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, 2023 December 31, 2022 ASSETS Cash and due from banks $ 27,558 $ 25,485 Interest-earning deposits in other banks 47,017 5,685 Total cash and cash equivalents 74,575 31,170 Available-for-sale debt securities, at fair value, net of allowance for credit losses of $0 593,430 648,825 Held-to-maturity debt securities, at amortized cost less allowance for credit losses of $281 at September 30, 2023 and $0 at December 31, 2022 303,451 305,107 Equity securities, at fair value 6,354 6,558 Loans, less allowance for credit losses of $15,534 at September 30, 2023 and $10,848 at December 31, 2022 1,259,877 1,245,456 Bank premises and equipment, net 9,703 7,987 Bank-owned life insurance 41,301 40,537 Federal Home Loan Bank stock 7,136 6,169 Goodwill 53,777 53,777 Accrued interest receivable and other assets 85,755 76,933 Total assets $ 2,435,359 $ 2,422,519 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest bearing $ 990,508 $ 1,056,567 Interest bearing 1,158,334 1,043,082 Total deposits 2,148,842 2,099,649 Short-term borrowings — 46,000 Senior debt and subordinated debentures, less debt issuance costs of $447 at September 30, 2023 and $556 at December 31, 2022 69,708 69,599 Accrued interest payable and other liabilities 35,159 32,611 Total liabilities 2,253,709 2,247,859 Commitments and contingencies ( Note 6 ) 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: 11,814,883 at September 30, 2023 and 11,735,291 at December 31, 2022 62,338 61,487 Retained earnings 206,073 194,400 Accumulated other comprehensive loss, net of tax ( 86,761 ) ( 81,227 ) Total shareholders’ equity 181,650 174,660 Total liabilities and shareholders’ equity $ 2,435,359 $ 2,422,519 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) 2023 2022 2023 2022 INTEREST INCOME: Interest and fees on loans $ 17,692 $ 14,708 $ 51,851 $ 39,752 Interest on deposits in other banks 1,481 48 2,930 157 Interest and dividends on investment securities: Taxable 5,900 4,411 17,612 14,586 Exempt from Federal income taxes 1,393 1,825 4,203 5,144 Total interest income 26,466 20,992 76,596 59,639 INTEREST EXPENSE: Interest on deposits 5,015 231 10,890 714 Interest on short-term borrowings — 411 661 1,168 Interest on senior debt and subordinated debentures 924 186 2,732 186 Total interest expense 5,939 828 14,283 2,068 Net interest income before provision for credit losses 20,527 20,164 62,313 57,571 PROVISION FOR CREDIT LOSSES 186 495 476 495 Net interest income after provision for credit losses 20,341 19,669 61,837 57,076 NON-INTEREST INCOME: Service charges 376 475 1,132 1,558 Net realized losses on sales and calls of investment securities ( 39 ) ( 14 ) ( 296 ) ( 777 ) Other income 1,246 1,019 3,916 3,303 Total non-interest income 1,583 1,480 4,752 4,084 NON-INTEREST EXPENSES: Salaries and employee benefits 7,474 7,500 23,483 21,501 Occupancy and equipment 1,490 1,363 4,012 3,869 Other 4,472 3,940 12,951 10,961 Total non-interest expenses 13,436 12,803 40,446 36,331 Income before provision for income taxes 8,488 8,346 26,143 24,829 Provision for income taxes 2,098 1,962 6,501 5,817 Net income $ 6,390 $ 6,384 $ 19,642 $ 19,012 Earnings per common share: Basic earnings per share $ 0.54 $ 0.55 $ 1.67 $ 1.62 Weighted average common shares used in basic computation 11,742,334 11,678,532 11,723,233 11,723,790 Diluted earnings per share $ 0.54 $ 0.55 $ 1.67 $ 1.62 Weighted average common shares used in diluted computation 11,755,758 11,689,323 11,745,606 11,748,693 Cash dividend per common share $ 0.12 $ 0.12 $ 0.36 $ 0.36 See notes to unaudited consolidated financial statements. 4 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) For the Three Months Ended September 30, For the Nine Months Ended September 30, (In thousands) 2023 2022 2023 2022 Net income $ 6,390 $ 6,384 $ 19,642 19,012 Other comprehensive loss: Unrealized losses on securities: Unrealized holding losses arising during the period ( 16,107 ) ( 24,378 ) ( 9,955 ) ( 141,308 ) Reclassification of net losses included in net income 39 14 296 777 Amortization of net unrealized losses transferred 602 651 1,802 1,045 Other comprehensive loss, before tax ( 15,466 ) ( 23,713 ) ( 7,857 ) ( 139,486 ) Tax effect 4,573 7,010 2,323 41,232 Total other comprehensive loss ( 10,893 ) ( 16,703 ) ( 5,534 ) ( 98,254 ) Comprehensive (loss) income $ ( 4,503 ) $ ( 10,319 ) $ 14,108 $ ( 79,242 ) 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, 2023 AND 2022 Common Stock Retained Earnings Accumulated Other Comprehensive Loss (Net of Taxes) Total Shareholders’ Equity (In thousands, except share amounts) Shares Amount Balance, June 30, 2022 11,717,146 $ 60,975 $ 183,197 $ ( 73,919 ) 170,253 Net income — — 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 Balance, June 30, 2023 11,812,425 $ 62,128 $ 201,100 $ ( 75,868 ) $ 187,360 Net income — — 6,390 — 6,390 Other comprehensive loss — — — ( 10,893 ) ( 10,893 ) Stock issued under employee stock purchase plan 3,025 40 — — 40 Restricted stock forfeitures ( 567 ) — — — — Stock-based compensation expense — 170 — — 170 Cash dividend — — ( 1,417 ) — ( 1,417 ) Balance, September 30, 2023 11,814,883 $ 62,338 $ 206,073 $ ( 86,761 ) $ 181,650 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, 2023 AND 2022 Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) (Net of Taxes) Total Shareholders’ Equity (In thousands, except share amounts) Shares Amount Balance, December 31, 2021 11,916,651 $ 66,820 $ 173,393 $ 7,632 247,845 Net income — — 19,012 — 19,012 Other comprehensive loss — — — ( 98,254 ) ( 98,254 ) Stock issued under employee stock purchase plan 10,071 164 — — 164 Stock awarded to employees 13,446 — — — — Restricted stock granted net of forfeitures 42,399 — — — — Stock-based compensation expense — 603 — — 603 Cash dividend — — ( 4,231 ) — ( 4,231 ) Repurchase and retirement of common stock ( 300,761 ) ( 6,814 ) — — ( 6,814 ) Stock options exercised 50,205 489 — — 489 Balance, September 30, 2022 11,732,011 $ 61,262 $ 188,174 $ ( 90,622 ) $ 158,814 Balance, December 31, 2022 11,735,291 $ 61,487 $ 194,400 $ ( 81,227 ) $ 174,660 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 Net income — — 19,642 — 19,642 Other comprehensive loss — — — ( 5,534 ) ( 5,534 ) Stock issued under employee stock purchase plan 10,817 163 — — 163 Stock awarded to employees 10,347 — — — — Restricted stock granted net of forfeitures 58,467 — — — — Stock-based compensation expense — 689 — — 689 Cash dividend — — ( 4,238 ) — ( 4,238 ) Repurchase and retirement of common stock ( 39 ) ( 1 ) — — ( 1 ) Balance, September 30, 2023 11,814,883 $ 62,338 $ 206,073 $ ( 86,761 ) $ 181,650 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) 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 19,642 $ 19,012 Adjustments to reconcile net income to net cash provided by operating activities: Net decrease (increase) in deferred loan fees 158 ( 419 ) Depreciation 454 586 Accretion ( 1,435 ) ( 892 ) Amortization 6,816 7,201 Stock-based compensation 689 603 Provision for credit losses 476 495 Net realized losses on sales and calls of available-for-sale investment securities 296 777 Net gain on disposal of premises and equipment ( 30 ) — Net change in equity securities 204 872 Increase in bank-owned life insurance, net of expenses ( 763 ) ( 736 ) Net increase in accrued interest receivable and other assets ( 4,760 ) ( 6,033 ) Net increase (decrease) in accrued interest payable and other liabilities 1,934 ( 6,860 ) Provision for deferred income taxes ( 244 ) ( 662 ) Net cash provided by operating activities 23,437 13,944 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale investment securities — ( 301,699 ) Proceeds from sales or calls of available-for-sale investment securities 12,580 235,645 Proceeds from calls of held-to-maturity investment securities 20 — Proceeds from maturity and principal repayments of available-for-sale investment securities 28,849 54,691 Proceeds from maturity and principal repayments of held-to-maturity investment securities 1,964 738 Net increase in loans ( 19,455 ) ( 185,474 ) Purchases of premises and equipment ( 4,609 ) ( 115 ) FHLB stock purchased ( 967 ) ( 574 ) Proceeds from sale of premises and equipment 2,469 — Net cash provided by (used in) investing activities 20,851 ( 196,788 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in demand, interest bearing and savings deposits ( 46,131 ) 30,257 Net increase (decrease) in time deposits 95,324 ( 13,910 ) Proceeds from short-term borrowings from Federal Home Loan Bank 3,346,500 2,090,326 Repayments of short-term borrowings to Federal Home Loan Bank ( 3,392,500 ) ( 2,065,326 ) Proceeds of issuance of senior debt — 30,000 Repurchase and retirement of common stock ( 1 ) ( 6,814 ) Proceeds from stock issued under employee stock purchase plan 163 164 Proceeds from exercise of stock options — 489 Cash dividend payments on common stock ( 4,238 ) ( 4,231 ) Net cash (used in) provided by financing activities ( 883 ) 60,955 Increase (decrease) in cash and cash equivalents 43,405 ( 121,889 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 31,170 163,467 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 74,575 $ 41,578 See notes to unaudited consolidated financial statements. 8 For the Nine Months Ended September 30, (In thousands) 2023 2022 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid during the period for : Interest $ 14,180 $ 1,525 Income taxes $ 6,700 $ 5,614 Operating cash flows from operating leases $ 1,874 $ 1,653 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. 9 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 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, 2023, and the results of its operations and its cash flows for the three and nine month interim periods ended September 30, 2023 and 2022 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 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 prospective 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 adoption modified the Company’s disclosures but did not have a material impact on its financial position or results of operations. 10 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 . 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. 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 credit). 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. The Company elected the practical expedient under ASC 326-20-30-5A to exclude accrued interest from the amortized cost basis when measuring potential impairment. Additionally, management notes that due to this election, accrued interest is separately reported from the securities’ amortized cost basis. Allowance for Credit Losses on Loans: The allowance for credit losses (“ACL”) on loans 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. The Company elected the practical expedient under ASC 326-20-30-5A to exclude accrued interest from the amortized cost basis when measuring potential impairment. Additionally, management notes that due to this election, accrued interest is separately reported from the loans’ amortized cost basis. 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 local 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 11 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: 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 Consumer: 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 12 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. Note 2. Investments The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at September 30, 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): September 30, 2023 Available-for-Sale Securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Estimated Fair Value Debt securities: U.S. Treasury securities $ 9,989 $ — $ ( 1,373 ) $ — $ 8,616 U.S. Government agencies 103 — ( 11 ) — 92 Obligations of states and political subdivisions 198,823 — ( 32,698 ) — 166,125 U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 93,303 1 ( 7,358 ) — 85,946 Private label mortgage and asset backed securities 392,514 7 ( 59,870 ) — 332,651 Total available-for-sale $ 694,732 $ 8 $ ( 101,310 ) $ — $ 593,430 September 30, 2023 Held-to-Maturity Securities Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Estimated Fair Value Allowance for Credit Losses Debt securities: Obligations of states and political subdivisions $ 192,056 $ 75 $ ( 27,959 ) $ 164,172 $ 15 U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 10,675 — ( 2,379 ) 8,296 — Private label mortgage and asset backed securities 54,943 — ( 8,103 ) 46,840 12 Corporate debt securities 46,058 — ( 5,343 ) 40,715 254 Total held-to-maturity $ 303,732 $ 75 $ ( 43,784 ) $ 260,023 $ 281 December 31, 2022 Available-for-Sale Securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Debt securities: U.S. Treasury securities $ 9,990 $ — $ ( 1,283 ) $ 8,707 U.S. Government agencies 107 — ( 9 ) 98 Obligations of states and political subdivisions 201,638 — ( 26,653 ) 174,985 U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 117,292 4 ( 7,803 ) 109,493 Private label mortgage and asset backed securities 411,441 14 ( 55,913 ) 355,542 Total available-for-sale $ 740,468 $ 18 $ ( 91,661 ) $ 648,825 13 December 31, 2022 Held-to-Maturity Securities Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Estimated Fair Value Debt securities: Obligations of states and political subdivisions 192,004 67 ( 23,166 ) $ 168,905 U.S. 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 available-for-sale investment securities for the periods ended September 30, 2023 and 2022 are shown below (in thousands): For the Three Months Ended September 30, For the Nine Months Ended September 30, Available-for-Sale Securities 2023 2022 2023 2022 Proceeds from sales or calls $ 205 $ 275 $ 12,580 $ 235,645 Gross realized gains from sales or calls — — — 5,123 Gross realized losses from sales or calls ( 39 ) ( 14 ) ( 296 ) ( 5,900 ) The provision for income taxes includes a $ 87,000 and $ 230,000 income tax benefit from security sales for the nine months ended September 30, 2023 and 2022. The amortized cost and estimated fair value of available-for-sale and held-to maturity investment securities at September 30, 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. September 30, 2023 December 31, 2022 Available-for-Sale Securities Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Within one year $ — $ — $ — $ — After one year through five years 9,991 8,618 — — After five years through ten years 35,063 28,981 45,918 38,383 After ten years 163,756 137,142 165,710 145,309 208,810 174,741 211,628 183,692 Investment securities not due at a single maturity date: U.S. Government agencies 103 92 107 98 U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 93,303 85,946 117,292 109,493 Private label mortgage and asset backed securities 392,516 332,651 411,441 355,542 Total available-for-sale $ 694,732 $ 593,430 $ 740,468 $ 648,825 14 September 30, 2023 December 31, 2022 Held-to-Maturity Securities Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Within one year $ — $ — $ — $ — After one year through five years 5,968 5,343 132 129 After five years through ten years 75,645 66,265 51,424 46,143 After ten years 110,443 92,564 140,448 122,633 192,056 164,172 192,004 168,905 Investment securities not due at a single maturity date: U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 10,675 8,296 10,430 8,668 Private label mortgage and asset backed securities 54,943 46,840 56,691 50,760 Corporate debt securities 46,058 40,715 45,982 42,916 Total held-to-maturity $ 303,732 $ 260,023 $ 305,107 $ 271,249 At September 30, 2023 there were nine 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): September 30, 2023 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Available-for-Sale Securities Value Losses Value Losses Value Losses Debt securities: U.S. Treasury securities $ — $ — $ 8,616 $ ( 1,373 ) $ 8,616 $ ( 1,373 ) U.S. Government agencies — — 92 ( 11 ) 92 ( 11 ) Obligations of states and political subdivisions — — 166,125 ( 32,698 ) 166,125 ( 32,698 ) U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 546 ( 21 ) 85,400 ( 7,337 ) 85,946 ( 7,358 ) Private label mortgage and asset backed securities 44 ( 2 ) 332,607 ( 59,868 ) 332,651 ( 59,870 ) Total available-for-sale $ 590 $ ( 23 ) $ 592,840 $ ( 101,287 ) $ 593,430 $ ( 101,310 ) December 31, 2022 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Available-for-Sale Securities Value Losses Value Losses Value Losses Debt securities: U.S. Treasury securities $ — $ — $ 8,707 $ ( 1,283 ) $ 8,707 $ ( 1,283 ) U.S. Government agencies — — 98 ( 9 ) 98 ( 9 ) Obligations of states and political subdivisions 90,808 ( 12,208 ) 84,177 ( 14,445 ) 174,985 ( 26,653 ) U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 20,825 ( 1,058 ) 88,520 ( 6,745 ) 109,345 ( 7,803 ) Private label mortgage and asset backed securities 126,284 ( 14,529 ) 229,152 ( 41,384 ) 355,436 ( 55,913 ) Total available-for-sale $ 237,917 $ ( 27,795 ) $ 410,654 $ ( 63,866 ) $ 648,571 $ ( 91,661 ) 15 As of September 30, 2023, the Company had a total of 193 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, 61 U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations, and 83 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 September 30, 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. As of September 30, 2023, the Company determined that it is not more likely than not that there is an intention to sell securities or that the Company would be required to sell securities. 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: 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. • U.S. Treasury and Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations: The unrealized losses on the Company’s investments in U.S. treasuries and 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. • Private Label Mortgage and Asset Backed Securities: 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. No allowance for credit losses have been recognized on AFS debt securities in an unrealized loss position, as management does not believe that any of the securities are impaired due to credit risk factors as of September 30, 2023 and December 31, 2022. 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 $ 281,000 at September 30, 2023. 16 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. For non-rated investment securities, management receives quarterly performance updates to monitor for any credit concerns. 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. U.S. Government sponsored agencies are not included in the below tables as credit ratings are not applicable. September 30, 2023 Debt Securities Held-to-Maturity AAA/AA/A BBB Unrated Obligations of states and political subdivisions $ 192,056 $ — $ — Private label mortgage and asset backed securities 46,411 — 8,532 Corporate debt securities — 30,163 15,895 Total debt securities held-to-maturity $ 238,467 $ 30,163 $ 24,427 Note 3. 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 $ 4,225,000 and $ 4,512,000 at September 30, 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) September 30, 2023 December 31, 2022 Commercial: Commercial and industrial $ 106,061 $ 141,197 Agricultural production 25,190 37,007 Total commercial 131,251 178,204 Real estate: Construction & other land loans 81,264 109,175 Commercial real estate - owner occupied 197,228 194,663 Commercial real estate - non-owner occupied 525,835 464,809 Farmland 123,467 119,648 Multi-family residential 44,794 24,586 1-4 family - close-ended 95,573 93,510 1-4 family - revolving 28,251 30,071 Total real estate 1,096,412 1,036,462 Consumer 46,204 40,252 Total gross loans 1,273,867 1,254,918 Net deferred origination fees 1,544 1,386 Loans, net of deferred origination fees 1,275,411 1,256,304 Allowance for credit losses ( 15,534 ) ( 10,848 ) Total loans, net $ 1,259,877 $ 1,245,456 At September 30, 2023 and December 31, 2022, loans originated under Small Business Administration (SBA) programs totaling $ 18,246,000 and $ 19,947,000 , respectively, were included in the real estate and commercial categories, of which, $ 13,955,000 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 local 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, 17 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 September 30, 2023 or December 31, 2022. The following table shows the summary of activities for the allowance for credit losses for the three months ended September 30, 2023 and 2022 by portfolio segment (in thousands): Commercial Commercial Real Estate 1-4 Family Real Estate Consumer Total Allowance for credit losses: Beginning balance, July 1, 2023 $ 1,477 $ 10,684 $ 2,489 $ 813 $ 15,463 Provision (credit) for credit losses (1) 161 195 ( 71 ) ( 20 ) 265 Charge-offs ( 236 ) — — ( 18 ) ( 254 ) Recoveries 38 — 2 20 60 Ending balance, September 30, 2023 $ 1,440 $ 10,879 $ 2,420 $ 795 $ 15,534 (1) Represents credit losses for loans only. The provision for credit losses on the Consolidated Statements of Income of $ 186 includes a $(175) credit for held-to-maturity securities and a $96 provision for unfunded loan commitments. Commercial Real Estate Consumer Unallocated Total Allowance for credit losses: Beginning balance, July 1, 2022 $ 1,973 $ 6,994 $ 769 $ 137 $ 9,873 Provision (credit) for credit losses (1) 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 (1) Represents credit losses for loans only. The provision for credit losses on the Consolidated Statements of Income of $ 495 includes a $5 provision for unfunded loan commitments. The following table shows the summary of activities for the allowance for credit losses as of and for the nine months ended September 30, 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, 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 (Credit) provision for credit losses (1) ( 630 ) 1,383 184 30 — 967 Charge-offs ( 558 ) — — ( 53 ) — ( 611 ) Recoveries 360 — 15 45 — 420 Ending balance, September 30, 2023 $ 1,440 $ 10,879 $ 2,420 $ 795 $ — $ 15,534 (1) Represents credit losses for loans only. The provision for credit losses on the Consolidated Statements of Income of $ 476 includes a $(495) credit for held-to-maturity securities and a $4 provision for unfunded loan commitments. 18 Commercial Real Estate Consumer Unallocated Total Allowance for credit losses: Beginning balance, January 1, 2022 $ 2,011 $ 6,741 $ 568 $ 280 $ 9,600 (Credit) provision for credit losses (1) ( 269 ) 671 248 ( 150 ) 500 Charge-offs ( 18 ) — ( 120 ) — ( 138 ) Recoveries 367 — 37 — 404 Ending balance, September 30, 2022 $ 2,091 $ 7,412 $ 733 $ 130 $ 10,366 (1) Represents credit losses for loans only. The provision for credit losses on the Consolidated Statements of Income of $ 495 includes a $5 provision for unfunded loan commitments. During the three and nine month periods ended September 30, 2023, the provision for credit losses was primarily driven by weakening economic scenario forecasts in commercial real estate and multi-family and increases in commercial real estate and multi-family loan balances, partially offset by lower loan balances in the commercial loan segment. Management believes that the allowance for credit losses at September 30, 2023 appropriately reflected expected credit losses in the loan portfolio at that date. 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 September 30, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Converted to Term Total Commercial and industrial Pass/Watch $ 16,221 $ 22,452 $ 21,652 $ 4,966 $ 1,852 $ 8,127 $ 25,568 $ 215 $ 101,053 Special mention — 294 151 188 703 276 3,500 — 5,112 Substandard — — — 192 — 87 — — 279 Total $ 16,221 $ 22,746 $ 21,803 $ 5,346 $ 2,555 $ 8,490 $ 29,068 $ 215 $ 106,444 Current period gross write-offs $ 241 $ — $ 323 $ — $ — $ — $ — $ — $ 564 Agricultural production Pass/Watch $ 144 $ 242 $ 15 $ — $ 251 $ 162 $ 15,105 $ 999 $ 16,918 Special mention — — — — — — 6,940 — 6,940 Substandard — 1,366 — — — — — — 1,366 Total $ 144 $ 1,608 $ 15 $ — $ 251 $ 162 $ 22,045 $ 999 $ 25,224 Current period gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Construction & other land loans Pass/Watch $ 1,734 $ 18,366 $ 21,988 $ 10,801 $ 1,677 $ 2,795 $ 5,263 $ — $ 62,624 Special mention — — — — — — — — — Substandard — 2,452 — — 15,928 — — — 18,380 Total $ 1,734 $ 20,818 $ 21,988 $ 10,801 $ 17,605 $ 2,795 $ 5,263 $ — $ 81,004 Current period gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial real estate - owner occupied Pass/Watch $ 13,216 $ 23,104 $ 20,962 $ 28,148 $ 22,170 $ 82,973 $ 2,887 $ — $ 193,460 Special mention — — — — — 1,420 247 — 1,667 Substandard — — — — — 2,126 — — 2,126 19 Total $ 13,216 $ 23,104 $ 20,962 $ 28,148 $ 22,170 $ 86,519 $ 3,134 $ — $ 197,253 Current period gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial real estate - non-owner occupied Pass/Watch $ 71,209 $ 114,906 $ 77,927 $ 40,903 $ 23,257 $ 181,300 $ 12,308 $ — $ 521,810 Special mention — 600 — — — 434 — — 1,034 Substandard — — — — — 2,362 — — 2,362 Total $ 71,209 $ 115,506 $ 77,927 $ 40,903 $ 23,257 $ 184,096 $ 12,308 $ — $ 525,206 Current period gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Farmland Pass/Watch $ 5,597 $ 23,972 $ 10,960 $ 29,810 $ 11,221 $ 23,816 $ 13,685 $ 1,955 $ 121,016 Special mention — — — 2,213 — — — — 2,213 Substandard — — — — — 196 — — 196 Total $ 5,597 $ 23,972 $ 10,960 $ 32,023 $ 11,221 $ 24,012 $ 13,685 $ 1,955 $ 123,425 Current period gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Multi-family residential Pass/Watch $ 2,992 $ 1,858 $ 20,358 $ 2,381 $ 4,561 $ 12,134 $ 531 $ — $ 44,815 Special mention — — — — — — — — — Substandard — — — — — — — — Total $ 2,992 $ 1,858 $ 20,358 $ 2,381 $ 4,561 $ 12,134 $ 531 $ — $ 44,815 Current period gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — 1-4 family - close-ended Pass/Watch $ — $ 64,585 $ 8,052 $ 2,305 $ 2,122 $ 18,624 $ — $ — $ 95,688 Special mention — — — — — — — — — Substandard — — — — — — — — — Total $ — $ 64,585 $ 8,052 $ 2,305 $ 2,122 $ 18,624 $ — $ — $ 95,688 Current period gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — 1-4 family - revolving Pass/Watch $ — $ — $ — $ — $ — $ 22,376 $ 6,103 $ 28,479 Special mention — — — — — — — — Substandard — — — — — — — — Total $ — $ — $ — $ — $ — $ — $ 22,376 $ 6,103 $ 28,479 Current period gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Consumer Pass/Watch $ 23,021 $ 9,655 $ 7,254 $ 2,450 $ 2,168 $ 2,650 $ 640 $ 4 $ 47,842 Special mention — — — — — — — — — Substandard — — 31 — — — — — 31 Total $ 23,021 $ 9,655 $ 7,285 $ 2,450 $ 2,168 $ 2,650 $ 640 $ 4 $ 47,873 Current period gross write-offs $ 20 $ — $ — $ — $ 27 $ — $ — $ — $ 47 20 Total loans outstanding (risk rating): Pass/Watch $ 134,134 $ 279,140 $ 189,168 $ 121,764 $ 69,279 $ 332,581 $ 98,363 $ 9,276 $ 1,233,705 Special mention — 894 151 2,401 703 2,130 10,687 — 16,966 Substandard — 3,818 31 192 15,928 4,771 — — 24,740 Grand Total $ 134,134 $ 283,852 $ 189,350 $ 124,357 $ 85,910 $ 339,482 $ 109,050 $ 9,276 $ 1,275,411 Current period total gross write-offs $ 261 $ — $ 323 $ — $ 27 $ — $ — $ — $ 611 The following table shows the loan portfolio by class, net of deferred fees, allocated by management’s internal risk ratings at December 31, 2022 (in thousands): Pass Special Mention Substandard Doubtful Total Commercial: Commercial and industrial $ 131,300 $ 8,707 $ 1,655 $ — $ 141,662 Agricultural production 24,926 6,713 5,399 — 37,038 Real Estate: Construction & other land loans 93,817 — 15,024 — 108,841 Commercial real estate - owner occupied 189,344 3,283 2,169 — 194,796 Commercial real estate - non-owner occupied 458,746 3,440 2,412 — 464,598 Farmland 109,898 8,879 824 — 119,601 Multi-family residential 24,636 — — — 24,636 1-4 family - close-ended 93,644 — — — 93,644 1-4 family - revolving 30,031 — 266 — 30,297 Consumer: 41,155 2 34 — 41,191 Total $ 1,197,497 $ 31,024 $ 27,783 $ — $ 1,256,304 The following table shows an aging analysis of the loan portfolio by class at September 30, 2023 (in thousands): 21 30-59 Days Past Due 60-89 Days Past Due Greater Than 89 Days Past Due Total Past Due Current Total Loans Loans Past Due > 89 Days, Still Accruing Non-accrual Commercial: Commercial and industrial $ 37 $ — $ — $ 37 $ 106,024 $ 106,061 $ — $ — Agricultural production — — — — 25,190 25,190 — — Real estate: — Construction & other land loans — — — — 81,264 81,264 — — Commercial real estate - owner occupied — — — — 197,228 197,228 — — Commercial real estate - non-owner occupied — — — — 525,835 525,835 — — Farmland — — — — 123,467 123,467 — — Multi-family residential — — — — 44,794 44,794 — — 1-4 family - close-ended — — — — 95,573 95,573 — — 1-4 family - revolving — — — — 28,251 28,251 — — Consumer 199 — — 199 46,005 46,204 — — Deferred fees — — — — $ 1,544 1,544 — — Total $ 236 $ — $ — $ 236 $ 1,275,175 $ 1,275,411 $ — $ — The following table shows an aging analysis of the loan portfolio by class at December 31, 2022 (in thousands): 30-59 Days Past Due 60-89 Days Past Due Greater Than 89 Days Past Due Total Past Due Current Total Loans Loans Past Due > 89 Days, Still Accruing Non- accrual Commercial: Commercial and industrial $ 440 $ — $ — $ 440 $ 140,757 $ 141,197 $ — $ — Agricultural production — — — — 37,007 37,007 — — Real estate: — Construction & other land loans — — — — 109,175 109,175 — — Commercial real estate - owner occupied 250 — — 250 194,413 194,663 — — Commercial real estate - non-owner occupied 4,507 — — 4,507 460,302 464,809 — — Farmland — — — — 119,648 119,648 — — Multi-family residential — — — — 24,586 24,586 — — 1-4 family - close-ended — — — — 93,510 93,510 — — 1-4 family - revolving 465 — — 465 29,606 30,071 — — Consumer 233 — — 233 40,019 40,252 — — Deferred fees — — — — 1,386 1,386 — — Total $ 5,895 $ — $ — $ 5,895 $ 1,250,409 $ 1,256,304 $ — $ — As of September 30, 2023 and December 31, 2022 there were no collateral dependent loans. 22 There was no foregone interest on nonaccrual loans for the three and nine month periods ended September 30, 2023. Foregone interest on nonaccrual loans totaled $ 75,000 and $ 132,000 for the three and nine month periods ended September 30, 2022, respectively. Occasionally, the Company modifies loans to borrowers in financial distress by providing reductions 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 similar risk. There were no loan modifications granted to borrowers experiencing financial difficulty during the nine month period ended September 30, 2023 or during 2022. As of December 31, 2022, the Company had a recorded investment in troubled debt restructurings (“TDR”) of $ 2,372,000 . The Company allocated $ 314,000 of specific reserves for those loans at December 31, 2022. The Company committed to lend no additional amounts as of December 31, 2022 to customers with outstanding loans that were classified as troubled debt restructurings. Note 4. Borrowing Arrangements As of September 30, 2023 the Company had no Federal Home Loan Bank (“FHLB”) of San Francisco advances as compared to $ 46,000,000 at December 31, 2022. Approximately $ 575,783,000 in loans and $ 20,739,000 in securities were pledged under a blanket lien as collateral to the FHLB resulting in borrowing capacity of $ 340,197,000 as of September 30, 2023. 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, 2023, and December 31, 2022 the Company had no Federal funds purchased. The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at September 30, 2023 and December 31, 2022: Credit Lines (In thousands) September 30, 2023 December 31, 2022 Unsecured Credit Lines Credit limit $ 110,000 $ 110,000 Balance outstanding $ — $ — Federal Home Loan Bank Credit limit $ 340,197 $ 319,309 Balance outstanding $ — $ 46,000 Collateral pledged $ 596,523 $ 687,357 Fair value of collateral $ 497,968 $ 565,869 Federal Reserve Bank Term Loan Funding Program Credit limit $ 37,245 $ — Balance outstanding $ — $ — Collateral pledged $ 54,380 $ — Fair value of collateral $ 46,281 $ — Federal Reserve Bank Credit limit $ 4,242 $ 4,702 Balance outstanding $ — $ — Collateral pledged $ 5,073 $ 5,508 Fair value of collateral $ 4,306 $ 4,893 Note 5. Senior Debt and Subordinated Debentures The following table summarizes the Company’s long-term debt: 23 (Dollars in thousands) September 30, 2023 December 31, 2022 Fixed - floating rate subordinated debentures, due 2031 $ 35,000 $ 35,000 Unamortized debt issuance costs ( 447 ) ( 556 ) Floating rate senior debt bank loan, due 2032 30,000 30,000 Junior subordinated deferrable interest debentures, due October 2036 5,155 5,155 Total subordinated debentures $ 69,708 $ 69,599 Junior Subordinated Debentures Service 1 st Capital Trust I is a Delaware business trust formed by Service 1 st . The Company succeeded to all of the rights and obligations of Service 1 st in connection with the merger with Service 1 st as of November 12, 2008. The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1 st . Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25 % of the Company’s Tier 1 capital on a pro forma basis. At September 30, 2023, all of the trust preferred securities that have been issued qualify as Tier 1 capital. The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three month SOFR plus 1.60 %. The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $ 5,155,000 in aggregate principal amount of Service 1 st ’s junior subordinated notes (the Notes). The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities. The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes (ii) in the event the Trust is deemed an investment company or (iii) upon the occurrence of certain adverse tax events. In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest. The Notes may be declared immediately due and payable at the election of the trustee or holders of 25 % of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods. Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $ 1,000 per security. For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month SOFR plus 1.60 %. As of September 30, 2023, the rate was 7.12 %. Interest expense recognized by the Company for the three months ended September 30, 2023 and 2022 was $ 97,000 and $ 65,000 , respectively. Interest expense recognized by the Company for the nine months ended September 30, 2023 and 2022 was $ 267,000 and $ 112,000 , respectively. Subordinated Debentures On November 12, 2021, the Company completed a private placement of $ 35,000,000 aggregate principal amount of its fixed-to-floating rate subordinated notes (“Subordinated Debt”) due December 1, 2031. The Subordinated Debt initially bears a fixed interest rate of 3.125 % per year. Commencing on December 1, 2026, the interest rate on the Subordinated Debt will reset each quarter at a floating interest rate equal to the then-current three month term SOFR plus 2.10 %. The Company may at its option redeem in whole or in part the Subordinated Debt on or after November 12, 2026 without a premium. The Subordinated Debt is treated as Tier 2 Capital for regulatory purposes. Interest expense recognized by the Company for the Subordinated Debentures for the three months ended September 30, 2023 and 2022 was $ 310,000 . Interest expense recognized by the Company for the Subordinated Debentures for the nine months ended September 30, 2023 and 2022 was $ 929,000 . Senior Debt On September 15, 2022, the Company entered into a $ 30,000,000 loan agreement with Bell Bank. Initially, payments of interest only are payable in 12 quarterly payments commencing December 31, 2022. Commencing December 31, 2025, 27 equal quarterly principal and interest payments are payable based on the outstanding balance of the loan on August 30, 2025 and an amortization of 48 quarters. A final payment of outstanding principal and accrued interest is due at maturity on September 30, 2032. Variable interest is payable at the Prime Rate (published by the Wall Street Journal) less 50 basis points. 24 The loan is secured by the assets of the Company and a pledge of the outstanding common stock of Central Valley Community Bank, the Company’s banking subsidiary. The Company may prepay the loan without penalty with one exception. If the loan is prepaid prior to August 30, 2025 with funds received from a financing source other than Bell Bank, the Company will incur a 2 % prepayment penalty. The loan contains customary representations, covenants, and events of default. Interest expense recognized by the Company for the Senior Debt for the three and nine months ended September 30, 2023 was $ 517,000 and $ 1,536,000 , respectively. Note 6. 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 $ 271,215,000 and $ 288,141,000 were outstanding at September 30, 2023 and December 31, 2022, 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 $ 269,267,000 and $ 286,925,000 at September 30, 2023 and December 31, 2022, 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 $ 45,760,000 and $ 45,604,000 as of September 30, 2023 and December 31, 2022, 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 $ 1,948,000 and $ 1,216,000 were outstanding at September 30, 2023 and December 31, 2022, 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, 2023 or December 31, 2022. The Company recognizes these fees as revenue over the term of the commitment or when the commitment is used. The Company generally requires collateral or other security to support financial instruments with credit risk. Management does not anticipate any material loss will result from the outstanding commitments to extend credit, standby letters of credit and financial guarantees. At September 30, 2023 and December 31, 2022, the allowance for credit losses of unfunded commitments was $ 725,000 and $ 110,000 , respectively. The allowance for credit losses of unfunded commitments 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 on loans 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. 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 7. Other Income and Expense The following table shows significant components of other non-interest income for the periods indicated: 25 For the Three Months Ended September 30, For the Nine Months Ended September 30, (Dollars in thousands) 2023 2022 2023 2022 Appreciation in cash surrender value of bank owned life insurance $ 260 $ 249 $ 763 $ 736 Loan placement fees 119 155 415 722 Interchange Fees 450 432 1,353 1,352 Federal Home Loan Bank dividends 134 91 349 258 Other 283 92 1,036 235 Total other non-interest income $ 1,246 $ 1,019 $ 3,916 $ 3,303 The following table shows significant components of other non-interest expense for the periods indicated: For the Three Months Ended September 30, For the Nine Months Ended September 30, (Dollars in thousands) 2023 2022 2023 2022 Regulatory assessments $ 358 $ 224 $ 924 $ 640 Data processing expense 680 560 1,949 1,649 ATM/Debit card expenses 192 176 569 588 Internet banking 40 29 121 98 Advertising 133 138 382 416 Professional Services 842 613 2,076 1,451 Information technology 915 879 2,697 2,465 Directors’ expenses 150 91 464 184 Loan related expenses 106 156 393 349 Personnel other 51 57 373 219 Amortization of core deposit intangibles — 139 68 419 Other 1,005 878 2,935 2,483 Total other non-interest expense $ 4,472 $ 3,940 $ 12,951 $ 10,961 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) 2023 2022 2023 2022 Net income $ 6,390 $ 6,384 $ 19,642 $ 19,012 Weighted average shares outstanding 11,742,334 11,678,532 11,723,233 11,723,790 Basic earnings per share $ 0.54 $ 0.55 $ 1.67 $ 1.62 26 Diluted Earnings Per Share For the Three Months Ended September 30, For the Nine Months Ended September 30, (In thousands, except share and per share amounts) 2023 2022 2023 2022 Net income $ 6,390 $ 6,384 $ 19,642 $ 19,012 Weighted average shares outstanding 11,742,334 11,678,532 11,723,233 11,723,790 Effect of diluted stock options and restricted stock 13,424 10,791 22,373 24,903 Weighted average shares of common stock and common stock equivalents 11,755,758 11,689,323 11,745,606 11,748,693 Diluted earnings per share $ 0.54 $ 0.55 $ 1.67 $ 1.62 No options awards were anti-dilutive for the nine months ended September 30, 2022. There were no outstanding options at September 30, 2023. The two-class method for the calculation of earnings per share was applicable for the periods presented, but not materially significant. Note 9. Share-Based Compensation In May 2015, the Company adopted the Central Valley Community Bancorp 2015 Omnibus Incentive Plan (2015 Plan). The plan provides for awards in the form of 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’s common stock. With respect to stock options and restricted stock the exercise price in the case of stock options and the grant value in the case of restricted stock may not be less than the fair market value at the date of the award. The options and awards under the plan expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period for stock options and restricted stock rights is determined by the Board of Directors and ranges one to five five years. The maximum number of shares that can be issued with respect to all awards under the plan is 875,000. Currently under the 2015 Plan, 612,652 shares remain reserved for future grants as of September 30, 2023. Share-based compensation cost recognized for the 2015 Plan plans was $ 170,000 and $689,000 for the three and nine months ended September 30, 2023, respectively, and $ 143,000 and $603,000 for the three and nine months ended September 30, 2022, respectively. The recognized tax benefit for the share-based compensation expense, forfeitures of restricted stock, and exercise of stock options, resulted in the recognition of $ 0 for the three and nine months ended September 30, 2023, and $ 18,000 and $ 87,000 for the three and nine months ended September 30, 2022, respectively. Restricted Stock and Common Stock Awards The 2015 Plan provides for the issuance of restricted common stock to directors and officers and common stock awards based on the achievement of performance goals as determined by the Board of Directors or in accordance with executive employment agreements. Restricted common stock grants typically vest over a one to five-year period. Restricted 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. 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. Common stock awards for performance vest immediately. Holders of restricted stock awards receive non-forfeitable dividends at the same rate as common stockholders and they both share equally in undistributed earnings. Therefore, under the two-class method the difference in EPS is not significant for these participating securities. The following table summarizes restricted stock activity for the nine months ended September 30, 2023 as follows: Shares Weighted Average Grant-Date Fair Value Nonvested outstanding shares at December 31, 2022 46,706 $ 17.28 Granted 69,692 $ 15.86 Vested ( 40,387 ) $ 17.90 Forfeited ( 878 ) $ 15.19 Nonvested outstanding shares at September 30, 2023 75,133 $ 15.83 27 As of September 30, 2023, there were 75,133 shares of restricted stock that are nonvested and expected to vest. As of September 30, 2023, there was $ 926,085 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 2.24 years and will be adjusted for subsequent changes in estimated forfeitures. Restricted common stock awards had an intrinsic value of $ 649,000 at September 30, 2023. Note 10. 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. The estimated carrying and fair values of the Company’s financial instruments not carried at fair value are as follows (in thousands): September 30, 2023 Carrying Amount Fair Value (In thousands) Level 1 Level 2 Level 3 Total Financial assets: Cash and due from banks $ 27,558 $ 27,558 $ — $ — $ 27,558 Interest-earning deposits in other banks 47,017 47,017 — — 47,017 Held-to-maturity investment securities 303,451 — 260,023 — 260,023 Loans, net 1,259,877 — — 1,172,613 1,172,613 Financial liabilities: Time deposits 163,246 — 161,758 — 161,758 Senior debt and subordinated debentures 69,708 — — 58,848 58,848 December 31, 2022 Carrying Amount Fair Value (In thousands) Level 1 Level 2 Level 3 Total Financial assets: Cash and due from banks $ 25,485 $ 25,485 $ — $ — $ 25,485 Interest-earning deposits in other banks 5,685 5,685 — — 5,685 Held-to-maturity investment securities 305,107 — 271,249 — 271,249 Loans, net 1,245,456 — — 1,113,849 1,113,849 Financial liabilities: 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 The methods and assumptions used to estimate fair values are described as follows: 28 (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 — 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). (c) Loans — Fair values of loans are estimated as follows: fixed and variable loans are estimated using discounted cash flow analyses, taking into consideration various factors including loan type, credit loss and prepayment expectations. The loan cash flows are discounted to present value using a combination of existing market rates and liquidity spreads as well as underlying index rates and margins on variable rate loans resulting in a Level 3 classification. (d) Time Deposits — 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. (e) Short-Term Borrowings — The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification. (f) Subordinated Debentures and Senior Debt — 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. Assets Recorded at Fair Value 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 September 30, 2023 and December 31, 2022: Fair Value Measurements Using September 30, 2023 Fair Value Level 1 Level 2 Level 3 Available-for-sale debt securities: U.S. Treasury securities $ 8,616 $ — $ 8,616 $ — U.S. Government agencies 92 — 92 — Obligations of states and political subdivisions 166,125 — 166,125 — U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 85,946 — 85,946 — Private label mortgage and asset backed securities 332,651 — 332,651 — Equity securities 6,354 6,354 — — Total assets measured at fair value on a recurring basis $ 599,784 $ 6,354 $ 593,430 $ — 29 Fair Value Measurements Using December 31, 2022 Fair Value Level 1 Level 2 Level 3 Available-for-sale debt securities: U.S. Treasury securities $ 8,707 $ — $ 8,707 $ — U.S. Government agencies 98 — 98 — Obligations of states and political subdivisions 174,985 — 174,985 — U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 109,493 — 109,493 — Private label mortgage and asset backed securities 355,542 — 355,542 — Equity securities 6,558 6,558 — — Total assets measured at fair value on a recurring basis $ 655,383 $ 6,558 $ 648,825 $ — There were no changes in valuation techniques used during the nine months ended September 30, 2023 or the year ended December 31, 2022. There were no assets measured on a non-recurring basis at September 30, 2023 and December 31, 2022. Note 11. Subsequent Events Dividend Declared On October 18, 2023, the Board of Directors declared a $0.12 per share cash dividend payable on November 17, 2023 to shareholders of record as of November 3, 2023. Other Events On October 3, 2023, the Company executed a sale of property in connection with a branch relocation. The gain recognized on the sale was $371,000. On October 26, 2023, the Company sold $10 million of available-for-sale securities for a net loss of $365,000. On October 10, 2023, the Company, entered into an Agreement and Plan of Reorganization and Merger (the “Merger Agreement”) with Community West Bancshares, a California corporation (“Community West”), pursuant to which Community West will merge with and into the Company in an all stock merger (the “Merger”), with the Company as the surviving corporation. 30