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, 2021 December 31, 2020 ASSETS Cash and due from banks $ 32,634 $ 34,175 Interest-earning deposits in other banks 35,059 36,103 Total cash and cash equivalents 67,693 70,278 Available-for-sale debt securities 1,060,362 710,092 Equity securities 7,486 7,634 Loans, less allowance for credit losses of $10,061 at September 30, 2021 and $12,915 at December 31, 2020 1,073,436 1,089,432 Bank premises and equipment, net 8,429 8,228 Bank-owned life insurance 39,309 28,713 Federal Home Loan Bank stock 5,595 5,595 Goodwill 53,777 53,777 Core deposit intangibles 662 1,183 Accrued interest receivable and other assets 31,628 29,164 Total assets $ 2,348,377 $ 2,004,096 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest bearing $ 934,249 $ 824,889 Interest bearing 1,123,843 897,821 Total deposits 2,058,092 1,722,710 Junior subordinated deferrable interest debentures 5,155 5,155 Accrued interest payable and other liabilities 38,582 31,210 Total liabilities 2,101,829 1,759,075 Commitments and contingencies (Note 7) Shareholders’ equity: Preferred stock, no par value; 10,000,000 shares authorized, none issued and outstanding — — Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 11,987,904 at September 30, 2021 and 12,509,848 at December 31, 2020 68,265 79,416 Retained earnings 167,993 150,749 Accumulated other comprehensive income, net of tax 10,290 14,856 Total shareholders’ equity 246,548 245,021 Total liabilities and shareholders’ equity $ 2,348,377 $ 2,004,096 See notes to unaudited consolidated financial statements. 3 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the Three Months Ended September 30, For the Nine Months Ended September 30, (In thousands, except share and per-share amounts) 2021 2020 2021 2020 INTEREST INCOME: Interest and fees on loans $ 13,208 $ 13,190 $ 40,529 $ 38,688 Interest on deposits in other banks 28 26 89 222 Interest and dividends on investment securities: Taxable 3,844 2,771 9,938 8,996 Exempt from Federal income taxes 1,417 444 4,143 1,015 Total interest income 18,497 16,431 54,699 48,921 INTEREST EXPENSE: Interest on deposits 263 363 783 1,169 Interest on junior subordinated deferrable interest debentures 24 25 70 106 Total interest expense 287 388 853 1,275 Net interest income before provision for credit losses 18,210 16,043 53,846 47,646 (REVERSAL OF) PROVISION FOR CREDIT LOSSES ( 500 ) 600 ( 3,800 ) 4,975 Net interest income after provision for credit losses 18,710 15,443 57,646 42,671 NON-INTEREST INCOME: Service charges 487 463 1,386 1,556 Appreciation in cash surrender value of bank-owned life insurance 247 178 596 536 Interchange fees 472 355 1,313 995 Net realized gains on sales and calls of investment securities 117 57 38 4,197 Federal Home Loan Bank dividends 84 71 237 253 Loan placement fees 467 685 1,634 1,545 Other income 274 262 1,020 1,577 Total non-interest income 2,148 2,071 6,224 10,659 NON-INTEREST EXPENSES: Salaries and employee benefits 7,091 6,729 21,008 21,053 Occupancy and equipment 1,224 1,196 3,538 3,479 Professional services 507 715 1,338 1,695 Data processing 599 594 1,841 1,484 Regulatory assessments 219 147 552 340 ATM/Debit card expenses 199 144 615 625 Information technology 891 594 2,061 1,804 Directors’ expenses 152 140 306 468 Advertising 129 167 386 507 Internet banking expense 54 167 262 545 Amortization of core deposit intangibles 174 174 521 521 Other 823 961 2,652 2,784 Total non-interest expenses 12,062 11,728 35,080 35,305 Income before provision for income taxes 8,796 5,786 28,790 18,025 Provision for income taxes 2,275 1,442 7,227 4,757 Net income $ 6,521 $ 4,344 $ 21,563 $ 13,268 Earnings per common share: Basic earnings per share $ 0.54 $ 0.35 $ 1.75 $ 1.06 Weighted average common shares used in basic computation 12,007,689 12,471,070 12,332,248 12,551,480 Diluted earnings per share $ 0.54 $ 0.35 $ 1.74 $ 1.05 Weighted average common shares used in diluted computation 12,044,896 12,496,174 12,378,591 12,596,172 Cash dividend per common share $ 0.12 $ 0.11 $ 0.35 $ 0.33 See notes to unaudited consolidated financial statements. 4 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) For the Three Months Ended September 30, For the Nine Months Ended September 30, (In thousands) 2021 2020 2021 2020 Net income $ 6,521 $ 4,344 $ 21,563 13,268 Other Comprehensive Income: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period ( 3,552 ) 5,798 ( 6,444 ) 16,477 Reclassification of net gains included in net income ( 117 ) ( 57 ) ( 38 ) ( 4,197 ) Other comprehensive income (loss), before tax ( 3,669 ) 5,741 ( 6,482 ) 12,280 Tax effect 1,085 ( 1,698 ) 1,916 ( 3,631 ) Total other comprehensive income (loss) ( 2,584 ) 4,043 ( 4,566 ) 8,649 Comprehensive income $ 3,937 $ 8,387 $ 16,997 $ 21,917 See notes to unaudited consolidated financial statements. 5 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (Unaudited) Common Stock Accumulated Other Comprehensive Income (Loss) (Net of Taxes) Total Shareholders’ Equity Retained Earnings (In thousands, except share amounts) Shares Amount Balance, 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 Balance, June 30, 2021 12,329,089 $ 75,265 $ 162,910 $ 12,874 $ 251,049 Net income — — 6,521 — 6,521 Other comprehensive income — — — ( 2,584 ) ( 2,584 ) Stock issued under employee stock purchase plan 2,470 48 — — 48 Stock-based compensation expense — 100 — — 100 Cash dividend — — ( 1,438 ) — ( 1,438 ) Stock options exercised 1,285 10 — — 10 Repurchase and retirement of common stock ( 344,940 ) ( 7,158 ) — — ( 7,158 ) Balance, September 30, 2021 11,987,904 $ 68,265 $ 167,993 $ 10,290 $ 246,548 See notes to unaudited consolidated financial statements. 6 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) (Net of Taxes) Total Shareholders’ Equity (In thousands, except share amounts) Shares Amount Balance, January 1, 2020 13,052,407 $ 89,379 $ 135,932 $ 2,817 228,128 Net income — — 13,268 — 13,268 Other comprehensive income — — — 8,649 8,649 Stock issued under employee stock purchase plan 12,300 162 — — 162 Stock awarded to employees 6,548 141 — — 141 Restricted stock granted net of forfeitures 14,482 — — — — Stock-based compensation expense — 362 — — 362 Cash dividend — — ( 4,155 ) — ( 4,155 ) Repurchase and retirement of common stock ( 621,379 ) ( 11,052 ) — — ( 11,052 ) Stock options exercised 43,300 277 — — 277 Balance, September 30, 2020 12,507,658 $ 79,269 $ 145,045 $ 11,466 $ 235,780 Balance, January 1, 2021 12,509,848 $ 79,416 $ 150,749 $ 14,856 $ 245,021 Net income — — 21,563 — 21,563 Other comprehensive income — — — ( 4,566 ) ( 4,566 ) Restricted stock granted net of forfeitures 20,720 — — — — Stock issued under employee stock purchase plan 10,141 159 — — 159 Stock awarded to employees 10,529 158 — — 158 Stock-based compensation expense — 310 — — 310 Cash dividend — — ( 4,319 ) — ( 4,319 ) Stock options exercised 21,285 222 — — 222 Repurchase and retirement of common stock ( 584,619 ) ( 12,000 ) — — ( 12,000 ) Balance, September 30, 2021 11,987,904 $ 68,265 $ 167,993 $ 10,290 $ 246,548 See notes to unaudited consolidated financial statements. 7 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended September 30, (In thousands) 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 21,563 $ 13,268 Adjustments to reconcile net income to net cash provided by operating activities: Net decrease (increase) in deferred loan fees 2,203 ( 5,304 ) Depreciation 688 668 Accretion ( 1,050 ) ( 994 ) Amortization 5,752 3,328 Stock-based compensation 310 362 (Reversal of) provision for credit losses ( 3,800 ) 4,975 Net realized gains on sales and calls of available-for-sale investment securities ( 38 ) ( 4,197 ) Net gain on disposal of premises and equipment ( 8 ) ( 6 ) Net change in equity securities 148 ( 183 ) Increase in bank-owned life insurance, net of expenses ( 596 ) ( 376 ) Net gain on bank-owned life insurance — ( 462 ) Net increase in accrued interest receivable and other assets ( 1,878 ) ( 1,394 ) Net increase (decrease) in accrued interest payable and other liabilities 7,529 ( 1,636 ) Benefit (provision) for deferred income taxes 1,256 ( 1,227 ) Net cash provided by operating activities 32,079 6,822 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale investment securities ( 410,308 ) ( 319,707 ) Proceeds from sales or calls of available-for-sale investment securities 10,760 147,811 Proceeds from maturity and principal repayments of available-for-sale investment securities 38,727 25,536 Net decrease (increase) in loans 17,593 ( 160,653 ) Purchases of premises and equipment ( 889 ) ( 307 ) Purchases of bank-owned life insurance ( 10,000 ) ( 250 ) FHLB stock redeemed — 467 Proceeds from bank-owned life insurance — 1,550 Proceeds from sale of premises and equipment 9 6 Net cash used in investing activities ( 354,108 ) ( 305,547 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand, interest bearing and savings deposits 335,370 353,622 Net increase (decrease) in time deposits 12 ( 5,693 ) Purchase and retirement of common stock ( 12,000 ) ( 11,052 ) Proceeds from stock issued under employee stock purchase plan 159 162 Proceeds from exercise of stock options 222 277 Cash dividend payments on common stock ( 4,319 ) ( 4,155 ) Net cash provided by financing activities 319,444 333,161 (Decrease) increase in cash and cash equivalents ( 2,585 ) 34,436 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 70,278 52,574 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 67,693 $ 87,010 For the Nine Months Ended September 30, (In thousands) 2021 2020 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid during the period for : Interest $ 866 $ 1,354 Income taxes $ 6,755 $ 5,120 Operating cash flows from operating leases $ 1,688 $ 1,678 See notes to unaudited consolidated financial statements. 8 Note 1. Basis of Presentation The interim unaudited condensed consolidated financial statements of Central Valley Community Bancorp and subsidiary have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). These interim condensed consolidated financial statements include the accounts of Central Valley Community Bancorp and its wholly owned subsidiary Central Valley Community Bank (the Bank) (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted. The Company believes that the disclosures are adequate to make the information presented not misleading. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2020 Annual Report to Shareholders on Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position at September 30, 2021, and the results of its operations and its cash flows for the nine-month interim periods ended September 30, 2021 and 2020 have been included. The results of operations for interim periods are not necessarily indicative of results for the full year. The preparation of these interim unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment, and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank. Impact of New Financial Accounting Standards: FASB Accounting Standards Update (ASU) 2016-13 - Measurement of Credit Losses on Financial Instruments (Subtopic 326) : Financial Instruments - Credit Losses, commonly referred to as “CECL,” was issued June 2016. The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to be based on an incurred loss methodology. Under CECL, reserves required for financial assets measured at amortized cost will reflect an organization’s estimate of all expected credit losses over the contractual term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (“HTM”) debt securities. Under the provisions of the update, credit losses recognized on available for sale (“AFS”) debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP a purchased loan’s contractual balance is adjusted to fair value through a credit discount and no reserve is recorded on the purchased loan upon acquisition. Since under CECL, reserves will be established for purchased loans at the time of acquisition, the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. The FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage disclosures. On August 15, 2019, the FASB issued a proposed Accounting Standards Update (ASU), “Financial Instruments -Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” that would provide private entities and certain small public companies additional time to implement the standards on CECL, leases, and hedging. The final ASU extends the effective date for SEC filers, such as the Company, that are classified as smaller reporting companies to January 1, 2023. The Company has formed an internal task force that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard. The Company has also established a project management governance process to manage the implementation across affected disciplines. An external provider specializing in community bank loss driver and CECL reserving model design as well as other related consulting services has been retained, and we have begun to evaluate potential CECL modeling alternatives. As part of this process, the Company has determined potential loan pool segmentation and sub-segmentation under CECL, as well as begun to evaluate the key economic loss drivers for each segment. Further, the Company has begun developing internal controls around the CECL process, data, calculations and implementation. The Company presently plans to generate and evaluate model scenarios under CECL in tandem with its current reserving processes for interim and annual reporting periods during 2022 due to the fact the Company elected to delay 9 implementation of the CECL process as allowed by FASB. While the Company is currently unable to reasonably estimate the impact of adopting this new guidance, management expects the impact of adoption will be significantly influenced by the composition and quality of the Company’s loans as well as the economic conditions as of the date of adoption. The Company also anticipates changes to the processes and procedures for calculating the reserve for credit losses and continues to evaluate the potential impact on our consolidated financial statements. FASB Accounting Standards Update (ASU) 2020-04 - Reference Rate Reform (Subtopic 848) : Facilitation of the Effects of Reference Rate Reform on Financial Reporting, was issued March 2020. This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements. The Company believes the adoption of this guidance on activities subsequent to September 30, 2021 through December 31, 2022 will not have a material impact on the consolidated financial statements. In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued a revised interagency statement encouraging financial institutions to work with customers affected by COVID-19 and providing additional information regarding loan modifications. The revised interagency statement clarifies the interaction between the interagency statement issued on March 22, 2020 and the temporary relief provided by Section 4013 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Section 4013 allows financial institutions to suspend the requirements to classify certain loan modifications as troubled debt restructurings (“TDRs”). The revised statement also provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification programs and regulatory capital. This interagency guidance is expected to reduce the number of TDRs that will be reported in future periods; however, the amount is indeterminable and will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic . Note 2. Fair Value Measurements Fair Value Hierarchy Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level 1 — Quoted market prices (unadjusted) for identical instruments traded in active markets that the entity has the ability to access as of the measurement date. Level 2 —Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 — Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, we report the transfer at the beginning of the reporting period. The estimated carrying and fair values of the Company’s financial instruments are as follows (in thousands): 10 September 30, 2021 Carrying Amount Fair Value (In thousands) Level 1 Level 2 Level 3 Total Financial assets: Cash and due from banks $ 32,634 $ 32,634 $ — $ — $ 32,634 Interest-earning deposits in other banks 35,059 35,059 — — 35,059 Available-for-sale debt securities 1,060,362 — 1,060,362 — 1,060,362 Equity securities 7,486 7,486 — — 7,486 Loans, net 1,073,436 — — 1,065,575 1,065,575 Federal Home Loan Bank stock 5,595 N/A N/A N/A N/A Accrued interest receivable 9,170 8 5,587 3,575 9,170 Financial liabilities: Deposits 2,058,092 1,952,489 89,877 — 2,042,366 Junior subordinated deferrable interest debentures 5,155 — — 4,322 4,322 Accrued interest payable 52 — 29 23 52 December 31, 2020 Carrying Amount Fair Value (In thousands) Level 1 Level 2 Level 3 Total Financial assets: Cash and due from banks $ 34,175 $ 34,175 $ — $ — $ 34,175 Interest-earning deposits in other banks 36,103 36,103 — — 36,103 Available-for-sale debt securities 710,092 — 710,092 — 710,092 Equity securities 7,634 7,634 — — 7,634 Loans, net 1,089,432 — — 1,087,124 1,087,124 Federal Home Loan Bank stock 5,595 N/A N/A N/A N/A Accrued interest receivable 8,834 9 3,617 5,208 8,834 Financial liabilities: Deposits 1,722,710 1,691,647 90,008 — 1,781,655 Junior subordinated deferrable interest debentures 5,155 — — 3,693 3,693 Accrued interest payable 65 — 41 24 65 These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. The methods and assumptions used to estimate fair values are described as follows: (a) Cash and Cash Equivalents — The carrying amounts of cash and due from banks, interest-earning deposits in other banks, and Federal funds sold approximate fair values and are classified as Level 1. (b) Investment Securities — Investment securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for investment securities classified in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. (c) Loans — Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Purchased credit 11 impaired (PCI) loans are measured at estimated fair value on the date of acquisition. Carrying value is calculated as the present value of expected cash flows and approximates fair value and included in Level 3. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are initially valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The estimated fair values of financial instruments disclosed above follow the guidance in ASU 2016-01 which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity, and marketability factors. (d) FHLB Stock — It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. (e) Deposits — Fair value of demand deposit, savings, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair value for fixed and variable rate certificates of deposit are estimated using discounted cash flow analyses using interest rates offered at each reporting date by the Company for certificates with similar remaining maturities resulting in a Level 2 classification. (f) Subordinated Debentures — The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification. (g) Accrued Interest Receivable/Payable — The fair value of accrued interest receivable and payable is based on the fair value hierarchy of the related asset or liability. (h) Off-Balance Sheet Instruments — Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not considered significant for financial reporting purposes. Assets Recorded at Fair Value The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2021: Recurring Basis The Company is required or permitted to record the following assets at fair value on a recurring basis as of September 30, 2021 (in thousands). Description Fair Value Level 1 Level 2 Level 3 Available-for-sale debt securities: U.S. Treasury securities $ 10,010 $ — $ 10,010 $ — U.S. Government agencies 505 — 505 — Obligations of states and political subdivisions 507,920 — 507,920 — U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 228,045 — 228,045 — Private label mortgage and asset backed securities 253,756 — 253,756 — Corporate debt securities 60,126 — 60,126 — Equity securities 7,486 7,486 — — Total assets measured at fair value on a recurring basis $ 1,067,848 $ 7,486 $ 1,060,362 $ — 12 Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for available-for-sale debt securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the nine months ended September 30, 2021, no transfers between levels occurred. There were no Level 3 assets measured at fair value on a recurring basis at or during the nine months ended September 30, 2021. Also there were no liabilities measured at fair value on a recurring basis at September 30, 2021. Non-recurring Basis The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at September 30, 2021. Fair Value Level 1 Level 2 Level 3 Impaired loans: Real estate: Real estate-construction and other land loans $ 262 $ — $ — $ 262 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 necessarily a market rate. There were no changes in valuation techniques used during the nine months ended September 30, 2021. Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value is compared with independent data sources such as recent market data or industry-wide statistics. Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans had a principal balance of $ 304,000 with a valuation allowance of $ 42,000 at September 30, 2021, and a resulting fair value of $ 262,000 . The valuation allowance represent 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, 2021 and 2020. Activity related to changes in the allowance for loan losses related to impaired loans for the three months ended September 30, 2021 and 2020 was not considered significant for disclosure purposes. There were no liabilities measured at fair value on a non-recurring basis at September 30, 2021. 13 The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 2020: Recurring Basis The Company is required or permitted to record the following assets at fair value on a recurring basis as of December 31, 2020 (in thousands). Description Fair Value Level 1 Level 2 Level 3 Available-for-sale debt securities: U.S. Government agencies $ 680 $ — $ 680 $ — Obligations of states and political subdivisions 379,565 — 379,565 — U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 216,298 — 216,298 — Private label mortgage and asset backed securities 83,508 — 83,508 — Corporate debt securities 30,041 — 30,041 — Equity securities 7,634 7,634 — — Total assets measured at fair value on a recurring basis $ 717,726 $ 7,634 $ 710,092 $ — Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for available-for-sale debt securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the year ended December 31, 2020, no transfers between levels occurred. There were no Level 3 assets measured at fair value on a recurring basis at or during the year ended December 31, 2020. Also there were no liabilities measured at fair value on a recurring basis at December 31, 2020. Non-recurring Basis The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include the following assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at December 31, 2020 (in thousands): Fair Value Level 1 Level 2 Level 3 Impaired loans: Real estate: Real estate-construction and other land loans $ 1,260 $ — $ — $ 1,260 Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans had a principal balance of $1,528,000 with a valuation allowance of $268,000 at December 31, 2020, and a resulting fair value of $1,260,000. The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans. There were no liabilities measured at fair value on a non-recurring basis at December 31, 2020. Note 3. Investments The investment portfolio consists primarily of U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations, private label mortgage and asset backed securities (PLMABS), corporate debt securities, and obligations of states and political subdivisions securities. As of September 30, 2021, $ 262,024,000 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 $ 14,609,000 at September 30, 2021 compared to an unrealized gain of $ 21,091,000 at December 31, 2020. The unrealized gain/(loss) recorded is net of $ 4,319,000,000 and $ 6,235,000 in tax liabilities (benefits) as accumulated other comprehensive income (loss) within shareholders’ equity at September 30, 2021 and December 31, 2020, respectively. 14 The following table sets forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands): September 30, 2021 Available-for-Sale Securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Debt securities: U.S. Treasury securities $ 9,988 $ 22 $ — $ 10,010 U.S. Government agencies 489 16 — 505 Obligations of states and political subdivisions 494,425 15,844 ( 2,349 ) 507,920 U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 226,027 2,837 ( 819 ) 228,045 Private label mortgage and asset backed securities 255,324 1,184 ( 2,752 ) 253,756 Corporate debt securities 59,500 878 ( 252 ) 60,126 Total available-for-sale $ 1,045,753 $ 20,781 $ ( 6,172 ) $ 1,060,362 December 31, 2020 Available-for-Sale Securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Debt securities: U.S. Government agencies $ 651 $ 29 $ — $ 680 Obligations of states and political subdivisions 361,734 18,170 ( 339 ) 379,565 U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 214,203 3,575 ( 1,480 ) 216,298 Private label mortgage and asset backed securities 82,413 1,337 ( 242 ) 83,508 Corporate debt securities 30,000 260 ( 219 ) 30,041 Total available-for-sale $ 689,001 $ 23,371 $ ( 2,280 ) $ 710,092 Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended September 30, 2021 and 2020 are shown below (in thousands): For the Three Months Ended September 30, For the Nine Months Ended September 30, Available-for-Sale Securities 2021 2020 2021 2020 Proceeds from sales or calls $ 10,170 $ 25,442 $ 10,760 $ 147,811 Gross realized gains from sales or calls 117 1,035 117 5,539 Gross realized losses from sales or calls — ( 978 ) ( 79 ) ( 1,342 ) 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 $ 11,000 and $ 1,241,000 income tax impact from the reclassification of unrealized net gains on securities to realized net gains on securities for the nine months ended ended September 30, 2021 and 2020, respectively. The provision for income taxes includes $ 35,000 and $ 17,000 income tax impact from the reclassification of unrealized net gains on available-for-sale securities to realized net gains on available-for-sale securities for the three months ended September 30, 2021 and 2020, respectively. 15 Investment securities, aggregated by investment category, with unrealized losses as of the dates indicated are summarized and classified according to the duration of the loss period as follows (in thousands): September 30, 2021 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Available-for-Sale Securities Value Losses Value Losses Value Losses Debt securities: Obligations of states and political subdivisions $ 126,701 $ ( 2,349 ) $ — $ — 126,701 ( 2,349 ) U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 74,656 ( 509 ) 42,022 ( 310 ) 116,678 ( 819 ) Private label mortgage and asset backed securities 152,197 ( 2,438 ) 12,891 ( 314 ) 165,088 ( 2,752 ) Corporate debt securities 27,248 ( 252 ) — — 27,248 ( 252 ) Total available-for-sale $ 380,802 $ ( 5,548 ) $ 54,913 $ ( 624 ) $ 435,715 $ ( 6,172 ) December 31, 2020 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Available-for-Sale Securities Value Losses Value Losses Value Losses Debt securities: Obligations of states and political subdivisions $ 36,209 $ ( 339 ) $ — $ — $ 36,209 $ ( 339 ) U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 30,755 ( 385 ) 77,337 ( 1,095 ) 108,092 ( 1,480 ) Private label mortgage and asset backed securities 25,407 ( 242 ) — — 25,407 ( 242 ) Corporate debt securities 12,881 ( 119 ) 3,900 ( 100 ) 16,781 ( 219 ) Total available-for-sale $ 105,252 $ ( 1,085 ) $ 81,237 $ ( 1,195 ) $ 186,489 $ ( 2,280 ) The Company periodically evaluates each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions, and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase. As of September 30, 2021, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). The Company evaluated all individual available-for-sale investment securities with an unrealized loss at September 30, 2021 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at September 30, 2021 greater than 10 % of the recorded book value on that date, or which had an unrealized loss of more than $ 75,000 . The Company also analyzed any securities that may have been downgraded by credit rating agencies. For those investment securities that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those investment securities. There were no OTTI losses recorded during the nine months ended September 30, 2021. U.S. Treasury Securities At September 30, 2021, the Company held one U.S. Treasury security which was in a gain position. U.S. Government Agencies At September 30, 2021, the Company held one U.S. Government agency security which was in a gain position. 16 Obligations of States and Political Subdivisions At September 30, 2021, the Company held 129 obligations of states and political subdivision securities of which 25 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, 2021. U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations At September 30, 2021, the Company held 119 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 14 were in a loss position for less than 12 months and nine 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, 2021. Private Label Mortgage and Asset Backed Securities At September 30, 2021, the Company had a total of 63 Private Label Mortgage and Asset Backed Securities (PLMABS). 31 of the PLMABS securities were in a loss position for less than 12 months and four have been in loss for more than 12 months at September 30, 2021. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell, those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2021. The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary. Corporate Debt Securities At September 30, 2021, the Company held 15 corporate debt securities of which eight 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, 2021. 17 The amortized cost and estimated fair value of available-for-sale investment securities at September 30, 2021 by contractual maturity is shown below (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties. September 30, 2021 Available-for-Sale Securities Amortized Cost Estimated Fair Value Within one year $ — $ — After one year through five years 3,349 3,659 After five years through ten years 94,640 97,424 After ten years 406,424 416,847 504,413 517,930 Investment securities not due at a single maturity date: U.S. Government agencies 489 505 U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 226,027 228,045 Private label mortgage and asset backed securities 255,324 253,756 Corporate debt securities 59,500 60,126 Total available-for-sale $ 1,045,753 $ 1,060,362 Note 4. Loans and Allowance for Credit Losses Outstanding loans are summarized as follows: Loan Type (Dollars in thousands) September 30, 2021 % of Total Loans December 31, 2020 % of Total Loans Commercial: Commercial and industrial $ 184,830 17.0 % $ 273,994 24.9 % Agricultural production 32,178 3.0 % 21,971 2.0 % Total commercial 217,008 20.0 % 295,965 26.9 % Real estate: Owner occupied 210,577 19.4 % 208,843 18.9 % Real estate construction and other land loans 65,912 6.1 % 55,419 5.0 % Commercial real estate 365,564 33.7 % 338,886 30.7 % Agricultural real estate 98,150 9.1 % 84,258 7.6 % Other real estate 33,612 3.1 % 28,718 2.6 % Total real estate 773,815 71.4 % 716,124 64.8 % Consumer: Equity loans and lines of credit 54,833 5.1 % 55,634 5.0 % Consumer and installment 38,250 3.5 % 37,236 3.3 % Total consumer 93,083 8.6 % 92,870 8.3 % Net deferred origination fees ( 409 ) ( 2,612 ) Total gross loans 1,083,497 100.0 % 1,102,347 100.0 % Allowance for credit losses ( 10,061 ) ( 12,915 ) Total loans $ 1,073,436 $ 1,089,432 At September 30, 2021 and December 31, 2020, loans originated under Small Business Administration (SBA) programs totaling $ 24,499,000 and $ 24,220,000 , respectively, were included in the real estate and commercial categories, of which, $ 18,826,000 or 77 % and $ 18,180,000 or 75 %, respectively, are secured by government guarantees. In addition, the Company participated in the SBA Paycheck Protection Program (PPP) to help provide loans to our business customers to provide them with additional working capital. At September 30, 2021, 341 PPP loans totaling $ 64,260,000 were outstanding and included in the commercial and industrial line item above. At December 31, 2020, 989 PPP loans totaling $ 192,916,000 were outstanding and included in the commercial and industrial line item above. 18 Allowance for Credit Losses The allowance for credit losses (the “Allowance”) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. The Allowance is established through a provision for credit losses which is charged to expense. Additions to the Allowance are expected to maintain the adequacy of the total Allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the Allowance. Cash received on previously charged-off credits is recorded as a recovery to the Allowance. The overall Allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired. For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer data) over the most recent 51 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, 2021 and 2020 by portfolio segment (in thousands): Commercial Real Estate Consumer Unallocated Total Allowance for credit losses: Beginning balance, July 1, 2021 $ 2,210 $ 7,050 $ 828 $ 351 $ 10,439 (Reversal) provision charged to operations 118 ( 434 ) ( 230 ) 46 ( 500 ) Charge-offs ( 15 ) — ( 19 ) — ( 34 ) Recoveries 21 — 135 — 156 Ending balance, September 30, 2021 $ 2,334 $ 6,616 $ 714 $ 397 $ 10,061 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 Charge-offs ( 43 ) — ( 2 ) — ( 45 ) Recoveries 146 — 19 — 165 Ending balance, September 30, 2020 $ 2,160 $ 10,656 $ 1,357 $ 484 $ 14,657 The following table shows the summary of activities for the Allowance as of and for the nine months ended September 30, 2021 and 2020 by portfolio segment (in thousands): Commercial Real Estate Consumer Unallocated Total Allowance for credit losses: Beginning balance, January 1, 2021 $ 2,019 $ 9,174 $ 1,091 $ 631 $ 12,915 Reversal charged to operations ( 321 ) ( 2,877 ) ( 368 ) ( 234 ) ( 3,800 ) Charge-offs ( 46 ) — ( 215 ) — ( 261 ) Recoveries 682 319 206 — 1,207 Ending balance, September 30, 2021 $ 2,334 $ 6,616 $ 714 $ 397 $ 10,061 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 Charge-offs ( 72 ) — ( 97 ) — ( 169 ) Recoveries 601 — 120 — 721 Ending balance, September 30, 2020 $ 2,160 $ 10,656 $ 1,357 $ 484 $ 14,657 19 The following is a summary of the Allowance by impairment methodology and portfolio segment as of September 30, 2021 and December 31, 2020 (in thousands): Commercial Real Estate Consumer Unallocated Total Allowance for credit losses: Ending balance, September 30, 2021 $ 2,334 $ 6,616 $ 714 $ 397 $ 10,061 Ending balance: individually evaluated for impairment $ 877 $ 50 $ 4 $ — $ 931 Ending balance: collectively evaluated for impairment $ 1,457 $ 6,566 $ 710 $ 397 $ 9,130 Ending balance, December 31, 2020 $ 2,019 $ 9,174 $ 1,091 $ 631 $ 12,915 Ending balance: individually evaluated for impairment $ 339 $ 271 $ 21 $ — $ 631 Ending balance: collectively evaluated for impairment $ 1,680 $ 8,903 $ 1,070 $ 631 $ 12,284 The following table shows the ending balances of loans as of September 30, 2021 and December 31, 2020 by portfolio segment and by impairment methodology (in thousands): Commercial Real Estate Consumer Total Loans: Ending balance, September 30, 2021 $ 217,008 $ 773,815 $ 93,083 $ 1,083,906 Ending balance: individually evaluated for impairment $ 8,051 $ 952 $ 1,057 $ 10,060 Ending balance: collectively evaluated for impairment $ 208,957 $ 772,863 $ 92,026 $ 1,073,846 Loans: Ending balance, December 31, 2020 $ 295,965 $ 716,124 $ 92,870 $ 1,104,959 Ending balance: individually evaluated for impairment $ 7,402 $ 2,616 $ 1,168 $ 11,186 Ending balance: collectively evaluated for impairment $ 288,563 $ 713,508 $ 91,702 $ 1,093,773 20 The following table shows the loan portfolio by class allocated by management’s internal risk ratings at September 30, 2021 (in thousands): Pass Special Mention Sub-Standard Doubtful Total Commercial: Commercial and industrial $ 173,016 $ 667 $ 11,147 $ — $ 184,830 Agricultural production 27,732 1,170 3,276 — 32,178 Real Estate: Owner occupied 202,100 2,993 5,484 — 210,577 Real estate construction and other land loans 60,180 5,732 — — 65,912 Commercial real estate 349,831 13,785 1,948 — 365,564 Agricultural real estate 94,985 2,021 1,144 — 98,150 Other real estate 33,612 — — — 33,612 Consumer: Equity loans and lines of credit 54,589 244 — — 54,833 Consumer and installment 38,184 — 66 — 38,250 Total $ 1,034,229 $ 26,612 $ 23,065 $ — $ 1,083,906 The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2020 (in thousands): Pass Special Mention Sub-Standard Doubtful Total Commercial: Commercial and industrial $ 258,587 $ 5,004 $ 10,403 $ — $ 273,994 Agricultural production 18,289 377 3,305 — 21,971 Real Estate: Owner occupied 197,721 3,870 7,252 — 208,843 Real estate construction and other land loans 50,560 1,622 3,237 — 55,419 Commercial real estate 314,710 14,537 9,639 — 338,886 Agricultural real estate 72,875 10,195 1,188 — 84,258 Other real estate 28,557 161 — — 28,718 Consumer: Equity loans and lines of credit 54,034 640 960 — 55,634 Consumer and installment 37,084 — 152 — 37,236 Total $ 1,032,417 $ 36,406 $ 36,136 $ — $ 1,104,959 21 The following table shows an aging analysis of the loan portfolio by class and the time past due at September 30, 2021 (in thousands): 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans Recorded Investment > 90 Days Accruing Non-accrual Commercial: Commercial and industrial $ 1 $ — $ — $ 1 $ 184,829 $ 184,830 $ — $ 333 Agricultural production — — — — 32,178 32,178 — 779 Real estate: — — Owner occupied 161 — — 161 210,416 210,577 — — Real estate construction and other land loans — — — — 65,912 65,912 — — Commercial real estate — — — — 365,564 365,564 — 485 Agricultural real estate — — — — 98,150 98,150 — — Other real estate — — — — 33,612 33,612 — — Consumer: — Equity loans and lines of credit 104 — — 104 54,729 54,833 — — Consumer and installment 47 — — 47 38,203 38,250 — — Total $ 313 $ — $ — $ 313 $ 1,083,593 $ 1,083,906 $ — $ 1,597 The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2020 (in thousands): 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans Recorded Investment > 90 Days Accruing Non- accrual Commercial: Commercial and industrial $ — $ — $ 60 $ 60 $ 273,934 $ 273,994 $ — $ 752 Agricultural production — — — — 21,971 21,971 — — Real estate: — Owner occupied — — — — 208,843 208,843 — 370 Real estate construction and other land loans — — — — 55,419 55,419 — 1,556 Commercial real estate — — — — 338,886 338,886 — 512 Agricultural real estate — — — — 84,258 84,258 — — Other real estate — — — — 28,718 28,718 — — Consumer: Equity loans and lines of credit — 24 — 24 55,610 55,634 — — Consumer and installment 5 — — 5 37,231 37,236 — 88 Total $ 5 $ 24 $ 60 $ 89 $ 1,104,870 $ 1,104,959 $ — $ 3,278 22 The following table shows information related to impaired loans by class at September 30, 2021 (in thousands): Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Real estate: Commercial real estate $ 486 $ 553 $ — Consumer: Equity loans and lines of credit 138 174 — Total with no related allowance recorded 624 727 — With an allowance recorded: Commercial: Commercial and industrial 7,272 7,307 772 Agricultural production 779 843 105 Total commercial 8,051 8,150 877 Real estate: Real estate construction and other land loans 305 305 42 Commercial real estate 140 141 3 Agricultural real estate 21 21 5 Total real estate 466 467 50 Consumer: Equity loans and lines of credit 919 919 4 Total with an allowance recorded 9,436 9,536 931 Total $ 10,060 $ 10,263 $ 931 The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality. 23 The following table shows information related to impaired loans by class at December 31, 2020 (in thousands): Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial: Commercial and industrial $ 60 $ 61 $ — Real estate: Owner occupied 370 409 — Real estate construction and other land loans 28 28 — Commercial real estate 512 561 — Total real estate 910 998 — Consumer: Equity loans and lines of credit 144 180 — Total with no related allowance recorded 1,114 1,239 — With an allowance recorded: Commercial: Commercial and industrial 7,342 7,373 339 Real estate: Real estate construction and other land loans 1,528 1,552 268 Commercial real estate 148 149 3 Agricultural real estate 30 29 — Total real estate 1,706 1,730 271 Consumer: Equity loans and lines of credit 936 936 9 Consumer and installment 88 93 12 Total consumer 1,024 1,029 21 Total with an allowance recorded 10,072 10,132 631 Total $ 11,186 $ 11,371 $ 631 The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality. 24 The following tables present by class, information related to the average recorded investment and interest income recognized on impaired loans for the three months ended September 30, 2021 and 2020 (in thousands). Three Months Ended September 30, 2021 Three Months Ended September 30, 2020 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial: Commercial and industrial $ 123 $ — $ 4,157 $ — Real estate: Owner occupied — — 385 — Real estate construction and other land loans 234 — 7 — Commercial real estate 365 — 689 — Agricultural real estate — — 120 — Total real estate 599 — 1,201 — Consumer: Equity loans and lines of credit 139 3 178 3 Total with no related allowance recorded 861 3 5,536 3 With an allowance recorded: Commercial: Commercial and industrial 5,538 129 5,440 138 Agricultural production 1,063 — 778 11 Total commercial 6,601 129 6,218 149 Real estate: Real estate construction and other land loans 76 5 656 — Commercial real estate 141 2 150 3 Agricultural real estate 28 — 28 1 Total real estate 245 7 834 4 Consumer: Equity loans and lines of credit 922 14 944 14 Consumer and installment — — 70 — Total consumer 922 14 1,014 14 Total with an allowance recorded 7,768 150 8,066 167 Total $ 8,629 $ 153 $ 13,602 $ 170 25 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, 2021 and 2020 (in thousands). Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial: Commercial and industrial $ 56 $ — $ 1,712 $ — Agricultural land and production — — 85 — Total commercial 56 — 1,797 — Real estate: Owner occupied 72 — 400 — Real estate construction and other land loans 203 — 3 — Commercial real estate 446 — 860 — Agricultural real estate — — 189 — Total real estate 721 — 1,452 — Consumer: Equity loans and lines of credit 141 9 237 9 Total with no related allowance recorded 918 9 3,486 9 With an allowance recorded: Commercial: Commercial and industrial 6,217 282 5,743 482 Agricultural land and production 983 — 481 36 Total commercial 7,200 282 6,224 518 Real estate: Real estate construction and other land loans 785 16 281 — Commercial real estate 144 7 223 8 Agricultural real estate 29 1 26 2 Total real estate 958 24 530 10 Consumer: Equity loans and lines of credit 928 40 1,019 41 Consumer and installment 18 — 45 — Total consumer 946 40 1,064 41 Total with an allowance recorded 9,104 346 7,818 569 Total $ 10,022 $ 355 $ 11,304 $ 578 Foregone interest on nonaccrual loans totaled $ 101,000 and $ 135,000 for the nine month period ended September 30, 2021 and 2020, respectively. Foregone interest on nonaccrual loans totaled 30,000 and 82,000 for the three month period ended September 30, 2021 and 2020, respectively. Troubled Debt Restructurings: As of September 30, 2021 and December 31, 2020, the Company has a recorded investment in troubled debt restructurings of $ 8,463,000 and $ 7,908,000 , respectively. The Company has allocated $ 678,000 and $ 20,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of September 30, 2021 and December 31, 2020, respectively. During the nine months ended September 30, 2021, 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 26 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 $ 335,950 resulting from the COVID-19 pandemic that were not classified as a TDRs at September 30, 2021. The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2021 (in thousands): Troubled Debt Restructurings: Number of Loans Pre-Modification Outstanding Recorded Investment (1) Principal Modification (2) Post Modification Outstanding Recorded Investment (3) Outstanding Recorded Investment Commercial: Commercial and industrial 1 $ 2,989 $ — $ 2,489 $ 2,489 Real Estate: Real estate-construction and other land loans 1 333 — 333 305 Total 2 $ 3,322 $ — $ 2,822 $ 2,794 (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, 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 The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended September 30, 2021 (in thousands): Troubled Debt Restructurings: Number of Loans Pre-Modification Outstanding Recorded Investment (1) Principal Modification (2) Post Modification Outstanding Recorded Investment (3) Outstanding Recorded Investment Commercial: Commercial and Industrial 1 $ 2,989 $ — $ 2,489 $ 2,489 Total 1 $ 2,989 $ — $ 2,489 $ 2,489 During the quarter ended September 30, 2020, no loans were modified as troubled debt restructurings. 27 Consumer: 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, 2021 or September 30, 2020. Note 5. Goodwill Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Total goodwill at September 30, 2021, was $ 53,777,000 consisting of $ 8,934,000 , $ 14,643,000 , $ 6,340,000 , $ 10,394,000 , and $ 13,466,000 representing the excess of the cost of Bank of Madera County, Service 1st Bancorp, Visalia Community Bank, Sierra Vista Bank, and Folsom Lake Bank, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the acquisition method of accounting. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes. A significant decline in net earnings, among other factors, could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed at least annually for impairment. The Company’s annual goodwill test is completed as of September 30 each year. Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. No such events or circumstances arose during the first nine months of 2021. Note 6. Borrowing Arrangements As of September 30, 2021 and December 31, 2020, the Company had no Federal Home Loan Bank (“FHLB”) of San Francisco advances. Approximately $ 462,491,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing capacity of $ 262,091,000 as of September 30, 2021. FHLB advances are also secured by investment securities with amortized costs totaling $ 121,000 and $ 169,000 and market values totaling $ 127,000 and $ 178,000 at September 30, 2021 and December 31, 2020, respectively. The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral. As of September 30, 2021, and December 31, 2020 the Company had no Federal funds purchased. Note 7. Commitments and Contingencies Financial Instruments With Off-Balance-Sheet Risk - In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit . These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for loans. Commitments to extend credit amounting to $ 332,875,000 and $ 326,179,000 were outstanding at September 30, 2021 and December 31, 2020, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract unless waived by the Bank. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Included in commitments to extend credit are undisbursed lines of credit totaling $ 322,441,000 and $ 314,774,000 at September 30, 2021 and December 31, 2020, respectively. Undisbursed lines of credit include credits whereby customers can repay principal and request principal advances during the term of the loan at their discretion and most expire between one and 12 months. Included in undisbursed lines of credit are commitments for the undisbursed portions of construction loans totaling $ 90,269,000 and $ 79,669,000 as of September 30, 2021 and December 31, 2020, respectively. These commitments are agreements to lend to customers, subject to meeting certain construction progress requirements established in the contracts. The underlying construction loans have fixed expiration dates. Standby letters of credit and financial guarantees amounting to $ 10,434,000 and $ 11,405,000 were outstanding at September 30, 2021 and December 31, 2020, respectively. Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private financial arrangements. Standby letters of credit and guarantees carry a one year term or less, many have auto-renewal features. 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, 2021 or December 31, 2020. The Company recognizes these fees as revenue over the term of the commitment or when the commitment is used. 28 The Company generally requires collateral or other security to support financial instruments with credit risk. Management does not anticipate any material loss will result from the outstanding commitments to extend credit, standby letters of credit and financial guarantees. At September 30, 2021 and December 31, 2020, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $ 150,000 and $ 250,000 , respectively. 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, 2021, was $ 2,975,000 . 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) 2021 2020 2021 2020 Net income $ 6,521 $ 4,344 $ 21,563 $ 13,268 Weighted average shares outstanding 12,007,689 12,471,070 12,332,248 12,551,480 Basic earnings per share $ 0.54 $ 0.35 $ 1.75 $ 1.06 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) 2021 2020 2021 2020 Net income $ 6,521 $ 4,344 $ 21,563 $ 13,268 Weighted average shares outstanding 12,007,689 12,471,070 12,332,248 12,551,480 Effect of diluted stock options and restricted stock 37,207 25,104 46,343 44,692 Weighted average shares of common stock and common stock equivalents 12,044,896 12,496,174 12,378,591 12,596,172 Diluted earnings per share $ 0.54 $ 0.35 $ 1.74 $ 1.05 No outstanding options awards were anti-dilutive for the nine months ended September 30, 2021 and 2020. Note 9. Share-Based Compensation The Company has four share-based compensation plans as described below. Share-based compensation cost recognized for those plans was $ 310,000 and $ 362,000 for the nine months ended September 30, 2021 and 2020, respectively. The recognized tax expense (benefit) for the share-based compensation expense, forfeitures of restricted stock, and exercise of stock options, resulted in the recognition of $ 50,000 and $ 78,000 , respectively, for the nine months ended September 30, 2021 and 2020. The Central Valley Community Bancorp 2005 Omnibus Incentive Plan (2005 Plan) was adopted in May 2005 and expired March 16, 2015. In October 2017, the Company assumed the Folsom Lake Bank 2007 Equity Incentive Plan (2007 Plan). While outstanding arrangements to issue shares under these plans, including options, continue in force until their expiration, no new options will be granted under these plans. The Central Valley Community Bancorp 2015 Omnibus Incentive Plan (2015 Plan) was adopted in May 2015. The plan provides for awards in the form of incentive stock options, non-statutory stock options, stock appreciation rights, and restricted stock. The plan also allows for performance awards that may be in the form of cash or shares of the Company, 29 including restricted stock. Outstanding arrangements to issue shares under this plan including options, will continue in force until expiration according to their respective terms. Effective June 2, 2017, the Company adopted an Employee Stock Purchase Plan (ESPP) whereby our employees may purchase Company common stock through payroll deductions of between one percent and 15 percent of pay in each pay period. Shares are purchased at the end of each of the three-month offering periods at a 10 percent discount from the lower of the closing market price on the Offering Date (first trading day of each offering period) or the Investment Date (last trading day of each offering period). The Company reserved 500,000 common shares to be set aside for the ESPP, and there were 447,787 shares available for future purchase under the plan as of September 30, 2021. Stock Option Plan The Company bases the fair value of the stock 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 stock 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 interest rate is based on the U. S. Treasury yield curve for the periods within the contractual life of the stock options in effect at the time of grant. The compensation cost for stock 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, 2021 and 2020. A summary of the combined activity of the Company’s stock option compensation plans for the nine months ended September 30, 2021 follows (in thousands, except per share amounts): Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Options outstanding at December 31, 2020 77,070 $ 10.06 Options exercised ( 21,285 ) $ 10.44 Options outstanding at September 30, 2021 55,785 $ 9.92 0.82 $ 650 Options exercisable at September 30, 2021 55,785 $ 9.92 0.82 $ 650 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, 2021 2020 2021 2020 Intrinsic value of options exercised $ 19 $ 51 $ 225 $ 432 Cash received from options exercised $ 10 $ 50 $ 222 $ 277 Excess tax benefit realized for option exercises $ 4 $ 6 $ 50 $ 78 As of September 30, 2021, there was no remaining unrecognized compensation cost related to stock options granted under all plans. Restricted and Performance Common Stock Awards The 2015 Plan provides for the issuance of restricted common stock to directors and officers. In addition, performance awards may be granted in the form of cash or shares. Restricted common stock grants typically vest over a one to five-year period. Restricted common stock (all of which are shares of our common stock) is subject to forfeiture if employment terminates prior to vesting. The cost of these awards is recognized over the vesting period of the awards based on the fair value of our common stock on the date of the grant. 30 The following table summarizes restricted stock and performance award activity for the nine months ended September 30, 2021 as follows: Shares Weighted Average Grant-Date Fair Value Nonvested outstanding shares at December 31, 2020 30,013 $ 15.60 Granted 31,496 $ 18.83 Vested ( 37,085 ) $ 15.12 Forfeited ( 247 ) $ 20.26 Nonvested outstanding shares at September 30, 2021 24,177 $ 20.50 The shares awarded to employees and directors under the restricted stock agreements vest on applicable vesting dates only to the extent the recipient of the shares is then an employee or a director of the Company or one of its subsidiaries, and each recipient will forfeit all of the shares that have not vested on the date his or her employment or service is terminated. Performance common stock awards vest immediately. As of September 30, 2021, there were 24,177 shares of restricted stock that are nonvested and expected to vest. As of September 30, 2021, there was $ 363,000 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 1.61 years and will be adjusted for subsequent changes in estimated forfeitures. Restricted common stock awards had an intrinsic value of $ 2,975,000 at September 30, 2021.