Community West Bancshares 10-Q

ITEM 1: FINANCIAL STATEMENTS CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share amounts) September 30, 2020 December 31, 2019 ASSETS Cash and due from banks $ 33,447 $ 24,195 Interest-earning deposits in other banks 53,563 28,379 Total cash and cash equivalents 87,010 52,574 Available-for-sale debt securities 631,854 470,746 Equity securities 7,655 7,472 Loans, less allowance for credit losses of $14,657 at September 30, 2020 and $9,130 at December 31, 2019 1,095,232 934,250 Bank premises and equipment, net 7,257 7,618 Bank-owned life insurance 29,769 30,230 Federal Home Loan Bank stock 5,595 6,062 Goodwill 53,777 53,777 Core deposit intangibles 1,356 1,878 Accrued interest receivable and other assets 31,055 32,148 Total assets $ 1,950,560 $ 1,596,755 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest bearing $ 804,893 $ 594,627 Interest bearing 876,321 738,658 Total deposits 1,681,214 1,333,285 Junior subordinated deferrable interest debentures 5,155 5,155 Accrued interest payable and other liabilities 28,411 30,187 Total liabilities 1,714,780 1,368,627 Commitments and contingencies (Note 7) Shareholders’ equity: Preferred stock, no par value; 10,000,000 shares authorized, none issued and outstanding — — Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 12,507,658 at September 30, 2020 and 13,052,407 at December 31, 2019 79,269 89,379 Retained earnings 145,045 135,932 Accumulated other comprehensive income, net of tax 11,466 2,817 Total shareholders’ equity 235,780 228,128 Total liabilities and shareholders’ equity $ 1,950,560 $ 1,596,755 See notes to unaudited consolidated financial statements. 3 Table of Contents ` CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the Three Months Ended September 30, For the Nine Months Ended September 30, (In thousands, except share and per-share amounts) 2020 2019 2020 2019 INTEREST INCOME: Interest and fees on loans $ 13,190 $ 13,238 $ 38,688 $ 38,747 Interest on deposits in other banks 26 74 222 283 Interest and dividends on investment securities: Taxable 2,771 3,462 8,996 9,821 Exempt from Federal income taxes 444 153 1,015 1,144 Total interest income 16,431 16,927 48,921 49,995 INTEREST EXPENSE: Interest on deposits 363 566 1,169 1,428 Interest on junior subordinated deferrable interest debentures 25 51 106 163 Other — 105 — 419 Total interest expense 388 722 1,275 2,010 Net interest income before provision for credit losses 16,043 16,205 47,646 47,985 PROVISION FOR CREDIT LOSSES 600 250 4,975 525 Net interest income after provision for credit losses 15,443 15,955 42,671 47,460 NON-INTEREST INCOME: Service charges 463 672 1,556 2,075 Appreciation in cash surrender value of bank-owned life insurance 178 184 536 545 Interchange fees 355 374 995 1,101 Net realized gains on sales of investment securities 57 1,685 4,197 5,196 Federal Home Loan Bank dividends 71 109 253 348 Loan placement fees 685 288 1,545 647 Other income 262 410 1,577 1,384 Total non-interest income 2,071 3,722 10,659 11,296 NON-INTEREST EXPENSES: Salaries and employee benefits 6,729 6,731 21,053 20,133 Occupancy and equipment 1,196 1,317 3,479 4,248 Professional services 715 404 1,695 1,011 Data processing 594 390 1,484 1,186 Regulatory assessments 147 ( 69 ) 340 217 ATM/Debit card expenses 144 270 625 647 Information technology 594 614 1,804 1,996 Directors’ expenses 140 184 468 552 Advertising 167 190 507 590 Internet banking expense 167 215 545 608 Amortization of core deposit intangibles 174 174 521 521 Other 961 1,114 2,784 3,263 Total non-interest expenses 11,728 11,534 35,305 34,972 Income before provision for income taxes 5,786 8,143 18,025 23,784 Provision for income taxes 1,442 2,452 4,757 6,790 Net income $ 4,344 $ 5,691 $ 13,268 $ 16,994 Earnings per common share: Basic earnings per share $ 0.35 $ 0.43 $ 1.06 $ 1.26 Weighted average common shares used in basic computation 12,471,070 13,360,030 12,551,480 13,515,109 Diluted earnings per share $ 0.35 $ 0.42 $ 1.05 $ 1.25 Weighted average common shares used in diluted computation 12,496,174 13,450,187 12,596,172 13,615,552 Cash dividend per common share $ 0.11 $ 0.11 $ 0.33 $ 0.32 See notes to unaudited consolidated financial statements. 4 Table of Contents ` CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) For the Three Months Ended September 30, For the Nine Months Ended September 30, (In thousands) 2020 2019 2020 2019 Net income $ 4,344 $ 5,691 $ 13,268 $ 16,994 Other Comprehensive Income: Unrealized gains (losses) on securities: Unrealized holding gains arising during the period 5,798 3,081 16,477 19,589 Reclassification of net (gains) losses included in net income ( 57 ) ( 1,685 ) ( 4,197 ) ( 5,196 ) Other comprehensive income, before tax 5,741 1,396 12,280 14,393 Tax effect ( 1,698 ) ( 412 ) ( 3,631 ) ( 4,255 ) Total other comprehensive income 4,043 984 8,649 10,138 Comprehensive income $ 8,387 $ 6,675 $ 21,917 $ 27,132 See notes to unaudited consolidated financial statements. 5 Table of Contents ` CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (Unaudited) Common Stock Accumulated Other Comprehensive Income (Loss) (Net of Taxes) Total Shareholders’ Equity Retained Earnings (In thousands, except share amounts) Shares Amount Balance, June 30, 2019 13,488,983 $ 98,210 $ 128,723 $ 4,747 $ 231,680 Net income — — 5,691 — 5,691 Other comprehensive income — — — 984 984 Restricted stock granted net of forfeitures ( 1,770 ) — — — — Stock issued under employee stock purchase plan 2,265 41 41 Stock-based compensation expense — 136 — — 136 Cash dividend — — ( 1,479 ) — ( 1,479 ) Stock options exercised 300 2 — — 2 Repurchase and retirement of common stock ( 188,383 ) ( 3,873 ) ( 3,873 ) Balance, September 30, 2019 13,301,395 $ 94,516 $ 132,935 $ 5,731 $ 233,182 Balance, June 30, 2020 12,494,597 $ 79,059 $ 142,076 $ 7,423 $ 228,558 Net income — — 4,344 — 4,344 Other comprehensive income — — — 4,043 4,043 Restricted stock granted net of forfeitures 392 — — — — Stock issued under employee stock purchase plan 4,319 47 — — 47 Stock-based compensation expense — 113 — — 113 Cash dividend — — ( 1,375 ) — ( 1,375 ) Stock options exercised 8,350 50 — — 50 Balance, September 30, 2020 12,507,658 $ 79,269 $ 145,045 $ 11,466 $ 235,780 See notes to unaudited consolidated financial statements. 6 Table of Contents ` CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (Unaudited) Accumulated Other Comprehensive Income (Loss) (Net of Taxes) Total Shareholders’ Equity Common Stock Retained Earnings (In thousands, except share amounts) Shares Amount Balance, January 1, 2019 13,754,965 $ 103,851 $ 120,294 $ ( 4,407 ) 219,738 Net income — — 16,994 — 16,994 Other comprehensive income — — — 10,138 10,138 Stock issued under employee stock purchase plan 9,733 171 — — 171 Stock awarded to employees 5,295 100 — — 100 Restricted stock granted net of forfeitures 18,265 — — — — Stock-based compensation expense — 430 — — 430 Cash dividend — — ( 4,353 ) — ( 4,353 ) Repurchase and retirement of common stock ( 508,983 ) ( 10,199 ) — — ( 10,199 ) Stock options exercised 22,120 163 — — 163 Balance, September 30, 2019 13,301,395 $ 94,516 $ 132,935 $ 5,731 $ 233,182 Balance, January 1, 2020 13,052,407 $ 89,379 $ 135,932 $ 2,817 $ 228,128 Net income — — 13,268 — 13,268 Other comprehensive income — — — 8,649 8,649 Restricted stock granted net of forfeitures 14,482 — — — — Stock issued under employee stock purchase plan 12,300 162 — — 162 Stock awarded to employees 6,548 141 — — 141 Stock-based compensation expense — 362 — — 362 Cash dividend — — ( 4,155 ) — ( 4,155 ) Stock options exercised 43,300 277 — — 277 Repurchase and retirement of common stock ( 621,379 ) ( 11,052 ) — — ( 11,052 ) Balance, September 30, 2020 12,507,658 $ 79,269 $ 145,045 $ 11,466 $ 235,780 See notes to unaudited consolidated financial statements. 7 Table of Contents ` CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended September 30, (In thousands) 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 13,268 $ 16,994 Adjustments to reconcile net income to net cash provided by operating activities: Net increase in deferred loan fees ( 5,304 ) ( 16 ) Depreciation 668 1,410 Accretion ( 994 ) ( 620 ) Amortization 3,328 3,556 Stock-based compensation 362 430 Provision for credit losses 4,975 525 Net realized gains on sales of available-for-sale investment securities ( 4,197 ) ( 5,196 ) Net gain on disposal of premises and equipment ( 6 ) — Increase in fair value of equity securities ( 183 ) ( 253 ) Increase in bank-owned life insurance, net of expenses ( 376 ) ( 545 ) Net gain on bank-owned life insurance ( 462 ) — Net increase in accrued interest receivable and other assets ( 1,394 ) ( 8,720 ) Net increase in accrued interest payable and other liabilities ( 1,636 ) 10,500 Provision for deferred income taxes ( 1,227 ) ( 1,345 ) Net cash provided by operating activities 6,822 16,720 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale investment securities ( 319,707 ) ( 286,896 ) Proceeds from sales or calls of available-for-sale investment securities 147,811 280,991 Proceeds from maturity and principal repayments of available-for-sale investment securities 25,536 17,140 Net increase in loans ( 160,653 ) ( 23,925 ) Purchases of premises and equipment ( 307 ) ( 730 ) Purchases of bank-owned life insurance ( 250 ) ( 1,000 ) FHLB stock redeemed 467 780 Proceeds from bank-owned life insurance 1,550 — Proceeds from sale of premises and equipment 6 — Net cash used in investing activities ( 305,547 ) ( 13,640 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand, interest bearing and savings deposits 353,622 27,003 Net (decrease) increase in time deposits ( 5,693 ) 445 Proceeds from short-term borrowings from Federal Home Loan Bank — 505,500 Repayments of short-term borrowings to Federal Home Loan Bank — ( 510,500 ) Proceeds of borrowings from other financial institutions — 2,870 Repayments of borrowings from other financial institutions — ( 2,870 ) Purchase and retirement of common stock ( 11,052 ) ( 10,199 ) Proceeds from stock issued under employee stock purchase plan 162 171 Proceeds from exercise of stock options 277 163 Cash dividend payments on common stock ( 4,155 ) ( 4,353 ) Net cash provided by financing activities 333,161 8,230 Increase in cash and cash equivalents 34,436 11,310 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 52,574 31,727 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 87,010 $ 43,037 8 Table of Contents ` For the Nine Months Ended September 30, (In thousands) 2020 2019 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid during the period for : Interest $ 1,354 $ 1,957 Income taxes $ 5,120 $ 6,580 Operating cash flows from operating leases $ 1,678 $ 1,643 Non-cash investing and financing activities: Initial recognition of operating lease right-of-use assets $ — $ 10,129 See notes to unaudited consolidated financial statements. 9 Table of Contents ` Note 1. Basis of Presentation The interim unaudited condensed consolidated financial statements of Central Valley Community Bancorp and subsidiary have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). These interim condensed consolidated financial statements include the accounts of Central Valley Community Bancorp and its wholly owned subsidiary Central Valley Community Bank (the Bank) (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted. The Company believes that the disclosures are adequate to make the information presented not misleading. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2019 Annual Report to Shareholders on Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position at September 30, 2020, and the results of its operations and its cash flows for the nine-month interim periods ended September 30, 2020 and 2019 have been included. The results of operations for interim periods are not necessarily indicative of results for the full year. The preparation of these interim unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment, and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank. Risks and Uncertainties In December 2019, a novel strain of coronavirus, COVID-19, was reported in Wuhan, China. COVID-19 continues to aggressively spread globally, including all 50 states in the United States. A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate, could adversely affect our operations. While the spread of COVID-19 has minimally affected our operations as of September 30, 2020, it has caused significant economic disruption throughout the United States as state and local governments issued “shelter at home” orders along with the closing of non-essential businesses. The potential financial impact is unknown at this time. However, if these actions are sustained, it may adversely affect several industries within our geographic footprint and impair the ability of our customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, investments, loans, or deferred tax assets. Impact of New Financial Accounting Standards: FASB Accounting Standards Update (ASU) 2016-13 - Measurement of Credit Losses on Financial Instruments (Subtopic 326) : Financial Instruments - Credit Losses, commonly referred to as “CECL,” was issued June 2016. The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to be based on an incurred loss methodology. Under CECL, reserves required for financial assets measured at amortized cost will reflect an organization’s estimate of all expected credit losses over the contractual term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (“HTM”) debt securities. Under the provisions of the update, credit losses recognized on available for sale (“AFS”) debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP a purchased loan’s contractual balance is adjusted to fair value through a credit discount and no reserve is recorded on the purchased loan upon acquisition. Since under CECL, reserves will be established for purchased loans at the time of acquisition, the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. The FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage disclosures. On August 15, 2019, the FASB issued a proposed Accounting Standards Update (ASU), “Financial 10 Table of Contents ` Instruments -Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” that would provide private entities and certain small public companies additional time to implement the standards on CECL, leases, and hedging. The final ASU extends the effective date for SEC filers, such as the Company, that are classified as smaller reporting companies to January 1, 2023. The Company has formed an internal task force that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard. The Company has also established a project management governance process to manage the implementation across affected disciplines. An external provider specializing in community bank loss driver and CECL reserving model design as well as other related consulting services has been retained, and we have begun to evaluate potential CECL modeling alternatives. As part of this process, the Company has determined potential loan pool segmentation and sub-segmentation under CECL, as well as begun to evaluate the key economic loss drivers for each segment. Further, the Company has begun developing internal controls around the CECL process, data, calculations and implementation. The Company presently plans to generate and evaluate model scenarios under CECL in tandem with its current reserving processes for interim and annual reporting periods during 2021 due to the fact the Company elected to delay implementation of the CECL process as allowed by FASB. While the Company is currently unable to reasonably estimate the impact of adopting this new guidance, management expects the impact of adoption will be significantly influenced by the composition and quality of the Company’s loans as well as the economic conditions as of the date of adoption. The Company also anticipates changes to the processes and procedures for calculating the reserve for credit losses and continues to evaluate the potential impact on our consolidated financial statements. FASB Accounting Standards Update (ASU) 2018-13 - Fair Value Measurement (Subtopic 820) : Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, was issued August 2018. The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this ASU effective January 1, 2020 and it did not have a material impact on the Company’s consolidated financial statements and disclosures. FASB Accounting Standards Update (ASU) 2020-04 - Reference Rate Reform (Subtopic 848) : Facilitation of the Effects of Reference Rate Reform on Financial Reporting, was issued March 2020. This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements. In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued a revised interagency statement encouraging financial institutions to work with customers affected by COVID-19 and providing additional information regarding loan modifications. The revised interagency statement clarifies the interaction between the interagency statement issued on March 22, 2020 and the temporary relief provided by Section 4013 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Section 4013 allows financial institutions to suspend the requirements to classify certain loan modifications as troubled debt restructurings (“TDRs”). The revised statement also provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification programs and regulatory capital. This interagency guidance is expected to reduce the number of TDRs that will be reported in future periods; however, the amount is indeterminable and will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic . Note 2. Fair Value Measurements Fair Value Hierarchy Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In accordance with applicable guidance, the Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuations within these levels are based upon: 11 Table of Contents ` Level 1 — Quoted market prices (unadjusted) for identical instruments traded in active exchange markets that the Company has the ability to access as of the measurement date. Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data. Level 3 — Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant. Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, we report the transfer at the beginning of the reporting period. The estimated carrying and fair values of the Company’s financial instruments are as follows (in thousands): September 30, 2020 Carrying Amount Fair Value (In thousands) Level 1 Level 2 Level 3 Total Financial assets: Cash and due from banks $ 33,447 $ 33,447 $ — $ — $ 33,447 Interest-earning deposits in other banks 53,563 53,563 — — 53,563 Available-for-sale debt securities 631,854 — 631,854 — 631,854 Equity securities 7,655 7,655 — — 7,655 Loans, net 1,095,232 — — 1,086,793 1,086,793 Federal Home Loan Bank stock 5,595 N/A N/A N/A N/A Accrued interest receivable 8,308 11 2,919 5,378 8,308 Financial liabilities: Deposits 1,681,214 1,668,057 88,264 — 1,756,321 Junior subordinated deferrable interest debentures 5,155 — — 3,504 3,504 Accrued interest payable 98 — 73 25 98 December 31, 2019 Carrying Amount Fair Value (In thousands) Level 1 Level 2 Level 3 Total Financial assets: Cash and due from banks $ 24,195 $ 24,195 $ — $ — $ 24,195 Interest-earning deposits in other banks 28,379 28,379 — — 28,379 Available-for-sale debt securities 470,746 — 470,746 — 470,746 Equity securities 7,472 7,472 — — 7,472 Loans, net 934,250 — — 928,807 928,807 Federal Home Loan Bank stock 6,062 N/A N/A N/A N/A Accrued interest receivable 5,591 33 1,798 3,760 5,591 Financial liabilities: Deposits 1,333,285 1,160,224 93,395 — 1,253,619 Junior subordinated deferrable interest debentures 5,155 — — 3,976 3,976 Accrued interest payable 176 — 129 47 176 These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business 12 Table of Contents ` related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. The methods and assumptions used to estimate fair values are described as follows: (a) Cash and Cash Equivalents — The carrying amounts of cash and due from banks, interest-earning deposits in other banks, and Federal funds sold approximate fair values and are classified as Level 1. (b) Investment Securities — Investment securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for investment securities classified in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. (c) Loans — Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Purchased credit impaired (PCI) loans are measured at estimated fair value on the date of acquisition. Carrying value is calculated as the present value of expected cash flows and approximates fair value and included in Level 3. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are initially valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The estimated fair values of financial instruments disclosed above follow the guidance in ASU 2016-01 which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity, and marketability factors. (d) FHLB Stock — It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. (e) Deposits — Fair value of demand deposit, savings, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair value for fixed and variable rate certificates of deposit are estimated using discounted cash flow analyses using interest rates offered at each reporting date by the Company for certificates with similar remaining maturities resulting in a Level 2 classification. (f) Short-Term Borrowings — The fair values of the Company’s federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, are based on the market rates for similar types of borrowing arrangements resulting in a Level 2 classification. (g) Other Borrowings — The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification. The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification. (h) Accrued Interest Receivable/Payable — The fair value of accrued interest receivable and payable is based on the fair value hierarchy of the related asset or liability. 13 Table of Contents ` (i) Off-Balance Sheet Instruments — Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not considered significant for financial reporting purposes. Assets Recorded at Fair Value The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2020: Recurring Basis The Company is required or permitted to record the following assets at fair value on a recurring basis as of September 30, 2020 (in thousands). Description Fair Value Level 1 Level 2 Level 3 Available-for-sale debt securities: U.S. Government agencies $ 40,628 $ — $ 40,628 $ — Obligations of states and political subdivisions 294,873 — 294,873 — U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 217,282 — 217,282 — Private label mortgage and asset backed securities 55,222 — 55,222 — Corporate debt securities 23,849 — 23,849 — Equity securities 7,655 7,655 — — Total assets measured at fair value on a recurring basis $ 639,509 $ 7,655 $ 631,854 $ — Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for available-for-sale debt securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the nine months ended September 30, 2020, no transfers between levels occurred. There were no Level 3 assets measured at fair value on a recurring basis at or during the nine months ended September 30, 2020. Also there were no liabilities measured at fair value on a recurring basis at September 30, 2020. Non-recurring Basis The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at September 30, 2020. Fair Value Level 1 Level 2 Level 3 Impaired loans: Real estate: Real estate-construction and other land loans $ 1,248 $ — $ — $ 1,248 Total assets measured at fair value on a non-recurring basis $ 1,248 $ — $ — $ 1,248 14 Table of Contents ` At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. The fair value of impaired loans is based on the fair value of the collateral. Impaired loans were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements. Impaired loans evaluated under the discounted cash flow method are excluded from the table above. The discounted cash flow methods as prescribed by ASC Topic 310 is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate which is not a market rate. There were no changes in valuation techniques used during the nine months ended ended September 30, 2020. Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value is compared with independent data sources such as recent market data or industry-wide statistics. Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans had a principal balance of $ 1,735,000 with a valuation allowance of $ 487,000 at September 30, 2020, and a resulting fair value of $ 1,248,000 . The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans. There were no charge-offs related to loans carried at fair value during the nine months ended September 30, 2020 and 2019. Activity related to changes in the allowance for loan losses related to impaired loans for the three months ended September 30, 2020 and 2019 was not considered significant for disclosure purposes. There were no liabilities measured at fair value on a non-recurring basis at September 30, 2020. The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 2019: Recurring Basis The Company is required or permitted to record the following assets at fair value on a recurring basis as of December 31, 2019 (in thousands). Description Fair Value Level 1 Level 2 Level 3 Available-for-sale debt securities: U.S. Government agencies $ 14,494 $ — $ 14,494 $ — Obligations of states and political subdivisions 91,111 — 91,111 — U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 196,719 — 196,719 — Private label mortgage and asset backed securities 159,378 — 159,378 — Corporate debt securities 9,044 — 9,044 — Equity securities 7,472 7,472 — — Total assets measured at fair value on a recurring basis $ 478,218 $ 7,472 $ 470,746 $ — Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for available-for-sale debt securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the year ended December 31, 2019, no transfers between levels occurred. There were no Level 3 assets measured at fair value on a recurring basis at or during the year ended December 31, 2019. Also there were no liabilities measured at fair value on a recurring basis at December 31, 2019. 15 Table of Contents ` Non-recurring Basis The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. As of December 31, 2019 there were no loans or assets that were measured at the lower of cost or fair value. There were no liabilities measured at fair value on a non-recurring basis at December 31, 2019. Note 3. Investments The investment portfolio consists primarily of U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations, private label mortgage and asset backed securities (PLMABS), corporate debt securities, and obligations of states and political subdivisions securities. As of September 30, 2020, $ 157,758,000 of these securities were held as collateral for borrowing arrangements, public funds, and for other purposes. The fair value of the available-for-sale investment portfolio reflected a net unrealized gain of $ 16,279,000 at September 30, 2020 compared to an unrealized gain of $ 3,999,000 at December 31, 2019. The unrealized gain/(loss) recorded is net of $ 4,813,000 and $ 1,182,000 in tax liabilities (benefits) as accumulated other comprehensive income (loss) within shareholders’ equity at September 30, 2020 and December 31, 2019, respectively. The following table sets forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands): September 30, 2020 Available-for-Sale Securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Debt securities: U.S. Government agencies $ 40,913 $ 32 $ ( 317 ) $ 40,628 Obligations of states and political subdivisions 280,506 14,930 ( 563 ) 294,873 U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 216,084 3,985 ( 2,787 ) 217,282 Private label mortgage and asset backed securities 54,072 1,253 ( 103 ) 55,222 Corporate debt securities 24,000 145 ( 296 ) 23,849 Total available-for-sale $ 615,575 $ 20,345 $ ( 4,066 ) $ 631,854 December 31, 2019 Available-for-Sale Securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Debt securities: U.S. Government agencies $ 14,740 $ 12 $ ( 258 ) $ 14,494 Obligations of states and political subdivisions 89,574 2,965 ( 1,428 ) 91,111 U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 198,125 1,409 ( 2,815 ) 196,719 Private label mortgage and asset backed securities 155,308 4,223 ( 153 ) 159,378 Corporate debt securities 9,000 79 ( 35 ) 9,044 Total available-for-sale $ 466,747 $ 8,688 $ ( 4,689 ) $ 470,746 16 Table of Contents ` Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended September 30, 2020 and 2019 are shown below (in thousands): For the Three Months Ended September 30, For the Nine Months Ended September 30, Available-for-Sale Securities 2020 2019 2020 2019 Proceeds from sales or calls $ 25,442 $ 77,375 $ 147,811 $ 280,991 Gross realized gains from sales or calls 1,035 1,709 5,539 5,316 Gross realized losses from sales or calls ( 978 ) ( 24 ) ( 1,342 ) ( 120 ) Losses recognized in 2020 and 2019 were incurred in order to reposition the investment securities portfolio based on the current rate environment. As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using proceeds to purchase securities that fit with the Company’s current risk profile is appropriate and beneficial to the Company. The provision for income taxes includes $ 1,241,000 and $ 1,536,000 income tax impact from the reclassification of unrealized net gains on securities to realized net gains on securities for the nine months ended September 30, 2020 and 2019, respectively. The provision (benefit) for income taxes includes $ 17,000 and $ 498,000 income tax impact from the reclassification of unrealized net gains/(losses) on available-for-sale securities to realized net gains/(losses) on available-for-sale securities for the three months ended September 30, 2020 and 2019, respectively Investment securities, aggregated by investment category, with unrealized losses as of the dates indicated are summarized and classified according to the duration of the loss period as follows (in thousands): September 30, 2020 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Available-for-Sale Securities Value Losses Value Losses Value Losses Debt securities: U.S. Government agencies $ 27,125 $ ( 132 ) $ 12,812 $ ( 185 ) $ 39,937 $ ( 317 ) Obligations of states and political subdivisions 50,672 ( 563 ) — — 50,672 ( 563 ) U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 32,953 ( 287 ) 81,338 ( 2,500 ) 114,291 ( 2,787 ) Private label mortgage and asset backed securities 12,698 ( 103 ) — — 12,698 ( 103 ) Corporate debt securities 8,704 ( 296 ) — — 8,704 ( 296 ) Total available-for-sale $ 132,152 $ ( 1,381 ) $ 94,150 $ ( 2,685 ) $ 226,302 $ ( 4,066 ) December 31, 2019 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Available-for-Sale Securities Value Losses Value Losses Value Losses Debt securities: U.S. Government agencies $ — $ — $ 13,713 $ ( 258 ) $ 13,713 $ ( 258 ) Obligations of states and political subdivisions 65,606 ( 1,428 ) — — 65,606 ( 1,428 ) U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 71,650 ( 932 ) 69,518 ( 1,883 ) 141,168 ( 2,815 ) Private label mortgage and asset backed securities 17,811 ( 81 ) 5,624 ( 72 ) 23,435 ( 153 ) Corporate debt securities 3,965 ( 35 ) — — 3,965 ( 35 ) Total available-for-sale $ 159,032 $ ( 2,476 ) $ 88,855 $ ( 2,213 ) $ 247,887 $ ( 4,689 ) The Company periodically evaluates each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions, and interest rate fluctuations. The portion of the impairment that 17 Table of Contents ` is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase. As of September 30, 2020, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). The Company evaluated all individual available-for-sale investment securities with an unrealized loss at September 30, 2020 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at September 30, 2020 greater than 10 % of the recorded book value on that date, or which had an unrealized loss of more than $ 10,000 . The Company also analyzed any securities that may have been downgraded by credit rating agencies. For those investment securities that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those investment securities. For those bonds that were obligations of states and political subdivisions with an investment grade rating by the rating agencies, the Company also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded there were no OTTI losses recorded during the nine months ended September 30, 2020. U.S. Government Agencies At September 30, 2020, the Company held 11 U.S. Government agency securities of which five were in a loss position for less than 12 months and five had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in direct obligations of U.S. Government agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell, those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020. Obligations of States and Political Subdivisions At September 30, 2020, the Company held 87 obligations of states and political subdivision securities of which 10 were in a loss position for less than 12 months. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020. U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations At September 30, 2020, the Company held 118 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 12 were in a loss position for less than 12 months and 17 have been in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed or supported by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability to hold and does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020. Private Label Mortgage and Asset Backed Securities At September 30, 2020, the Company had a total of 24 Private Label Mortgage and Asset Backed Securities (PLMABS). Four of the PLMABS securities were in a loss position for less than 12 months and none have been in loss for more than 12 months at September 30, 2020. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell, those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020. The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary. 18 Table of Contents ` Corporate Debt Securities At September 30, 2020, the Company held seven corporate debt securities of which two were in a loss position for less than 12 months. The unrealized loss on the Company’s investments in corporate debt security was caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020. The amortized cost and estimated fair value of available-for-sale investment securities at September 30, 2020 by contractual maturity is shown below (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties. September 30, 2020 Available-for-Sale Securities Amortized Cost Estimated Fair Value Within one year $ 295 $ 304 After one year through five years 1,314 1,454 After five years through ten years 31,221 34,368 After ten years 247,676 258,747 280,506 294,873 Investment securities not due at a single maturity date: U.S. Government agencies 40,913 40,628 U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 216,084 217,282 Private label mortgage and asset backed securities 54,072 55,222 Corporate debt securities 24,000 23,849 Total available-for-sale $ 615,575 $ 631,854 Note 4. Loans and Allowance for Credit Losses Outstanding loans are summarized as follows: Loan Type (Dollars in thousands) September 30, 2020 % of Total Loans December 31, 2019 % of Total Loans Commercial: Commercial and industrial $ 296,338 26.7 % $ 102,541 10.9 % Agricultural production 22,902 2.1 % 23,159 2.6 % Total commercial 319,240 28.8 % 125,700 13.5 % Real estate: Owner occupied 195,189 17.6 % 197,946 21.0 % Real estate construction and other land loans 72,612 6.5 % 73,718 7.8 % Commercial real estate 318,766 28.7 % 329,333 34.9 % Agricultural real estate 75,747 6.7 % 76,304 8.1 % Other real estate 34,883 3.1 % 31,241 3.3 % Total real estate 697,197 62.6 % 708,542 75.1 % Consumer: Equity loans and lines of credit 58,614 5.3 % 64,841 6.9 % Consumer and installment 38,627 3.3 % 42,782 4.5 % Total consumer 97,241 8.6 % 107,623 11.4 % Net deferred origination (fees) costs ( 3,789 ) 1,515 Total gross loans 1,109,889 100.0 % 943,380 100.0 % Allowance for credit losses ( 14,657 ) ( 9,130 ) Total loans $ 1,095,232 $ 934,250 19 Table of Contents ` At September 30, 2020 and December 31, 2019, loans originated under Small Business Administration (SBA) programs totaling $ 24,816,000 and $ 21,910,000 , respectively, were included in the real estate and commercial categories, of which, $ 18,618,000 or 75 % and $ 16,372,000 or 75 %, respectively, are secured by government guarantees. In addition, the Company participated in the SBA Paycheck Protection Program (PPP) to help provide loans to our business customers to provide them with additional working capital. At September 30, 2020, 1,076 PPP loans totaling $ 210,057,000 were outstanding and included in the commercial and industrial line item above. Allowance for Credit Losses The allowance for credit losses (the “Allowance”) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. The Allowance is established through a provision for credit losses which is charged to expense. Additions to the Allowance are expected to maintain the adequacy of the total Allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the Allowance. Cash received on previously charged-off credits is recorded as a recovery to the Allowance. The overall Allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired. For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer data) over the most recent 47 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole. The following table shows the summary of activities for the Allowance as of and for the three months ended September 30, 2020 and 2019 by portfolio segment (in thousands): Commercial Real Estate Consumer Unallocated Total Allowance for credit losses: Beginning balance, July 1, 2020 $ 2,087 $ 10,389 $ 1,280 $ 181 $ 13,937 Provision (reversal) charged to operations ( 30 ) 267 60 303 600 Losses charged to allowance ( 43 ) — ( 2 ) — ( 45 ) Recoveries 146 — 19 — 165 Ending balance, September 30, 2020 $ 2,160 $ 10,656 $ 1,357 $ 484 $ 14,657 Allowance for credit losses: Beginning balance, July 1, 2019 $ 1,800 $ 6,553 $ 911 $ 141 $ 9,405 Provision (reversal) charged to operations 3 508 117 ( 378 ) 250 Losses charged to allowance ( 122 ) — ( 93 ) — ( 215 ) Recoveries 37 — 18 — 55 Ending balance, September 30, 2019 $ 1,718 $ 7,061 $ 953 $ ( 237 ) $ 9,495 20 Table of Contents ` The following table shows the summary of activities for the Allowance as of and for the nine month ended September 30, 2020 and 2019 by portfolio segment (in thousands): Commercial Real Estate Consumer Unallocated Total Allowance for credit losses: Beginning balance, January 1, 2020 $ 1,428 $ 6,769 $ 897 $ 36 $ 9,130 Provision charged to operations 203 3,887 437 448 4,975 Losses charged to allowance ( 72 ) — ( 97 ) — ( 169 ) Recoveries 601 — 120 — 721 Ending balance, September 30, 2020 $ 2,160 $ 10,656 $ 1,357 $ 484 $ 14,657 Allowance for credit losses: Beginning balance, January 1, 2019 $ 1,671 $ 6,539 $ 826 $ 68 $ 9,104 Provision (reversal) charged to operations 123 522 185 ( 305 ) 525 Losses charged to allowance ( 172 ) — ( 108 ) — ( 280 ) Recoveries 96 — 50 — 146 Ending balance, September 30, 2019 $ 1,718 $ 7,061 $ 953 $ ( 237 ) $ 9,495 The following is a summary of the Allowance by impairment methodology and portfolio segment as of September 30, 2020 and December 31, 2019 (in thousands): Commercial Real Estate Consumer Unallocated Total Allowance for credit losses: Ending balance, September 30, 2020 $ 2,160 $ 10,656 $ 1,357 $ 484 $ 14,657 Ending balance: individually evaluated for impairment $ 223 $ 489 $ 27 $ — $ 739 Ending balance: collectively evaluated for impairment $ 1,937 $ 10,167 $ 1,330 $ 484 $ 13,918 Ending balance, December 31, 2019 $ 1,428 $ 6,769 $ 897 $ 36 $ 9,130 Ending balance: individually evaluated for impairment $ 2 $ 3 $ 35 $ — $ 40 Ending balance: collectively evaluated for impairment $ 1,426 $ 6,766 $ 862 $ 36 $ 9,090 The following table shows the ending balances of loans as of September 30, 2020 and December 31, 2019 by portfolio segment and by impairment methodology (in thousands): Commercial Real Estate Consumer Total Loans: Ending balance, September 30, 2020 $ 319,240 $ 697,197 $ 97,241 $ 1,113,678 Ending balance: individually evaluated for impairment $ 8,670 $ 2,838 $ 1,178 $ 12,686 Ending balance: collectively evaluated for impairment $ 310,570 $ 694,359 $ 96,063 $ 1,100,992 Loans: Ending balance, December 31, 2019 $ 125,700 $ 708,542 $ 107,623 $ 941,865 Ending balance: individually evaluated for impairment $ 187 $ 2,036 $ 1,511 $ 3,734 Ending balance: collectively evaluated for impairment $ 125,513 $ 706,506 $ 106,112 $ 938,131 21 Table of Contents ` The following table shows the loan portfolio by class allocated by management’s internal risk ratings at September 30, 2020 (in thousands): Pass Special Mention Sub-Standard Doubtful Total Commercial: Commercial and industrial $ 270,642 $ 15,004 $ 10,692 $ — $ 296,338 Agricultural production 14,386 1,352 7,164 — 22,902 Real Estate: Owner occupied 180,786 8,706 5,697 — 195,189 Real estate construction and other land loans 66,216 2,226 4,170 — 72,612 Commercial real estate 307,645 9,149 1,972 — 318,766 Agricultural real estate 61,960 6,896 6,891 — 75,747 Other real estate 34,722 161 — — 34,883 Consumer: Equity loans and lines of credit 57,250 399 965 — 58,614 Consumer and installment 38,535 — 92 — 38,627 Total $ 1,032,142 $ 43,893 $ 37,643 $ — $ 1,113,678 The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2019 (in thousands): Pass Special Mention Sub-Standard Doubtful Total Commercial: Commercial and industrial $ 86,705 $ 2,635 $ 13,201 $ — $ 102,541 Agricultural production 18,814 — 4,345 — 23,159 Real Estate: Owner occupied 186,370 6,881 4,695 — 197,946 Real estate construction and other land loans 72,142 — 1,576 — 73,718 Commercial real estate 310,982 17,202 1,149 — 329,333 Agricultural real estate 68,032 946 7,326 — 76,304 Other real estate 31,241 — — — 31,241 Consumer: Equity loans and lines of credit 62,776 519 1,546 — 64,841 Consumer and installment 42,782 — — — 42,782 Total $ 879,844 $ 28,183 $ 33,838 $ — $ 941,865 22 Table of Contents ` The following table shows an aging analysis of the loan portfolio by class and the time past due at September 30, 2020 (in thousands): 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans Recorded Investment > 90 Days Accruing Non-accrual Commercial: Commercial and industrial $ 64 $ — $ — $ 64 $ 296,274 $ 296,338 $ — $ 715 Agricultural production — — — — 22,902 22,902 — — Real estate: — — Owner occupied — — — — 195,189 195,189 — 380 Real estate construction and other land loans — — 186 186 72,426 72,612 — 1,764 Commercial real estate — — — — 318,766 318,766 — 507 Agricultural real estate — — — — 75,747 75,747 — — Other real estate — — — — 34,883 34,883 — — Consumer: — Equity loans and lines of credit — — — — 58,614 58,614 — — Consumer and installment 6 — — 6 38,621 38,627 — 92 Total $ 70 $ — $ 186 $ 256 $ 1,113,422 $ 1,113,678 $ — $ 3,458 The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2019 (in thousands): 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans Recorded Investment > 90 Days Accruing Non- accrual Commercial: Commercial and industrial $ 17 $ — $ — $ 17 $ 102,524 $ 102,541 $ — $ 187 Agricultural production — — — — 23,159 23,159 — — Real estate: — Owner occupied — 218 — 218 197,728 197,946 — 416 Real estate construction and other land loans — — — — 73,718 73,718 — — Commercial real estate — 381 — 381 328,952 329,333 — 381 Agricultural real estate — — — — 76,304 76,304 — 321 Other real estate — — — — 31,241 31,241 — — Consumer: Equity loans and lines of credit — — — — 64,841 64,841 — 388 Consumer and installment 168 — — 168 42,614 42,782 — — Total $ 185 $ 599 $ — $ 784 $ 941,081 $ 941,865 $ — $ 1,693 23 Table of Contents ` The following table shows information related to impaired loans by class at September 30, 2020 (in thousands): Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial: Commercial and industrial $ 7,175 $ 7,175 $ — Real estate: Owner occupied $ 380 $ 412 $ — Real estate construction and other land loans 29 29 — Commercial real estate 507 544 — Total real estate 916 985 — Consumer: Equity loans and lines of credit 145 181 — Total with no related allowance recorded 8,236 8,341 — With an allowance recorded: Commercial: Commercial and industrial 716 738 206 Agricultural production 779 779 17 Total commercial 1,495 1,517 223 Real estate: Real estate construction and other land loans 1,735 1,743 487 Commercial real estate 150 151 2 Agricultural real estate 37 37 — Total real estate 1,922 1,931 489 Consumer: Equity loans and lines of credit 941 941 13 Consumer and installment 92 95 14 Total consumer 1,033 1,036 27 Total with an allowance recorded 4,450 4,484 739 Total $ 12,686 $ 12,825 $ 739 The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality. 24 Table of Contents ` The following table shows information related to impaired loans by class at December 31, 2019 (in thousands): Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial: Commercial and industrial $ 163 $ 432 $ — Real estate: Owner occupied 416 426 — Real estate construction and other land loans — — — Commercial real estate 1,110 1,361 — Agricultural real estate 321 321 — Total real estate 1,847 2,108 — Consumer: Equity loans and lines of credit 220 256 — Total with no related allowance recorded 2,230 2,796 — With an allowance recorded: Commercial: Commercial and industrial 24 27 2 Real estate: Commercial real estate 152 153 3 Agricultural real estate 37 37 — Total real estate 189 190 3 Consumer: Equity loans and lines of credit 1,291 1,292 35 Total with an allowance recorded 1,504 1,509 40 Total $ 3,734 $ 4,305 $ 40 The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality. 25 Table of Contents ` The following tables present by class, information related to the average recorded investment and interest income recognized on impaired loans for the three months ended September 30, 2020 and 2019 (in thousands). Three Months Ended September 30, 2020 Three Months Ended September 30, 2019 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial: Commercial and industrial $ 4,157 $ — $ 202 $ — Agricultural production — — — — Total commercial 4,157 — 202 — Real estate: Owner occupied 385 — 204 — Real estate construction and other land loans 7 — 988 — Commercial real estate 689 — 1,528 12 Agricultural real estate 120 — — — Total real estate 1,201 — 2,720 12 Consumer: Equity loans and lines of credit 178 3 942 1 Total with no related allowance recorded 5,536 3 3,864 13 With an allowance recorded: Commercial: Commercial and industrial 5,440 138 45 — Agricultural production 778 11 — — Total commercial 6,218 149 45 — Real estate: Real estate construction and other land loans 656 — — — Commercial real estate 150 3 156 3 Agricultural real estate 28 1 42 1 Total real estate 834 4 198 4 Consumer: Equity loans and lines of credit 944 14 1,099 14 Consumer and installment 70 — 31 — Total consumer 1,014 14 1,130 14 Total with an allowance recorded 8,066 167 1,373 18 Total $ 13,602 $ 170 $ 5,237 $ 31 26 Table of Contents ` The following tables present by class, information related to the average recorded investment and interest income recognized on impaired loans for the nine months ended September 30, 2020 and 2019 (in thousands). Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial: Commercial and industrial $ 1,712 $ — $ 225 $ — Agricultural production 85 — — — Total commercial 1,797 — 225 — Real estate: Owner occupied 400 — 208 — Real estate construction and other land loans 3 — 1,494 46 Commercial real estate 860 — 1,363 37 Agricultural real estate 189 — — — Total real estate 1,452 — 3,065 83 Consumer: Equity loans and lines of credit 237 9 650 3 Total with no related allowance recorded 3,486 9 3,940 86 With an allowance recorded: Commercial: Commercial and industrial 5,743 482 67 1 Agricultural production 481 36 — — Total commercial 6,224 518 67 1 Real estate: Real estate construction and other land loans 281 — — — Commercial real estate 223 8 377 8 Agricultural real estate 26 2 44 2 Total real estate 530 10 421 10 Consumer: Equity loans and lines of credit 1,019 41 1,101 42 Consumer and installment 45 — 15 — Total consumer 1,064 41 1,116 42 Total with an allowance recorded 7,818 569 1,604 53 Total $ 11,304 $ 578 $ 5,544 $ 139 Foregone interest on nonaccrual loans totaled $ 135,000 and $ 105,000 for the nine month period ended September 30, 2020 and 2019, respectively. Foregone interest on nonaccrual loans totaled $ 82,000 and $ 39,000 for the three month periods ended September 30, 2020 and 2019, respectively. Troubled Debt Restructurings: As of September 30, 2020 and December 31, 2019, the Company has a recorded investment in troubled debt restructurings of $ 9,228,000 and $ 2,362,000 , respectively. The Company has allocated $ 33,000 and $ 38,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of September 30, 2020 and December 31, 2019, respectively. The Company has committed to lend no additional amounts as of September 30, 2020 to customers with outstanding loans that are classified as troubled debt restructurings. During the nine months ended September 30, 2020, two loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with 27 Table of Contents ` similar risk. During the same period, there were no troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower was forgiven or which resulted in a charge-off or change to the allowance for loan losses. As discussed in Note 1 to these financial statements, Section 4013 of the CARES Act and the “ Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) ” provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019 or at the time of modification program implementation, respectively, and the borrowers meet other applicable criteria. The remaining TDRs disclosed below were not related to COVID-19 modifications. The Company executed loan deferrals on outstanding balances of approximately $ 60.083 million resulting from the COVID-19 pandemic that were not classified as a TDRs at September 30, 2020. The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2020 (in thousands): Troubled Debt Restructurings: Number of Loans Pre-Modification Outstanding Recorded Investment (1) Principal Modification (2) Post Modification Outstanding Recorded Investment (3) Outstanding Recorded Investment Commercial: Commercial and industrial 1 $ 12,925 $ — $ 12,925 $ 7,175 Agricultural production 1 850 — 850 779 Total 2 $ 13,775 $ — $ 13,775 $ 7,954 (1) Amounts represent the recorded investment in loans before recognizing effects of the Troubled Debt Restructurings, if any. (2) Principal modification includes principal forgiveness at the time of modification, contingent principal forgiveness granted over the life of the loan based on borrower performance, and principal that has been legally separated and deferred to the end of the loan, with zero percent contractual interest rate. (3) Balance outstanding after principal modification, if any borrower reduction to recorded investment. The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2019 (in thousands): Troubled Debt Restructurings: Number of Loans Pre-Modification Outstanding Recorded Investment (1) Principal Modification (2) Post Modification Outstanding Recorded Investment (3) Outstanding Recorded Investment Consumer: Equity loans and lines of credit 2 $ 132 $ — $ 132 $ 124 Total 2 $ 132 $ — $ 132 $ 124 Troubled Debt Restructurings: During three months ended September 30, 2020 and September 30, 2019, no loans were modified as troubled debt restructuring. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings, within twelve months following the modification, during the nine months ended and three months ended September 30, 2020 or September 30, 2019. 28 Table of Contents ` Note 5. Goodwill Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Total goodwill at September 30, 2020, was $ 53,777,000 consisting of $ 8,934,000 , $ 14,643,000 , $ 6,340,000 , $ 10,394,000 , and $ 13,466,000 representing the excess of the cost of Bank of Madera County, Service 1st Bancorp, Visalia Community Bank, Sierra Vista Bank, and Folsom Lake Bank, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the acquisition method of accounting. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes. A significant decline in net earnings, among other factors, could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed at least annually for impairment. The Company’s annual goodwill test is completed as of September 30 each year. Management determined it appropriate to perform a quantitative goodwill impairment test in the third quarter of 2020. A third party valuation specialist was engaged to assist with the performance of the test. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value as of September 30, 2020. Therefore, there was no impairment of goodwill recorded during the three and nine months ended September 30, 2020. Note 6. Borrowing Arrangements As of September 30, 2020 and December 31, 2019, the Company had no Federal Home Loan Bank (“FHLB”) of San Francisco advances. Approximately $ 431,925,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing capacity of $ 241,964,000 as of September 30, 2020. FHLB advances are also secured by investment securities with amortized costs totaling $ 176,000 and $ 248,000 and market values totaling $ 185,000 and $ 256,000 at September 30, 2020 and December 31, 2019, respectively. The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral. As of September 30, 2020, and December 31, 2019 the Company had no Federal funds purchased. Note 7. Commitments and Contingencies Financial Instruments With Off-Balance-Sheet Risk - In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit . These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for loans. Commitments to extend credit amounting to $ 317,461,000 and $ 291,182,000 were outstanding at September 30, 2020 and December 31, 2019, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract unless waived by the Bank. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Included in commitments to extend credit are undisbursed lines of credit totaling $ 316,958,000 and $ 289,465,000 at September 30, 2020 and December 31, 2019, respectively. Undisbursed lines of credit include credits whereby customers can repay principal and request principal advances during the term of the loan at their discretion and most expire between one and 12 months . Included in undisbursed lines of credit are commitments for the undisbursed portions of construction loans totaling $ 86,098,000 and $ 74,019,000 as of September 30, 2020 and December 31, 2019, respectively. These commitments are agreements to lend to customers, subject to meeting certain construction progress requirements established in the contracts. The underlying construction loans have fixed expiration dates. Standby letters of credit and financial guarantees amounting to $ 503,000 and $ 1,717,000 were outstanding at September 30, 2020 and December 31, 2019, respectively. Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private financial arrangements. Most standby letters of credit and guarantees carry a one year term or less. The fair value of the liability related to these standby letters of credit, which represents the fees received for their issuance, was not significant at September 30, 2020 or December 31, 2019. The Company recognizes these fees as revenue over the term of the commitment or when the commitment is used. The Company generally requires collateral or other security to support financial instruments with credit risk. Management does not anticipate any material loss will result from the outstanding commitments to extend credit, standby letters 29 Table of Contents ` of credit and financial guarantees. At September 30, 2020 and December 31, 2019, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $ 250,000 . The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using an appropriate, systematic, and consistently applied process. While related to credit losses, this allocation is not a part of the allowance for credit losses and is considered separately as a liability for accounting and regulatory reporting purposes, and is included in Other Liabilities on the Company’s balance sheet. In 2018, the Company sold its credit card portfolio to a third party vendor. Part of the sale of the portfolio was to provide a guarantee of certain accounts which as of September 30, 2020, the total guarantee was $ 2,475,000 . The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or consolidated results of operations of the Company. Note 8. Earnings Per Share Basic earnings per share (EPS), which excludes dilution, is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options or restricted stock awards, result in the issuance of common stock which shares in the earnings of the Company. A reconciliation of the numerators and denominators of the basic and diluted EPS computations is as follows: Basic Earnings Per Share For the Three Months Ended September 30, For the Nine Months Ended September 30, (In thousands, except share and per share amounts) 2020 2019 2020 2019 Net income $ 4,344 $ 5,691 $ 13,268 $ 16,994 Weighted average shares outstanding 12,471,070 13,360,030 12,551,480 13,515,109 Basic earnings per share $ 0.35 $ 0.43 $ 1.06 $ 1.26 Diluted Earnings Per Share For the Three Months Ended September 30, For the Nine Months Ended September 30, (In thousands, except share and per share amounts) 2020 2019 2020 2019 Net income $ 4,344 $ 5,691 $ 13,268 $ 16,994 Weighted average shares outstanding 12,471,070 13,360,030 12,551,480 13,515,109 Effect of dilutive stock options 25,104 90,157 44,692 100,443 Weighted average shares of common stock and common stock equivalents 12,496,174 13,450,187 12,596,172 13,615,552 Diluted earnings per share $ 0.35 $ 0.42 $ 1.05 $ 1.25 No outstanding options or restricted stock awards were anti-dilutive for the nine months ended September 30, 2020 and 2019. During the three-month periods ended September 30, 2020 and 2019, no outstanding options or restricted stock awards were anti-dilutive. Note 9. Share-Based Compensation The Company has four share-based compensation plans as described below. Share-based compensation cost recognized for those plans was $ 362,000 and $ 430,000 for the nine months ended September 30, 2020 and 2019, respectively. The recognized tax benefits for the share-based compensation expense, forfeitures of restricted stock, and exercise of stock options, resulted in the recognition of $ 78,000 and $ 25,000 , respectively, for the nine months ended September 30, 2020 and 2019. The Central Valley Community Bancorp 2005 Omnibus Incentive Plan (2005 Plan) was adopted in May 2005 and expired March 16, 2015. While outstanding arrangements to issue shares under this plan, including options, continue in force until their expiration, no new options will be granted under this plan. The Central Valley Community Bancorp 2015 Omnibus Incentive Plan (2015 Plan) was adopted in May 2015. In October 2017, the Company assumed the Folsom Lake Bank 2007 Equity Incentive Plan (2007 Plan). The plans provide for awards in the form of incentive stock options, non-statutory stock options, stock appreciation rights, and restricted stock. Both plans allow for performance awards that may be in the form of cash or shares of the Company, including restricted stock. 30 Table of Contents ` Outstanding arrangements to issue shares under this plan including options, will continue in force until expiration according to their respective terms. Effective June 2, 2017, the Company adopted an Employee Stock Purchase Plan (ESPP) whereby our employees may purchase Company common stock through payroll deductions of between one percent and 15 percent of pay in each pay period. Shares are purchased at the end of each of the three-month offering periods at a 10 percent discount from the lower of the closing market price on the Offering Date (first trading day of each offering period) or the Investment Date (last trading day of each offering period). The Company reserved 500,000 common shares to be set aside for the ESPP, and there were 461,392 shares available for future purchase under the plan as of September 30, 2020. Stock Option Plan The Company bases the fair value of the options granted on the date of grant using a Black-Scholes Merton option pricing model that uses assumptions based on expected option life and the level of estimated forfeitures, expected stock volatility, risk free interest rate, and dividend yield. The expected term and level of estimated forfeitures of the Company’s options are based on the Company’s own historical experience. Stock volatility is based on the historical volatility of the Company’s stock. The risk-free rate is based on the U. S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of grant. The compensation cost for options granted is based on the weighted average grant date fair value per share. No options to purchase shares of the Company’s common stock were granted during the nine months ended September 30, 2020 and 2019. A summary of the combined activity of the Company’s stock option compensation plans for the nine months ended September 30, 2020 follows (in thousands, except per share amounts): Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (In thousands) Options outstanding at January 1, 2020 121,120 $ 8.73 Options exercised ( 43,300 ) $ 6.38 Options forfeited ( 550 ) $ 7.40 Options outstanding at September 30, 2020 77,270 $ 10.05 1.77 $ 182,699 Options vested or expected to vest at September 30, 2020 77,270 $ 10.05 1.77 $ 182,699 Options exercisable at September 30, 2020 77,270 $ 10.05 1.77 $ 182,699 Information related to the stock option plan is as follows (in thousands): For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 Intrinsic value of options exercised $ 51 $ 4 $ 432 $ 269 Cash received from options exercised $ 50 $ 3 $ 277 $ 163 Excess tax benefit realized for option exercises $ 6 $ — $ 78 $ 25 As of September 30, 2020, there was no remaining unrecognized compensation cost related to stock options granted under all plans. Restricted and Performance Common Stock Awards The 2015 Plan provides for the issuance of restricted common stock to directors and officers. In addition, performance awards may be granted in the form of cash or shares. Restricted common stock grants typically vest over a one to five-year period. Restricted common stock (all of which are shares of our common stock) is subject to forfeiture if employment terminates prior to vesting. The cost of these awards is recognized over the vesting period of the awards based on the fair value of our common stock on the date of the grant. 31 Table of Contents ` The following table summarizes restricted stock and performance award activity for the nine months ended September 30, 2020 as follows: Shares Weighted Average Grant-Date Fair Value Nonvested outstanding shares at January 1, 2020 45,160 $ 17.38 Granted 21,397 $ 16.42 Vested ( 34,703 ) $ 18.23 Forfeited ( 367 ) $ 18.42 Nonvested outstanding shares at September 30, 2020 31,487 $ 15.78 During the nine months ended September 30, 2020, 21,397 shares of restricted or performance common stock awards were granted. The restricted and performance common stock awards had a weighted average grant date fair market value of $ 16.42 per share on the date of grant during the nine months ended September 30, 2020. Restricted common stock awards fully vest after year one, or vest ratably until fully vested in year three or year five depending on agreement terms. Performance common stock awards vest immediately. As of September 30, 2020, there were 31,487 shares of restricted stock that are nonvested and expected to vest. As of September 30, 2020, there was $ 349,000 of total unrecognized compensation cost related to nonvested restricted common stock awards. Restricted stock compensation expense is recognized on a straight-line basis over the vesting period. This cost is expected to be recognized over a weighted-average remaining period of 1.03 years and will be adjusted for subsequent changes in estimated forfeitures. Restricted common stock awards had an intrinsic value of $ 2,403,000 at September 30, 2020.