitures 20,494 — — — —

Cash dividend ($0.31 per common share) — — (4,270) — (4,270)

Stock issued under employee stock purchase plan 11,581 211 — — 211

Stock-based compensation expense — 482 — — 482

Repurchase and retirement of common stock (47,862) (894) — — (894)

Other comprehensive income — — — 7,224 7,224

Stock issued under employee stock purchase plan 12,286 216 — — 216

Restricted stock granted net of forfeitures 16,495 — — — —

Stock-based compensation expense — 555 — — 555

Cash dividend ($0.43 per common share) — — (5,805) — (5,805)

Restricted stock granted, net of forfeitures 13,008 — — — —

Stock issued under employee stock purchase plan 15,764 199 — — 199

Stock-based compensation expense — 470 — — 470

Cash dividend ($0.44 per common share) — — (5,530) — (5,530)

The accompanying notes are an integral part of these consolidated financial statements.

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Cash flows from operating activities:

Net (increase) decrease in deferred loan costs (4,127) (77) 233

Net (gain) loss on sale and disposal of equipment (6) — 2

Net change in equity investments (162) (218) 42

Increase in bank owned life insurance, net of expenses (551) (728) (695)

Net gain on sale of credit card portfolio — — (462)

Net gain on bank owned life insurance (1,167) — —

(Provision) benefit for deferred income taxes (1,051) (589) 403

Cash Flows From Investing Activities:

Proceeds from sale of credit card portfolio — — 2,954

Purchases of premises and equipment (1,492) (876) (791)

Purchases of bank owned life insurance (250) (1,000) —

Proceeds from bank owned life insurance 3,485 — —

Proceeds from sale of premises and equipment 6 — —

Cash Flows From Financing Activities:

Proceeds of borrowings from other financial institutions — 2,870 19,705

Repayments of borrowings from other financial institutions — (2,870) (19,705)

Proceeds from stock issued under employee stock purchase plan 199 216 211

Proceeds from exercise of stock options 279 276 738

Cash dividend payments on common stock (5,530) (5,805) (4,270)

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid during the year for:

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Operating cash flows from operating leases $ 2,240 $ 1,643 $ —

Non-cash investing and financing activities:

Initial recognition of operating lease right-of-use assets $ — $ 10,129 $ —

The accompanying notes are an integral part of these consolidated financial statements.

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Central Valley Community Bancorp and Subsidiary

Notes to Consolidated Financial Statements

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General - Central Valley Community Bancorp (the “Company”) was incorporated on February 7, 2000 and subsequently obtained approval from the Board of Governors of the Federal Reserve System to be a bank holding company in connection with its acquisition of Central Valley Community Bank (the “Bank”). The Company became the sole shareholder of the Bank on November 15, 2000 in a statutory merger, pursuant to which each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company.

Service 1st Capital Trust I (the Trust) is a business trust formed by Service 1st for the sole purpose of issuing trust preferred securities. The Company succeeded to all the rights and obligations of Service 1st in connection with the acquisition of Service 1st. The Trust is a wholly-owned subsidiary of the Company.

The Bank operates 20 full service offices throughout California’s San Joaquin Valley and Greater Sacramento Region. The Bank’s primary source of revenue is providing loans to customers who are predominately small and middle-market businesses and individuals.

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

The accounting and reporting policies of the Company and the Bank conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.

Management has determined that because all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank.

Principles of Consolidation - The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, the Bank. Intercompany transactions and balances are eliminated in consolidation.

For financial reporting purposes, Service 1st Capital Trust I, is a wholly-owned subsidiary acquired in the merger of Service 1st Bancorp and formed for the exclusive purpose of issuing trust preferred securities. The Company is not considered the primary beneficiary of this trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability on the Company’s consolidated financial statements. The Company’s investment in the common stock of the Trust is included in accrued interest receivable and other assets on the consolidated balance sheet.

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

Use of Estimates - The preparation of these financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates the estimates used. Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances.

These estimates result in judgments regarding the carrying values of assets and liabilities when these values are not readily available from other sources, as well as assessing and identifying the accounting treatments of contingencies and commitments. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions.

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Cash and Cash Equivalents - For the purpose of the statement of cash flows, cash, due from banks with maturities less than 90 days, interest-earning deposits in other banks, and Federal funds sold are considered to be cash equivalents. Generally, Federal funds are sold and purchased for one-day periods. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other banks, and Federal funds purchased.

Investment Securities - Investments are classified into the following categories:

•Available-for-sale securities, reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders’ equity.

•Held-to-maturity securities, which management has the positive intent and ability to hold to maturity, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums.

Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. All transfers between categories are accounted for at fair value in the period which the transfer occurs. During the year ended December 31, 2020, there were no transfers between categories.

Gains or losses on the sale of investment securities are computed on the specific identification method. Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums. Premiums and discounts on securities are amortized or accreted on the level yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated.

An investment security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether such a decline in their fair value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, and management does not intend to sell the security or it is more likely than not that the Company will not be required to sell the security before recovery, for debt securities, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings.

Loans - All loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at principal balances outstanding net of deferred loan fees and costs, and the allowance for credit losses. Interest is accrued daily based upon outstanding loan principal balances. However, when a loan becomes impaired and the future collectability of interest and principal is in serious doubt, the loan is placed on nonaccrual status and the accrual of interest income is suspended. Any loan delinquent 90 days or more is automatically placed on nonaccrual status. Any interest accrued but unpaid is charged against income. Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectability of principal is not in doubt, are applied first to principal until fully collected and then to interest.

Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer and credit card loans are typically charged off no later than 90 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. A loan placed on non-accrual status may be restored to accrual status when principal and interest are no longer past due and unpaid, or the loan otherwise becomes both well secured and in the process of collection. When a loan is brought current, the Company must also have reasonable assurance that the obligor has the ability to meet all contractual obligations in the future, that the loan will be repaid within a reasonable period of time, and that a minimum of six months of satisfactory repayment performance has occurred.

Substantially all loan origination fees, commitment fees, direct loan origination costs and purchase premiums and discounts on loans are deferred and recognized as an adjustment of yield, and amortized to interest income over the contractual term of the loan. The unamortized balance of deferred fees and costs is reported as a component of net loans.