# Community West Bancshares (CWBC) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Community West Bancshares's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1127371/000112737122000037/cvcy-20211231.htm
Accession: 0001127371-22-000037
Filing date: 2022-03-09
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/CWBC/
All MD&A years: /company/CWBC/mda/
Next year: /company/CWBC/mda/fy2022/ (FY 2022)

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.

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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 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 2021, we focused on asset quality and capital adequacy as well as 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, 2021, 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 2021, the economy, as evidenced by the California, Central Valley, and Greater Sacramento Region unemployment rates, and housing prices, were showing moderate and steady improvement.

During 2020 and to a lesser extent in 2021, our business has been, and continues to be, impacted by the ongoing outbreak of COVID-19. During 2021 and 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. 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.

We only conduct business in the state of California. California placed significant restrictions on businesses and individuals at the outset of the COVID-19 pandemic. While many of these initial restrictions have been lifted, there is still the possibility that certain restrictions could be re-imposed or extended to contain further spread if the rate of infection were to surge again in any of these states, including as a result of the Delta and Omicron variants that have recently caused an uptick in infections particularly among non-vaccinated individuals. As a financial institution, we are considered an essential business and we have therefore continued to operate on a modified basis throughout the pandemic to comply with governmental restrictions and public health authority guidelines.

    We remain focused on keeping our employees safe and our bank running effectively to serve our customers and continue to monitor the continued spread of COVID-19 and its variants. Our branches have been reopened across our footprint.

    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

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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, 2021 was $2.31 compared to $1.62 and $1.59 for the years ended December 31, 2020 and 2019, respectively.  Net income for 2021 was $28,401,000 compared to $20,347,000 and $21,443,000 for the years ended December 31, 2020 and 2019, respectively.  The increase in net income for 2021 compared to 2020 was driven by a reversal of provision for credit losses, an increase in net interest income, and an increase in interchange fees, partially offset by an increase in the provision for income taxes, an increase in non-interest expense, a decrease in net realized gains on sales and calls of investment securities, a decrease in loan placement fees, and a decrease in service charge income. Total assets at December 31, 2021 were $2,450,139,000 compared to $2,004,096,000 at December 31, 2020.

Return on average equity (“ROE”) for 2021 was 11.50% compared to 8.85% and 9.39% for 2020 and 2019, respectively.  Return on average assets (“ROA”) for 2021 was 1.25% compared to 1.11% and 1.36% for 2020 and 2019, respectively.  Total equity was $247,845,000 at December 31, 2021 compared to $245,021,000 at December 31, 2020.  The increase in shareholders’ equity is the result of an increase in retained earnings from our net income of $28,401,000, the exercise of stock options in the amount of $256,000, the effect of share-based compensation expense of $405,000, and stock issued under our employee stock purchase plan of $204,000, partially offset by a decrease in accumulated other comprehensive income (AOCI) of $7,224,000, the payment of common stock cash dividends of $5,757,000 and the repurchase and retirement of common stock of $13,619,000.

Average total loans (including nonaccrual) increased $13,941,000 or 1.32% to $1,069,653,000 in 2021 compared to $1,055,712,000 in 2020.  In 2021, we recorded a reversal of provision for credit losses of $4,300,000 compared to a provision of $3,275,000 in 2020 and a provision of $1,025,000 in 2019.  The Company had nonperforming assets consisting of $946,000 in nonaccrual loans at December 31, 2021.  At December 31, 2020, nonperforming assets totaled $3,278,000.  Net loan loss recoveries for 2021 were $985,000 compared to net loan loss recoveries in the amount of $510,000 for 2020 and net loan loss charge-offs in the amount of $999,000 for 2019.  Refer to “Asset Quality” below for further information.

Dividend Declared

    The Company declared a $0.12 per common share cash dividend, payable on February 25, 2022 to shareholders of record on February 11, 2022.

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 11.50% for the year ended 2021 compared to 8.85% and 9.39% for the years ended 2020 and 2019, respectively. 

Our net income for the year ended December 31, 2021 increased $8,054,000 compared to 2020 and decreased $1,096,000 in 2020 compared to 2019.  Contributing to the increase during 2021 compared to 2020 was a reversal of provision for credit losses, an increase in net interest income, and an increase in interchange fees, partially offset by a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, an increase in non-interest expense, a decrease in loan placement fees, and an increase in the provision for income taxes. During 2020, net income

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compared to 2019 was negatively impacted by an increase in the provision for credit losses and higher non-interest expenses.  During 2019 net income was positively impacted by an increase in net interest income and an increase in net realized gains on sales and calls of investment securities.

Net interest income increased primarily because of increases in loan and fee income, increases in interest income on investments, and decreases in interest expense. For 2021, our net interest margin (NIM) decreased 33 basis points to 3.54% compared to 2020 as a result of yield changes and asset mix changes. The decrease in net interest margin in the period-to-period comparison resulted from the decrease in the effective yield on interest earning deposits in other banks and Federal Funds sold and the decrease in the effective yield on average investment securities, offset by the increase in the yield on the Company’s loan portfolio. Net interest income during 2021 was positively impacted by from the accretion of the loan marks on acquired loans in the amount of $802,000 and $1,321,000 for the year ended December 31, 2021 and 2020, respectively. In addition, net interest income before the provision for credit losses for the year ended December 31, 2021 benefited by approximately $676,000 in nonrecurring income from prepayment penalties and payoff of loans, as compared to $805,000 for the year ended December 31, 2020. Excluding these reversals and benefits, net interest income for the year ended December 31, 2021 increased by $8,779,000 compared to the year ended December 31, 2020.

Non-interest income decreased 34.73% in 2021 compared to 2020 primarily due to a $3,751,000 decrease in net realized gains on sales and calls of investment securities, a decrease of $1,118,000 in other income, a decrease in loan placement fees of $317,000, and a decrease in service charge income of $170,000, partially offset by an increase in interchange fees of $437,000 and an increase in appreciation in cash surrender value of bank-owned life insurance of $129,000. Other income for the year ended December 31, 2020 included a $1,167,000 gain related to the collection of tax-exempt life insurance proceeds.

Non-interest expenses increased $158,000 or 0.33% to $47,842,000 in 2021 compared to $47,684,000 in 2020. The net increase year over year resulted from increases in data processing of $348,000, information technology of $477,000, regulatory assessments of $341,000, occupancy and equipment expenses of $256,000, personnel of $213,000, salaries and employee benefits of $117,000, loan related expenses of $75,000, donations of $45,000, education and training of $42,000 general insurance of $31,000, telephone of $31,000, alarm of $16,000, and postage of $11,000, partially offset by decreases in professional services of $733,000, Internet banking expenses of $330,000, directors’ expenses of $193,000, advertising expenses of $136,000, stationary and supplies of $78,000, risk management expenses of $55,000, amortization of software of $41,000, amortization of core deposit intangible of $34,000, armored courier of $25,000, travel and mileage of $24,000, and operating losses of $5,000 in 2021 compared to 2020. The Company recorded an income tax provision of $9,616,000 for the year ended December 31, 2021, compared to $6,914,000 for the year ended December 31, 2020, and $8,509,000 for the year ended December 31, 2019. Basic EPS was $2.32 for 2021 compared to $1.62 and $1.60 for 2020 and 2019, respectively.  Diluted EPS was $2.31 for 2021 compared to $1.62 and $1.59 for 2020 and 2019, 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 2021 was 1.25% compared to 1.11% and 1.36% for the years ended December 31, 2020 and 2019, respectively.  The 2021 increase in ROA is primarily due to the increase in net income, notwithstanding the increase in average assets.  Annualized ROA for our peer group was 0.93% at December 31, 2021.  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 3.54% for the year ended December 31, 2021, compared to 3.87% and 4.51% for the years ended December 31, 2020 and 2019, respectively.  The decrease in 2021 net interest margin compared to 2020, 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, offset by the increase in the yield on the Company’s loan portfolio.  The effective tax equivalent yield on total earning assets decreased 36 basis points, while the cost of total interest-bearing liabilities decreased 7 basis points to 0.12% for the year ended December 31, 2021. Our cost of total deposits in 2021 and 2020 was 0.05% and 0.09%, respectively, compared to 0.15% for the same period in 2019. Our net interest income before provision for credit losses increased $8,131,000 or 12.62% to $72,554,000 for the year ended 2021 compared to $64,423,000 and $63,772,000 for the years ended 2020 and 2019, 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

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securities.  Non-interest income in 2021 decreased $4,792,000 or 34.73% to $9,005,000 compared to $13,797,000 in 2020 and $13,305,000 in 2019.  The decrease resulted primarily from a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, a decrease in loan placement fees, a decrease in FHLB dividends, and a decrease in other income, partially offset by an increase in interchange fees and an increase in appreciation in cash surrender value of bank-owned life insurance compared to 2020.  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 $946,000 and $3,278,000 at December 31, 2021 and 2020, respectively.  Nonperforming assets totaled 0.09% of gross loans as of December 31, 2021 and 0.30% of gross loans as of December 31, 2020. Nonperforming loans were $946,000 and $3,278,000 at December 31, 2021 and 2020, respectively.  The Company had no other real estate owned at December 31, 2021, or December 31, 2020. No foreclosed assets were recorded at December 31, 2021 or December 31, 2020. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods.

The ratio of nonperforming loans to total loans was 0.09% as of December 31, 2021 and 0.30% as of December 31, 2020. The allowance for credit losses as a percentage of outstanding loan balance was 0.92% as of December 31, 2021 and 1.17% as of December 31, 2020. The ratio of net recoveries (charge-offs) to average loans was 0.09% as of December 31, 2021 and 0.05% as of December 31, 2020.

Asset Growth

As revenues from both net interest income and non-interest income are a function of asset size, the 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 22.26% during 2021 to $2,450,139,000 as of December 31, 2021 from $2,004,096,000 as of December 31, 2020.  Total gross loans decreased 5.74% to $1,039,111,000 as of December 31, 2021, compared to $1,102,347,000 at December 31, 2020.  Total investment securities increased 55.58% to $1,116,624,000 as of December 31, 2021 compared to $717,726,000 as of December 31, 2020.  Total deposits increased 23.22% to $2,122,797,000 as of December 31, 2021 compared to $1,722,710,000 as of December 31, 2020.  Our loan to deposit ratio at December 31, 2021 was 48.95% compared to 63.99% at December 31, 2020.  The loan to deposit ratio of our peers was 71.00% at December 31, 2021. 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, 2021, we had a total capital to risk-weighted assets ratio of 15.80%, a Tier 1 risk-based capital ratio of 12.82%, common equity Tier 1 ratio of 12.48%, and a leverage ratio of 8.03%.  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, 2021, on a stand-alone basis, the Bank had a total risk-based capital ratio of 14.18%, a Tier 1 risk based capital ratio of 13.52%, common equity Tier 1 ratio of 13.52%, and a leverage ratio of 8.47%.  At December 31, 2020, the Bank had a total risk-based capital ratio of 15.48%, Tier 1 risk-based capital of 14.41% and a leverage ratio of 9.23%.  Note 13 of the audited Consolidated Financial Statements provides more detailed information concerning the Company’s capital amounts and ratios. As of December 31, 2021, 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, 2021.

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 57.16% for 2021 compared to 64.08% for 2020 and 62.77% for 2019.  The improvement in the efficiency ratio in 2021 was due to the growth in non-interest income outpacing the increase in non-interest expense. The Company’s net interest income before provision for credit losses plus non-interest income increased 4.27% to $81,559,000 in 2021 compared to $78,220,000 in 2020 and $77,077,000 in 2019, while operating expenses increased 0.33% in 2021, 3.44% in 2020, and 2.29% in 2019.

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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 $277,130,000 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 $1,280,091,000 or 52.25% of total assets at December 31, 2021 and $788,004,000 or 39.32% of total assets as of December 31, 2020.

RESULTS OF OPERATIONS

Net Income

Net income was $28,401,000 in 2021 compared to $20,347,000 and $21,443,000 in 2020 and 2019, respectively.  Basic earnings per share was $2.32, $1.62, and $1.60 for 2021, 2020, and 2019, respectively.  Diluted earnings per share was $2.31, $1.62, and $1.59 for 2021, 2020, and 2019, respectively.  ROE was 11.50% for 2021 compared to 8.85% for 2020 and 9.39% for 2019.  ROA for 2021 was 1.25% compared to 1.11% for 2020 and 1.36% for 2019.

The increase in net income for 2021 compared to 2020 was driven by a reversal of provision for credit losses, an increase in net interest income, and an increase in interchange fees, partially offset by an increase in the provision for income taxes, an increase in non-interest expense, a decrease in net realized gains on sales and calls of investment securities, a decrease in loan placement fees, and a decrease in service charge income. 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.

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2021","","Year Ended December 31, 2020","","Year Ended December 31, 2019"],["(Dollars in thousands)","","Average Balance","","Interest Income/ Expense","","Average Interest Rate","","Average Balance","","Interest Income/ Expense","","Average Interest Rate","","Average Balance","","Interest Income/ Expense","","Average Interest Rate"],["ASSETS"],["Interest-earning deposits in other banks","","$","104,710","","","$","129","","","0.12","%","","$","76,924","","","$","246","","","0.32","%","","$","17,893","","","$","375","","","2.10","%"],["Securities"],["Taxable securities","","678,093","","","14,044","","","2.07","%","","479,894","","","11,740","","","2.45","%","","438,042","","","13,197","","","3.01","%"],["Non-taxable securities (1)","","238,870","","","7,096","","","2.97","%","","66,299","","","2,489","","","3.75","%","","38,520","","","1,639","","","4.25","%"],["Total investment securities","","916,963","","","21,140","","","2.31","%","","546,193","","","14,229","","","2.61","%","","476,562","","","14,836","","","3.11","%"],["Total securities and interest-earning deposits","","1,021,673","","","21,269","","","2.08","%","","623,117","","","14,475","","","2.32","%","","494,455","","","15,211","","","3.08","%"],["Loans (2) (3)","","1,067,316","","","54,077","","","5.07","%","","1,053,450","","","52,066","","","4.94","%","","928,560","","","51,464","","","5.54","%"],["Total interest-earning assets","","2,088,989","","","$","75,346","","","3.61","%","","1,676,567","","","$","66,541","","","3.97","%","","1,423,015","","","$","66,675","","","4.69","%"],["Allowance for credit losses","","(11,482)","","","","","","","(12,242)","","","","","","","(9,337)"],["Nonaccrual loans","","2,337","","","","","","","2,262","","","","","","","2,323"],["Cash and due from banks","","38,202","","","","","","","27,575","","","","","","","25,726"],["Bank premises and equipment","","8,436","","","","","","","7,476","","","","","","","7,983"],["Other assets","","141,133","","","","","","","131,349","","","","","","","124,379"],["Total average assets","","$","2,267,615","","","","","","","$","1,832,987","","","","","","","$","1,574,089"],["LIABILITIES AND SHAREHOLDERS\u2019 EQUITY"],["Interest-bearing liabilities:"],["Savings and NOW accounts","","$","529,043","","","$","182","","","0.03","%","","$","433,742","","","$","341","","","0.08","%","","$","370,378","","","$","566","","","0.15","%"],["Money market accounts","","455,575","","","661","","","0.15","%","","300,603","","","542","","","0.18","%","","270,918","","","656","","","0.24","%"],["Time certificates of deposit","","89,875","","","193","","","0.21","%","","89,610","","","582","","","0.65","%","","97,136","","","706","","","0.73","%"],["Total interest-bearing deposits","","1,074,493","","","1,036","","","0.10","%","","823,955","","","1,465","","","0.18","%","","738,432","","","1,928","","","0.26","%"],["Other borrowed funds","","9,864","","","266","","","2.70","%","","5,155","","","130","","","2.52","%","","21,943","","","631","","","2.88","%"],["Total interest-bearing liabilities","","1,084,357","","","$","1,302","","","0.12","%","","829,110","","","$","1,595","","","0.19","%","","760,375","","","$","2,559","","","0.34","%"],["Non-interest bearing demand deposits","","900,083","","","","","","","744,239","","","","","","","557,348"],["Other liabilities","","36,311","","","","","","","29,831","","","","","","","28,014"],["Shareholders\u2019 equity","","246,864","","","","","","","229,807","","","","","","","228,352"],["Total average liabilities and shareholders\u2019 equity","","$","2,267,615","","","","","","","$","1,832,987","","","","","","","$","1,574,089"],["Interest income and rate earned on average earning assets","","","","$","75,346","","","3.61","%","","","","$","66,541","","","3.97","%","","","","$","66,675","","","4.69","%"],["Interest expense and interest cost related to average interest-bearing liabilities","","","","1,302","","","0.12","%","","","","1,595","","","0.19","%","","","","2,559","","","0.34","%"],["Net interest income and net interest margin (4)","","","","$","74,044","","","3.54","%","","","","$","64,946","","","3.87","%","","","","$","64,116","","","4.51","%"]]
[[/GREPCENT_TABLE]]

(1)Interest income is calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $1,490, $523, and $344 in 2021, 2020, and 2019, respectively.

(2)Loan interest income includes loan fees of $6,474 in 2021, $2,234 in 2020, and $164 in 2019.

(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.

[[GREPCENT_TABLE]]
[["Changes in Volume/Rate","","For the Years Ended December 31, 2021 Compared to 2020","","For the Years Ended December 31, 2020 Compared to 2019"],["(In thousands)","","Volume","","Rate","","Net","","Volume","","Rate","","Net"],["Increase (decrease) due to changes in:"],["Interest income:"],["Interest-earning deposits in other banks","","$","88","","","$","(205)","","","$","(117)","","","$","1,237","","","$","(1,366)","","","$","(129)"],["Investment securities:"],["Taxable","","4,848","","","(2,544)","","","2,304","","","1,260","","","(2,717)","","","(1,457)"],["Non-taxable (1)","","6,478","","","(1,871)","","","4,607","","","1,181","","","(331)","","","850"],["Total investment securities","","11,326","","","(4,415)","","","6,911","","","2,441","","","(3,048)","","","(607)"],["Loans","","685","","","1,326","","","2,011","","","6,921","","","(6,319)","","","602"],["Total earning assets (1)","","12,099","","","(3,294)","","","8,805","","","10,599","","","(10,733)","","","(134)"],["Interest expense:"],["Deposits:"],["Savings, NOW and MMA","","353","","","(393)","","","(40)","","","167","","","(506)","","","(339)"],["Time certificate of deposits","","1","","","(390)","","","(389)","","","(54)","","","(70)","","","(124)"],["Total interest-bearing deposits","","354","","","(783)","","","(429)","","","113","","","(576)","","","(463)"],["Other borrowed funds","","119","","","17","","","136","","","(483)","","","(18)","","","(501)"],["Total interest bearing liabilities","","473","","","(766)","","","(293)","","","(370)","","","(594)","","","(964)"],["Net interest income (1)","","$","11,626","","","$","(2,528)","","","$","9,098","","","$","10,969","","","$","(10,139)","","","$","830"]]
[[/GREPCENT_TABLE]]

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

Interest and fee income from loans increased $2,011,000 or 3.86% in 2021 compared to 2020.  Interest and fee income from loans increased $602,000 or 1.17% in 2020 compared to 2019.  The increase in 2021 is primarily attributable to an increase in average total loans outstanding as well as an increase in the yield on loans of 13 basis points.

Average total loans for 2021 increased $13,941,000 to $1,069,653,000 compared to $1,055,712,000 for 2020 and $930,883,000 for 2019.  The yield on loans for 2021 was 5.07% compared to 4.94% and 5.54% for 2020 and 2019, respectively. The impact to interest income from the accretion of the loan marks on acquired loans was an increase of $802,000 and $1,321,000 for the years ended December 31, 2021 and 2020, 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), increased $5,827,000 or 41.76% in 2021 compared to 2020. The yield on average investments decreased 24 basis points to 2.08% for the year ended December 31, 2021 from 2.32% for the year ended December 31, 2020. Average total investments increased $398,556,000 to $1,021,673,000 in 2021 compared to $623,117,000 in 2020.  In 2020, total investment income on a non tax-equivalent basis decreased $915,000 or 6.15% compared to 2019.

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, 2021, we held $527,659,000 or 47.57% of the total market value of the investment portfolio in MBS and CMOs with an average yield of 2.08%.  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.  However, in the current economic environment, prepayments may not behave according to historical norms. Premium amortization and discount accretion of these investments affects our net interest income.  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, 2021 was an unrealized gain of $7,632,000 and is reflected in the Company’s equity.  At December 31, 2021, the effective duration of the investment portfolio was 4.86 years and the market value reflected a pre-tax unrealized gain of $10,835,000.  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, 2021, 2020, and 2019, 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, 2021, an immediate rate increase of 200 basis points would result in an estimated decrease in the market value of the investment portfolio by approximately $117,000,000.  Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio would be $123,000,000.  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 2021 increased $7,838,000 to $73,856,000 compared to $66,018,000 in 2020 and $66,331,000 in 2019, respectively.  The increase in 2021 was the result of yield changes and asset mix changes.  The tax-equivalent yield on interest earning assets decreased to 3.61% for the year ended December 31, 2021 from 3.97% for the year ended December 31, 2020.  Average interest earning assets increased to $2,088,989,000 for the year ended December 31, 2021 compared to $1,676,567,000 for the year ended December 31, 2020.  Average interest-earning deposits in other banks increased $27,786,000 in 2021 compared to 2020.  Average yield on these deposits was 0.12% compared to 0.32% on December 31, 2021 and December 31, 2020 respectively.  Average investments and interest-earning deposits increased $398,556,000 but the tax equivalent yield on those assets decreased 24 basis points.  Average total loans increased $13,941,000 and the yield on average loans increased 13 basis points.

The decrease in total interest income for 2020 was the result of yield changes, decrease in interest rates, and asset mix changes. The tax-equivalent yield on interest-earning assets increased 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 total loans increased and the yield on average loans decreased 60 basis points.

Interest expense on deposits in 2021 decreased $429,000 or 29.28% to $1,036,000 compared to $1,465,000 in 2020 and decreased $892,000 as compared to 2019.  The yield on interest-bearing deposits decreased 8 basis points to 0.10% in 2021 from 0.18% in 2020.  The yield on interest-bearing deposits decreased 8 basis points to 0.18% in 2020 from 0.26% in 2019.  Average interest-bearing deposits were $1,074,493,000 for 2021 compared to $823,955,000 and $738,432,000 for 2020 and 2019, respectively. 

Average other borrowings were $9,864,000 with an effective rate of 2.70% for 2021 compared to $5,155,000 with an effective rate of 2.52% for 2020.  In 2019, the average other borrowings were $21,943,000 with an effective rate of 2.88%.  Included in other borrowings are the junior subordinated deferrable interest debentures acquired from Service 1st, subordinated debt, advances on lines of credit, advances from the Federal Home Loan Bank (FHLB), and overnight borrowings.  The junior subordinated debentures carry a floating rate based on the three month LIBOR plus a margin of 1.60%. The rate was 1.73% for 2021, 1.84% for 2020, and 3.59% for 2019. The subordinated debt, issued in 2021, bears a fixed interest rate of 3.125% per year.

The cost of all interest-bearing liabilities was 0.12% and 0.19% basis points for 2021 and 2020, respectively, compared to 0.34% for 2019.  The cost of total deposits decreased to 0.05% for the year ended December 31, 2021, compared to 0.09% and 0.15% for the years ended December 31, 2020 and 2019, respectively.  Average demand deposits increased 20.94% to $900,083,000 in 2021 compared to $744,239,000 for 2020 and $557,348,000 for 2019. The ratio of average non-interest demand deposits to average total deposits increased to 45.58% for 2021 compared to 47.46% and 43.01% for 2020 and 2019, respectively.

Net Interest Income before Provision for Credit Losses

Net interest income before provision for credit losses for 2021 increased $8,131,000 or 12.62% to $72,554,000 compared to $64,423,000 for 2020 and $63,772,000 for 2019.  The increase in 2021 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 33 basis points. Yield on interest earning assets decreased 36 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, offset by

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the increase in the yield on the Company’s loan portfolio.  Net interest income before provision for credit losses increased $651,000 in 2020 compared to 2019, primarily due to the increase in average earning assets, yield changes, asset mix changes, offset by an increase in average interest bearing liabilities. Average interest-earning assets were $2,088,989,000 for the year ended December 31, 2021 with a NIM of 3.54% compared to $1,676,567,000 with a NIM of 3.87% in 2020, and $1,423,015,000 with a NIM of 4.51% in 2019.  For a discussion of the repricing of our assets and liabilities, refer to Quantitative and Qualitative Disclosure about Market Risk.

Provision for Credit Losses

We provide for probable incurred credit losses through a charge to operating income based upon the composition of the loan portfolio, delinquency levels, historical losses, and nonperforming assets, economic and environmental conditions and other factors which, in management’s judgment, deserve recognition in estimating credit losses. Credit risk is inherent in the business of making loans. Credit risk is inherent in the business of making loans. The Company establishes an allowance for credit losses on loans through charges to earnings, which are presented in the statements of income as the provision for credit losses on loans. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. Loans are charged off when they are considered uncollectible or when continuance as an active earning bank asset is not warranted.

The 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/Compliance 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, 2021, the Company recorded a reversal of provision for credit losses of $4,300,000 compared to a provision of $3,275,000 and $1,025,000 for the same periods in 2020 and 2019, 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, 2021, 2020 and 2019 the Company had net charge-offs (recoveries) totaling $(985,000), $(510,000), and $999,000, respectively. The net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans, was (0.09)%, (0.05)% and 0.11% for 2021, 2020, and 2019, 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 operations principally in California’s Central Valley. The Central Valley is largely dependent on agriculture. The agricultural economy in the Central Valley is therefore important to our business, financial performance and results of operations. We are also dependent in a large part upon the business activity, population growth, income levels and real estate activity in this market area. A downturn in agriculture and the agricultural related businesses could have a material adverse effect our business, results of operations and financial condition. The agricultural industry has been affected by declines in prices and the changes in yields on various crops and other agricultural commodities. Similarly, weaker prices could reduce the cash flows generated by farms and the value of agricultural land in our local markets and thereby increase the risk of default by our borrowers or reduce the foreclosure value of agricultural land and equipment that serve as collateral for 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, 2021, there were $8.5 million in classified loans of which $2.6 million related to commercial and industrial loans, $3.6 million to real estate owner occupied, and $2.4 million to agricultural production. This compares to $36.1 million in classified loans as of December 31, 2020 of which $1.2 million related to agricultural real estate, $3.2 million to real estate construction, $10.4 million to commercial and industrial, $3.3 million to agricultural production, $9.6 million to commercial real estate, and $7.3 million to real estate owner occupied.

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As of December 31, 2021, we believe, based on all current and available information, the allowance for credit losses is adequate to absorb probable incurred losses within the loan portfolio; however, no assurance can be given that we may not sustain charge-offs which are in excess of the allowance in any given period.  Refer to “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 $76,854,000 for 2021 compared to $61,148,000 and $62,747,000 for 2020 and 2019, 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 $9,005,000 in 2021 compared to $13,797,000 and $13,305,000 in 2020 and 2019, respectively. The $4,792,000 or 34.73% decrease in non-interest income in 2021 was driven by a decrease of $3,751,000 in net realized gains on sales and calls of investment securities, a decrease of $1,118,000 in other income, a decrease in service charge income of $170,000, and a decrease in loan placement fees of $317,000, partially offset by an increase in interchange fees of $437,000 and an increase in appreciation in cash surrender value of bank-owned life insurance of $129,000. Other income for the year ended December 31, 2020 included a $1,167,000 gain related to the collection of tax-exempt life insurance proceeds. The 492,000 or 3.70% increase in non-interest income in 2020 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.

Customer service charges decreased $170,000 to $1,901,000 in 2021 compared to $2,071,000 in 2020 and $2,756,000 in 2019.  The decreases in 2021 and 2020 resulted from decreases in our NSF fees and lower analysis service charge income.

During the year ended December 31, 2021, we realized net gains on sales and calls of investment securities of $501,000, compared to $4,252,000 in 2020 and $5,199,000 in 2019. The net gains in 2021, 2020, and 2019 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 $840,000 in 2021 compared to $711,000 and $728,000 in 2020 and 2019, 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 $1,784,000 in 2021 compared to $1,347,000 and $1,446,000 in 2020 and 2019, 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 decreased $317,000 in 2021 to $1,974,000 compared to $2,291,000 in 2020 and $978,000 in 2019. 

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, 2021 and 2020, we held FHLB stock totaling $5,595,000.  Dividends in 2021 decreased to $321,000 compared to $323,000 in 2020 and $455,000 in 2019.

Other income decreased to $1,684,000 in 2021 compared to $2,802,000 and $1,743,000 in 2020 and 2019, respectively. Other income for the year ended December 31, 2020 included a $1,167,000 gain related to the collection of tax-exempt life insurance proceeds.

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 $158,000 or 0.33% to $47,842,000 in 2021 compared to $47,684,000 in 2020, and $46,100,000 in 2019.

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 57.16% for 2021 compared to 64.08% for 2020 and 62.77% for 2019. The improvement in the efficiency ratio in 2021 and 2020 was due to the growth in non-interest income outpacing the increase in non-interest expense.

Salaries and employee benefits increased $117,000 or 0.41% to $28,720,000 in 2021 compared to $28,603,000 in 2020 and $26,654,000 in 2019.  Full time equivalents were 256 for the year ended December 31, 2021 compared to 273 for the year ended December 31, 2020. The increase in salaries and employee benefits in 2021 compared to 2020 was the result of an increase of approximately $535,000 in salaries and benefits and lower loan origination costs of approximately $878,000, offset

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by a decrease of $1,296,000 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.

For the years ended December 31, 2021, 2020, and 2019, the compensation cost recognized for equity-based compensation was $405,000, $470,000 and $555,000, respectively. As of December 31, 2021, there was $273,000 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 1.55 years.  See Notes 1 and 14 to the audited Consolidated Financial Statements for more detail. No options to purchase shares of the Company’s common stock were issued during the years ending December 31, 2021 and 2020. Restricted common stock awards of 31,496 and 21,397 shares were awarded in 2021 and 2020, respectively.

Occupancy and equipment expense increased $256,000 or 5.53% to $4,882,000 in 2021 compared to $4,626,000 in 2020 and $5,439,000 in 2019. The Company made no changes in its depreciation expense methodology. The Company operated 20 full-service offices at December 31,2021 and at December 31, 2020.

Regulatory assessments were $831,000 in 2021 compared to $490,000 and $251,000 in 2020 and 2019, 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 increased $477,000 to $2,868,000 for the year ended December 31, 2021 compared to $2,391,000 and $2,611,000 in 2020 and 2019, respectively. Data processing expenses were $2,394,000 in 2021 compared to $2,046,000 in 2020 and $1,557,000 in 2019. Professional services decreased $733,000 in 2021 compared to 2020 due to lower legal expenses and consulting fees.

Amortization of core deposit intangibles was $661,000 for 2021, $695,000 for 2020, and $695,000 for 2019. During 2021, amortization expense related to FLB core deposit intangibles (“CDI”) was $423,000, amortization expense related to SVB CDI was $101,000, and amortization expense related to Visalia Community Bank (“VCB”) CDI was $137,000. During 2020, 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 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 $137,00.

ATM/Debit card expenses decreased $1,000 to $818,000 for the year ended December 31, 2021 compared to $819,000 in 2020 and $920,000 in 2019. Other non-interest expenses decreased $46,000 or 1.25% to $3,734,000 in 2021 compared to $3,688,000 in 2020 and $4,386,000 in 2019.

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

[[GREPCENT_TABLE]]
[["For the years ended December 31, (Dollars in thousands)","","Other Expense 2021","","% Average Assets","","Other Expense 2020","","% Average Assets","","Other Expense 2019","","% Average Assets"],["Stationery/supplies","","$","150","","","0.01","%","","$","228","","","0.01","%","","$","240","","","0.02","%"],["Amortization of software","","82","","","\u2014","%","","123","","","0.01","%","","350","","","0.02","%"],["Telephone","","224","","","0.01","%","","193","","","0.01","%","","342","","","0.02","%"],["Alarm","","131","","","0.01","%","","115","","","0.01","%","","100","","","0.01","%"],["Postage","","202","","","0.01","%","","191","","","0.01","%","","218","","","0.01","%"],["Armored courier fees","","255","","","0.01","%","","280","","","0.02","%","","284","","","0.02","%"],["Risk management expense","","94","","","\u2014","%","","149","","","0.01","%","","232","","","0.01","%"],["Donations","","197","","","0.01","%","","152","","","0.01","%","","212","","","0.01","%"],["Personnel other","","374","","","0.02","%","","161","","","0.01","%","","177","","","0.01","%"],["Credit card expense","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","114","","","0.01","%"],["Education/training","","198","","","0.01","%","","156","","","0.01","%","","155","","","0.01","%"],["Loan related expenses","","133","","","0.01","%","","58","","","\u2014","%","","52","","","\u2014","%"],["General insurance","","202","","","0.01","%","","171","","","0.01","%","","165","","","0.01","%"],["Travel and mileage expense","","103","","","\u2014","%","","127","","","0.01","%","","256","","","0.02","%"],["Operating losses","","147","","","0.01","%","","142","","","0.01","%","","102","","","0.01","%"],["Shareholder services","","107","","","\u2014","%","","109","","","0.01","%","","101","","","0.01","%"],["Other","","1,135","","","0.05","%","","1,333","","","0.08","%","","1,286","","","0.08","%"],["Total other non-interest expense","","$","3,734","","","0.16","%","","$","3,688","","","0.22","%","","$","4,386","","","0.28","%"]]
[[/GREPCENT_TABLE]]

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Provision for Income Taxes

Our effective income tax rate was 25.3% for 2021 compared to 25.4% for 2020 and 28.4% for 2019.  The Company reported an income tax provision of $9,616,000, $6,914,000, and $8,509,000 for the years ended December 31, 2021, 2020, and 2019, respectively. 

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 $6.31 million and $4.74 million at December 31, 2021 and 2020, 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, 2021 and 2020 will be fully realized in future years.

FINANCIAL CONDITION

Summary of Changes in Consolidated Balance Sheets

Total assets were $2,450,139,000 as of December 31, 2021, compared to $2,004,096,000 as of December 31, 2020, an increase of 22.26% or $446,043,000.  Total gross loans were $1,039,111,000 as of December 31, 2021, compared to $1,102,347,000 as of December 31, 2020, a decrease of $63,236,000 or 5.74%.  The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) increased 65.91% or $496,850,000 to $1,250,679,000.  Total deposits increased 23.22% or $400,087,000 to $2,122,797,000 as of December 31, 2021, compared to $1,722,710,000 as of December 31, 2020.  Shareholders’ equity increased $2,824,000 or 1.15% to $247,845,000 as of December 31, 2021, compared to $245,021,000 as of December 31, 2020. The increase in shareholders’ equity was driven by the retention of earnings, net of dividends paid, the decrease in net unrealized gains on available-for-sale (AFS) securities recorded, net of estimated taxes, in accumulated other comprehensive income (AOCI), and share repurchases. Accrued interest payable and other liabilities were $40,043,000 as of December 31, 2021, compared to $31,210,000 as of December 31, 2020, an increase of $8,833,000.

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:

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[[GREPCENT_TABLE]]
[["Available-for-Sale Securities","","Amortized Cost at December 31,"],["(In thousands)","","2021","","2020","","2019"],["Treasuries","","$","9,988","","","$","\u2014","","","$","\u2014"],["U.S. Government agencies","","373","","","651","","","14,740"],["Obligations of states and political subdivisions","","512,952","","","361,734","","","89,574"],["U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations","","213,471","","","214,203","","","198,125"],["Private label mortgage and asset backed securities","","317,089","","","82,413","","","155,308"],["Corporate debt securities","","44,500","","","30,000","","","9,000"],["Total Available-for-Sale Securities","","$","1,098,373","","","$","689,001","","","$","466,747"]]
[[/GREPCENT_TABLE]]

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, 2021, investment securities with a fair value of $260,325,000, or 23.47% 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, 2021 was 48.95% compared to 63.99% at December 31, 2020.  The loan to deposit ratio of our peers was 71.00% at December 31, 2021.  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 65.91% or $496,850,000 to $1,250,679,000 at December 31, 2021, from $753,829,000 at December 31, 2020.  The market value of the portfolio reflected an unrealized gain of $10,835,000 at December 31, 2021, compared to an unrealized gain of $21,091,000 at December 31, 2020.

    Losses recognized in 2021, 2020, and 2019 were incurred in order to reposition the investment securities portfolio based on the current rate environment.  As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using proceeds to purchase securities that fit with the Company’s current risk profile is appropriate and beneficial to the Company.

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

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

As of December 31, 2021, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). The Company evaluated all individual available-for-sale investment securities with an unrealized loss at December 31, 2021 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at December 31, 2021 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $75,000.  The Company also analyzed any securities that may have been downgraded by credit rating agencies.

For those 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, 2021, 2020, or 2019. 

The amortized cost, maturities and weighted average yield of investment securities at December 31, 2021 are summarized in the following table.

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[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","In one year or less","","After one through five years","","After five through ten years","","After ten years","","Total"],["Available-for-Sale Securities","","Amount","","Yield(1)","","Amount","","Yield(1)","","Amount","","Yield(1)","","Amount","","Yield(1)","","Amount","","Yield(1)"],["Debt securities(1)"],["U.S. Treasury securities","","$","\u2014","","","\u2014","","","$","\u2014","","","\u2014","","","$","9,988","","","1.25","%","","$","\u2014","","","\u2014","","","$","9,988","","","1.25","%"],["U.S. Government agencies","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","373","","","4.25","%","","373","","","4.25","%"],["Obligations of states and political subdivisions (2)","","\u2014","","","\u2014","","","3,690","","","\u2014","%","","89,627","","","2.72","%","","419,635","","","3.79","%","","512,952","","","3.57","%"],["U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations","","5","","","4.80","%","","16","","","5.99","%","","6,056","","","1.44","%","","207,394","","","2.32","%","","213,471","","","2.26","%"],["Private label residential mortgage and asset backed securities","","47","","","4.75","%","","41,890","","","3.70","%","","28,155","","","1.31","%","","246,997","","","2.34","%","","317,089","","","2.43","%"],["Corporate debt securities","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","44,500","","","4.44","%","","\u2014","","","\u2014","","","44,500","","","4.44","%"],["","","$","52","","","4.85","%","","$","45,596","","","3.40","%","","$","178,326","","","2.81","%","","$","874,399","","","3.03","%","","$","1,098,373","","","3.01","%"]]
[[/GREPCENT_TABLE]]

(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 decreased $63,236,000 or 5.74% to $1,039,111,000 as of December 31, 2021, compared to $1,102,347,000 as of December 31, 2020.

The following table sets forth information concerning the composition of our loan portfolio as of December 31, 2021, 2020, 2019, 2018, and 2017.

[[GREPCENT_TABLE]]
[["","","2021","","2020","","2019","","2018","","2017"],["Loan Type (Dollars in thousands)","","Amount","","% of Total Loans","","Amount","","% of Total Loans","","Amount","","% of Total Loans","","Amount","","% of Total Loans","","Amount","","% of Total Loans"],["Commercial:"],["Commercial and industrial","","$","136,847","","","13.2","%","","$","273,994","","","24.9","%","","$","102,541","","","10.9","%","","$","101,533","","","11.1","%","","$","100,856","","","11.2","%"],["Agricultural production","","40,860","","","3.9","%","","21,971","","","2.0","%","","23,159","","","2.6","%","","7,998","","","0.9","%","","14,956","","","1.7","%"],["Total commercial","","177,707","","","17.1","%","","295,965","","","26.9","%","","125,700","","","13.5","%","","109,531","","","12.0","%","","115,812","","","12.9","%"],["Real estate:"],["Owner occupied","","212,234","","","20.4","%","","208,843","","","18.9","%","","197,946","","","21.0","%","","183,169","","","19.9","%","","204,452","","","22.7","%"],["Real estate-construction and other land loans","","61,586","","","5.9","%","","55,419","","","5.0","%","","73,718","","","7.8","%","","101,606","","","11.1","%","","96,460","","","10.7","%"],["Commercial real estate","","369,529","","","35.6","%","","338,886","","","30.7","%","","329,333","","","34.9","%","","305,118","","","33.2","%","","269,254","","","29.9","%"],["Agricultural real estate","","98,481","","","9.5","%","","84,258","","","7.6","%","","76,304","","","8.1","%","","76,884","","","8.4","%","","76,081","","","8.4","%"],["Other real estate","","26,084","","","2.5","%","","28,718","","","2.6","%","","31,241","","","3.3","%","","32,799","","","3.6","%","","31,220","","","3.5","%"],["Total real estate","","767,914","","","73.9","%","","716,124","","","64.8","%","","708,542","","","75.1","%","","699,576","","","76.2","%","","677,467","","","75.2","%"],["Consumer:"],["Equity loans and lines of credit","","55,620","","","5.4","%","","55,634","","","5.0","%","","64,841","","","6.9","%","","69,958","","","7.6","%","","76,404","","","8.5","%"],["Consumer and installment","","36,999","","","3.6","%","","37,236","","","3.3","%","","42,782","","","4.5","%","","38,038","","","4.2","%","","29,637","","","3.4","%"],["Total consumer","","92,619","","","9.0","%","","92,870","","","8.3","%","","107,623","","","11.4","%","","107,996","","","11.8","%","","106,041","","","11.9","%"],["Deferred loan (fees) costs, net","","871","","","","","(2,612)","","","","","1,515","","","","","1,592","","","","","1,359"],["Total gross loans (1)","","1,039,111","","","100.0","%","","1,102,347","","","100.0","%","","943,380","","","100.0","%","","918,695","","","100.0","%","","900,679","","","100.0","%"],["Allowance for credit losses","","(9,600)","","","","","(12,915)","","","","","(9,130)","","","","","(9,104)","","","","","(8,778)"],["Total loans (1)","","$","1,029,511","","","","","$","1,089,432","","","","","$","934,250","","","","","$","909,591","","","","","$","891,901"],["(1) Includes nonaccrual loans of:","","$","946","","","","","$","3,278","","","","","$","1,693","","","","","$","2,740","","","","","$","2,875"]]
[[/GREPCENT_TABLE]]

At December 31, 2021, loans acquired in the FLB, SVB and VCB acquisitions had a balance of $93,201,000, of which $2,111,000 were commercial loans, $83,128,000 were real estate loans, and $7,962,000 were consumer loans, and at December 31, 2020, the acquired loans 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.

At December 31, 2021, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 96.4% of total loans of which 17.1% were commercial and 79.3% were real-estate-related.  This level of concentration is consistent with 96.7% at December 31, 2020.  Although we believe the loans

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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, 2021 and 2020.

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 in 2020 was the issuance of PPP loans. As of December 31, 2021, gross loans included $18,553,000 in PPP loans which are fully guaranteed by the SBA as compared to $192,916,000.00 as of December 31, 2020.

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.

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, 2021.

[[GREPCENT_TABLE]]
[["(In thousands) (net of deferred costs)","","One Year or Less","","After One Through Five Years","","After Five Years","","Total"],["Loan Maturities:"],["Commercial and agricultural","","$","87,847","","","$","63,086","","","$","26,774","","","$","177,707"],["Real estate construction and other land loans","","52,139","","","5,436","","","4,011","","","61,586"],["Other real estate","","45,556","","","160,129","","","500,643","","","706,328"],["Consumer and installment","","5,983","","","13,967","","","72,669","","","92,619"],["","","$","191,525","","","$","242,618","","","$","604,097","","","$","1,038,240"],["Sensitivity to Changes in Interest Rates:"],["Loans with fixed interest rates","","$","67,138","","","$","149,904","","","$","137,841","","","$","354,883"],["Loans with floating interest rates (1)","","124,387","","","92,432","","","466,538","","","683,357"],["","","$","191,525","","","$","242,336","","","$","604,379","","","$","1,038,240"],["(1) Includes floating rate loans which are currently at their floor rate in accordance with their respective loan agreement","","$","62,044","","","$","78,461","","","$","406,836","","","$","547,341"]]
[[/GREPCENT_TABLE]]

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.

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At December 31, 2021, total nonperforming assets totaled $946,000, or 0.04% of total assets, compared to $3,278,000, or 0.16% of total assets at December 31, 2020.  Nonperforming assets totaled 0.09% of gross loans as of December 31, 2021 and 0.30% of gross loans as of December 31, 2020. Total nonperforming assets at December 31, 2021, included nonaccrual loans totaling $946,000, no OREO, and no repossessed assets. Nonperforming assets at December 31, 2020 consisted of $3,278,000 in nonaccrual loans, no OREO, and no repossessed assets. At December 31, 2021 and December 31, 2020, we had no loans considered a troubled debt restructuring (“TDR”) included in nonaccrual loans. 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, 2021, 2020, 2019, 2018, and 2017 is set forth below.  The Company had no loans past due more than 90 days and still accruing interest at December 31, 2021 and 2020.  Management is not aware of any potential problem loans, which were current and accruing at December 31, 2021, 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.

Composition of Nonaccrual, Past Due and Restructured Loans

[[GREPCENT_TABLE]]
[["(As of December 31, Dollars in thousands)","","2021","","2020","","2019","","2018","","2017"],["Nonaccrual Loans:"],["Commercial and industrial","","$","312","","","$","752","","","$","187","","","$","298","","","$","356"],["Agricultural production","","634","","","\u2014","","","\u2014","","\u2014","","\u2014","","","\u2014"],["Owner occupied real estate","","\u2014","","","370","","","416","","","215","","","\u2014"],["Real estate construction and other land loans","","\u2014","","","1,556","","","\u2014","","","1,439","","","1,397"],["Agricultural real estate","","\u2014","","","\u2014","","","321","","","\u2014","","","\u2014"],["Commercial real estate","","\u2014","","","512","","","381","","","418","","","976"],["Equity loans and line of credit","","\u2014","","","\u2014","","","66","","","320","","","87"],["Consumer and installment","","\u2014","","","88","","","\u2014","","","\u2014","","","\u2014"],["Restructured loans (non-accruing):"],["Equity loans and line of credit","","\u2014","","","\u2014","","","322","","","50","","","59"],["Total nonaccrual","","946","","","3,278","","","1,693","","","2,740","","","2,875"],["Accruing loans past due 90 days or more","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total nonperforming loans","","$","946","","","$","3,278","","","$","1,693","","","$","2,740","","","$","2,875"],["Interest foregone","","$","99","","","$","177","","","$","85","","","$","267","","","$","210"],["Nonperforming loans to total loans","","0.09","%","","0.30","%","","0.18","%","","0.30","%","","0.32","%"],["Accruing loans past due 90 days or more","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["Accruing troubled debt restructurings","","$","7,640","","","$","7,908","","","$","2,040","","","$","3,170","","","$","3,491"],["Ratio of nonperforming loans to allowance for credit losses","","9.85","%","","25.38","%","","18.54","%","","30.10","%","","32.75","%"],["Loans considered to be impaired","","$","8,586","","","$","11,186","","","$","3,734","","","$","5,909","","","$","6,366"],["Related allowance for credit losses on impaired loans","","$","649","","","$","631","","","$","40","","","$","90","","","$","36"]]
[[/GREPCENT_TABLE]]

As of December 31, 2021 and 2020, we had impaired loans totaling $8,586,000 and $11,186,000, 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

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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 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 $99,000 for the year ended December 31, 2021 of which none was attributable to troubled debt restructurings. 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.

The following table provides a reconciliation of the change in non-accrual loans for the year ended December 31, 2021.

[[GREPCENT_TABLE]]
[["(In thousands)","","Balances December 31, 2020","","Additions to Nonaccrual Loans","","Net Pay Downs","","Transfer to Foreclosed Collateral","","Returns to Accrual Status","","Charge-Offs","","Balances December 31, 2021"],["Non-accrual loans:"],["Commercial and industrial","","$","752","","","$","\u2014","","","$","(385)","","","$","\u2014","","","$","(55)","","","$","\u2014","","","$","312"],["Agricultural real estate","","\u2014","","","2,141","","","(1,507)","","","\u2014","","","\u2014","","","\u2014","","","634"],["Real estate","","882","","","17","","","(249)","","","\u2014","","","(650)","","","\u2014","","","\u2014"],["Real estate construction and other land loans","","1,556","","","\u2014","","","(1,531)","","","\u2014","","","(25)","","","\u2014","","","\u2014"],["Consumer","","88","","","\u2014","","","(2)","","","\u2014","","","(86)","","","\u2014","","","\u2014"],["Total non-accrual","","$","3,278","","","$","2,158","","","$","(3,674)","","","$","\u2014","","","$","(816)","","","$","\u2014","","","$","946"]]
[[/GREPCENT_TABLE]]

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, 2021, 2020, and 2019, the Bank had no OREO properties. The Company held no repossessed assets at December 31, 2021, 2020, and 2019, 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 52 quarters, and qualitative and quantitative factors including economic trends in the Company’s service areas, industry experience and trends, industry and 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 52 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.

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

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

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

The following table 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:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","2021","","2020","","2019","","2018","","2017"],["Loans outstanding at December 31,","","$","1,038,240","","","$","1,104,959","","","$","941,865","","","$","917,103","","","$","899,320"],["Average loans outstanding during the year","","$","1,069,653","","","$","1,055,712","","","$","930,883","","","$","912,128","","","$","793,343"],["Allowance for credit losses:"],["Balance at beginning of year","","$","12,915","","$","9,130","","","$","9,104","","","$","8,778","","","$","9,326"],["Deduct loans charged off:"],["Commercial and industrial","","(46)","","(121)","","","(1,032)","","","(94)","","","(197)"],["Agricultural production","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","(10)"],["Owner occupied","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","(22)"],["Consumer loans","","(221)","","","(108)","","","(164)","","","(116)","","","(235)"],["Total loans charged off","","(267)","","","(229)","","","(1,196)","","","(210)","","","(464)"],["Add recoveries of loans previously charged off:"],["Commercial and industrial","","701","","","612","","","134","","","207","","","850"],["Agricultural production","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","10"],["Owner occupied","","\u2014","","","\u2014","","","\u2014","","","21","","","49"],["Real estate construction and other land loans","","319","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Commercial real estate","","\u2014","","","\u2014","","","\u2014","","","81","","","17"],["Consumer loans","","232","","","127","","","63","","","177","","","140"],["Total recoveries","","1,252","","","739","","","197","","","486","","","1,066"],["Net (charge-offs) recoveries","","985","","","510","","","(999)","","","276","","","602"],["(Reversal of) Provision for credit losses","","(4,300)","","","3,275","","","1,025","","","50","","","(1,150)"],["Balance at end of year","","$","9,600","","","$","12,915","","","$","9,130","","","$","9,104","","","$","8,778"],["Allowance for credit losses as a percentage of outstanding loan balance","","0.92","%","","1.17","%","","0.97","%","","0.99","%","","0.98","%"],["Net recoveries (charge-offs) to average loans outstanding","","0.09","%","","0.05","%","","(0.11)","%","","0.03","%","","0.08","%"]]
[[/GREPCENT_TABLE]]

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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.

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

[[GREPCENT_TABLE]]
[["","","2021","","2020","","2019","","2018","","2017"],["Loan Type (Dollars in thousands)","","Amount","","Percent of Loans in Each Category to Total Loans","","Amount","","Percent of Loans in Each Category to Total Loans","","Amount","","Percent of Loans in Each Category to Total Loans","","Amount","","Percent of Loans in Each Category to Total Loans","","Amount","","Percent of Loans in Each Category to Total Loans"],["Commercial:"],["Commercial and industrial","","$","1,691","","","13.2","%","","$","1,764","","","24.9","%","","$","1,115","","","10.9","%","","$","1,604","","","11.1","%","","$","1,784","","","11.2","%"],["Agricultural production","","320","","","3.9","%","","255","","","2.0","%","","313","","","2.6","%","","67","","","0.9","%","","287","","","1.7","%"],["Real estate:"],["Owner occupied","","1,355","","","20.4","%","","2,128","","","18.9","%","","1,319","","","21.0","%","","1,131","","","19.9","%","","1,252","","","22.7","%"],["Real estate construction and other land loans","","812","","","5.9","%","","1,204","","","5.0","%","","932","","","7.8","%","","1,271","","","11.1","%","","1,004","","","10.7","%"],["Commercial real estate","","3,805","","","35.6","%","","4,781","","","30.7","%","","3,453","","","34.9","%","","3,017","","","33.2","%","","1,958","","","29.9","%"],["Agricultural real estate","","697","","","9.5","%","","838","","","7.6","%","","925","","","8.1","%","","947","","","8.4","%","","1,441","","","8.4","%"],["Other real estate","","72","","","2.5","%","","223","","","2.6","%","","140","","","3.3","%","","173","","","3.6","%","","140","","","3.5","%"],["Consumer:"],["Equity loans and lines of credit","","256","","","5.4","%","","457","","","5.0","%","","425","","","6.9","%","","419","","","7.6","%","","464","","","8.5","%"],["Consumer and installment","","312","","","3.6","%","","634","","","3.3","%","","472","","","4.5","%","","407","","","4.2","%","","361","","","3.4","%"],["Unallocated reserves","","280","","","","","631","","","","","36","","","","","68","","","","","87"],["Total allowance for credit losses","","$","9,600","","","100.0","%","","$","12,915","","","100.0","%","","$","9,130","","","100.0","%","","$","9,104","","","100.0","%","","$","8,778","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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, 2021, the allowance for credit losses (ALLL) was $9,600,000, compared to $12,915,000 at December 31, 2020, a net decrease of $3,315,000.  The net decrease in the ALLL reflected the negative provision and net recoveries during the year ended December 31, 2021 which was necessitated by management’s observations and assumptions about the existing credit quality of the loan portfolio.  Net recoveries totaled $985,000 while the reversal of provision for credit losses was $4,300,000 for the year ended December 31, 2021. The Company’s negative provision for credit losses during the year ended December 31, 2021 is primarily due to change 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 $8,540,000 and $40,845,000 at December 31, 2021 and $36,136,000 and $36,406,000 at December 31, 2020, respectively.  The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was $326,108,000 as of December 31, 2021, compared to $326,179,000 as of December 31, 2020. At December 31, 2021 and 2020, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $115,000 and $250,000, respectively. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using appropriate, systematic, and consistently applied processes.  While related to credit losses, this allocation is not a part of 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.

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    The ALLL as a percentage of total loans was 0.92% at December 31, 2021, and 1.17% at December 31, 2020. Total loans include FLB, SVB and VCB loans that were recorded at fair value in connection with the acquisitions of $93,201,000 at December 31, 2021 and $127,186,000 at December 31, 2020. Excluding these acquired loans from the calculation, the ALLL to total gross loans was 1.01% and 1.32% as of December 31, 2021 and 2020, respectively, and general reserves associated with non-impaired loans to total non-impaired loans was 0.98% and 1.59%, 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.  As of December 31, 2021 and 2020 gross loans included loans related to PPP loans which are fully guaranteed by the SBA in the amount of $18,553,000 and $192,916,000.00, respectively. Excluding PPP loans and the acquired loans from the calculation, the allowance for credit losses to total gross loans was 1.04% and 1.65% as of December 31, 2021 and 2020, respectively.

    The Company’s loan portfolio balances in 2021 decreased from 2020. Net loans decreased $59.9 million or 5.50%, at December 31, 2021 compared to December 31, 2020. The net loan decrease consisted of a decrease of $174.4 million in SBA Paycheck Protection Program (PPP) loans, offset by an increase of $114.4 million in non-PPP loan growth. 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 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, 2021.

Non-performing loans totaled $946,000 as of December 31, 2021, and $3,278,000 as of December 31, 2020.  Nonperforming loans as a percentage of total loans were 0.09% at December 31, 2021 compared to 0.30% at December 31, 2020.  The Company had no other real estate owned at December 31, 2021, December 31, 2020, and December 31, 2019. No foreclosed assets were recorded at December 31, 2021, December 31, 2020, and December 31, 2019. The allowance for credit losses as a percentage of nonperforming loans was 1,014.80% and 393.99% as of December 31, 2021 and December 31, 2020, 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, 2021 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, 2021 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.

Management performed an annual impairment test in the third quarter of 2021 utilizing various qualitative factors. Management believes these factors are sufficient and comprehensive and as such, no further factors need to be assessed at this time. Based on management’s analysis performed, no impairment was required.

Goodwill is also assessed for impairment between annual tests if a triggering event occurs or circumstances change that may cause the fair value of a reporting unit to decline below its carrying amount. Management considers the entire Company to be one reporting unit. No such events or circumstances arose during for the year ended December 31, 2021. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material adverse impact on the Company’s operating results.

The intangible assets at December 31, 2021 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, 2021 was $522,000, net of

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$3,230,000 in accumulated amortization expense.  The carrying value at December 31, 2020 was $1,183,000, net of $2,569,000 in accumulated amortization expense.  Management evaluates the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization.  Based on the evaluation, no changes to the remaining useful lives was required.  Management performed an annual impairment test on core deposit intangibles as of September 30, 2021 and determined no impairment was necessary. In addition, management determined that no events had occurred between the annual evaluation date and December 31, 2021 which would necessitate further analysis. Amortization expense recognized was $661,000 for 2021, $695,000 for 2020 and $695,000 for 2019.

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

[[GREPCENT_TABLE]]
[["Years Ending December 31,","","Estimated Core Deposit Intangible Amortization"],["2022","","$","454"],["2023","","68"],["Thereafter","","\u2014"],["Total","","$","522"]]
[[/GREPCENT_TABLE]]

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 $400,087,000 or 23.22% to $2,122,797,000 as of December 31, 2021, compared to $1,722,710,000 as of December 31, 2020.  Interest-bearing deposits increased $261,392,000 or 29.11% to $1,159,213,000 as of December 31, 2021, compared to $897,821,000 as of December 31, 2020.  Non-interest bearing deposits increased $138,695,000 or 16.81% to $963,584,000 as of December 31, 2021, compared to $824,889,000 as of December 31, 2020.  The Company’s deposit balances for the year ended December 31, 2021 increased through organic growth and PPP loan proceeds retained in customer deposit accounts. Average non-interest bearing deposits to average total deposits was 45.58% for the year ended December 31, 2021 compared to 47.46% for the same period in 2020. Based on FDIC deposit market share information published as of June 2021, our total market share of deposits in Fresno, Madera, San Joaquin, and Tulare counties was 3.83% in 2021 compared to 3.40% in 2020. Our total market share in the other counties we operate in (El Dorado, Merced, Placer, Sacramento, and Stanislaus), was less than 1.00% in 2021 and 2020.

The composition of the deposits and average interest rates paid at December 31, 2021 and December 31, 2020 is summarized in the table below.

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","December 31, 2021","","% of Total Deposits","","Effective Rate","","December 31, 2020","","% of Total Deposits","","Effective Rate"],["NOW accounts","","$","360,462","","","17.0","%","","0.05","%","","$","310,697","","","18.0","%","","0.11","%"],["MMA accounts","","511,448","","","24.1","%","","0.15","%","","341,088","","","19.8","%","","0.18","%"],["Time deposits","","90,030","","","4.2","%","","0.21","%","","89,846","","","5.2","%","","0.65","%"],["Savings deposits","","197,273","","","9.3","%","","0.01","%","","156,190","","","9.1","%","","0.02","%"],["Total interest-bearing","","1,159,213","","","54.6","%","","0.10","%","","897,821","","","52.1","%","","0.18","%"],["Non-interest bearing","","963,584","","","45.4","%","","","","824,889","","","47.9","%"],["Total deposits","","$","2,122,797","","","100.0","%","","","","$","1,722,710","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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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, 2021, 2020, and 2019.

[[GREPCENT_TABLE]]
[["","","2021","","2020","","2019"],["(Dollars in thousands)","","Balance","","Rate","","Balance","","Rate","","Balance","","Rate"],["Savings and NOW accounts","","$","529,043","","","0.03","%","","$","433,742","","","0.08","%","","$","370,378","","","0.15","%"],["Money market accounts","","$","455,575","","","0.15","%","","$","300,603","","","0.18","%","","$","270,918","","","0.24","%"],["Non-interest bearing demand","","$","900,083","","","\u2014","","","$","744,239","","","\u2014","","","$","557,348","","","\u2014"],["Total deposits","","$","1,974,576","","","0.05","%","","$","1,568,194","","","0.09","%","","$","1,295,780","","","0.15","%"]]
[[/GREPCENT_TABLE]]

The following table sets forth the maturity of time certificates of deposit and other time deposits of $100,000 or more at December 31, 2021.

[[GREPCENT_TABLE]]
[["(In thousands)"],["Three months or less","$","31,308"],["Over 3 through 6 months","7,712"],["Over 6 through 12 months","18,090"],["Over 12 months","8,249"],["","$","65,359"]]
[[/GREPCENT_TABLE]]

As of December 31, 2021 and 2020, 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 at December 31, 2021 and 2020, at interest rates which vary with market conditions. As of December 31, 2021 and 2020, 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 $247,845,000 as of December 31, 2021, compared to $245,021,000 as of December 31, 2020.  The increase in shareholders’ equity is the result of an increase in retained earnings from our net income of $28,401,000, the exercise of stock options in the amount of $256,000, the effect of share-based compensation expense of $405,000, and stock issued under our employee stock purchase plan of $204,000, partially offset by a decrease in accumulated other comprehensive income (AOCI) of $7,224,000, the payment of common stock cash dividends of $5,757,000, and the repurchase and retirement of common stock of $13,619,000.

During 2021, the Bank declared and paid cash dividends to the Company in the amount of $7,679,000 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 $5,757,000 or $0.47 per common share cash dividend to shareholders of record during the year ended December 31, 2021. During the year ended December 31, 2021, the Company repurchased and retired common stock in the amount of $13,619,000.

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

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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.

The following table sets forth certain financial ratios for the years ended December 31, 2021, 2020, and 2019.

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019"],["Net income:"],["To average assets","1.25","%","","1.11","%","","1.36","%"],["To average shareholders\u2019 equity","11.50","%","","8.85","%","","9.39","%"],["Dividends declared per share to net income per share","19.72","%","","26.99","%","","26.22","%"],["Average shareholders\u2019 equity to average assets","10.89","%","","12.54","%","","14.51","%"]]
[[/GREPCENT_TABLE]]

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, 2021 and December 31, 2020.

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","Actual Ratio"],["December 31, 2021","","Amount","","Ratio"],["Tier 1 Leverage Ratio","","$","189,020","","","8.03","%"],["Common Equity Tier 1 Ratio (CET 1)","","$","184,020","","","12.48","%"],["Tier 1 Risk-Based Capital Ratio","","$","189,020","","","12.82","%"],["Total Risk-Based Capital Ratio","","$","233,034","","","15.80","%"],["December 31, 2020"],["Tier 1 Leverage Ratio","","$","178,407","","","9.28","%"],["Common Equity Tier 1 Ratio (CET 1)","","$","173,407","","","14.10","%"],["Tier 1 Risk-Based Capital Ratio","","$","178,407","","","14.50","%"],["Total Risk-Based Capital Ratio","","$","191,572","","","15.58","%"]]
[[/GREPCENT_TABLE]]

The following table presents the Bank’s regulatory capital ratios as of December 31, 2021 and December 31, 2020

[[GREPCENT_TABLE]]
[["","","Actual Ratio","","Minimum regulatory requirement (1)","","Minimum requirement for \u201cWell-Capitalized\u201d Institution"],["December 31, 2021","","Amount","","Ratio","","Amount","","Ratio","","Amount","","Ratio"],["Tier 1 Leverage Ratio","","$","199,329","","","8.47","%","","$","94,156","","","4.00","%","","$","117,695","","","5.00","%"],["Common Equity Tier 1 Ratio (CET 1)","","$","199,329","","","13.52","%","","$","66,355","","","4.50","%","","$","95,846","","","6.50","%"],["Tier 1 Risk-Based Capital Ratio","","$","199,329","","","13.52","%","","$","88,473","","","6.00","%","","$","117,964","","","8.00","%"],["Total Risk-Based Capital Ratio","","$","209,044","","","14.18","%","","$","117,964","","","8.00","%","","$","147,455","","","10.00","%"],["December 31, 2020"],["Tier 1 Leverage Ratio","","$","177,269","","","9.23","%","","$","76,852","","","4.00","%","","$","96,065","","","5.00","%"],["Common Equity Tier 1 Ratio (CET 1)","","$","177,269","","","14.41","%","","$","55,346","","","7.00","%","","$","79,945","","","6.50","%"],["Tier 1 Risk-Based Capital Ratio","","$","177,269","","","14.41","%","","$","73,795","","","8.50","%","","$","98,394","","","8.00","%"],["Total Risk-Based Capital Ratio","","$","190,434","","","15.48","%","","$","98,394","","","10.50","%","","$","122,992","","","10.00","%"],["(1) The minimum regulatory requirement threshold includes the capital conservation buffer of 2.50%."]]
[[/GREPCENT_TABLE]]

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The Company succeeded to all of the rights and obligations of the Service 1st Capital Trust I, a Delaware business trust, in connection with the acquisition of Service 1st as of November 12, 2008.  The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st.  Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis.  At December 31, 2021, all of the trust preferred securities that have been issued qualify as Tier 1 capital.  The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option beginning five years 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, 2021, the rate was 1.73%.  Interest expense recognized by the Company for the years ended December 31, 2021, 2020, and 2019 was $266,000, $130,000 and $210,000, respectively.

On November 12, 2021, the Company completed a private placement of $35.0 million aggregate principal amount of its fixed-to-floating rate subordinated notes (“Subordinated Debt”) due December 1, 2031. The Subordinated Debt initially bears a fixed interest rate of 3.125% per year. Commencing on December 1, 2026, the interest rate on the Subordinated Debt will reset each quarter at a floating interest rate equal to the then-current three month term SOFR plus 210 basis points. The Company may at its option redeem in whole or in part the Subordinated Debt on or after November 12, 2026 without a premium. The Subordinated Debt is treated as Tier 2 Capital for regulatory purposes.

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, 2021, the Company had unpledged securities totaling $856,299,000 available as a secondary source of liquidity and total cash and cash equivalents of $163,467,000.  Cash and cash equivalents at December 31, 2021 increased 132.60% compared to December 31, 2020.  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, 2021, our available borrowing capacity includes approximately $110,000,000 in Federal funds lines with our correspondent banks and $277,130,000 in unused FHLB advances.  At December 31, 2021, 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, 2021 and 2020:

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[[GREPCENT_TABLE]]
[["Credit Lines (In thousands)","","December 31, 2021","","December 31, 2020"],["Unsecured Credit Lines (interest rate varies with market):"],["Credit limit","","$","110,000","","","$","110,000"],["Balance outstanding","","$","\u2014","","","$","\u2014"],["Federal Home Loan Bank (interest rate at prevailing interest rate):"],["Credit limit","","$","277,130","","","$","235,371"],["Balance outstanding","","$","\u2014","","","$","\u2014"],["Collateral pledged","","$","481,437","","","$","435,152"],["Fair value of collateral","","$","435,089","","","$","379,831"],["Federal Reserve Bank (interest rate at prevailing discount interest rate):"],["Credit limit","","$","9,961","","","$","13,323"],["Balance outstanding","","$","\u2014","","","$","\u2014"],["Collateral pledged","","$","10,361","","","$","13,538"],["Fair value of collateral","","$","10,241","","","$","13,703"]]
[[/GREPCENT_TABLE]]

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.

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”.

INFLATION

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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, 2021, 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.