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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 June 30, 2019
 
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

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value
 
CVCY
 
NASDAQ Capital Market
(Title of Each Class)
 
(Trading Symbol)
 
(Name of Each Exchange on which Registered)

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.
 

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Large accelerated filer o
 
Accelerated filer ý
 
 
 
Non-accelerated filer o
 
(Do not check if a smaller reporting company)
 
 
Small reporting company ý
 
 
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
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 August 2, 2019 there were 13,447,553 shares of the registrant’s common stock outstanding.

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
 
2019 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)
 
June 30, 2019
 
December 31, 2018
 
 
 
 
 
ASSETS
 
 

 
 

Cash and due from banks
 
$
33,787

 
$
24,954

Interest-earning deposits in other banks
 
14,739

 
6,725

Federal funds sold
 
77

 
48

Total cash and cash equivalents
 
48,603

 
31,727

Available-for-sale debt securities
 
476,211

 
463,905

Equity securities
 
7,458

 
7,254

Loans, less allowance for credit losses of $9,405 at June 30, 2019 and $9,104 at December 31, 2018
 
950,806

 
909,591

Bank premises and equipment, net
 
7,742

 
8,484

Bank-owned life insurance
 
29,863

 
28,502

Federal Home Loan Bank stock
 
6,062

 
6,843

Goodwill
 
53,777

 
53,777

Core deposit intangibles
 
2,225

 
2,572

Accrued interest receivable and other assets
 
30,480

 
25,181

Total assets
 
$
1,613,227

 
$
1,537,836

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Deposits:
 
 

 
 

Non-interest bearing
 
$
558,000

 
$
550,657

Interest bearing
 
736,087

 
731,641

Total deposits
 
1,294,087

 
1,282,298

 
 
 
 
 
Short-term borrowings
 
54,000

 
10,000

Junior subordinated deferrable interest debentures
 
5,155

 
5,155

Accrued interest payable and other liabilities
 
28,305

 
20,645

Total liabilities
 
1,381,547

 
1,318,098

Commitments and contingencies (Note 7)
 


 


Shareholders’ equity:
 
 

 
 

Preferred stock, no par value; 10,000,000 shares authorized, none issued and outstanding
 

 

Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 13,488,983 at June 30, 2019 and 13,754,965 at December 31, 2018
 
98,210

 
103,851

Retained earnings
 
128,723

 
120,294

Accumulated other comprehensive income (loss), net of tax
 
4,747

 
(4,407
)
Total shareholders’ equity
 
231,680

 
219,738

Total liabilities and shareholders’ equity
 
$
1,613,227

 
$
1,537,836

 
See notes to unaudited consolidated financial statements.

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
For the Three Months Ended June 30,
 
For the Six Months
Ended June 30,
(In thousands, except share and per-share amounts) 
 
2019
 
2018
 
2019
 
2018
INTEREST INCOME:
 
 
 
 
 
 

 
 

Interest and fees on loans
 
$
12,955

 
$
12,519

 
$
25,509

 
$
24,525

Interest on deposits in other banks
 
59

 
44

 
209

 
142

Interest and dividends on investment securities:
 
 
 
 
 
 
 
 
Taxable
 
3,337

 
2,185

 
6,360

 
4,744

Exempt from Federal income taxes
 
429

 
1,045

 
991

 
2,112

Total interest income
 
16,780

 
15,793

 
33,069

 
31,523

INTEREST EXPENSE:
 
 
 
 
 
 

 
 

Interest on deposits
 
469

 
252

 
862

 
490

Interest on junior subordinated deferrable interest debentures
 
55

 
52

 
112

 
95

Other
 
310

 
92

 
314

 
115

Total interest expense
 
834

 
396

 
1,288

 
700

Net interest income before provision for credit losses
 
15,946

 
15,397

 
31,781

 
30,823

PROVISION FOR CREDIT LOSSES
 
300

 
50

 
275

 
50

Net interest income after provision for credit losses
 
15,646

 
15,347

 
31,506

 
30,773

NON-INTEREST INCOME:
 
 
 
 
 
 

 
 

Service charges
 
713

 
726

 
1,403

 
1,481

Appreciation in cash surrender value of bank-owned life insurance
 
190

 
176

 
361

 
347

Interchange fees
 
384

 
380

 
727

 
725

Net realized gains on sale of credit card portfolio
 

 
578

 

 
578

Net realized gains on sales of investment securities
 
2,459

 
82

 
3,511

 
897

Federal Home Loan Bank dividends
 
118

 
118

 
239

 
239

Loan placement fees
 
220

 
173

 
359

 
339

Other income
 
514

 
453

 
974

 
851

Total non-interest income
 
4,598

 
2,686

 
7,574

 
5,457

NON-INTEREST EXPENSES:
 
 
 
 
 
 

 
 

Salaries and employee benefits
 
6,912

 
6,833

 
13,402

 
13,249

Occupancy and equipment
 
1,452

 
1,577

 
2,931

 
3,114

Professional services
 
280

 
363

 
607

 
801

Data processing
 
401

 
370

 
796

 
850

Regulatory assessments
 
134

 
160

 
286

 
322

ATM/Debit card expenses
 
186

 
176

 
377

 
377

License and maintenance contracts
 
605

 
222

 
1,382

 
434

Directors’ expenses
 
193

 
133

 
369

 
223

Advertising
 
198

 
188

 
400

 
377

Internet banking expense
 
199

 
175

 
393

 
370

Acquisition and integration
 

 

 

 
217

Amortization of core deposit intangibles
 
173

 
93

 
347

 
187

Other
 
1,039

 
1,209

 
2,149

 
2,346

Total non-interest expenses
 
11,772

 
11,499

 
23,439

 
22,867

Income before provision for income taxes
 
8,472

 
6,534

 
15,641

 
13,363

Provision for income taxes
 
2,385

 
1,569

 
4,338

 
3,107

Net income
 
$
6,087

 
$
4,965

 
$
11,303

 
$
10,256

Earnings per common share:
 
 
 
 
 
 

 
 

Basic earnings per share
 
$
0.45

 
$
0.36

 
$
0.84

 
$
0.75

Weighted average common shares used in basic computation
 
13,533,724

 
13,692,358

 
13,515,752

 
13,681,229

Diluted earnings per share
 
$
0.45

 
$
0.36

 
$
0.83

 
$
0.74

Weighted average common shares used in diluted computation
 
13,635,834

 
13,823,278

 
13,612,866

 
13,814,087

Cash dividend per common share
 
$
0.11

 
$
0.07

 
$
0.21

 
$
0.14

 
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 Three Months Ended June 30,
 
For the Six Months
Ended June 30,
(In thousands)
 
2019
 
2018
 
2019
 
2018
Net income
 
$
6,087

 
$
4,965

 
$
11,303

 
$
10,256

Other Comprehensive Income:
 
 
 
 
 
 
 
 
Unrealized gains (losses) on securities:
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
 
7,890

 
(1,259
)
 
16,508

 
(9,831
)
Less: reclassification for net gains included in net income
 
2,459

 
82

 
3,511

 
897

Other comprehensive income (loss), before tax
 
5,431

 
(1,341
)
 
12,997

 
(10,728
)
Tax (expense) benefit related to items of other comprehensive income
 
(1,606
)
 
335

 
(3,843
)
 
3,111

Total other comprehensive income (loss)
 
3,825

 
(1,006
)
 
9,154

 
(7,617
)
Comprehensive income (loss)
 
$
9,912

 
$
3,959

 
$
20,457

 
$
2,639


See notes to unaudited consolidated financial statements.



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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
THREE MONTHS ENDED JUNE 30, 2019 AND 2018
 (Unaudited)

 
 
Common Stock
 
 
 
Accumulated
Other
Comprehensive Income (Loss)
(Net of Taxes)
 
Total Shareholders’ Equity
 
 
 
 
 
 
Retained Earnings
 
(In thousands, except share amounts)
 
Shares
 
Amount
 
 
Balance, March 31, 2018
 
13,752,037

 
$
103,980

 
$
107,544

 
$
(3,581
)
 
$
207,943

Net income
 

 

 
4,965

 

 
4,965

Other comprehensive loss
 

 

 

 
(1,006
)
 
(1,006
)
Restricted stock granted, net of forfeitures, and related tax benefit
 
20,448

 

 

 

 

Stock issued under employee stock purchase plan
 
2,606

 
45

 
 
 
 
 
45

Stock-based compensation expense
 

 
110

 

 

 
110

Cash dividend
 

 

 
(964
)
 

 
(964
)
Stock options exercised
 
10,500

 
91

 

 

 
91

Balance, June 30, 2018
 
13,785,591

 
$
104,226

 
$
111,545

 
$
(4,587
)
 
$
211,184

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2019
 
13,680,930

 
$
102,395

 
$
124,138

 
$
922

 
$
227,455

Net income
 

 

 
6,087

 

 
6,087

Other comprehensive income
 

 

 

 
3,825

 
3,825

Restricted stock granted, net of forfeitures, and related tax benefit
 
20,125

 

 

 

 

Stock issued under employee stock purchase plan
 
2,865

 
51

 

 

 
51

Stock-based compensation expense
 

 
151

 

 

 
151

Cash dividend
 

 

 
(1,502
)
 

 
(1,502
)
Stock options exercised
 
8,184

 
65

 

 

 
65

Repurchase and retirement of common stock
 
(223,121
)
 
(4,452
)
 

 

 
(4,452
)
Balance, June 30, 2019
 
13,488,983

 
$
98,210

 
$
128,723

 
$
4,747

 
$
231,680
























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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2019 AND 2018
 (Unaudited)
 
 
Common Stock
 
 
 
Accumulated
Other
Comprehensive Income (Loss)
(Net of Taxes)
 
Total Shareholders’ Equity
 
 
 
 
 
 
Retained Earnings
 
(In thousands, except share amounts)
 
Shares
 
Amount
 
 
Balance, January 1, 2018
 
13,696,722

 
$
103,314

 
$
103,419

 
$
2,826

 
$
209,559

Cumulative-effect adjustment
 
 
 
 
 
(204
)
 
204

 
 
Balance, January 1, 2018, adjusted
 
13,696,722

 
103,314

 
103,215

 
3,030

 
209,559

Net income
 

 

 
10,256

 

 
10,256

Other comprehensive loss
 

 

 

 
(7,617
)
 
(7,617
)
Restricted stock granted, net of forfeitures, and related tax benefit
 
19,910

 

 

 

 

Stock issued under employee stock purchase plan
 
5,059

 
88

 
 
 
 
 
88

Stock-based compensation expense
 

 
184

 

 

 
184

Cash dividend
 

 

 
(1,926
)
 

 
(1,926
)
Stock options exercised
 
63,900

 
640

 

 

 
640

Balance, June 30, 2018
 
13,785,591

 
$
104,226

 
$
111,545

 
$
(4,587
)
 
$
211,184

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2019
 
13,754,965

 
$
103,851

 
$
120,294

 
$
(4,407
)
 
$
219,738

Net income
 

 

 
11,303

 

 
11,303

Other comprehensive income
 

 

 

 
9,154

 
9,154

Restricted stock granted, net of forfeitures, and related tax benefit
 
20,035

 

 

 

 

Stock issued under employee stock purchase plan
 
7,468

 
131

 

 

 
131

Stock awarded to employees
 
5,295

 
100

 

 

 
100

Stock-based compensation expense
 

 
294

 

 

 
294

Cash dividend
 

 

 
(2,874
)
 

 
(2,874
)
Stock options exercised
 
21,820

 
160

 

 

 
160

Repurchase and retirement of common stock
 
(320,600
)
 
(6,326
)
 

 

 
(6,326
)
Balance, June 30, 2019
 
13,488,983

 
$
98,210

 
$
128,723

 
$
4,747

 
$
231,680





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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
 
For the Six Months
Ended June 30,
(In thousands)
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income
 
$
11,303

 
$
10,256

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

Net decrease in deferred loan costs
 
132

 
5,948

Depreciation
 
1,046

 
915

Accretion
 
(406
)
 
(530
)
Amortization
 
2,545

 
3,848

Stock-based compensation
 
294

 
184

Provision for credit losses
 
275

 
50

Net realized gains on sales of available-for-sale investment securities
 
(3,511
)
 
(897
)
Net change in equity securities
 
(204
)
 
42

Increase in bank-owned life insurance, net of expenses
 
(361
)
 
(347
)
Net gain on sale of credit card portfolio
 

 
(578
)
Net (increase) decrease in accrued interest receivable and other assets
 
(8,485
)
 
3,332

Net increase (decrease) in accrued interest payable and other liabilities
 
7,761

 
(1,772
)
Deferred income tax (benefit) expense
 
(713
)
 
180

Net cash provided by operating activities
 
9,676

 
20,631

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Purchases of available-for-sale investment securities
 
(212,662
)
 
(116,785
)
Proceeds from sales or calls of available-for-sale investment securities
 
203,426

 
131,617

Proceeds from maturity and principal repayments of available-for-sale investment securities
 
11,701

 
23,668

Proceeds from sale of credit card portfolio
 

 
2,954

Net increase in loans
 
(41,622
)
 
(42,515
)
Purchases of premises and equipment
 
(304
)
 
(649
)
Purchases of bank-owned life insurance
 
(1,000
)
 

FHLB stock redeemed
 
781

 

Net cash used in investing activities
 
(39,680
)
 
(1,710
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Net increase (decrease) in demand, interest bearing and savings deposits
 
11,711

 
(84,636
)
Net increase (decrease) in time deposits
 
78

 
(16,840
)
Proceeds from short-term borrowings from Federal Home Loan Bank
 
274,500

 
502,000

Repayments of short-term borrowings to Federal Home Loan Bank
 
(230,500
)
 
(472,000
)
Proceeds of borrowings from other financial institutions
 
2,870

 

Repayments of borrowings from other financial institutions
 
(2,870
)
 

Purchase and retirement of common stock
 
(6,326
)
 

Proceeds from stock issued under employee stock purchase plan
 
131

 
88

Proceeds from exercise of stock options
 
160

 
640

Cash dividend payments on common stock
 
(2,874
)
 
(1,926
)
Net cash provided by (used in) financing activities
 
46,880

 
(72,674
)
Increase (decrease) in cash and cash equivalents
 
16,876

 
(53,753
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
31,727

 
100,383

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
48,603

 
$
46,630

 
 
 
For the Six Months
Ended June 30,
(In thousands)
 
2019
 
2018
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
 
 

 
 

Cash paid during the period for:
 
 

 
 

Interest
 
$
1,238

 
$
688

Income taxes
 
$
4,720

 
$
1,080

Operating cash flows from operating leases
 
$
1,091

 
$

Non-cash investing and financing activities:
 
 

 
 

Initial recognition of operating lease right-of-use assets
 
$
10,129

 
$

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 2018 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 June 30, 2019, and the results of its operations and its cash flows for the six-month interim periods ended June 30, 2019 and 2018 have been included. The results of operations for interim periods are not necessarily indicative of results for the full year.
     The preparation of these interim unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
     Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment, and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank.

Impact of New Financial Accounting Standards:

FASB Accounting Standards Update (ASU) 2016-02 - Leases - Overall (Subtopic 845), was issued February 2016. ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 was effective for us on January 1, 2019 and initially required transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) - Targeted Improvements,” which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow- Scope Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. As of January 1, 2019, the Company adopted ASU 2016-02 and has recorded a right-of-use asset and lease liability of approximately $10 million on the balance sheet for its operating leases where it is a lessee. We elected to apply certain practical expedients provided under ASU 2016-02 whereby we will not reassess(i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We also did not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). We account for lease and non-lease components separately because such amounts are readily determinable under our lease contracts and because we expect this election will result in a lower impact on our balance sheet.

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

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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.

The Company has formed an internal task force that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard. The Company has also established a project management governance process to manage the implementation across affected disciplines. An external provider specializing in community bank loss driver and CECL reserving model design as well as other related consulting services has been retained, and we have begun to evaluate potential CECL modeling alternatives. As part of this process, the Company has determined potential loan pool segmentation and sub-segmentation under CECL, as well as begun to evaluate the key economic loss drivers for each segment. Further, the Company has begun developing internal controls around the CECL process, data, calculations and implementation. The Company presently plans to generate and evaluate model scenarios under CECL in tandem with its current reserving processes for interim and annual reporting periods during the second half of 2019. While the Company is currently unable to reasonably estimate the impact of adopting this new guidance, management expects the impact of adoption will be significantly influenced by the composition and quality of the Company’s loans as well as the economic conditions as of the date of adoption. The Company also anticipates significant changes to the processes and procedures for calculating the reserve for credit losses and continues to evaluate the potential impact on our consolidated financial statements.

FASB Accounting Standards Update (ASU) 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. The Company adopted ASU 2017-04 effective during the first quarter of 2019 and it did not have a material impact on the Company’s financial position, results of operations or cash flows.

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 become effective in fiscal years beginning after December 15, 2018. The Company adopted this ASU effective January 1, 2019 and it did not have a material impact on the Company’s financial position, results of operations or cash flows.

FASB Accounting Standards Update (ASU) 2018-13 - Fair Value Measurement (Subtopic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, was issued August 2018. The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt the removed or modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of the additional disclosures, which are required for public companies only, until their effective date. Management is currently evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.



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Note 2.  Fair Value Measurements
 
Fair Value Hierarchy
 
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In accordance with applicable guidance, the Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  Valuations within these levels are based upon:
 
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):
 
 
June 30, 2019
 
 
Carrying
Amount
 
Fair Value
(In thousands)
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets:
 
 

 
 

 
 

 
 
 
 

Cash and due from banks
 
$
33,787

 
$
33,787

 
$

 
$

 
$
33,787

Interest-earning deposits in other banks
 
14,739

 
14,739

 

 

 
14,739

Federal funds sold
 
77

 
77

 

 

 
77

Available-for-sale debt securities
 
476,211

 

 
476,211

 

 
476,211

Equity securities
 
7,458

 
7,458

 

 

 
7,458

Loans, net
 
950,806

 

 

 
947,248

 
947,248

Federal Home Loan Bank stock
 
6,062

 
N/A

 
N/A

 
N/A

 
N/A

Accrued interest receivable
 
5,528

 
11

 
1,809

 
3,708

 
5,528

Financial liabilities:
 
 

 
 

 
 

 
 
 
 

Deposits
 
1,294,087

 
1,102,613

 
96,319

 

 
1,198,932

Short-term borrowings
 
54,000

 

 
54,000

 

 
54,000

Junior subordinated deferrable interest debentures
 
5,155

 

 

 
4,129

 
4,129

Accrued interest payable
 
185

 

 
130

 
55

 
185



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December 31, 2018
 
 
Carrying
Amount
 
Fair Value
(In thousands)
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
24,954

 
$
24,954

 
$

 
$

 
$
24,954

Interest-earning deposits in other banks
 
6,725

 
6,725

 

 

 
6,725

Federal funds sold
 
48

 
48

 

 

 
48

Available-for-sale debt securities
 
463,905

 

 
463,905

 

 
463,905

Equity securities
 
7,254

 
7,254

 

 

 
7,254

Loans, net
 
909,591

 

 

 
899,214

 
899,214

Federal Home Loan Bank stock
 
6,843

 
N/A

 
N/A

 
N/A

 
N/A

Accrued interest receivable
 
6,429

 
32

 
2,323

 
4,074

 
6,429

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
1,282,298

 
1,031,369

 
95,633

 

 
1,127,002

Short-term borrowings
 
10,000

 

 
10,000

 

 
10,000

Junior subordinated deferrable interest debentures
 
5,155

 

 

 
4,114

 
4,114

Accrued interest payable
 
134

 

 
81

 
53

 
134


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 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.

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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) Short-Term Borrowings — The fair values of the Company’s federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, are based on the market rates for similar types of borrowing arrangements resulting in a Level 2 classification.

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

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

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

(i) Off-Balance Sheet Instruments — Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not considered significant for financial reporting purposes.
 
Assets Recorded at Fair Value
 
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2019:
 
Recurring Basis
 
The Company is required or permitted to record the following assets at fair value on a recurring basis as of June 30, 2019 (in thousands). 
Description
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Available-for-sale debt securities:
 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
17,903

 
$

 
$
17,903

 
$

Obligations of states and political subdivisions
 
29,375

 

 
29,375

 

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
224,941

 

 
224,941

 

Private label mortgage and asset backed securities
 
194,813

 

 
194,813

 

Corporate debt securities
 
9,179

 

 
9,179

 

Equity securities
 
7,458

 
7,458

 

 

Total assets measured at fair value on a recurring basis
 
$
483,669

 
$
7,458

 
$
476,211

 
$

 
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 six months ended June 30, 2019, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at or during the six months ended June 30, 2019. Also there were no liabilities measured at fair value on a recurring basis at June 30, 2019.


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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 June 30, 2019.
 
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Impaired loans:
 
 

 
 

 
 

 
 

Consumer:
 
 

 
 

 
 

 
 

Consumer and installment
 
$
9

 
$

 
$

 
$
9

Total assets measured at fair value on a non-recurring basis
 
$
9

 
$

 
$

 
$
9

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 six months ended June 30, 2019.
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 $22,000 with a valuation allowance of $13,000 at June 30, 2019, and a resulting fair value of $9,000. The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans.
There were no charge-offs related to loans carried at fair value during the six months ended June 30, 2019 and 2018. Activity related to changes in the allowance for loan losses related to impaired loans for the three months ended June 30, 2019 and 2018 was not considered significant for disclosure purposes. There were no liabilities measured at fair value on a non-recurring basis at June 30, 2019.

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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, 2018:

Recurring Basis
 
The Company is required or permitted to record the following assets at fair value on a recurring basis as of December 31, 2018 (in thousands).
Description
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Available-for-sale debt securities:
 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
21,321

 
$

 
$
21,321

 
$

Obligations of states and political subdivisions
 
81,504

 

 
81,504

 

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
234,930

 

 
234,930

 

Private label mortgage and asset backed securities
 
126,150

 

 
126,150

 

Equity securities
 
7,254

 
7,254

 

 

Total assets measured at fair value on a recurring basis
 
$
471,159

 
$
7,254

 
$
463,905

 
$

 
Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets.  Fair values for available-for-sale debt securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators.
     Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the year ended December 31, 2018, 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, 2018. Also there were no liabilities measured at fair value on a recurring basis at December 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 December 31, 2018 (in thousands).
Description
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Impaired loans:
 
 

 
 

 
 

 
 

Real estate:
 
 

 
 

 
 

 
 

Commercial real estate
 
$
134

 
$

 
$

 
$
134

Total assets measured at fair value on a non-recurring basis
 
$
134

 
$

 
$

 
$
134


Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans in which the collateral value did not exceed the loan balance had a principal balance of $161,000 with a valuation allowance of $27,000 at December 31, 2018, resulting in a fair value of $134,000. The valuation allowance represent specific allocation for the allowance for credit losses for impaired loans.
During the year ended December 31, 2018 specific allocation for the allowance for credit losses related to loans carried at fair value was $27,000. During the year ended December 31, 2018, 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, 2018.

Note 3.  Investments
 
The investment portfolio consists primarily of U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations, private label mortgage and asset backed securities (PLMABS), corporate debt securities, and obligations of states and political subdivisions securities.  As of June 30, 2019, $72,924,000 of these securities were held as collateral for borrowing arrangements, public funds, and for other purposes.
     The fair value of the available-for-sale investment portfolio reflected a net unrealized gain of $6,740,000 at June 30, 2019 compared to an unrealized loss of $6,257,000 at December 31, 2018. The unrealized gain/(loss) recorded is net of

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$1,993,000 and $(1,850,000) in tax liabilities (benefits) as accumulated other comprehensive income within shareholders’ equity at June 30, 2019 and December 31, 2018, respectively.
     The following table sets forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands): 
 
 
June 30, 2019
Available-for-Sale Securities
 
Amortized Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
 Fair Value
Debt securities:
 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
18,167

 
$
17

 
$
(281
)
 
$
17,903

Obligations of states and political subdivisions
 
26,577

 
2,798

 

 
29,375

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
225,045

 
1,559

 
(1,663
)
 
224,941

Private label mortgage and asset backed securities
 
190,682

 
4,296

 
(165
)
 
194,813

Corporate debt securities
 
9,000

 
179

 

 
9,179

Total available-for-sale
 
$
469,471

 
$
8,849

 
$
(2,109
)
 
$
476,211


 

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

 
 

 
 

 
 

U.S. Government agencies
 
$
21,723

 
$

 
$
(402
)
 
$
21,321

Obligations of states and political subdivisions
 
79,886

 
2,205

 
(587
)
 
81,504

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
239,388

 
253

 
(4,711
)
 
234,930

Private label mortgage and asset backed securities
 
129,165

 
756

 
(3,771
)
 
126,150

Total available-for-sale
 
$
470,162

 
$
3,214

 
$
(9,471
)
 
$
463,905


Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended June 30, 2019 and 2018 are shown below (in thousands):
 
 
For the Three Months Ended June 30,
 
For the Six Months
Ended June 30,
Available-for-Sale Securities
 
2019

2018

2019

2018
Proceeds from sales or calls
 
$
150,441

 
$
62,301

 
$
203,426

 
$
131,617

Gross realized gains from sales or calls
 
2,508

 
249

 
3,607

 
1,316

Gross realized losses from sales or calls
 
(49
)
 
(167
)
 
(96
)
 
(419
)

Losses recognized in 2019 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 $1,038,000 and $265,000 income tax impact from the reclassification of unrealized net gains on securities to realized net gains on securities for the six months ended June 30, 2019 and 2018, respectively. The provision for income taxes includes $727,000 and $24,000 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 June 30, 2019 and 2018, 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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June 30, 2019
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Available-for-Sale Securities
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government agencies
 
$

 
$

 
$
16,923

 
$
(281
)
 
$
16,923

 
$
(281
)
Obligations of states and political subdivisions
 

 

 

 

 

 

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
80,111

 
(953
)
 
40,549

 
(710
)
 
120,660

 
(1,663
)
Private label mortgage and asset backed securities
 
19,089

 
(126
)
 
2,171

 
(39
)
 
21,260

 
(165
)
Total available-for-sale
 
$
99,200

 
$
(1,079
)

$
59,643

 
$
(1,030
)
 
$
158,843

 
$
(2,109
)

 
 
December 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. Government agencies
 
$
14,891

 
$
(254
)
 
$
6,430

 
$
(148
)
 
$
21,321

 
$
(402
)
Obligations of states and political subdivisions
 
10,056

 
(99
)
 
22,945

 
(488
)
 
33,001

 
(587
)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
61,866

 
(424
)
 
124,673

 
(4,287
)
 
186,539

 
(4,711
)
Private label mortgage and asset backed securities
 
31,325

 
(195
)
 
84,784

 
(3,576
)
 
116,109

 
(3,771
)
Total available-for-sale
 
$
118,138

 
$
(972
)
 
$
238,832

 
$
(8,499
)
 
$
356,970

 
$
(9,471
)

     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 June 30, 2019, 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 June 30, 2019 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at June 30, 2019 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 six months ended June 30, 2019. There were no OTTI losses recorded during the six months ended June 30, 2018.

U.S. Government Agencies

At June 30, 2019, the Company held six U.S. Government agency securities of which none were in a loss position for less than 12 months and five had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in direct obligations of U.S. Government agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell, those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2019.


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Table of Contents

Obligations of States and Political Subdivisions
 
At June 30, 2019, the Company held 28 obligations of states and political subdivision securities of which none were in a loss position.
 
U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations
 
At June 30, 2019, the Company held 126 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 21 were in a loss position for less than 12 months and 17 have been in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed or supported by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability to hold and does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2019.
 
Private Label Mortgage and Asset Backed Securities
 
At June 30, 2019, the Company had a total of 47 Private Label Mortgage and Asset Backed Securities (PLMABS). Four of the PLMABS securities were in a loss position for less than 12 months and one has been in loss for more than 12 months at June 30, 2019. 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 June 30, 2019. The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary.

Corporate Debt Securities
 
At June 30, 2019, the Company held two corporate debt securities of which none were in a loss position.

The following tables provide a roll forward for the six months ended June 30, 2019 and 2018 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 Six Months
Ended June 30,
(In thousands)
 
2019
 
2018
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 June 30, 2019 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.

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Table of Contents

 
 
June 30, 2019
Available-for-Sale Securities
 
Amortized Cost

Estimated Fair
Value
Within one year
 
$

 
$

After one year through five years
 
2,496

 
2,642

After five years through ten years
 
9,145

 
9,763

After ten years
 
14,936

 
16,970

 
 
26,577

 
29,375

Investment securities not due at a single maturity date:
 
 

 
 

U.S. Government agencies
 
18,167

 
17,903

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
225,045

 
224,941

Private label mortgage and asset backed securities
 
190,682

 
194,813

Corporate debt securities
 
9,000

 
9,179

Total available-for-sale
 
$
469,471

 
$
476,211

 

Note 4.  Loans and Allowance for Credit Losses
 
Outstanding loans are summarized as follows:
Loan Type (Dollars in thousands)
 
June 30, 2019
 
% of Total
Loans
 
December 31, 2018
 
% of Total
Loans
Commercial:
 
 

 
 

 
 

 
 

   Commercial and industrial
 
$
110,178

 
11.5
%
 
$
101,533

 
11.1
%
   Agricultural production
 
25,987

 
2.7
%
 
7,998

 
0.9
%
Total commercial
 
136,165

 
14.2
%
 
109,531

 
12.0
%
Real estate:
 
 

 
 

 
 

 
 

   Owner occupied
 
195,626

 
20.4
%
 
183,169

 
19.9
%
   Real estate construction and other land loans
 
102,927

 
10.7
%
 
101,606

 
11.1
%
   Commercial real estate
 
302,026

 
31.5
%
 
305,118

 
33.2
%
   Agricultural real estate
 
75,077

 
7.8
%