What changed in this filing

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Item 1. Financial Statements

2023-05-15 compared with 2022-11-02 · 412 added, 603 removed, 428 unchanged (70% of the section changed)

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts) September 30, 2022 December 31, 2021

(In thousands, except share amounts) March 31, 2023 December 31, 2022

Cash and due from banks $ 25,464 $ 25,485

1 unchanged sentence

Total cash and cash equivalents 64,262 31,170

Available-for-sale investment securities 668,300 1,109,208

Held-to-maturity investment securities 305,482 —

Equity securities 6,544 7,416

Loans, less allowance for credit losses of $10,366 at September 30, 2022 and $9,600 at December 31, 2021 1,214,904 1,029,511

Available-for-sale debt securities, at fair value 631,524 648,825

Held-to-maturity debt securities, at amortized cost less allowance for credit losses of $684 at March 31, 2023 and $- at December 31, 2022 303,844 305,107

Equity securities, at fair value 6,663 6,558

Loans, less allowance for credit losses of $15,257 at March 31, 2023 and $10,848 at December 31, 2022 1,270,297 1,245,456

Bank premises and equipment, net 8,040 7,987

2 unchanged sentences

Goodwill 53,777 53,777

Core deposit intangibles 102 522

Accrued interest receivable and other assets 78,531 76,933

5 unchanged sentences

Short-term borrowings — 46,000

Senior debt and subordinated debentures 69,563 39,454

Senior debt and subordinated debentures, less debt issuance costs of $520 at March 31, 2023 and $556 at December 31, 2022 69,635 69,599

Accrued interest payable and other liabilities 36,459 32,611

Total liabilities 2,281,841 2,247,859

Commitments and contingencies (Note 8)

Shareholders’ equity:

4 unchanged sentences

issued and outstanding:

11,732,011 at September 30, 2022 and 11,916,651 at December 31, 2021 61,262 66,820

11,754,938 at March 31, 2023 and 11,735,291 at December 31, 2022 61,924 61,487

Retained earnings 196,229 194,400

6 unchanged sentences

For the Three Months

Ended September 30, For the Nine Months

Ended September 30,

Ended March 31,

(In thousands, except share and per-share amounts) 2023 2022

8 unchanged sentences

Interest on deposits 1,004 252

Interest on subordinated debentures and borrowings 597 24 1,354 70

Interest on short-term borrowings 661 —

Interest on senior debt and subordinated debentures 897 333

Total interest expense 2,562 585

Net interest income before provision for credit losses 21,581 17,597

PROVISION FOR (REVERSAL OF) CREDIT LOSSES 500 ( 500 ) 500 ( 3,800 )

PROVISION FOR CREDIT LOSSES 633 —

Net interest income after provision for credit losses 20,948 17,597

2 unchanged sentences

Appreciation in cash surrender value of bank-owned life insurance

249 247 736 596

Interchange fees 446 442

14 unchanged sentences

Advertising 125 140

Internet banking expense 29 54 98 262

Loan related expenses 147 71

Personnel other 259 103

Amortization of core deposit intangibles 34 140

12 unchanged sentences

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three Months

Ended September 30, For the Nine Months

Ended September 30,

Ended March 31,

(In thousands) 2023 2022

Net income $ 6,970 $ 6,086

Other Comprehensive (Loss) Income:

Unrealized losses on securities:

Unrealized holding losses arising during the period ( 24,378 ) ( 3,552 ) ( 141,308 ) ( 6,444 )

Other Comprehensive Income (Loss):

Unrealized gains (losses) on securities:

Unrealized holding gains (losses) arising during the period 6,433 ( 80,603 )

Reclassification of net losses (gains) included in net income 219 ( 206 )

Amortization of net unrealized losses transferred 627 —

Other comprehensive loss, before tax ( 23,713 ) ( 3,669 ) ( 139,486 ) ( 6,482 )

Other comprehensive income (loss), before tax 7,279 ( 80,809 )

Tax effect ( 2,153 ) 23,890

Total other comprehensive loss ( 16,703 ) ( 2,584 ) ( 98,254 ) ( 4,566 )

Comprehensive (loss) income $ ( 10,319 ) $ 3,937 $ ( 79,242 ) $ 16,997

See notes to unaudited consolidated financial statements.

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

Common Stock Accumulated

Total other comprehensive income (loss) 5,126 ( 56,919 )

Comprehensive income (loss) $ 12,096 $ ( 50,833 )

(Net of Taxes) Total Shareholders’ Equity

Retained Earnings

(In thousands, except share amounts) Shares Amount

Balance, June 30, 2021 12,329,089 $ 75,265 $ 162,910 $ 12,874 $ 251,049

Net income — — 6,521 — 6,521

Other comprehensive loss — — — ( 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

Balance, June 30, 2022 11,717,146 $ 60,975 $ 183,197 $ ( 73,919 ) $ 170,253

— — 6,384 — 6,384

Other comprehensive loss — — — ( 16,703 ) ( 16,703 )

Stock issued under employee stock purchase plan

3,515 53 — — 53

Stock-based compensation expense

— 143 — — 143

Cash dividend

— — ( 1,407 ) — ( 1,407 )

Stock options exercised

11,350 91 — — 91

Balance, September 30, 2022 11,732,011 $ 61,262 $ 188,174 $ ( 90,622 ) $ 158,814

See notes to unaudited consolidated financial statements.

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

THREE MONTHS ENDED MARCH 31, 2023 AND 2022

Common Stock Retained Earnings Accumulated

2 unchanged sentences

(In thousands, except share amounts) Shares Amount

Balance, January 1, 2021 12,509,848 $ 79,416 $ 150,749 $ 14,856 245,021

Balance, December 31, 2021 11,916,651 $ 66,820 $ 173,393 $ 7,632 247,845

Net income — — 6,086 — 6,086

6 unchanged sentences

Stock-based compensation expense

— 310 — — 310

Cash dividend

4 unchanged sentences

11,075 132 — — 132

Balance, September 30, 2021 11,987,904 $ 68,265 $ 167,993 $ 10,290 $ 246,548

Balance, January 1, 2022 11,916,651 $ 66,820 $ 173,393 $ 7,632 $ 247,845

Balance, March 31, 2022 11,752,623 $ 62,893 $ 178,054 $ ( 49,287 ) $ 191,660

Balance, December 31, 2022

11,735,291 $ 61,487 $ 194,400 $ ( 81,227 ) $ 174,660

Other comprehensive loss — — — ( 98,254 ) ( 98,254 )

Implementation of ASU 2016-13, Current Expected Credit Loss (CECL) Day 1 Adjustment — — ( 3,731 ) — ( 3,731 )

Adjusted Balance, January 1, 2023 11,735,291 $ 61,487 $ 190,669 $ ( 81,227 ) $ 170,929

— — 6,970 — 6,970

Other comprehensive income — — — 5,126 5,126

Restricted stock granted net of forfeitures

7 unchanged sentences

— — ( 1,410 ) — ( 1,410 )

Stock options exercised

50,205 489 — — 489

Repurchase and retirement of common stock

( 300,761 ) ( 6,814 ) — — ( 6,814 )

Balance, September 30, 2022 11,732,011 $ 61,262 $ 188,174 $ ( 90,622 ) $ 158,814

Balance, March 31, 2023 11,754,938 $ 61,924 $ 196,229 $ ( 76,101 ) $ 182,052

See notes to unaudited consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months

Ended September 30,

For the Three Months

Ended March 31,

(In thousands) 2023 2022

7 unchanged sentences

Stock-based compensation 140 97

Provision for (reversal of) credit losses 500 ( 3,800 )

Provision for credit losses 633 —

Net realized losses (gains) on sales and calls of available-for-sale investment securities 219 ( 206 )

Net gain on disposal of premises and equipment — ( 8 )

Net change in equity securities ( 105 ) 345

Increase in bank-owned life insurance, net of expenses ( 249 ) ( 242 )

Net increase in accrued interest receivable and other assets ( 6,033 ) ( 1,878 )

Net (decrease) increase in accrued interest payable and other liabilities ( 6,586 ) 7,529

(Provision) benefit for deferred income taxes ( 662 ) 1,256

Net cash provided by operating activities 13,944 32,079

Net (decrease) increase in accrued interest receivable and other assets ( 2,509 ) 1,574

Net increase (decrease) in accrued interest payable and other liabilities 3,251 ( 10,249 )

Benefit (provision) for deferred income taxes 289 ( 435 )

Net cash provided by (used in) operating activities 10,532 ( 635 )

CASH FLOWS FROM INVESTING ACTIVITIES:

5 unchanged sentences

Purchases of premises and equipment ( 210 ) ( 2 )

Purchases of bank-owned life insurance — ( 10,000 )

FHLB stock purchased ( 574 ) —

Proceeds from sale of premises and equipment — 9

Net cash used in investing activities ( 6,203 ) ( 107,836 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase in demand, interest bearing and savings deposits 30,257 335,370

Net (decrease) increase in time deposits ( 13,910 ) 12

Net (decrease) increase in demand, interest bearing and savings deposits ( 69,013 ) 44,891

Net increase (decrease) in time deposits 145,110 ( 5,328 )

Proceeds from short-term borrowings from Federal Home Loan Bank

Repayments of short-term borrowings to Federal Home Loan Bank ( 3,392,500 ) —

Proceeds of issuance of senior debt 30,000 —

Purchase and retirement of common stock — ( 4,486 )

3 unchanged sentences

Net cash provided by financing activities 28,763 33,841

Decrease in cash and cash equivalents ( 121,889 ) ( 2,585 )

Increase (decrease) in cash and cash equivalents 33,092 ( 74,630 )

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 31,170 163,467

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 64,262 $ 88,837

For the Nine Months

Ended September 30,

See notes to unaudited consolidated financial statements.

For the Three Months

Ended March 31,

(In thousands) 2023 2022

4 unchanged sentences

Operating cash flows from operating leases $ 589 $ 575

Non-cash investing and financing activities:

Transfer of securities from available-for-sale to held-to-maturity $ 331,230 $ —

Transfer of unrealized loss on securities from available-for-sale to held-to-maturity $ ( 25,328 ) $ —

See notes to unaudited consolidated financial statements.

6 unchanged sentences

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 2022 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, 2022, and the results of its operations and its cash flows for the nine month interim periods ended September 30, 2022 and 2021 have been included.

In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position at March 31, 2023, and the results of its operations and its cash flows for the three month interim periods ended March 31, 2023 and 2022 have been included.

The results of operations for interim periods are not necessarily indicative of results for the full year.

4 unchanged sentences

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 weighted average life 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 bank loss driver and CECL reserving model design as well as other related consulting services has been retained.

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 the fourth quarter of 2022 due to the fact the Company elected to delay implementation of the CECL process as allowed by FASB.

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, 2022 through December 31, 2022 will not have a material impact on the consolidated financial statements.

FASB Accounting Standards Update (ASU) 2022-02 - Financial Instruments-Credit Losses (Subtopic 326).

Troubled Debt Restructurings and Vintage Disclosures, was issued March 2022.

The amendments in this update eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

Impact of New Financial Accounting Standards Adopted in 2023

On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity securities.

It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments).

In addition, credit losses recognized on available-for-sale debt securities will be presented as an allowance as opposed to a write-down, based on management’s intent to sell the security or the likelihood the Company will be required to sell the security before recovery of the amortized cost basis.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures.

Results for the reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

The Company recognized an increase in the allowance for credit losses on loans totaling $ 3,910,000 , a reserve for credit losses for held-to-maturity securities of $ 776,000 , and an increase to the reserve for unfunded commitments of $ 612,000 with a corresponding decrease, net of taxes, in retained earnings, of $ 3,731,000 as of January 1, 2023 for the cumulative effect of adopting ASC 326.

The Company also adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures upon the adoption of ASU 2016-13 as of January 1, 2023 on a propsective basis.

The amendments in this update eliminated the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors , while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan.

Additionally, for public business entities, the amendments in this Update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6.

The guidance is effective for the Corporation upon the adoption of ASU 2016-13, January 1, 2023.

The Company is currently assessing the impact of ASU 2022-02 on its disclosures and control structure;

however, the Company does not expect the adoption of this standard to 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 the COVID-19 pandemic 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 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.

Section 4013 and the interagency guidance were applied by the Company to loan modifications made related to the COVID-19 pandemic as eligible and appropriate.

The application of the guidance reduced the number of TDRs that were reported.

In December 2020, the Consolidated Appropriations Act, 2021 was signed into law.

Section 541 of this legislation, “Extension of Temporary Relief From Troubled Debt Restructurings and Insurer Clarification,” extended Section 4013 of the CARES Act to the earlier of January 1, 2022 or 60 days after the termination of the national emergency declared relating to COVID-19.

This relief ended on January 1, 2022.

Future TDRs are indeterminable and will depend on future developments, which are highly uncertain and cannot be predicted, including the economic recovery, market volatility and other actions taken by governmental authorities and other third parties as a result of the pandemic.

The adoption modified the Company’s disclosures but did not have a material impact on its financial position or results of operations.

In March 2020, The FASB issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Subtopic 848) :

Facilitation of the Effects of Reference Rate Reform on Financial Reporting .

As the Company has an insignificant number of instruments that are applicable to this ASU, management has determined that no impact to the valuations of these instruments are applicable for financial reporting purposes.

Reclassifications - Certain reclassifications have been made to prior year financial statements to conform to the classifications used in 2023.

None of the reclassifications had an impact on equity or net income.

Summary of Significant Accounting Policies

The Company has revised the following significant accounting policies as a result of the the adoption of ASU 2016-13.

Allowance for Credit Losses on Available-for-Sale Debt Securities:

For available-for-sale (“AFS”) debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more than likely than not that it will be required to sell the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income.

For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of the cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as credit loss provision (or reversal).

Losses are charged against the allowance when management believes that the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Allowance for Credit Losses on Held-to-Maturity Debt Securities:

Management measures expected credit losses on held-to-maturity (“HTM”) debt securities on a collective basis by major security type.

The estimate of expected credit losses considers historical credit loss information based on industry data that is adjusted for current conditions and reasonable and supportable forecasts.

Management classifies the held-to-maturity portfolio into the following major security types:

Obligations of States and Political Subdivisions, U.S.

Government sponsored Entities and Agencies collateralized by Residential Mortgage Obligations, Private Label Mortgage and Asset Backed Securities, and Corporate Debt Securities.

Allowance for Credit Losses on Loans:

The allowance for credit losses (“ACL”) is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

The allowance is established through a provision for credit losses which is charged to expense.

Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Cash received on previously charged off amounts is recorded as a recovery to the allowance.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts.

Historical credit loss experience from national and peer data provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for the differences in the current loan-specific risk characteristics, such as differences in loan-to-values, portfolio mix, or term as well as for changes in environmental conditions, such as changes in unemployment rates, market interest rates, property values, or other relevant factors.

Management may assign qualitative factors to each loan segment if there are material risks or improvements present but not yet captured in the model environment.

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist.

The Company segregates the allowance by portfolio segment.

These portfolio segments include commercial, commercial real estate, 1-4 family real estate and consumer loans.

The relative significance of risk considerations vary by portfolio segment.

Real estate construction loans, as summarized by class within the loan footnote, are disaggregated into either the commercial real estate or 1-4 family real estate allowance segments based on the type of construction loan due to the varying risks between commercial and consumer construction.

Commercial and industrial - Commercial and industrial loans are generally underwritten to existing cash flows of operating businesses.

Additionally, economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Past due payments may indicate the borrower’s capacity to repay their obligations may be deteriorating.

Agricultural production - Loans secured by crop production and livestock are especially vulnerable to two risk factors that are largely outside the control of Company and borrowers:

commodity prices and weather conditions.

Commercial Real Estate:

Commercial real estate construction and other land loans - Commercial Land and construction loans generally possess a higher inherent risk of loss than other real estate portfolio segments.

A major risk arises from the necessity to complete projects within specified costs and time lines.

Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity.

In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial real estate - owner-occupied - Real estate collateral secured by commercial or professional properties with repayment arising from the owner’s business cash flows.

To meet this classification, the owner’s operation must occupy no less than 50% of the real estate held.

Financial profitability and capacity to meet the cyclical nature of the industry and related real estate market over a significant timeframe is essential.

Commercial real estate - non-owner occupied - Investor commercial real estate loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans.

Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans.

Trends in vacancy rates of commercial properties impact the credit quality of these loans.

High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flows to service debt obligations.

Farmland - Agricultural loans secured by real estate generally possess a higher inherent risk of loss caused by changes in concentration of permanent plantings, government subsidies, and the value of the U.S.

dollar affecting the export of commodities.

Multi-family - These properties are generally comprised of more than four rentable units, such as apartment buildings, with each unit intended to be occupied as the primary residence for one or more persons.

Multi-family properties are also subject to changes in general or regional economic conditions, such as unemployment, ultimately resulting in increased vacancy rates or reduced rents or both.

In addition, new construction can create an oversupply condition and market competition resulting in increased vacancy, reduced market rents, or both.

Due to the nature of their use and the greater likelihood of tenant turnover, the management of these properties is more intensive and therefore is more critical to the preclusion of loss.

1-4 Family Real Estate:

Including 1-4 family close-ended, revolving real estate loans, and residential construction loans, the degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion.

These loans generally possess a lower inherent risk of loss than other real estate portfolio segments.

Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Weak economic trends may indicate that the borrowers’ capacity to repay their obligations may be deteriorating

A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period.

Most installment loans are made directly for consumer purchases.

Other consumer loans include other open ended unsecured consumer loans.

Open ended unsecured loans generally have a higher rate of default than all other portfolio segments and are also impacted by weak economic conditions and trends.

When loans do not share similar risk characteristics, the Company evaluates the loan for expected credit losses on an individual basis.

Loans evaluated individually are not included in the collective evaluation.

When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

When the Company measures credit losses based on the present value of expected future cash flows, management does not adjust the effective interest rate used to discount expected cash flows to incorporate expected prepayments.

Allowance for Credit Losses on Unfunded Commitments:

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.

The allowance for credit losses on unfunded commitments is

adjusted through provision for credit losses.

The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

Fair Value Measurements

7 unchanged sentences

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):

September 30, 2022

The estimated carrying and fair values of the Company’s financial instruments not carried at fair value are as follows (in thousands):

March 31, 2023

Amount Fair Value

3 unchanged sentences

Interest-earning deposits in other banks 38,798 38,798 — — 38,798

Available-for-sale debt securities 668,300 — 668,300 — 668,300

Held-to-maturity investment securities 303,844 — 276,633 — 276,633

Equity securities 6,544 6,544 — — 6,544

Loans, net 1,270,297 — — 1,182,862 1,182,862

Federal Home Loan Bank stock 6,169 N/A N/A N/A N/A

Accrued interest receivable 9,616 14 5,770 3,832 9,616

Financial liabilities:

Deposits 2,139,144 2,063,024 75,157 — 2,138,181

Short-term borrowings 25,000 — 25,000 — 25,000

Time Deposits 213,033 — 207,554 — 207,554

Senior debt and subordinated debentures 69,635 — — 58,944 58,944

Accrued interest payable 608 — 62 546 608

December 31, 2022

4 unchanged sentences

Interest-earning deposits in other banks 5,685 5,685 — — 5,685

Available-for-sale debt securities 1,109,208 — 1,109,208 — 1,109,208

Equity securities 7,416 7,416 — — 7,416

Held-to-maturity investment securities 305,107 — 271,249 — 271,249

Loans, net 1,245,456 — — 1,113,849 1,113,849

Federal Home Loan Bank stock 5,595 N/A N/A N/A N/A

Accrued interest receivable 9,395 7 6,076 3,312 9,395

Financial liabilities:

Deposits 2,122,797 2,010,407 89,923 — 2,100,330

Time deposits 67,923 — 67,047 — 67,047

Short-term borrowings 46,000 — 46,000 — 46,000

Subordinated debentures 69,599 — — 62,504 62,504

Accrued interest payable 202 — 30 172 202

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.

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.

(a) Investment securities — The fair values for investment securities are determined by quoted market prices, if available (Level 1).

For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing.

Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but

rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

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 (Level 3).

(b) Individually Evaluated Loans — Fair values for individually evaluated loans are estimated either using the fair value of the collateral less selling costs if collateral dependent resulting in a Level 3 classification.

Individually evaluated loan amounts are initially valued at the lower of cost or fair value.

Individually evaluated 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.

3 unchanged sentences

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.

Individually evaluated loans are evaluated on a quarterly basis for additional credit losses 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) Subordinated Debentures and Senior Debt — The fair values of the Company’s Subordinated Debentures and Senior Debt 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.

(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.

(c) Real Estate Owned — Appraisals for assets acquired through foreclosure 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.

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, 2022 and December 31, 2021:

Recurring Basis

The Company is required or permitted to record the following assets at fair value on a recurring basis under other accounting pronouncements (in thousands):

The Company is required or permitted to record the following assets at fair value on a recurring basis.

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:

Fair Value Measurements Using

September 30, 2022 Fair Value Level 1 Level 2 Level 3

March 31, 2023 Fair Value Level 1 Level 2 Level 3

Available-for-sale debt securities:

20 unchanged sentences

355,542 — 355,542 —

Corporate debt securities 44,778 — 44,778 —

Equity securities 6,558 6,558 — —

Total assets measured at fair value on a recurring basis $ 655,383 $ 6,558 $ 648,825 $ —

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 periods ended September 30, 2022 and December 31, 2021, no transfers between levels occurred.

There were no Level 3 assets measured at fair value on a recurring basis at or during the periods ended September 30, 2022 and December 31, 2021.

Also there were no liabilities measured at fair value on a recurring basis at September 30, 2022 or December 31, 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, 2022 and December 31, 2021.

As of September 30, 2022, there were no impaired loans measured for impairment using the fair value.

Those measured at December 31, 2021 were (in thousands):

December 31, 2021 Fair Value Level 1 Level 2 Level 3

Impaired loans:

Real estate-construction and other land loans $ 262 $ — $ — $ 262

Total assets measured at fair value on a non-recurring basis $ 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.

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, 2022 or the year ended December 31, 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 resultin g fair value is compared with independent data sources such as recent market data or industry-wide statistics.

Impaired loans that are measured for impairment on a non-recurring basis using the fair value of the collateral for collateral dependent loans had a principal balance of $ 292,000 with a valuation allowance of $ 30,000 at December 31, 2021, resulting in a fair value of $262,000.

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, 2022.

Activity related to changes in the allowance for loan losses related to impaired loans for the three months ended September 30, 2022 and 2021 was not considered significant for disclosure purposes.

There were no liabilities measured at fair value on a non-recurring basis at September 30, 2022 or December 31, 2021.

The investm ent 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, 2022, $ 177,503,000 of these securities were held as collateral for borrowing arrangements, pub lic funds, and for other purposes.

The fair value of the available-for-sale investment portfolio reflected a net unrealized loss of $( 104,377,000 ) at September 30, 2022 compared to an unrealized gain of $ 10,835,000 at December 31, 2021.

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, 2022

There were no changes in valuation techniques used during the three months ended March 31, 2023 or the year ended December 31, 2022.

There were no assets measured on a non-recurring basis at March 31, 2023 and December 31, 2022.

The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at March 31, 2023 and December 31, 2022 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses (in thousands):

March 31, 2023

Available-for-Sale Securities Amortized Cost Gross

Losses Estimated

Losses Allowance for Credit Losses Estimated

Debt securities:

7 unchanged sentences

Total available-for-sale $ 716,515 $ 15 $ ( 85,006 ) $ — $ 631,524

September 30, 2022

March 31, 2023

Held-to-Maturity Securities Amortized Cost Gross

Losses Estimated

Allowance for Credit Losses

Debt securities:

17 unchanged sentences

411,441 14 ( 55,913 ) 355,542

Corporate debt securities 44,500 595 ( 317 ) 44,778

Total available-for-sale $ 740,468 $ 18 $ ( 91,661 ) $ 648,825

Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended September 30, 2022 and 2021 are shown below (in thousands):

December 31, 2022

Held-to-Maturity Securities Amortized Cost Gross

Losses Estimated

Debt securities:

Obligations of states and political subdivisions 192,004 67 ( 23,166 ) $ 168,905

Government sponsored entities and agencies collateralized by residential mortgage obligations

10,430 — ( 1,762 ) 8,668

Private label mortgage and asset backed securities

56,691 — ( 5,931 ) 50,760

Corporate debt securities 45,982 — ( 3,066 ) 42,916

Total held-to-maturity $ 305,107 $ 67 $ ( 33,925 ) $ 271,249

Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended March 31, 2023 and 2022 are shown below (in thousands):

For the Three Months

Ended September 30, For the Nine Months

Ended September 30,

Ended March 31,

Available-for-Sale Securities 2023 2022

2 unchanged sentences

Gross realized losses from sales or calls ( 219 ) —

During the second quarter of 2022, the Company designated certain securities previously classified as available-for-sale to the held-to-maturity classification.

The securities designated consisted of obligations of states and political subdivision securities, U.S.

Government sponsored entity and agency securities collateralized by residential mortgage obligations, private label mortgage and asset backed securities, and corporate debt securities with a total carrying value of $ 306.7 million at April 1, 2022.

At the time of re-designation the securities included $ 25.3 million of pretax unrealized losses in other comprehensive income which is being amortized over the remaining life of the securities in a manner consistent with the amortization of a premium or discount.

As market interest rates or risks associated with an available-for-sale 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 a $( 230,000 ) and $ 11,000 income (benefit) tax impact from unrealized net losses and gains on securities realized through security sales for the nine months ended September 30, 2022 and 2021.

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, 2022

The provision for income taxes includes a $( 44,000 ) and $ 61,000 income tax (benefit)/expense from unrealized net losses and gains on securities realized through security sales for the three months ended March 31, 2023 and 2022.

The amortized cost and estimated fair value of available-for-sale and held-to maturity investment securities at March 31, 2023 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.

Securities not due at a single maturity date are shown separately.

March 31, 2023

Available-for-Sale Securities Amortized Cost Estimated Fair

Within one year $ — $ —

After one year through five years 9,990 8,879

After five years through ten years 35,853 30,451

After ten years 165,062 147,600

210,905 186,930

Investment securities not due at a single maturity date:

Government agencies 106 98

Government sponsored entities and agencies collateralized by residential mortgage obligations

99,307 92,631

Private label mortgage and asset backed securities 406,197 351,865

Total available-for-sale $ 716,515 $ 631,524

March 31, 2023

Held-to-Maturity Securities Amortized Cost Estimated Fair

Within one year $ — $ —

After one year through five years 133 131

After five years through ten years 57,832 52,986

After ten years 134,063 121,450

192,028 174,567

Investment securities not due at a single maturity date:

Government sponsored entities and agencies collateralized by residential mortgage obligations 10,511 8,952

Private label mortgage and asset backed securities 55,981 50,062

Corporate debt securities 46,008 43,052

Total held-to-maturity $ 304,528 $ 276,633

At March 31, 2023 there were eight issuers of private label mortgage securities in which the Company had holdings of securities in amounts greater than 10% of shareholders’ equity.

Investments with these issuers were in senior tranches and/or were rated “AAA” or higher and there were no credit issues identified.

The following table summarizes the Company’s AFS debt securities in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):

March 31, 2023

Less than 12 Months 12 Months or More Total

13 unchanged sentences

Total available-for-sale $ 4,623 $ ( 562 ) $ 626,606 $ ( 84,444 ) $ 631,229 $ ( 85,006 )

September 30, 2022

Less than 12 Months 12 Months or More Total

Fair Unrealized Fair Unrealized Fair Unrealized

Held-to-Maturity Securities Value Losses Value Losses Value Losses

Debt securities:

Obligations of states and political subdivisions $ 87,855 $ ( 15,353 ) $ 76,024 $ ( 12,768 ) $ 163,879 $ ( 28,121 )

Government sponsored entities and agencies collateralized by residential mortgage obligations — — 9,033 ( 1,317 ) 9,033 ( 1,317 )

Private label mortgage and asset backed securities

35,419 ( 4,702 ) 15,749 ( 1,331 ) 51,168 ( 6,033 )

Corporate debt securities 26,916 ( 1,501 ) 16,447 ( 1,092 ) 43,363 ( 2,593 )

Total held-to-maturity $ 150,190 $ ( 21,556 ) $ 117,253 $ ( 16,508 ) $ 267,443 $ ( 38,064 )

December 31, 2022

4 unchanged sentences

Treasury securities $ — $ — $ 8,707 $ ( 1,283 ) $ 8,707 $ ( 1,283 )

Government agencies

— — 98 ( 9 ) 98 ( 9 )

5 unchanged sentences

126,284 ( 14,529 ) 229,152 ( 41,384 ) 355,436 ( 55,913 )

Corporate debt securities 21,183 ( 317 ) — — 21,183 ( 317 )

Total available-for-sale $ 237,917 $ ( 27,795 ) $ 410,654 $ ( 63,866 ) $ 648,571 $ ( 91,661 )

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, 2022, 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, 2022 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at September 30, 2022 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, 2022.

Treasury Securities

At September 30, 2022, the Company held one U.S.

Treasury security which was in a loss position for more than 12 months.

The unrealized losses on the Company’s investments in U.S.

Treasury 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, 2022.

Government Agencies

At September 30, 2022, the Company held one U.S.

Government agency security which was in a loss position for less than 12 months.

As of March 31, 2023, the Company had a total of 183 AFS debt securities in a gross unrealized loss position with no credit impairment, consisting of 6 U.S.

Treasury securities and U.S.

Government agencies, 43 obligations of states and political subdivisions, 50 U.S.

Government sponsored entities and agencies collateralized by residential mortgage obligations, and 84 private label mortgage and asset backed securities.

Allowance for Credit Losses on Available-for-Sale Debt Securities

Each reporting period, the Company assesses each AFS debt security that is in an unrealized loss position to determine whether the decline in fair value below the amortized cost basis results from a credit loss or other factors.

The Company did not record an ACL on any available for sale securities at March 31, 2023 or upon adoption of ASU 2016-13 on January 1, 2023.

As of both dates, the Company considers the unrealized losses across the classes of major security-type to be related to fluctuations in market conditions, primarily interest rates, and not reflective of a deterioration in credit value.

The gross unrealized losses presented in the preceding tables were primarily attributable to interest rate increases and liquidity and were mainly comprised of the following:

• Obligations of States and Political Subdivisions:

At September 30, 2022, the Company held 97 obligations of states and political subdivision securities of which 73 were in a loss position for less than 12 months and 22 have been in a loss position for more 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.

The unrealized losses on investments in obligations of states and political subdivisions are caused by increases in required yields by investors in these types of securities.

It is expected that the securities would not be settled at a price less than the amortized cost of the investment.

Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations:

At September 30, 2022, the Company held 85 U.S.

Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 49 were in a loss position for less than 12 months and 15 have been in a loss position for more than 12 months.

The unrealized losses on the Company’s investments in U.S.

2 unchanged sentences

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, 2022.

• Private Label Mortgage and Asset Backed Securities:

At September 30, 2022, the Company had a total of 97 Private Label Mortgage and Asset Backed Securities (PLMABS).

48 of the PLMABS securities were in a loss position for less than 12 months and 45 have been in loss for more than 12 months at September 30, 2022.

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, 2022.

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, 2022, the Company held 13 corporate debt securities of which 8 were in a loss position for less than 12 months and 5 have been in a loss position for more than 12 months.

The unrealized loss on the Company’s investments in corporate debt security was caused by interest rate changes.

The amortized cost and estimated fair value of available-for-sale and held-to maturity investment securities at September 30, 2022 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, 2022

Available-for-Sale Securities Amortized Cost Estimated Fair

Within one year $ — $ —

After one year through five years — —

After five years through ten years 46,640 38,868

After ten years 183,069 152,279

229,709 191,147

Investment securities not due at a single maturity date:

Government agencies 344 333

Government sponsored entities and agencies collateralized by residential mortgage obligations

123,093 115,340

The Company has invested exclusively in AA and AAA tranches of various private label mortgage and asset backed securities.

Each purchase is subject to a credit and structure review prior to their purchase.

Ratings are reviewed on a quarterly basis in addition to other metrics provided through third-party services.

Following review of the financial metrics and ratings, management concluded that the unrealized loss position of the private label mortgage and asset backed securities related exclusively to the fluctuation in market conditions and were not reflective of any credit concerns with the tranches comprising the Company’s investments.

As of March 31, 2023 and December 31, 2022, the Company had the intent to hold the AFS debt securities with unrealized losses through the anticipated recovery period and it was more-than-likely-than-not that the Company would not be required to sell these securities.

Accordingly, there was no allowance for credit losses as of March 31, 2023 and December 31, 2022 provided against these securities.

Allowance for Credit Losses on Held-to-Maturity Debt Securities

The Company separately evaluates its HTM debt securities for any credit losses based on probability of default and loss given default utilizing historical industry data based on investment category, while also considering reasonable and supportable forecasts.

The probability of default and loss given default are incorporated into the present value of expected cash flows and

compared against amortized cost.

The Company recorded an ACL on January 1, 2023 for held-to-maturity debt securities within the corporate bond and private label mortgage securities of $ 545,000 and $ 231,000 , respectively.

The allowance for credit losses on HTM securities was $ 684,000 at March 31, 2023.

The Company monitors credit quality of debt securities held-to-maturity through the use of credit ratings.

The Company monitors the credit ratings on a quarterly basis.

There were no HTM securities on nonaccrual or past due over 89 days and still on accrual.

The following table summarizes the amortized cost of debt securities held-to-maturity at the dates indicated, aggregated by credit quality indicator.

Government sponsored agencies are not included in the below tables as credit ratings are not applicable.

March 31, 2023

Debt Securities Held-to-Maturity AAA/AA/A BBB/BB/B Unrated

Obligations of states and political subdivisions $ 192,028 $ — $ —

Private label mortgage and asset backed securities

Total available-for-sale $ 772,677 $ 668,300

September 30, 2022

Held-to-Maturity Securities Amortized Cost Estimated Fair

Within one year $ — $ —

After one year through five years 131 124

After five years through ten years 49,810 44,318

After ten years 142,034 119,437

46,706 — 9,275

Investment securities not due at a single maturity date:

Government sponsored entities and agencies collateralized by residential mortgage obligations 10,350 9,033

Private label mortgage and asset backed securities 57,201 51,168

Corporate debt securities — — 46,008

Total held-to-maturity $ 305,482 $ 267,443

Loans and Allowance for Credit Losses

Outstanding loans are summarized as follows:

Loan Type (Dollars in thousands) September 30, 2022 % of Total

Loans December 31, 2021 % of Total

Total debt securities held-to-maturity $ 238,734 $ — $ 65,794

Loans and Allowance for Credit Losses on Loans

The majority of the disclosures in this footnote are prepared at the class level, which is equivalent to the call report or call code classification.

The roll forward of the allowance for credit losses is presented at the portfolio segment level.

Accrued interest receivable on loans of $ 3,773,000 and $ 4,512,000 at March 31, 2023 and December 31, 2022 respectively is not included in the loan tables below and is included in other assets on the Company’s balance sheets.

Outstanding loans are summarized by class as follows:

Loan Type (Dollars in thousands) March 31, 2023 December 31, 2022

Commercial and industrial $ 149,689 $ 141,197

1 unchanged sentence

Total commercial 171,793 178,204

Owner occupied 195,272 15.9 % 212,234 20.4 %

Real estate construction and other land loans 97,169 7.9 % 61,586 5.9 %

Commercial real estate 451,588 37.0 % 369,529 35.6 %

Agricultural real estate 115,477 9.4 % 98,481 9.5 %

Other real estate 24,776 2.0 % 26,084 2.5 %

Construction & other land loans 112,989 109,175

Commercial real estate - owner occupied 196,117 194,663

Commercial real estate - non-owner occupied 500,420 464,809

Farmland 116,723 119,648

Multi-family residential 23,694 24,586

1-4 family - close-ended 91,696 93,510

1-4 family - revolving 27,260 30,071

Total real estate 1,068,899 1,036,462

Equity loans and lines of credit 121,305 9.9 % 55,620 5.4 %

Consumer and installment 35,546 2.9 % 36,999 3.6 %

Total consumer 156,851 12.8 % 92,619 9.0 %

Net deferred origination fees 1,297 871

43,431 40,252

Total gross loans 1,284,123 1,254,918

Allowance for credit losses ( 10,366 ) ( 9,600 )

Total loans $ 1,214,904 $ 1,029,511

At September 30, 2022 and December 31, 2021, loans originated under Small Business Administration (SBA) programs totaling $ 21,090,000 and $ 23,024,000 , respectively, were included in the real estate and commercial categories, of which, $ 16,242,000 or 77 % and $ 17,720,000 or 77 %, 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, 2022, two PPP loans totaling $ 350,000 were outstanding and included in the commercial and industrial line item above.

At December 31, 2021, 70 PPP loans totaling $ 18,553,000 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 55 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, 2022 and 2021 by portfolio segment (in thousands):

Commercial Real Estate Consumer Unallocated Total

Net deferred origination fees 1,431 1,386

Loans, net of deferred origination fees 1,285,554 1,256,304

Allowance for credit losses ( 15,257 ) ( 10,848 )

Beginning balance, July 01, 2022 $ 1,973 $ 6,994 $ 769 $ 137 $ 9,873

Provision (reversal) charged to operations 118 418 ( 29 ) ( 7 ) 500

Charge-offs — — ( 20 ) — ( 20 )

Recoveries — — 13 — 13

Ending balance, September 30, 2022 $ 2,091 $ 7,412 $ 733 $ 130 $ 10,366

Total loans, net $ 1,270,297 $ 1,245,456

At March 31, 2023 and December 31, 2022, loans originated under Small Business Administration (SBA) programs totaling $ 18,964,000 and $ 19,947,000 , respectively, were included in the real estate and commercial categories, of which, $ 14,505,000 or 76 % and $ 15,333,000 or 77 %, respectively, are secured by government guarantees.

Allowance for Credit Losses on Loans

The measurement of the allowance for credit losses on collectively evaluated loans is based on modeled expectations of lifetime expected credit losses utilizing national and peer group historical losses, weighting of economic scenarios, and other relevant factors.

The Company incorporates forward-looking information using macroeconomic scenarios, which include variables that are considered key drivers of credit losses within the portfolio.

The Company uses a probability-weighted, multiple scenario forecast approach.

These scenarios may consist of a base forecast representing the most likely outcome, combined with downside or upside scenarios reflecting possible worsening or improving economic conditions.

When a loan no longer shares similar risk characteristics with other loans, such as in the case of certain nonaccrual loans, the Company estimates the allowance for credit losses on an individual loan basis.

There were no loans on nonaccrual or individually evaluated as of March 31, 2023 or December 31, 2022.

The following table shows the summary of activities for the allowance for credit losses as of and for the three months ended March 31, 2023 and 2022 by portfolio segment (in thousands):

Commercial Commercial Real Estate 1-4 Family Real Estate Consumer Unallocated Total

Allowance for credit losses:

Beginning balance, July 1, 2021 $ 2,210 $ 7,050 $ 828 $ 351 $ 10,439

Provision (reversal) charged to operations 118 ( 434 ) ( 230 ) 46 ( 500 )

Beginning balance, January 1, 2023 prior to adoption of ASU 2016-13 (CECL) $ 1,814 $ 7,803 $ 607 $ 284 $ 340 $ 10,848

Impact of adoption of ASU 2016-13 454 1,693 1,614 489 ( 340 ) 3,910

Provision (credit) for credit losses (1)

( 240 ) 569 64 125 — 518

Charge-offs ( 322 ) — — ( 32 ) — ( 354 )

Recoveries 322 — — 13 — 335

Ending balance, September 30, 2021 $ 2,334 $ 6,616 $ 714 $ 397 $ 10,061

The following table shows the summary of activities for the Allowance as of and for the nine months ended September 30, 2022 and 2021 by portfolio segment (in thousands):

Ending balance, March 31, 2023 $ 2,028 $ 10,065 $ 2,285 $ 879 $ — $ 15,257

(1) Represents credit losses for loans only.

The provision for credit losses on the Consolidated Statements of Income of $ 633 includes a $(92) credit for held-to-maturity securities and a $207 provision for unfunded loan commitments.

Commercial Real Estate Consumer Unallocated Total

1 unchanged sentence

Beginning balance, January 1, 2022 $ 2,011 $ 6,741 $ 568 $ 280 $ 9,600

(Reversal) provision charged to operations ( 269 ) 671 248 ( 150 ) 500

Losses charged to allowance ( 18 ) — ( 120 ) — ( 138 )

Recoveries 367 — 37 — 404

Ending balance, September 30, 2022 $ 2,091 $ 7,412 $ 733 $ 130 $ 10,366

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 )

Losses charged to allowance ( 46 ) — ( 215 ) — ( 261 )

Provision (credit) for credit losses ( 356 ) 307 31 18 —

Charge-offs ( 18 ) — ( 83 ) — ( 101 )

Recoveries 356 — 9 — 365

Ending balance, September 30, 2021 $ 2,334 $ 6,616 $ 714 $ 397 $ 10,061

The following is a summary of the Allowance by impairment methodology and portfolio segment as of September 30, 2022 and December 31, 2021 (in thousands):

Commercial Real Estate Consumer Unallocated Total

Allowance for credit losses:

Ending balance, September 30, 2022 $ 2,091 $ 7,412 $ 733 $ 130 $ 10,366

Ending balance:

individually evaluated for impairment $ 337 $ 7 $ — $ — $ 344

Ending balance:

collectively evaluated for impairment $ 1,754 $ 7,405 $ 733 $ 130 $ 10,022

Ending balance, December 31, 2021 $ 2,011 $ 6,741 $ 568 $ 280 $ 9,600

Ending balance:

individually evaluated for impairment $ 607 $ 38 $ 4 $ — $ 649

Ending balance:

collectively evaluated for impairment $ 1,404 $ 6,703 $ 564 $ 280 $ 8,951

The following table shows the ending balances of loans as of September 30, 2022 and December 31, 2021 by portfolio segment and by impairment methodology (in thousands):

Commercial Real Estate Consumer Total

Ending balance, September 30, 2022 $ 182,840 $ 884,282 $ 156,851 $ 1,223,973

Ending balance:

individually evaluated for impairment $ 1,490 $ 150 $ 1,025 $ 2,665

Ending balance:

collectively evaluated for impairment $ 181,350 $ 884,132 $ 155,826 $ 1,221,308

Ending balance, December 31, 2021 $ 177,707 $ 767,914 $ 92,619 $ 1,038,240

Ending balance:

individually evaluated for impairment $ 7,086 $ 450 $ 1,050 $ 8,586

Ending balance:

collectively evaluated for impairment

$ 170,621 $ 767,464 $ 91,569 $ 1,029,654

The following table shows the loan portfolio by class allocated by management’s internal risk ratings at September 30, 2022 (in thousands):

Pass Special Mention Sub-Standard Doubtful Total

Ending balance, March 31, 2022 $ 1,993 $ 7,048 $ 525 $ 298 $ 9,864

The following table shows the loan portfolio by class, net of deferred fees, allocated by management’s internal risk ratings for the period indicated (in thousands):

Term Loans Amortized Cost Basis by Origination Year - As of March 31, 2023

2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Converted to Term Total

Commercial and industrial

Pass/Watch $ 10,246 $ 33,809 $ 42,922 $ 6,238 $ 2,545 $ 9,035 $ 33,886 $ — $ 138,681

Special mention — — 174 197 2,718 283 6,150 — 9,522

Substandard — — 26 6 — 1,583 335 — 1,950

Total $ 10,246 $ 33,809 $ 43,122 $ 6,441 $ 5,263 $ 10,901 $ 40,371 $ — $ 150,153

Current period gross write-offs $ — $ — $ 323 $ — $ — $ — $ — $ — $ 323

Agricultural production

Owner occupied 189,648 3,441 2,183 — 195,272

Real estate construction and other land loans 83,956 — 13,213 — 97,169

Commercial real estate 446,273 2,881 2,434 — 451,588

Agricultural real estate 105,521 9,956 — — 115,477

Other real estate 24,776 — — — 24,776

Equity loans and lines of credit 121,036 224 45 — 121,305

Consumer and installment 35,502 9 35 — 35,546

Pass/Watch $ 83 $ 347 $ 51 $ — $ 257 $ 185 $ 11,538 $ 535 $ 12,996

Special mention — — — — — — 3,941 — 3,941

Substandard — 1,160 1,123 — — — 2,900 — 5,183

Total $ 83 $ 1,507 $ 1,174 $ — $ 257 $ 185 $ 18,379 $ 535 $ 22,120

The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2021 (in thousands):

Pass Special Mention Sub-Standard Doubtful Total