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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
(Mark One)
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED March 31, 2018
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM                        TO
 
COMMISSION FILE NUMBER: 000—31977
 
CENTRAL VALLEY COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
 
California
 
77-0539125
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
7100 N. Financial Dr., Suite 101, Fresno, California
 
93720
(Address of principal executive offices)
 
(Zip code)
 
Registrant’s telephone number (559) 298-1775
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer ý
 
 
 
Non-accelerated filer o
 
(Do not check if a smaller reporting company)
 
 
Small reporting company o
 
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  o

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No  ý
As of May 4, 2018 there were 13,757,937 shares of the registrant’s common stock outstanding.

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
 
2018 QUARTERLY REPORT ON FORM 10-Q
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART 1: FINANCIAL INFORMATION
 

ITEM 1: FINANCIAL STATEMENTS

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(In thousands, except share amounts)
 
March 31, 2018
 
December 31, 2017
 
 
 
 
 
ASSETS
 
 

 
 

Cash and due from banks
 
$
26,092

 
$
38,286

Interest-earning deposits in other banks
 
16,016

 
62,080

Federal funds sold
 
115

 
17

Total cash and cash equivalents
 
42,223

 
100,383

Available-for-sale debt securities
 
537,389

 
535,281

Equity securities
 
7,296

 
7,423

Loans, less allowance for credit losses of $8,788 at March 31, 2018 and $8,778 at December 31, 2017
 
908,701

 
891,901

Bank premises and equipment, net
 
9,429

 
9,398

Bank-owned life insurance
 
27,978

 
27,807

Federal Home Loan Bank stock
 
6,843

 
6,843

Goodwill
 
53,777

 
53,777

Core deposit intangibles
 
2,934

 
3,027

Accrued interest receivable and other assets
 
26,427

 
25,815

Total assets
 
$
1,622,997

 
$
1,661,655

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Deposits:
 
 

 
 

Non-interest bearing
 
$
561,490

 
$
585,039

Interest bearing
 
829,420

 
840,648

Total deposits
 
1,390,910

 
1,425,687

 
 
 
 
 
Junior subordinated deferrable interest debentures
 
5,155

 
5,155

Accrued interest payable and other liabilities
 
18,989

 
21,254

Total liabilities
 
1,415,054

 
1,452,096

Commitments and contingencies (Note 7)
 


 


Shareholders’ equity:
 
 

 
 

Preferred stock, no par value, $1,000 per share liquidation preference; 10,000,000 shares authorized, none issued and outstanding
 

 

Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 13,752,037 at March 31, 2018 and 13,696,722 at December 31, 2017
 
103,980

 
103,314

Retained earnings
 
107,544

 
103,419

Accumulated other comprehensive income (loss), net of tax
 
(3,581
)
 
2,826

Total shareholders’ equity
 
207,943

 
209,559

Total liabilities and shareholders’ equity
 
$
1,622,997

 
$
1,661,655

 
See notes to unaudited consolidated financial statements.

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
For the Quarter
Ended March 31,
(In thousands, except share and per share amounts) 
 
2018
 
2017
INTEREST INCOME:
 
 

 
 

Interest and fees on loans
 
$
12,006

 
$
10,090

Interest on deposits in other banks
 
98

 
75

Interest and dividends on investment securities:
 
 
 
 
Taxable
 
2,559

 
1,303

Exempt from Federal income taxes
 
1,067

 
2,122

Total interest income
 
15,730

 
13,590

INTEREST EXPENSE:
 
 

 
 

Interest on deposits
 
238

 
245

Interest on junior subordinated deferrable interest debentures
 
43

 
33

Other
 
23

 
4

Total interest expense
 
304

 
282

Net interest income before provision for credit losses
 
15,426

 
13,308

PROVISION FOR (REVERSAL OF) CREDIT LOSSES
 

 
(100
)
Net interest income after provision for credit losses
 
15,426

 
13,408

NON-INTEREST INCOME:
 
 

 
 

Service charges
 
755

 
747

Appreciation in cash surrender value of bank-owned life insurance
 
171

 
148

Interchange fees
 
345

 
324

Net realized gains on sales of investment securities
 
815

 
482

Federal Home Loan Bank dividends
 
121

 
128

Loan placement fees
 
166

 
91

Other income
 
398

 
326

Total non-interest income
 
2,771

 
2,246

NON-INTEREST EXPENSES:
 
 

 
 

Salaries and employee benefits
 
6,416

 
5,855

Occupancy and equipment
 
1,537

 
1,179

Professional services
 
438

 
420

Data processing
 
480

 
424

Regulatory assessments
 
162

 
175

ATM/Debit card expenses
 
201

 
166

License and maintenance contracts
 
212

 
146

Directors’ expenses
 
90

 
229

Advertising
 
189

 
170

Internet banking expense
 
195

 
169

Acquisition and integration
 
217

 

Amortization of core deposit intangibles
 
94

 
47

Other
 
1,137

 
1,133

Total non-interest expenses
 
11,368

 
10,113

Income before provision for income taxes
 
6,829

 
5,541

Provision for income taxes
 
1,538

 
1,291

Net income
 
$
5,291

 
$
4,250

Earnings per common share:
 
 

 
 

Basic earnings per share
 
$
0.39

 
$
0.35

Weighted average common shares used in basic computation
 
13,669,976

 
12,167,810

Diluted earnings per share
 
$
0.38

 
$
0.35

Weighted average common shares used in diluted computation
 
13,804,480

 
12,317,579

Cash dividend per common share
 
$
0.07

 
$
0.06

 
See notes to unaudited consolidated financial statements.

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
For the Quarter
Ended March 31,
(In thousands)
 
2018
 
2017
Net income
 
$
5,291

 
$
4,250

Other Comprehensive Income:
 
 
 
 
Unrealized gains (losses) on securities:
 
 
 
 
Unrealized holding (losses) gains arising during the period
 
(8,571
)
 
3,935

Less: reclassification of net gains included in net income
 
815

 
482

Other comprehensive (loss) income, before tax
 
(9,386
)
 
3,453

Tax benefit (expense) related to items of other comprehensive income
 
2,775

 
(1,452
)
Total other comprehensive (loss) income
 
(6,611
)
 
2,001

Comprehensive (loss) income
 
$
(1,320
)
 
$
6,251


See notes to unaudited consolidated financial statements.




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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
 
For the Quarter
Ended March 31,
(In thousands)
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income
 
$
5,291

 
$
4,250

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 

Net (increase) decrease in deferred loan costs
 
(80
)
 
267

Depreciation
 
426

 
332

Accretion
 
(218
)
 
(218
)
Amortization
 
1,972

 
2,201

Stock-based compensation
 
74

 
203

(Reversal of) provision for credit losses
 

 
(100
)
Net realized gains on sales of available-for-sale investment securities
 
(815
)
 
(482
)
Increase in bank-owned life insurance, net of expenses
 
(171
)
 
(148
)
Net decrease in accrued interest receivable and other assets
 
1,489

 
2,192

Net decrease in accrued interest payable and other liabilities
 
(2,266
)
 
(821
)
Benefit for deferred income taxes
 
646

 
298

Net cash provided by operating activities
 
6,348

 
7,974

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Purchases of available-for-sale investment securities
 
(92,189
)
 
(14,947
)
Proceeds from sales or calls of available-for-sale investment securities
 
69,315

 
24,922

Proceeds from maturity and principal repayments of available-for-sale investment securities
 
10,688

 
10,561

Net increase in loans
 
(16,720
)
 
(8,041
)
Purchases of premises and equipment
 
(457
)
 
(87
)
Net cash provided by (used in) investing activities
 
(29,363
)
 
12,408

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Net (decrease) increase in demand, interest bearing and savings deposits
 
(27,615
)
 
23,260

Net decrease in time deposits
 
(7,161
)
 
(11,923
)
Repayments of borrowings from other financial institutions
 

 
(400
)
Proceeds from stock issued under employee stock purchase plan
 
43

 

Proceeds from exercise of stock options
 
549

 
371

Cash dividend payments on common stock
 
(961
)
 
(730
)
Net cash (used in) provided by financing activities
 
(35,145
)
 
10,578

Decrease in cash and cash equivalents
 
(58,160
)
 
30,960

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
100,383

 
38,568

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
42,223

 
$
69,528

 
 
 
For the Quarter
Ended March 31,
(In thousands)
 
2018
 
2017
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
 
 

 
 

Cash paid during the period for:
 
 

 
 

Interest
 
$
297

 
$
290

Income taxes
 
$
180

 
$
70

See notes to unaudited consolidated financial statements.


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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 2017 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 March 31, 2018, and the results of its operations and its cash flows for the three month interim periods ended March 31, 2018 and 2017 have been included. The results of operations for interim periods are not necessarily indicative of results for the full year.
     The preparation of these interim unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
     Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment, and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank.

Impact of New Financial Accounting Standards:

FASB Accounting Standards Update (ASU) 2014-09 - Revenue from Contracts with Customers (Topic 606): Revenue from Contracts with Customers was issued in May 2014. This ASU is the result of a joint project initiated by the FASB and the International Accounting Standards Board (IASB) to clarify the principles for recognizing revenue, and to develop common revenue standards and disclosure requirements that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosures; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required with regard to contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods therein, with early adoption permitted for reporting periods beginning after December 15, 2016. The Company adopted ASU 2014-09 on January 1, 2018 utilizing the modified retrospective approach. Since the guidance does not apply to revenue associated with financial instruments such as loans and investments, which are accounted for under other provisions of GAAP, there was no impact to interest income, our largest component of income. The Company adopted this ASU effective January 1, 2018 and it did not have a material impact on the Company’s consolidated financial position, cash flows or results of operations. No cumulative adjustment was required upon adoption.

The Company performed an overall assessment of revenue streams potentially affected by the ASU, including certain deposit related fees and interchange fees, to determine the potential impact of this guidance on our consolidated financial statements. Approximately 91% of our revenue, including all of our net interest income and a portion of our noninterest income, is out of scope of the guidance. The contracts that are in scope of the guidance are primarily related to service charges and fees on deposit accounts, debit card fees, ATM processing fees, and other service charges, commissions and fees. We have completed analyzing the individual contracts in scope and determined our revenue recognition practices within the scope of the ASU as described below did not change in any material regard upon adoption of the ASU.


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Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Merchant and Debit Card Fees: The Company earns interchange fees from cardholder transactions conducted through the payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

FASB Accounting Standards Update (ASU) 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, was issued January 2016. The main provisions of the update are to eliminate the available-for-sale classification of accounting for equity securities and to adjust the fair value disclosures for financial instruments carried at amortized costs such that the disclosed fair values represent an exit price as opposed to an entry price. The provisions of this update will require that equity securities be carried at fair market value on the balance sheet and any periodic changes in value will be adjustments to the income statement. A practical expedient is provided for equity securities without a readily determinable fair value, such that these securities can be carried at cost less any impairment. ASU No. 2016-01 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The impact of adoption of this ASU by the Company was not material, but did result in a reclassification of an equity investment from securities available-for-sale to equity securities. The Company was required to adopt the ASU provisions on January 1, 2018, and for those equity securities with readily determinable fair values, the Company elected the modified retrospective transition approach with a cumulative effect adjustment to the balance sheet. The impact of the adoption of this accounting standard on the Company’s consolidated financial statements will be subject to the price volatility of the equity investments. As a result of the adoption, $204,000 of after-tax unrealized losses on equity securities was reclassified on January 1, 2018, from accumulated other comprehensive income to retained earnings. In addition, the fair value disclosures for financial instruments in Note 3 are computed using an exit price notion as required by the ASU.

FASB Accounting Standards Update (ASU) 2016-02 - Leases - Overall (Subtopic 845), was issued February 2016. The update requires all leases, with the exception of short-term leases that have contractual terms of no greater than one year, to be recorded on the balance sheet. Under the provisions of the update, leases classified as operating will be reflected on the balance sheet with the recognition of both a right-of-use asset and a lease liability. Under the update, a distinction will exist between finance and operating type leases and the rules for determining which classification a lease will fall into are similar to existing rules. For public business entities, the amendments of this update are effective for interim and annual periods beginning after December 15, 2018. The update requires a modified retrospective transition under which comparative balance sheets from the earliest historical period presented will be revised to reflect what the financials would have looked like were the provisions of the update applied consistently in all prior periods. The Company is currently evaluating the provisions of ASU No. 2016-02 and has determined that the provisions of ASU No. 2016-02 will result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities; however, the Company does not expect this to have a material impact on the Company’s results of operations or cash flows.

FASB Accounting Standards Update (ASU) 2016-13 - Measurement of Credit Losses on Financial Instruments (Subtopic 326): Financial Instruments - Credit Losses, commonly referred to as “CECL,” was issued June 2016. The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to be based on an incurred loss methodology. Under CECL, reserves required for financial assets measured at amortized cost will reflect an organization’s estimate of all expected credit losses over the contractual term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (“HTM”) debt securities. Under the provisions of the update, credit losses recognized on available for sale (“AFS”) debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP a purchased loan’s contractual balance is adjusted to fair value through a credit discount and no reserve is recorded on the purchased loan upon acquisition. Since under CECL reserves will be established for purchased loans at the time of acquisition, the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. The FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage disclosures. For public business entities that are SEC filers, the amendments of the update will become effective beginning January 1, 2020. While the Company is currently evaluating the provisions of ASU No. 2016-13 to determine the

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potential impact the new standard will have on the Company’s Consolidated Financial Statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, and evaluating its current IT systems. Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the first reporting period in which the new standard is effective, but cannot yet estimate the magnitude of the one-time adjustment or the overall impact of the new guidance on the Company’s financial position, results of operations or cash flows.

FASB Accounting Standards Update (ASU) 2017-04 - Intangibles Goodwill and Other (Subtopic 350): Simplifying the Test for Goodwill Impairment, was issued January 2017. The provisions of the update eliminate the existing second step of the goodwill impairment test which provides for the allocation of reporting unit fair value among existing assets and liabilities, with the net leftover amount representing the implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update will provide that impairment should be recognized as the excess of any of the reporting unit’s goodwill over the fair value of the reporting unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the reporting unit’s goodwill. For public business entities that are SEC filers, the amendments of the update will become effective in fiscal years beginning after December 15, 2019.

FASB Accounting Standards Update (ASU) 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued March 2017. The provisions of the update require premiums recognized upon the purchase of callable debt securities to be amortized to the earliest call date in order to avoid losses recognized upon call. For public business entities that are SEC filers, the amendments of the update will become effective in fiscal years beginning after December 15, 2018. Management does not expect the requirements of this update to have a material impact on the Company’s financial position, results of operations or cash flows.

FASB Accounting Standards Update (ASU) 2017-09 - Compensation - Stock Compensation (Subtopic 718): Scope of Modification Accounting, was issued May 2017. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless all of the following conditions are met: the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The amendments in this Update are effective for annual periods, and interim periods within those annual periods, beginning after December 31, 2017. The Company adopted this ASU effective January 1, 2018 and it did not have a material impact on the Company’s Consolidated Financial Statements.


Note 2.  ACQUISITIONS
 
On October 1, 2017, the Company completed the acquisition of Folsom Lake Bank (“FLB”) for an aggregate transaction value of $28,475,000. FLB was merged into the Bank, and the Company issued 1,276,888 shares of common stock to the former shareholders of FLB. The Company also assumed the outstanding FLB stock options. With the FLB acquisition, the Company added two full service branches, located in Folsom, and Rancho Cordova, California. The FLB Roseville branch was consolidated with the Company’s Roseville branch in October 2017. FLB’s assets as of October 1, 2017 totaled approximately $196,148,000.
In accordance with GAAP guidance for business combinations, the Company recorded $13,466,000 of goodwill and $1,879,000 of other intangible assets on the acquisition date. The other intangible assets are primarily related to core deposits and are being amortized using a straight-line method over a period of ten years with no significant residual value. For tax purposes, purchase accounting adjustments including goodwill are all non-taxable and/or non-deductible. Acquisition related costs of $217,000 are included in the income statement for the quarter ended March 31, 2018.
The acquisition was consistent with the Company’s strategy to build a regional presence in Central California. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region. Goodwill arising from the acquisition consisted largely of synergies and the expected cost savings resulting from the combined operations.     

Pro Forma Results of Operations

The following table presents pro forma results of operations information for the periods presented as if the acquisition had occurred on January 1, 2017 after giving effect to certain adjustments. The unaudited pro forma results of operations for the three months ended March 31, 2017 include the historical accounts of the Company and FLB and pro forma adjustments as

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may be required, including the amortization of intangibles with definite lives and the amortization or accretion of any premiums or discounts arising from fair value adjustments for assets acquired and liabilities assumed. The pro forma information is intended for informational purposes only and is not necessarily indicative of the Company’s future operating results or operating results that would have occurred had the acquisition been completed at the beginning of 2017. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. (In thousands, except per-share amounts):

Pro Forma Results of Operations
 
For the Quarter
Ended March 31,
(In thousands, except per share amounts)
 
2017
Net interest income
 
$
14,907

(Reversal of) Provision for credit losses
 
(100
)
Non-interest income
 
2,298

Non-interest expense
 
11,303

Income before provision for income taxes
 
6,002

Provision for income taxes
 
1,481

Net income
 
$
4,521

Basic earnings per common share
 
$
0.37

Diluted earnings per common share
 
$
0.37




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Note 3.  Fair Value Measurements
 
Fair Value Hierarchy
 
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In accordance with applicable guidance, the Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  Valuations within these levels are based upon:
 
Level 1 — Quoted market prices (unadjusted) for identical instruments traded in active exchange markets that the Company has the ability to access as of the measurement date.
 
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.
 
Level 3 — Model-based techniques that use at least one significant assumption not observable in the market.  These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability.  Valuation techniques include management judgment and estimation which may be significant.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, we report the transfer at the beginning of the reporting period. The estimated carrying and fair values of the Company’s financial instruments are as follows (in thousands):
 
 
March 31, 2018
 
 
Carrying
Amount
 
Fair Value
(In thousands)
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets:
 
 

 
 

 
 

 
 
 
 

Cash and due from banks
 
$
26,092

 
$
26,092

 
$

 
$

 
$
26,092

Interest-earning deposits in other banks
 
16,016

 
16,016

 

 

 
16,016

Federal funds sold
 
115

 
115

 

 

 
115

Available-for-sale debt securities
 
537,389

 

 
537,389

 

 
537,389

Equity securities
 
7,296

 
7,296

 

 

 
7,296

Loans, net
 
908,701

 

 

 
900,986

 
900,986

Federal Home Loan Bank stock
 
6,843

 
N/A

 
N/A

 
N/A

 
N/A

Accrued interest receivable
 
6,159

 
22

 
2,939

 
3,198

 
6,159

Financial liabilities:
 
 

 
 

 
 

 
 
 
 

Deposits
 
1,390,910

 
1,268,148

 
120,978

 

 
1,389,126

Junior subordinated deferrable interest debentures
 
5,155

 

 

 
3,950

 
3,950

Accrued interest payable
 
110

 

 
72

 
38

 
110



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December 31, 2017
 
 
Carrying
Amount
 
Fair Value
(In thousands)
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
38,286

 
$
38,286

 
$

 
$

 
$
38,286

Interest-earning deposits in other banks
 
62,080

 
62,080

 

 

 
62,080

Federal funds sold
 
17

 
17

 

 

 
17

Available-for-sale debt securities
 
535,281

 

 
535,281

 

 
535,281

Equity securities
 
7,423

 
7,423

 

 

 
7,423

Loans, net
 
891,901

 

 

 
899,191

 
899,191

Federal Home Loan Bank stock
 
6,843

 
N/A

 
N/A

 
N/A

 
N/A

Accrued interest receivable
 
7,168

 
57

 
3,256

 
3,855

 
7,168

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
1,425,687

 
1,296,048

 
127,966

 

 
1,424,014

Junior subordinated deferrable interest debentures
 
5,155

 

 

 
3,550

 
3,550

Accrued interest payable
 
110

 

 
72

 
38

 
110


These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments.  In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.
These estimates are made at a specific point in time based on relevant market data and information about the financial instruments.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the fair values presented.
The methods and assumptions used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents The carrying amounts of cash and due from banks, interest-earning deposits in other banks, and Federal funds sold approximate fair values and are classified as Level 1.

(b) Investment Securities — Investment securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for investment securities classified in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators.

(c) Loans — Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Purchased credit impaired (PCI) loans are measured at estimated fair value on the date of acquisition. Carrying value is calculated as the present value of expected cash flows and approximates fair value and included in Level 3. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are initially valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The estimated fair values of financial instruments disclosed above as of March 31, 2018 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. The fair values shown as of December 31, 2017 and prior use an “entry price” approach.

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(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) Other Borrowings — The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

(g) Accrued Interest Receivable/Payable — The fair value of accrued interest receivable and payable is based on the fair value hierarchy of the related asset or liability.

(h) Off-Balance Sheet Instruments — Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not considered significant for financial reporting purposes.
 
Assets Recorded at Fair Value
 
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2018:
 
Recurring Basis
 
The Company is required or permitted to record the following assets at fair value on a recurring basis as of March 31, 2018 (in thousands). 
Description
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Available-for-sale debt securities:
 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
32,607

 
$

 
$
32,607

 
$

U.S. Government agencies
 
69,852

 

 
69,852

 

Obligations of states and political subdivisions
 
140,626

 

 
140,626

 

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
203,717

 

 
203,717

 

Private label mortgage and asset backed securities
 
90,587

 

 
90,587

 

Equity securities
 
7,296

 
7,296

 

 

Total assets measured at fair value on a recurring basis
 
$
544,685

 
$
7,296

 
$
537,389

 
$

 
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 three months ended March 31, 2018, no transfers between levels occurred.

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There were no Level 3 assets measured at fair value on a recurring basis at or during the three months ended March 31, 2018. Also there were no liabilities measured at fair value on a recurring basis at March 31, 2018.

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 March 31, 2018.
At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. The fair value of impaired loans is based on the fair value of the collateral. Impaired loans were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements. Impaired loans evaluated under the discounted cash flow method are excluded from the table above. The discounted cash flow methods as prescribed by ASC Topic 310 is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate which is not a market rate. There were no changes in valuation techniques used during the three months month period ended March 31, 2018.
Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value is compared with independent data sources such as recent market data or industry-wide statistics.
Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $165,000 with a valuation allowance of $165,000 at March 31, 2018, resulting in fair value of $0. The valuation allowance represent specific allocation for the allowance for credit losses for impaired loans.
There were no charge-offs related to loans carried at fair value during the three months ended March 31, 2018 and 2017. Activity related to changes in the allowance for loan losses related to impaired loans for the three months ended March 31, 2018 and 2017 was not considered significant for disclosure purposes. There were no liabilities measured at fair value on a non-recurring basis at March 31, 2018.
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 2017:

Recurring Basis
 
The Company is required or permitted to record the following assets at fair value on a recurring basis as of December 31, 2017 (in thousands).
Description
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Available-for-sale debt securities:
 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
66,587

 
$

 
$
66,587

 
$

Obligations of states and political subdivisions
 
143,105

 

 
143,105

 

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
234,908

 

 
234,908

 

Private label mortgage and asset backed securities
 
90,681

 

 
90,681

 

Equity securities
 
7,423

 
7,423

 

 

Total assets measured at fair value on a recurring basis
 
$
542,704

 
$
7,423

 
$
535,281

 
$

 
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.

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     Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the year ended December 31, 2017, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at or during the year ended December 31, 2017. Also there were no liabilities measured at fair value on a recurring basis at December 31, 2017.

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 December 31, 2017 (in thousands).
Description
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Other repossessed assets
 
70

 

 

 
70

Total assets measured at fair value on a non-recurring basis
 
$
70

 
$

 
$

 
$
70


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 loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. The fair value of impaired loans is based on the fair value of the collateral. Impaired loans were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements. Impaired loans evaluated under the discounted cash flow method are excluded from the table above. The discounted cash flow method as prescribed by ASC Topic 310 is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate which is not a market rate. There were no changes in valuation techniques used during the year ended December 31, 2017.
Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value is compared with independent data sources such as recent market data or industry-wide statistics.
As of December 31, 2017, there were no loans measured using the fair value of the collateral for collateral dependent loans.
During the year ended December 31, 2017 specific allocation for the allowance for credit losses related to loans carried at fair value was $0. During the year ended December 31, 2017, there was no net charge-offs related to loans carried at fair value.
There were no liabilities measured at fair value on a non-recurring basis at December 31, 2017.
Note 4.  Investments
 
The investment portfolio consists primarily of U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations, private label residential mortgage backed securities (PLRMBS), and obligations of states and political subdivisions securities.  As of March 31, 2018, $87,955,000 of these securities were held as collateral for borrowing arrangements, public funds, and for other purposes. The Company adopted ASU 2016-01 on January 1, 2018, and applied it prospectively without prior period amounts restated. Upon adoption, equity securities included in the available-for-sale portfolio were reclassified to equity securities. The December 31, 2017 cost and fair value of the equity securities transferred were $7,500,000 and $7,423,000, respectively.
     The fair value of the available-for-sale investment portfolio reflected a net unrealized loss of $5,171,000 at March 31, 2018 compared to an unrealized gain of $4,089,000 at December 31, 2017. The unrealized gain/(loss) recorded is net of $(1,590,000) and $1,186,000 in tax (benefits) liabilities as accumulated other comprehensive income within shareholders’ equity at March 31, 2018 and December 31, 2017, respectively.
     The following table sets forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands): 

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Table of Contents

 
 
March 31, 2018
Available-for-Sale Securities
 
Amortized Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
 Fair Value
Debt securities:
 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
32,638

 
$

 
$
(31
)
 
$
32,607

U.S. Government agencies
 
69,563

 
543

 
(254
)
 
69,852

Obligations of states and political subdivisions
 
138,422

 
3,116

 
(912
)
 
140,626

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
208,730

 
196

 
(5,209
)
 
203,717

Private label mortgage and asset backed securities
 
93,207

 
875

 
(3,495
)
 
90,587

Total available-for-sale
 
$
542,560

 
$
4,730

 
$
(9,901
)
 
$
537,389


 

December 31, 2017
Available-for-Sale Securities
 
Amortized Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Debt securities:
 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
65,994

 
$
667

 
$
(74
)
 
$
66,587

Obligations of states and political subdivisions
 
136,955

 
6,240

 
(90
)
 
143,105

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
237,210

 
601

 
(2,903
)
 
234,908

Private label mortgage and asset backed securities
 
91,033

 
924

 
(1,276
)
 
90,681

Total available-for-sale
 
$
531,192

 
$
8,432

 
$
(4,343
)
 
$
535,281


Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended March 31, 2018 and 2017 are shown below (in thousands):
 
 
For the Quarter
Ended March 31,
Available-for-Sale Securities
 
2018

2017
Proceeds from sales or calls
 
$
69,315

 
$
24,922

Gross realized gains from sales or calls
 
1,067

 
732

Gross realized losses from sales or calls
 
(252
)
 
(250
)

Losses recognized in 2017 and 2018 were incurred in order to reposition the investment securities portfolio based on the current rate environment.  The securities which were sold at a loss were acquired when the rate environment was not as volatile.  As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using proceeds to purchase securities that fit with the Company’s current risk profile is appropriate and beneficial to the Company.
The provision for income taxes includes $241,000 and $203,000 income tax impact from the reclassification of unrealized net gains on available-for-sale securities to realized net gains on available-for-sale securities for the three months ended March 31, 2018 and 2017, respectively.
Investment securities, aggregated by investment category, with unrealized losses as of the dates indicated are summarized and classified according to the duration of the loss period as follows (in thousands): 

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March 31, 2018
 
 
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
 
$
32,607

 
$
(31
)
 
$

 
$

 
$
32,607

 
$
(31
)
U.S. Government agencies
 
21,626

 
(232
)
 
2,518

 
(22
)
 
24,144

 
(254
)
Obligations of states and political subdivisions
 
40,931

 
(760
)
 
3,282

 
(152
)
 
44,213

 
(912
)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
106,725

 
(2,783
)
 
35,105

 
(2,426
)
 
141,830

 
(5,209
)
Private label mortgage and asset backed securities
 
85,827

 
(3,495
)
 

 

 
85,827

 
(3,495
)
Total available-for-sale
 
$
287,716

 
$
(7,301
)

$
40,905

 
$
(2,600
)
 
$
328,621

 
$
(9,901
)

 
 
December 31, 2017
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Available-for-Sale Securities
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
8,201

 
$
(47
)
 
$
6,741

 
$
(27
)
 
$
14,942

 
$
(74
)
Obligations of states and political subdivisions
 
1,627

 
(3
)
 
3,357

 
(87
)
 
4,984

 
(90
)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
82,604

 
(822
)
 
64,488

 
(2,081
)
 
147,092

 
(2,903
)
Private label mortgage and asset backed securities
 
88,312

 
(1,276
)
 

 

 
88,312

 
(1,276
)
Total available-for-sale
 
$
180,744

 
$
(2,148
)
 
$
74,586

 
$
(2,195
)
 
$
255,330

 
$
(4,343
)

     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 March 31, 2018, 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 March 31, 2018 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at March 31, 2018 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000.  The Company also analyzed any securities that may have been downgraded by credit rating agencies. 
For those investment securities that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those investment securities.  For those bonds that were obligations of states and political subdivisions with an investment grade rating by the rating agencies, the Company also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded there were no OTTI losses recorded during the three months ended March 31, 2018. There were no OTTI losses recorded during the three months ended March 31, 2017.

U.S. Treasury Securities

At March 31, 2018, the Company held one U.S. Treasury security, which had been in a loss position for less than 12 months. The unrealized loss on the Company’s investment in direct obligations of U.S. Treasury securities is associated with the general fluctuation of market interest rates and are not an indication of any deterioration in the credit quality of the security issuer. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell, those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2018.

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U.S. Government Agencies

At March 31, 2018, the Company held 23 U.S. Government agency securities, of which six were in a loss position for less than 12 months and one was in a loss position or had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in direct obligations of U.S. government agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell, those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2018.

Obligations of States and Political Subdivisions
 
At March 31, 2018, the Company held 82 obligations of states and political subdivision securities of which 13 were in a loss position for less than 12 months and one was in a loss position or had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company 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 March 31, 2018.
 
U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations
 
At March 31, 2018, the Company held 139 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 51 were in a loss position for less than 12 months and 18 have been in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability to hold and does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2018.
 
Private Label Mortgage and Asset Backed Securities
 
At March 31, 2018, the Company had a total of 29 PLMBS with a remaining principal balance of $93,207,000 and a net unrealized loss of approximately $2,620,000Nine of these PLMBS with a remaining principal balance of $1,306,000 had credit ratings below investment grade.  17 of the PLMBS securities were in a loss position for less than 12 months at March 31, 2018. 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 March 31, 2018. The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary.


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The following tables provide a roll forward for the three months month periods ended March 31, 2018 and 2017 of investment securities credit losses recorded in earnings. The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods.  Additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred on securities for which OTTI credit losses have been previously recognized. 
 
 
For the Quarter
Ended March 31,
(In thousands)
 
2018
 
2017
Beginning balance
 
$
874

 
$
874

Amounts related to credit loss for which an OTTI charge was not previously recognized
 

 

Increases to the amount related to credit loss for which OTTI was previously recognized
 

 

Realized gain for securities sold
 

 

Ending balance
 
$
874

 
$
874


The amortized cost and estimated fair value of available-for-sale investment securities at March 31, 2018 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.
 
 
March 31, 2018
Available-for-Sale Securities
 
Amortized Cost

Estimated Fair
Value
Within one year
 
$
34,567

 
$
34,560

After one year through five years
 
5,255

 
5,382

After five years through ten years
 
23,031

 
23,266

After ten years
 
108,207

 
110,025

 
 
171,060

 
173,233

Investment securities not due at a single maturity date:
 
 

 
 

U.S. Government agencies
 
69,563

 
69,852

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
208,730

 
203,717

Private label mortgage and asset backed securities
 
93,207

 
90,587

Total available-for-sale
 
$
542,560

 
$
537,389

 


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Table of Contents

Note 5.  Loans and Allowance for Credit Losses
 
Outstanding loans are summarized as follows:
Loan Type (Dollars in thousands)
 
March 31, 2018
 
% of Total
Loans
 
December 31, 2017
 
% of Total
Loans
Commercial:
 
 

 
 

 
 

 
 

   Commercial and industrial
 
$
99,101

 
10.8
%
 
$
100,856

 
11.2
%
   Agricultural land and production
 
15,317

 
1.7
%
 
14,956

 
1.7
%
Total commercial
 
114,418

 
12.5
%
 
115,812

 
12.9
%
Real estate:
 
 

 
 

 
 

 
 

   Owner occupied
 
202,416

 
22.1
%
 
204,452

 
22.7
%
   Real estate construction and other land loans
 
87,571

 
9.5
%
 
96,460

 
10.7
%
   Commercial real estate
 
300,642

 
32.8
%
 
269,254

 
29.9
%
   Agricultural real estate
 
73,540

 
8.0
%
 
76,081

 
8.4
%
   Other real estate
 
32,082

 
3.5
%
 
31,220

 
3.5
%
Total real estate
 
696,251

 
75.9
%
 
677,467

 
75.2
%
Consumer:
 
 

 
 

 
 

 
 

   Equity loans and lines of credit
 
74,952

 
8.2
%
 
76,404

 
8.5
%
   Consumer and installment
 
30,429

 
3.4
%
 
29,637

 
3.4
%
Total consumer
 
105,381

 
11.6
%
 
106,041

 
11.9
%
Net deferred origination costs
 
1,439

 
 

 
1,359

 
 

Total gross loans
 
917,489

 
100.0
%
 
900,679

 
100.0
%
Allowance for credit losses
 
(8,788
)
 
 

 
(8,778
)
 
 

Total loans
 
$
908,701

 
 

 
$
891,901

 
 

 
At March 31, 2018 and December 31, 2017, loans originated under Small Business Administration (SBA) programs totaling $25,798,000 and $25,925,000, respectively, were included in the real estate and commercial categories, of which, $19,174,000 or 74% and $19,182,000 or 74%, respectively, are secured by government guarantees.

Purchased Credit Impaired Loans

The Company has loans that were acquired in acquisitions for which there was at acquisition evidence of deterioration of credit quality since origination, and for which it was probable at acquisition that all contractually required payments would not be collected.
The carrying amount of those loans is included in the balance sheet amounts of loans receivable at March 31, 2018 and December 31, 2017. The amounts of loans at March 31, 2018 and December 31, 2017 are as follows (in thousands):
 
 
March 31, 2018
 
December 31, 2017
Commercial
 
$
340

 
$
383

Outstanding balance
 
$
340

 
$
383

Carrying amount, net of allowance of $0
 
$
340

 
$
383


Purchased credit impaired (PCI) loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. The Company estimates the amount and timing of expected cash flows for each loan and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

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Table of Contents

Certain of the loans acquired by the Company that are within the scope of Topic ASC 310-30 are not accounted for using the income recognition model of the Topic because the Company cannot reliably estimate cash flows expected to be collected. The carrying amounts of such loans (which are included in the carrying amount, net of allowance, described above) are as follows.
 
 
March 31, 2018
 
December 31, 2017
Loans acquired during the year
 
$

 
$

Loans at the end of the period
 
$
340

 
$
383


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 20 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 March 31, 2018 and 2017 by portfolio segment (in thousands):
 
 
Commercial
 
Real Estate
 
Consumer
 
Unallocated
 
Total
Allowance for credit losses:
 
 

 
 

 
 

 
 

 
 

Beginning balance, January 1, 2018
 
$
2,071

 
$
5,795

 
$
825

 
$
87

 
$
8,778

(Reversal) provision charged to operations
 
(356
)
 
331

 
3

 
22

 

Losses charged to allowance
 
(50
)
 

 
(42
)
 

 
(92
)
Recoveries
 
71

 
5

 
26

 

 
102

Ending balance, March 31, 2018
 
$
1,736

 
$
6,131

 
$
812

 
$
109

 
$
8,788

 
 
 
 
 
 
 
 
 
 
 
Allowance for credit losses:
 
 

 
 

 
 

 
 

 
 

Beginning balance, January 1, 2017
 
$
2,180

 
$
6,200

 
$
852

 
$
94

 
$
9,326

(Reversal) provision charged to operations
 
(237
)
 
43

 
(5
)
 
99

 
(100
)
Losses charged to allowance
 
(44
)
 
(22
)
 
(116
)
 

 
(182
)
Recoveries
 
122

 
4

 
44

 

 
170

Ending balance, March 31, 2017
 
$
2,021

 
$
6,225

 
$
775

 
$
193

 
$
9,214



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Table of Contents

 
The following is a summary of the Allowance by impairment methodology and portfolio segment as of March 31, 2018 and December 31, 2017 (in thousands):
 
 
Commercial
 
Real Estate
 
Consumer
 
Unallocated
 
Total
Allowance for credit losses:
 
 

 
 

 
 

 
 

 
 

Ending balance, March 31, 2018
 
$
1,736

 
$
6,131

 
$
812

 
$
109

 
$
8,788

Ending balance: individually evaluated for impairment
 
$
2

 
$
166

 
$
32

 
$

 
$
200

Ending balance: collectively evaluated for impairment
 
$
1,734

 
$
5,965

 
$
780

 
$
109

 
$
8,588

 
 
 
 
 
 
 
 
 
 
 
Ending balance, December 31, 2017
 
$
2,071

 
$
5,795

 
$
825

 
$
87

 
$
8,778

Ending balance: individually evaluated for impairment
 
$
1

 
$
1

 
$
34

 
$

 
$
36

Ending balance: collectively evaluated for impairment
 
$
2,070

 
$
5,794

 
$
791

 
$
87

 
$
8,742


 
 
Commercial
 
Real Estate
 
Consumer
 
Total
Loans:
 
 

 
 

 
 

 
 

Ending balance, March 31, 2018
 
$
114,418

 
$
696,251

 
$
105,381

 
$
916,050

Ending balance: individually evaluated for impairment
 
$
397

 
$
6,076

 
$
1,192

 
$
7,665

Ending balance: collectively evaluated for impairment
 
$
114,021

 
$
690,175

 
$
104,189

 
$
908,385

 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
Ending balance, December 31, 2017
 
$
115,812

 
$
677,467

 
$
106,041

 
$
899,320

Ending balance: individually evaluated for impairment
 
$
377

 
$
4,846

 
$
1,143

 
$
6,366

Ending balance: collectively evaluated for impairment
 
$
115,435

 
$
672,621

 
$
104,898

 
$
892,954


The following table shows the loan portfolio by class allocated by management’s internal risk ratings at March 31, 2018 (in thousands):
 
 
Pass
 
Special Mention
 
Sub-Standard
 
Doubtful
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
   Commercial and industrial
 
$
87,076

 
$
10,811

 
$
1,214

 
$

 
$
99,101

   Agricultural land and production
 
9,192

 
86

 
6,039

 

 
15,317

Real Estate:
 
 
 
 
 
 
 
 
 
 
   Owner occupied
 
198,571

 
3,144

 
701

 

 
202,416

   Real estate construction and other land loans
 
82,126

 
1,554

 
3,891

 

 
87,571

   Commercial real estate
 
293,149

 
5,484

 
2,009

 

 
300,642

   Agricultural real estate
 
48,100

 

 
25,440

 

 
73,540

   Other real estate
 
30,917

 

 
1,165

 

 
32,082

Consumer:
 
 
 
 
 
 
 
 
 
 
   Equity loans and lines of credit
 
72,908

 
601

 
1,443

 

 
74,952

   Consumer and installment
 
30,427

 

 
2

 

 
30,429

Total
 
$
852,466

 
$
21,680

 
$
41,904

 
$

 
$
916,050



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Table of Contents

The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2017 (in thousands):
 
 
Pass
 
Special Mention
 
Sub-Standard
 
Doubtful
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
84,745

 
$
8,217

 
$
7,894

 
$

 
$
100,856

Agricultural land and production
 
10,848

 
206

 
3,902

 

 
14,956

Real Estate:
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
196,838

 
4,795

 
2,819

 

 
204,452

Real estate construction and other land loans
 
90,927

 
1,625

 
3,908

 

 
96,460

Commercial real estate
 
261,746

 
4,147

 
3,361

 

 
269,254

Agricultural real estate
 
48,274

 
1,270

 
26,537

 

 
76,081

Other real estate
 
29,867

 
1,165

 
188

 

 
31,220

Consumer:
 
 
 
 
 
 
 
 
 
 
Equity loans and lines of credit
 
74,535

 
483

 
1,386

 

 
76,404

Consumer and installment
 
29,634

 

 
3

 

 
29,637

Total
 
$
827,414

 
$
21,908

 
$
49,998

 
$

 
$
899,320


The following table shows an aging analysis of the loan portfolio by class and the time past due at March 31, 2018 (in thousands):
 
 
30-59 Days
Past Due
 
60-89
Days Past
Due
 
Greater
Than
 90 Days
Past Due
 
Total Past
Due
 
Current
 
Total
Loans
 
Recorded
Investment
> 90 Days
Accruing
 
Non-accrual
Commercial:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

   Commercial and industrial
 
$

 
$

 
$

 
$
<