Company Quick10K Filing
Quick10K
Farmers & Merchants Bancorp
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-24 Earnings, Exhibits
8-K 2019-05-22 Shareholder Vote
8-K 2019-05-21 Other Events, Exhibits
8-K 2019-05-01 Earnings, Exhibits
8-K 2019-02-12 Earnings, Exhibits
8-K 2018-10-31 Earnings, Exhibits
8-K 2018-10-10 Other Events, Exhibits
8-K 2018-08-07 Earnings, Exhibits
8-K 2018-07-02 Enter Agreement
8-K 2018-05-24 Shareholder Vote, Other Events, Exhibits
8-K 2018-05-22 Other Events, Exhibits
8-K 2018-04-23 Other Events, Exhibits
8-K 2018-03-26 Other Events, Exhibits
8-K 2018-03-13 Officers
8-K 2018-03-07 Officers
8-K 2018-02-16 Earnings, Exhibits
8-K 2018-01-08 Officers
BNS Bank of Nova Scotia 65,490
REDU Rise Education Cayman 583
BSGM Biosig Technologies 177
AMS American Shared Hospital Services 16
BTHE Boston Therapeutics 0
BBII Brisset Beer 0
PCTL PCT 0
ESMC Escalon Medical 0
CRGS Curaegis Technologies 0
RGUS REGI 0
FMCB 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 ex10_1.htm
EX-10.3 ex10_3.htm
EX-10.4 ex10_4.htm
EX-10.6 ex10_6.htm
EX-10.8 ex10_8.htm
EX-10.10 ex10_10.htm
EX-31.(A) ex31_a.htm
EX-31.(B) ex31_b.htm
EX-32 ex32.htm

Farmers & Merchants Bancorp Earnings 2019-06-30

FMCB 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

or

☐ 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:  000-26099

FARMERS & MERCHANTS BANCORP
(Exact name of registrant as specified in its charter)

Delaware
 
94-3327828
(State or other jurisdiction of incorporation or organization)
 
(I.R.S.  Employer Identification No.)

111 W. Pine Street, Lodi, California
 
95240
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code (209) 367-2300

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 preceding 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 ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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  ☐
Accelerated filer  ☒
Non-accelerated filer  ☐
Smaller Reporting Company ☐
 
Emerging growth company

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 ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:
 
Trading Symbol(s)
 
Name of each exchange on which registered:
Common Stock
 
FMCB
 
OTCQX

Number of shares of common stock of the registrant 787,307 outstanding as of July 31, 2019.



FARMERS & MERCHANTS BANCORP
10-Q
TABLE OF CONTENTS

PART I. - FINANCIAL INFORMATION
Page
   

Item 1 - Financial Statements
 
     
 

3
     
 

4
     
 

5
     
 

6
     
 

7
     
 

Notes to the Consolidated Financial Statements (Unaudited)
8
     

36
     

56
     

58
     
PART II. - OTHER INFORMATION
 
     
 
59
     
 
59
     
 
59
     
 
59
     
 
60
     
  60
     
 
60
     
61

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements

FARMERS & MERCHANTS BANCORP
Consolidated Balance Sheets   (Unaudited)
(in thousands except share data)
                 
   
June 30,
2019
   
December 31,
2018
   
June 30,
2018
 
Assets
                 
Cash and Cash Equivalents:
                 
Cash and Due from Banks
 
$
64,476
   
$
61,058
   
$
51,491
 
Interest Bearing Deposits with Banks
   
50,241
     
84,506
     
55,408
 
Total Cash and Cash Equivalents
   
114,717
     
145,564
     
106,899
 
                         
Investment Securities:
                       
Available-for-Sale
   
488,093
     
495,396
     
450,174
 
Held-to-Maturity
   
60,310
     
53,566
     
52,210
 
Total Investment Securities
   
548,403
     
548,962
     
502,384
 
                         
Loans & Leases:
   
2,598,898
     
2,571,241
     
2,344,448
 
Less: Allowance for Credit Losses
   
55,125
     
55,266
     
51,137
 
Loans & Leases, Net
   
2,543,773
     
2,515,975
     
2,293,311
 
                         
Premises and Equipment, Net
   
31,864
     
32,623
     
29,254
 
Bank Owned Life Insurance
   
66,114
     
65,117
     
60,495
 
Interest Receivable and Other Assets
   
129,929
     
126,002
     
105,480
 
Total Assets
 
$
3,434,800
   
$
3,434,243
   
$
3,097,823
 
                         
Liabilities
                       
Deposits:
                       
Demand
 
$
949,817
   
$
974,756
   
$
815,575
 
Interest Bearing Transaction
   
656,211
     
694,384
     
603,494
 
Savings and Money Market
   
899,741
     
903,665
     
812,083
 
Time
   
519,507
     
490,027
     
466,121
 
Total Deposits
   
3,025,276
     
3,062,832
     
2,697,273
 
                         
Subordinated Debentures
   
10,310
     
10,310
     
10,310
 
Interest Payable and Other Liabilities
   
57,705
     
49,886
     
74,748
 
Total Liabilities
   
3,093,291
     
3,123,028
     
2,782,331
 
                         
Shareholders’ Equity
                       
Preferred Stock:  No Par Value,  1,000,000 Shares Authorized, None Issued or Outstanding
   
-
     
-
     
-
 
Common Stock:  Par Value $0.01, 7,500,000 Shares Authorized, 787,307, 783,721, and 821,073 Shares Issued and Outstanding at June 30, 2019, December 31, 2018 and June 30, 2018, Respectively
   
8
     
8
     
8
 
Additional Paid-In Capital
   
75,538
     
72,974
     
99,192
 
Retained Earnings
   
263,325
     
241,221
     
221,671
 
Accumulated Other Comprehensive Income (Loss)
   
2,638
     
(2,988
)
   
(5,379
)
Total Shareholders’ Equity
   
341,509
     
311,215
     
315,492
 
Total Liabilities and Shareholders’ Equity
 
$
3,434,800
   
$
3,434,243
   
$
3,097,823
 

The accompanying notes are an integral part of these unaudited consolidated financial statements

FARMERS & MERCHANTS BANCORP
Consolidated Statements of Income  (Unaudited)
(in thousands except per share data)
 
Three Months
Ended June 30,
   
Six Months
Ended June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Interest Income
                       
Interest and Fees on Loans & Leases
 
$
34,716
   
$
28,927
   
$
67,893
   
$
55,971
 
Interest on Deposits with Banks
   
1,161
     
514
     
2,286
     
1,099
 
Interest on Investment Securities:
                               
Taxable
   
2,244
     
2,315
     
4,671
     
4,696
 
Exempt from Federal Tax
   
505
     
405
     
949
     
823
 
Total Interest Income
   
38,626
     
32,161
     
75,799
     
62,589
 
                                 
Interest Expense
                               
Deposits
   
3,112
     
1,529
     
5,933
     
2,934
 
Subordinated Debentures
   
141
     
131
     
286
     
248
 
Total Interest Expense
   
3,253
     
1,660
     
6,219
     
3,182
 
                                 
Net Interest Income
   
35,373
     
30,501
     
69,580
     
59,407
 
Provision for Credit Losses
   
200
     
500
     
200
     
833
 
Net Interest Income After Provision for Credit Losses
   
35,173
     
30,001
     
69,380
     
58,574
 
                                 
Non-Interest Income
                               
Service Charges on Deposit Accounts
   
901
     
842
     
1,777
     
1,659
 
Net (Loss) on Sale of Investment Securities
   
-
     
(1,330
)
   
-
     
(1,330
)
Increase in Cash Surrender Value of Bank Owned Life Insurance
   
505
     
460
     
997
     
912
 
Debit Card and ATM Fees
   
1,291
     
1,096
     
2,468
     
2,112
 
Net Gain on Deferred Compensation Investments
   
818
     
407
     
1,863
     
1,189
 
Other
   
885
     
808
     
1,759
     
2,406
 
Total Non-Interest Income
   
4,400
     
2,283
     
8,864
     
6,948
 
                                 
Non-Interest Expense
                               
Salaries and Employee Benefits
   
13,439
     
11,653
     
26,863
     
25,180
 
Net Gain on Deferred Compensation Investments
   
818
     
407
     
1,863
     
1,189
 
Occupancy
   
1,014
     
907
     
2,054
     
1,849
 
Equipment
   
1,176
     
1,018
     
2,353
     
2,041
 
Marketing
   
233
     
390
     
613
     
719
 
Legal
   
851
     
852
     
1,720
     
1,292
 
FDIC Insurance
   
230
     
227
     
471
     
466
 
Other
   
2,804
     
2,691
     
5,073
     
5,345
 
Total Non-Interest Expense
   
20,565
     
18,145
     
41,010
     
38,081
 
                                 
Income Before Provision for Income Taxes
   
19,008
     
14,139
     
37,234
     
27,441
 
Provision for Income Taxes
   
4,903
     
3,589
     
9,580
     
6,950
 
Net Income
 
$
14,105
   
$
10,550
   
$
27,654
   
$
20,491
 
Basic and Diluted Earnings Per Common Share
 
$
17.92
   
$
12.90
   
$
35.19
   
$
25.14
 

The accompanying notes are an integral part of these unaudited consolidated financial statements

FARMERS & MERCHANTS BANCORP
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
 
Three Months
Ended June 30,
   
Six Months
Ended June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Net Income
 
$
14,105
   
$
10,550
   
$
27,654
   
$
20,491
 
                                 
Other Comprehensive Income
                               
Increase in Net Unrealized Gain (Loss) on Available-for-Sale Securities
   
3,741
     
(2,519
)
   
7,987
     
(7,807
)
Deferred Tax (Expense) Benefit Related to net Unrealized Gains (loss)
   
(1,105
)
   
757
     
(2,361
)
   
2,320
 
Reclassification Adjustment for Realized Losses (Gains) on Available-for-Sale Securities Included in Net Income
   
-
     
1,330
     
-
     
1,330
 
Deferred Tax (Expense) Benefit  Related to Reclassification Adjustment
   
-
     
(405
)
   
-
     
(405
)
Total Other Comprehensive Income (Loss)
   
2,636
     
(837
)
   
5,626
     
(4,562
)
Comprehensive Income
 
$
16,741
   
$
9,713
   
$
33,280
   
$
15,929
 

The accompanying notes are an integral part of these unaudited consolidated financial statements

FARMERS & MERCHANTS BANCORP
Consolidated Statements of Changes in Shareholders’ Equity  (Unaudited)
For the three and six months ended June 30, 2019 and 2018
 
(in thousands except share data)
 
 
Common
Shares
Outstanding
   
Common
Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
(Loss) Income, net
   
Total
Shareholders’
Equity
 
   
Three Months Ended June 30, 2019
 
Balance, April 1, 2019
   
787,307
   
$
8
   
$
75,538
   
$
254,770
   
$
2
   
$
330,318
 
Net Income
                   
-
     
14,105
     
-
     
14,105
 
Cash Dividends Declared on
                                           
-
 
Common Stock ($7.05 per share)
           
-
     
-
     
(5,550
)
   
-
     
(5,550
)
Issuance of Common Stock
   
-
     
-
     
-
     
-
     
-
     
-
 
Change in Net Unrealized Loss on Securities Available-for-Sale, net of tax
           
-
     
-
     
-
     
2,636
     
2,636
 
Balance, June 30, 2019
   
787,307
   
$
8
   
$
75,538
   
$
263,325
   
$
2,638
   
$
341,509
 
                                                 
   
Three Months Ended June 30, 2018
 
Balance, April 1, 2018
   
812,304
   
$
8
   
$
93,624
   
$
216,786
   
$
(4,542
)
 
$
305,876
 
Net Income
                   
-
     
10,550
     
-
     
10,550
 
Cash Dividends Declared on
                                           
-
 
Common Stock ($6.90 per share)
           
-
     
-
     
(5,665
)
   
-
     
(5,665
)
Issuance of Common Stock
   
8,769
     
-
     
5,568
     
-
     
-
     
5,568
 
Change in Net Unrealized Loss on Securities Available-for-Sale, net of tax
           
-
     
-
     
-
     
(837
)
   
(837
)
Balance, June 30, 2018
   
821,073
   
$
8
   
$
99,192
   
$
221,671
   
$
(5,379
)
 
$
315,492
 
                                                 
   
Six Months Ended June 30, 2019
 
Balance, January 1, 2019
   
783,721
   
$
8
   
$
72,974
   
$
241,221
   
$
(2,988
)
 
$
311,215
 
Net Income
                   
-
     
27,654
     
-
     
27,654
 
Cash Dividends Declared on
                                           
-
 
Common Stock ($7.05 per share)
           
-
     
-
     
(5,550
)
   
-
     
(5,550
)
Issuance of Common Stock
   
3,586
     
-
     
2,564
     
-
     
-
     
2,564
 
Change in Net Unrealized Loss on Securities Available-for-Sale, net of tax
           
-
     
-
     
-
     
5,626
     
5,626
 
Balance, June 30, 2019
   
787,307
   
$
8
   
$
75,538
   
$
263,325
   
$
2,638
   
$
341,509
 
                                                 
   
Six Months Ended June 30, 2018
 
Balance, January 1, 2018
   
812,304
   
$
8
   
$
93,624
   
$
206,845
   
$
(817
)
 
$
299,660
 
Net Income
                   
-
     
20,491
     
-
     
20,491
 
Cash Dividends Declared on
                                           
-
 
Common Stock ($6.90 per share)
           
-
     
-
     
(5,665
)
   
-
     
(5,665
)
Issuance of Common Stock
   
8,769
     
-
     
5,568
     
-
     
-
     
5,568
 
Change in Net Unrealized Loss on Securities Available-for-Sale, net of tax
           
-
     
-
     
-
     
(4,562
)
   
(4,562
)
Balance, June 30, 2018
   
821,073
   
$
8
   
$
99,192
   
$
221,671
   
$
(5,379
)
 
$
315,492
 

The accompanying notes are an integral part of these unaudited consolidated financial statements

FARMERS & MERCHANTS BANCORP
Consolidated Statements of Cash Flows (Unaudited)
   
Six Months Ended
 
(in thousands)
 
June 30,
2019
   
June 30,
2018
 
Operating Activities:
           
Net Income
 
$
27,654
   
$
20,491
 
Adjustments to Reconcile Net Income to Net
               
Cash Provided by Operating Activities:
               
Provision for Credit Losses
   
200
     
833
 
Depreciation and Amortization
   
1,387
     
1,155
 
Net Amortization of Investment Security Premiums & Discounts
   
222
     
568
 
Amortization of Core Deposit Intangible
   
319
     
54
 
Accretion of Discount on Acquired Loans
   
(6
)
   
(87
)
Net Loss on Sale of Investment Securities
   
-
     
1,330
 
Net (Gain) on Sale of Property & Equipment
   
-
     
(292
)
Earnings from Equity Investment
   
-
     
(164
)
Dividends from Equity Investment
   
-
     
63
 
Net Change in Operating Assets & Liabilities:
               
Net Decrease in Interest Receivable and Other Assets
   
810
     
218
 
Net Increase in Interest Payable and Other Liabilities
   
4,175
     
1,788
 
Net Cash Provided by Operating Activities
   
34,761
     
25,957
 
Investing Activities:
               
Purchase of Investment Securities Available-for-Sale
   
(316,054
)
   
(169,467
)
Proceeds from Sold, Matured or Called Securities Available-for-Sale
   
330,902
     
227,072
 
Purchase of Investment Securities Held-to-Maturity
   
(11,606
)
   
(2,770
)
Proceeds from Matured or Called Securities Held-to-Maturity
   
4,823
     
4,990
 
Net Loans & Leases Paid, Originated or Acquired
   
(28,069
)
   
(129,154
)
Principal Collected on Loans & Leases Previously Charged Off
   
77
     
50
 
Additions to Premises and Equipment
   
(628
)
   
(2,497
)
Purchase of Other Investments
   
(1,947
)
   
(3,794
)
Proceeds from Sale of Property & Equipment
   
-
     
983
 
Net Cash Used in Investing Activities
   
(22,502
)
   
(74,587
)
Financing Activities:
               
Net Decrease in Deposits
   
(37,556
)
   
(25,955
)
Cash Dividends
   
(5,550
)
   
(5,665
)
Net Cash Used in Financing Activities
   
(43,106
)
   
(31,620
)
Decrease in Cash and Cash Equivalents
   
(30,847
)
   
(80,250
)
Cash and Cash Equivalents at Beginning of Period
   
145,564
     
187,149
 
Cash and Cash Equivalents at End of Period
 
$
114,717
   
$
106,899
 
Supplementary Data
               
Cash Payments Made for Income Taxes
 
$
4,631
   
$
3,051
 
Issuance of Common Stock to the Bank’s Non-Qualified Retirement Plans
 
$
2,564
   
$
5,568
 
Interest Paid
 
$
5,109
   
$
3,492
 

The accompanying notes are an integral part of these unaudited consolidated financial statements

FARMERS & MERCHANTS BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Significant Accounting Policies

Farmers & Merchants Bancorp (the “Company”) was organized March 10, 1999. Primary operations are related to traditional banking activities through its subsidiary Farmers & Merchants Bank of Central California (the “Bank”) which was established in 1916. The Bank’s wholly owned subsidiaries include Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Farmers & Merchants Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts as trustee on deeds of trust originated by the Bank.

The Company’s other wholly owned subsidiaries include F & M Bancorp, Inc. and FMCB Statutory Trust I. F & M Bancorp, Inc. was created in March 2002 to protect the name F & M Bank. During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name “F & M Bank” as part of a larger effort to enhance the Company’s image and build brand name recognition. In December 2003, the Company formed a wholly owned subsidiary, FMCB Statutory Trust I, for the sole purpose of issuing Trust Preferred Securities and related subordinated debentures, in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). FMCB Statutory Trust I is a non-consolidated subsidiary.

On October 10, 2018, Farmers & Merchants Bancorp completed the acquisition of the Bank of Rio Vista, headquartered in Rio Vista, California, a locally owned and operated community bank established in 1904. As of the acquisition date, Bank of Rio Vista had approximately $217.5 million in assets and three branch locations in the communities of Rio Vista, Walnut Grove, and Lodi. At the effective time of the acquisition, Bank of Rio Vista was merged into Farmers & Merchants Bank of Central California.

The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practice within the banking industry. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements.

Basis of Presentation
The accompanying consolidated financial statements and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America for financial information.

The accompanying consolidated financial statements include the accounts of the Company and the Company’s wholly owned subsidiaries, F & M Bancorp, Inc. and the Bank, along with the Bank’s wholly owned subsidiaries, Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Significant inter-company transactions have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with U.S. GAAP 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 period.  The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and accompanying notes required by U.S. GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. In the opinion of Management, the unaudited consolidated financial statements reflect all adjustments, which are necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income, changes in stockholders’ equity, and cash flows for the periods presented. All material intercompany transactions have been eliminated. The results of these interim periods may not be indicative of the results for the full year or for any other period. Actual results could differ from these estimates. See “Financial Condition – Critical Accounting Policies and Estimates” in the Company’s 2018 Annual Report to Shareholders on Form 10-K.

Certain amounts in the prior years’ financial statements and related footnote disclosures have been reclassified to conform to the current-year presentation. These reclassifications had no effect on previously reported net income or total shareholders’ equity.

New Accounting Changes
The FASB issued guidance in February 2016, with amendments in 2018 and 2019, which changed the accounting for leases. The guidance requires lessees to recognize right-of-use (ROU) assets and lease liabilities for most leases where we are the lessee in the Consolidated Statement of Financial Position. The guidance also made some changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the lease classification test, and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the consolidated balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. The Company elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs (IDC’s). From a lessor perspective, the changes in lease termination guidance, IDC and removal of third-party residual value guarantee insurance in the lease classification test did not have a material impact on the consolidated financial results. We adopted ASU No. 2016-02 Leases (Topic 842), as of January 1, 2019, using the cumulative effect transition approach. The cumulative effect transition approach provides a method for recording existing leases at adoption and not restated comparative periods; rather the effect of the change is recorded at the beginning of the year of adoption.  The Company elected the ASU’s package of three practical expedients, which allowed the Company to forego a reassessment of (i) whether any expired or existing contracts contain leases, (ii) the lease classification for any expired or existing leases and (iii) the initial direct costs for any existing leases. The Company elected the option not to separate lease and non-lease components and instead to account for them as a single lease component and the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets.

The Company has several lease agreements, such as branch locations, which are considered operating leases, and therefore, were not previously recognized on the Company’s consolidated statements of condition. The new guidance requires these lease agreements to be recognized as a right-of-use asset and corresponding lease liability.
 
Our operating leases relate primarily to office space and bank branches. As a result of implementing ASU 2016-02, we recognized an operating lease right-of-use (“ROU”) asset of $4.73 million and an operating lease liability of $4.73 million on January 1, 2019, with no impact on our consolidated statement of income or consolidated statement of cash flows compared to the prior lease accounting model. The ROU asset and operating lease liability are recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. See Note 7 – “Leases” for additional information.

Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company has defined cash and cash equivalents as those amounts included in the balance sheet captions Cash and Due from Banks, Interest Bearing Deposits with Banks, Federal Funds Sold which have maturity dates of 3 months or less. For these instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities
Investment securities are debt securities classified at the time of purchase as held-to-maturity (“HTM”) if it is management’s intent and the Company has the ability to hold the securities until maturity. These securities are carried at cost, adjusted for amortization of premium and accretion of discount using a level yield of interest over the estimated remaining period until maturity. Losses, reflecting a decline in value judged by the Company to be other than temporary, are recognized in the period in which they occur.

Debt securities are classified as available-for-sale (“AFS”) if it is management’s intent, at the time of purchase, to hold the securities for an indefinite period of time and/or to use the securities as part of the Company’s asset/liability management strategy. These securities are reported at fair value with aggregate unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, net of related income taxes. Fair values are based on quoted market prices or broker/dealer price quotations on a specific identification basis. Gains or losses on the sale of these securities are computed using the specific identification method.

Trading debt securities, if any, are acquired for short-term appreciation and are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in non-interest income.

Management evaluates debt securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For debt securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement; and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

Equity securities are carried at fair value with the entire amount of a market adjustment recognized through earnings.

Securities Sold Under Agreement to Repurchase
Securities Sold Under Agreement to Repurchase are used as secured borrowing alternatives to FHLB Advances or FRB Borrowings.

Loans & Leases
Loans & leases are reported at the principal amount outstanding net of unearned discounts and deferred loan & lease fees and costs. Interest income on loans & leases is accrued daily on the outstanding balances using the simple interest method. Loan & lease origination fees are deferred and recognized over the contractual life of the loan or lease as an adjustment to the yield. Loans & leases are placed on non-accrual status when the collection of principal or interest is in doubt or when they become past due for 90 days or more unless they are both well-secured and in the process of collection. For this purpose, a loan or lease is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or lease or is guaranteed by a financially capable party. When a loan or lease is placed on non-accrual status, the accrued and unpaid interest receivable is reversed and charged against current income; thereafter, interest income is recognized only as it is collected in cash. Additionally, cash would be applied to principal if all principal was not expected to be collected. Loans & leases placed on non-accrual status are returned to accrual status when the loans or leases are paid current as to principal and interest and future payments are expected to be made in accordance with the contractual terms of the loan or lease.

A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Impaired loans & leases are either: (1) non-accrual loans & leases; or (2) restructured loans & leases that are still accruing interest. Loans or leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan or lease’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan or lease’s observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.

A restructuring of a loan or lease constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the borrower’s (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction) financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans & leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become TDR, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment as described above.

Generally, the Company will not restructure loans or leases for borrowers unless: (1) the existing loan or lease is brought current as to principal and interest payments; and (2) the restructured loan or lease can be underwritten to reasonable underwriting standards. If these standards are not met other actions will be pursued (e.g., foreclosure) to collect outstanding loan or lease amounts. After restructure, a determination is made whether the loan or lease will be kept on accrual status based upon the underwriting and historical performance of the restructured credit.

Allowance for Credit Losses
The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company’s loan & lease portfolio as of the balance sheet date. 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 & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to impaired loans & leases; general reserves for inherent losses related to loans & leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors.

The determination of the general reserve for loans & leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, qualitative factors that include 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 & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer and other; and (9) equipment leases. The allowance for credit losses attributable to each portfolio segment, which includes both individually evaluated impaired loans & leases and loans & leases that are collectively evaluated for impairment, is combined to determine the Company’s overall allowance, which is included on the consolidated balance sheet.

The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans & leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:

Pass – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management’s close attention.

Special Mention – A special mention loan or lease has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company’s credit position at some future date. Special mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – A substandard loan or lease is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans or leases classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans or leases classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance.

The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:

Commercial Real Estate – Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.

Real Estate Construction – Real estate construction loans, including land loans, are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial – These loans are generally considered to possess a moderate inherent risk of loss because they are shorter-term; typically made to relationship customers; generally underwritten to existing cash flows of operating businesses; and may be collateralized by fixed assets, inventory and/or accounts receivable. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Agricultural Real Estate and Agricultural – These loans are generally considered to possess a moderate inherent risk of loss since they are typically made to relationship customers and are secured by crop production, livestock and related real estate. These loans are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.

Leases – Equipment leases are generally considered to possess a moderate inherent risk of loss. As lessor, the Company is subject to both the credit risk of the borrower and the residual value risk of the equipment. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

Residential 1st Mortgages and Home Equity Lines and Loans – These loans are generally considered to possess a low inherent risk of loss, although this is not always true as evidenced by the correction in residential real estate values that occurred between 2007 and 2012. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.

Consumer & Other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.

At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company’s and Bank’s regulators, including the Federal Reserve Board (“FRB”), the California Department of Business Oversight (“DBO”) and the Federal Deposit Insurance Corporation (“FDIC”), as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations. See Note 8 “Recent Accounting Pronouncements” for a discussion of ASU 2016-13 and the accounting changes which will impact our allowance for credit losses in 2020.

Acquired Loans
Loans acquired through purchase or through a business combination are recorded at their fair value at the acquisition date. Credit discounts, which reflect estimates of credit losses, expected to be incurred over the life of the loan, are included in the determination of fair value; therefore, an allowance for loan losses is not recorded for loans acquired at the acquisition date.

Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures
The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in Interest Payable and Other Liabilities on the Company’s Consolidated Balance Sheet.

Premises and Equipment
Premises, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. Estimated useful lives of buildings range from 30 to 40 years, and for furniture and equipment from 3 to 7 years. Leasehold improvements are amortized over the lesser of the terms of the respective leases, or their useful lives, which are generally 5 to 10 years. Remodeling and capital improvements are capitalized while maintenance and repairs are charged directly to occupancy expense.

Other Real Estate
Other real estate, which is included in other assets, is expected to be sold and is comprised of properties no longer utilized for business operations and property acquired through foreclosure in satisfaction of indebtedness. These properties are recorded at fair value less estimated selling costs upon acquisition. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Initial losses on properties acquired through full or partial satisfaction of debt are treated as credit losses and charged to the allowance for credit losses at the time of acquisition. Subsequent declines in value from the recorded amounts, routine holding costs, and gains or losses upon disposition, if any, are included in non-interest expense as incurred.

Income Taxes
The Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current year.

The Company follows the standards set forth in the “Income Taxes” topic of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company accounts for leases with Investment Tax Credits (ITC) under the deferred method as established in ASC 740-10. ITC are viewed and accounted for as a reduction of the cost of the related assets and presented as deferred income tax on the Company’s financial statement.

The Company accounts for its interest in LIHTC using the cost method as established in ASC 323-740. As an investor, the Company obtains income tax credits and deductions from the operating losses of these tax credit entities. The income tax credits and deductions are allocated to the investors based on their ownership percentages and are recorded as a reduction of income tax expense (or an increase to income tax benefit) and a reduction of federal income taxes payable.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

At June 30, 2019 and 2018, the Company has no material uncertain tax positions and recognized no interest or penalties. The Company’s policy is to recognize interest and penalties related to income taxes in the provision for income taxes in the Consolidated Statement of Income.

Basic and Diluted Earnings Per Common Share
The Company’s common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. There are no common stock equivalent shares. Therefore, basic and diluted earnings per common share are reflected as the same amounts. See Note 6 for additional information.

Segment Reporting
The “Segment Reporting” topic of the FASB ASC requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is a holding company for a community bank, which offers a wide array of products and services to its customers. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. As a result, the Company is not organized around discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change.

Comprehensive Income
The “Comprehensive Income” topic of the FASB ASC establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial statements. Other comprehensive income refers to revenues, expenses, gains, and losses that U.S. GAAP recognize as changes in value to an enterprise but are excluded from net income. For the Company, comprehensive income includes net income and changes in fair value of its available-for-sale investment securities.

Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the consolidated financial statements.

Business Combinations And Related Matters
Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the fair value over the purchase price of net assets and other identifiable intangible assets acquired is recorded as bargain purchase gain. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the consolidated statement of operations from the date of acquisition. Acquisition-related costs, including conversion charges, are expensed as incurred. The Company applied this guidance to the acquisition of Bank of Rio Vista (BRV) which was consummated on October 10, 2018. The Company’s consolidated financial statements reflect the operations of Bank of Rio Vista beginning October 11, 2018.

Goodwill and Other Intangible Assets: Goodwill is determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill that arises from a business combination is periodically evaluated for impairment at the reporting unit level, at least annually. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Core deposit intangible (“CDI”) represents the estimated future benefit of deposits related to an acquisition and is booked separately from the related deposits and evaluated periodically for impairment. The CDI asset is amortized on a straight-line method over its estimated useful life of ten years. At June 30, 2019, the future estimated amortization expense for the CDI arising from our past acquisitions is as follows:

(in thousands) 
 
2019
   
2020
   
2021
   
2022
   
2023
   
Thereafter
   
Total
 
Core Deposit Intangible Amortization
 
$
320
   
$
626
   
$
611
   
$
593
   
$
573
   
$
2,236
   
$
4,959
 

We make a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit where goodwill is assigned is less than its carrying amount. If we conclude that it is more likely than not that the fair value is more than its carrying amount, no impairment is recorded. Goodwill is tested for impairment on an interim basis if circumstances change or an event occurs between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The qualitative assessment includes adverse events or circumstances identified that could negatively affect the reporting units’ fair value as well as positive and mitigating events. Such indicators may include, among others, a significant change in legal factors or in the general business climate, significant change in our stock price and market capitalization, unanticipated competition, and an action or assessment by a regulator. If the fair value of a reporting unit is less than its carrying amount, an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value is recognized. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

2. Investment Securities

The amortized cost, fair values, and unrealized gains and losses of the debt securities available-for-sale are as follows
(in thousands)


 
Amortized
   
Gross Unrealized
   
Fair/Book
 
June 30, 2019
 
Cost
   
Gains
   
Losses
   
Value
 
Government Agency & Government-Sponsored Entities
 
$
3,009
   
$
5
   
$
-
   
$
3,014
 
US Treasury Notes
   
174,688
     
245
     
25
     
174,908
 
US Government Agency SBA
   
13,289
     
23
     
114
     
13,198
 
Mortgage Backed Securities (1)
   
288,550
     
3,727
     
116
     
292,161
 
Other
   
4,812
     
-
     
-
     
4,812
 
Total
 
$
484,348
   
$
4,000
   
$
255
   
$
488,093
 


  Amortized    
Gross Unrealized
   
Fair/Book
 
December 31, 2018
 
Cost
   
Gains
   
Losses
   
Value
 
Government Agency & Government-Sponsored Entities
 
$
3,033
   
$
6
   
$
-
   
$
3,039
 
US Treasury Notes
   
164,672
     
-
     
158
     
164,514
 
US Government Agency SBA
   
15,601
     
6
     
160
     
15,447
 
Mortgage Backed Securities (1)
   
310,982
     
1,196
     
5,133
     
307,045
 
Other
   
5,351
     
-
     
-
     
5,351
 
Total
 
$
499,639
   
$
1,208
   
$
5,451
   
$
495,396
 


 
Amortized
   
Gross Unrealized
   
Fair/Book
 
June 30, 2018
 
Cost
   
Gains
   
Losses
   
Value
 
Government Agency & Government-Sponsored Entities
 
$
3,056
   
$
15
   
$
-
   
$
3,071
 
US Treasury Notes
   
139,689
     
2
     
416
     
139,275
 
US Government Agency SBA
   
18,583
     
8
     
188
     
18,403
 
Mortgage Backed Securities (1)
   
293,473
     
337
     
7,396
     
286,414
 
Other
   
3,011
     
-
     
-
     
3,011
 
Total
 
$
457,812
   
$
362
   
$
8,000
   
$
450,174
 

 (1) All Mortgage Backed Securities consist of securities collateralized by residential real estate and were issued by an agency or government sponsored entity of the U.S. government.

The book values, estimated fair values and unrealized gains and losses of debt securities classified as held-to-maturity are as follows (in thousands):


 
Book
   
Gross Unrealized
    Fair  
June 30, 2019
 
Value
   
Gains
   
Losses
   
Value
 
Obligations of States and Political Subdivisions
 
$
60,310
   
$
845
   
$
-
   
$
61,155
 
Total
 
$
60,310
   
$
845
   
$
-
   
$
61,155
 


 
Book
   
Gross Unrealized
    Fair  
December 31, 2018
 
Value
   
Gains
   
Losses
   
Value
 
Obligations of States and Political Subdivisions
 
$
53,566
   
$
211
   
$
39
   
$
53,738
 
Total
 
$
53,566
   
$
211
   
$
39
   
$
53,738
 


 
Book
   
Gross Unrealized
    Fair  
June 30, 2018
 
Value
   
Gains
   
Losses
   
Value
 
Obligations of States and Political Subdivisions
 
$
52,210
   
$
227
   
$
79
   
$
52,358
 
Total
 
$
52,210
   
$
227
   
$
79
   
$
52,358
 

Fair values are based on quoted market prices or dealer quotes. If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities.

The amortized cost and estimated fair values of investment securities at June 30, 2019 by contractual maturity are shown in the following table (in thousands):

   
Available-for-Sale
   
Held-to-Maturity
 
June 30, 2019
 
Amortized
Cost
   
Fair/Book
Value
   
Book
Value
   
Fair
Value
 
Within one year
 
$
166,665
   
$
166,644
   
$
562
   
$
563
 
After one year through five years
   
16,515
     
16,760
     
3,513
     
3,520
 
After five years through ten years
   
1,239
     
1,241
     
24,440
     
25,048
 
After ten years
   
11,380
     
11,287
     
31,795
     
32,024
 
     
195,799
     
195,932
     
60,310
     
61,155
 
Investment securities not due at a single maturity date:
                               
Mortgage-backed securities
   
288,549
     
292,161
     
-
     
-
 
Total
 
$
484,348
   
$
488,093
   
$
60,310
   
$
61,155
 

Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

The following tables show those investments with gross unrealized losses and their market value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at the dates indicated (in thousands):

   
Less Than 12 Months
   
12 Months or More
   
Total
 
June 30, 2019
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
                                     
Securities Available-for-Sale
                                   
US Treasury Notes
 
$
159,966
   
$
25
   
$
-
   
$
-
   
$
159,966
   
$
25
 
US Government Agency SBA
   
60
     
-
     
6,750
     
114
     
6,810
     
114
 
Mortgage Backed Securities
   
1,331
     
1
     
35,247
     
115
     
36,578
     
116
 
Total
 
$
161,357
   
$
26
   
$
41,997
   
$
229
   
$
203,354
   
$
255
 

There were no HTM investments with gross unrealized losses at June 30, 2019.

   
Less Than 12 Months
   
12 Months or More
   
Total
 
December 31, 2018
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
                                     
Securities Available-for-Sale
                                   
US Treasury Notes
 
$
124,985
   
$
7
   
$
39,529
   
$
151
   
$
164,514
   
$
158
 
US Government Agency SBA
   
3,250
     
28
     
8,618
     
132
     
11,868
     
160
 
Mortgage Backed Securities
   
52,289
     
528
     
207,271
     
4,605
     
259,560
     
5,133
 
Total
 
$
180,524
   
$
563
   
$
255,418
   
$
4,888
   
$
435,942
   
$
5,451
 
                                                 
Securities Held-to-Maturity
                                               
Obligations of States and Political Subdivisions
 
$
6,052
   
$
23
   
$
849
   
$
16
   
$
6,901
   
$
39
 
Total
 
$
6,052
   
$
23
   
$
849
   
$
16
   
$
6,901
   
$
39
 

   
Less Than 12 Months
   
12 Months or More
   
Total
 
June 30, 2018
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
                                     
Securities Available-for-Sale
                                   
US Treasury Notes
 
$
14,412
   
$
178
   
$
29,876
   
$
238
   
$
44,288
   
$
416
 
US Government Agency SBA
   
5,589
     
68
     
9,023
     
120
     
14,612
     
188
 
Mortgage Backed Securities
   
214,949
     
5,464
     
58,148
     
1,932
     
273,097
     
7,396
 
Total
 
$
234,950
   
$
5,710
   
$
97,047
   
$
2,290
   
$
331,997
   
$
8,000
 
                                                 
Securities Held-to-Maturity
                                               
Obligations of States and Political Subdivisions
 
$
8,543
   
$
79
   
$
-
   
$
-
   
$
8,543
   
$
79
 
Total
 
$
8,543
   
$
79
   
$
-
   
$
-
   
$
8,543
   
$
79
 

As of June 30, 2019, the Company held 572 investment securities of which 20 were in an unrealized loss position for less than twelve months and 84 securities were in an unrealized loss position for twelve months or more. Management periodically evaluates each investment security for other-than-temporary impairment relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities.

Securities of Government Agency and Government Sponsored Entities – At June 30, 2019, no securities of government agency and government sponsored entities were in an unrealized loss position for less than 12 months, and none were in an unrealized loss position for 12 months or more. The unrealized losses on the Company’s investments in securities of government agency and government sponsored entities were $0 at June 30, 2019, December 31, 2018 and at June 30, 2018.

U.S. Treasury Notes – At June 30, 2019, 16 U.S. Treasury Note security investments were in an unrealized loss position for less than 12 months and none were in an unrealized loss position for 12 months or more. The unrealized losses on the Company’s investment in U.S. Treasury Notes were $25,000, $158,000, and $416,000 at June 30, 2019, December 31, 2018, and June 30, 2018, respectively. The unrealized losses were caused by interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2019, December 31, 2018, and June 30, 2018.

U.S. Government SBA – At June 30, 2019, 2 U.S. Government SBA security investments were in an unrealized loss position for less than 12 months and 55 were in an unrealized loss position for 12 months or more. The unrealized losses on the Company’s investment in U.S. Government SBA securities were $114,000, $160,000, and $188,000 at June 30, 2019, December 31, 2018, and June 30, 2018, respectively. The unrealized losses were caused by interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2019, December 31, 2018, and June 30, 2018.

Mortgage Backed Securities – At June 30, 2019, 2 mortgage backed security investments were in an unrealized loss position for less than 12 months and 29 were in an unrealized loss position for 12 months or more. The unrealized losses on the Company’s investment in mortgage backed securities were $116,000, $5.1 million, and $7.4 million at June 30, 2019, December 31, 2018, and June 30, 2018, respectively. The unrealized losses on the Company’s investment in mortgage backed securities were caused by interest rate fluctuations. The contractual cash flows of these investments are guaranteed by an agency or government 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 does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2019, December 31, 2018, and June 30, 2018.

Obligations of States and Political Subdivisions  At June 30, 2019, no obligations of states and political subdivisions were in an unrealized loss position for less than 12 months, and none were in an unrealized loss position for 12 months or more. As of June 30, 2019, over ninety-nine percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or issuer level, and all of these ratings are “investment grade.” The Company monitors the status of the one percent of the portfolio that is not rated and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.

The unrealized losses on the Company’s investment in obligations of states and political subdivisions were $0, $39,000 and $79,000 at June 30, 2019, December 31, 2018 and June 30, 2018, respectively. Management believes that any unrealized losses on the Company’s investments in obligations of states and political subdivisions were primarily caused by interest rate fluctuations. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2019, December 31, 2018 and June 30, 2018.

Proceeds from sales and calls of securities were as follows:

   
Three Months
Ended June 30,
   
Six Months
Ended June 30,
 
                         
(in thousands)
 
2019
   
2018
   
2019
   
2018
 
Proceeds
 
$
1,310
   
$
31,370
   
$
1,310
   
$
31,370
 
Gains
   
-
     
8
     
-
     
8
 
Losses
   
-
     
1,338
     
-
     
1,338
 

Pledged Securities
As of June 30, 2019, securities carried at $250.9 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. This amount was $268.8 million at December 31, 2018, and $210.0 million at June 30, 2018.

3. Loans & Leases and Allowance for Credit Losses

The following tables show the allocation of the allowance for credit losses by portfolio segment and by impairment methodology at the dates indicated (in thousands):

June 30, 2019
 
Commercial Real
Estate
   
Agricultural
Real Estate
   
Real Estate
Construction
   
Residential 1st
Mortgages
   
Home Equity
Lines & Loans
   
Agricultural
   
Commercial
   
Consumer &
Other
   
Leases
   
Unallocated
   
Total
 
                                                                   
Year-To-Date Allowance for Credit Losses:
                                                             
Beginning Balance- January 1, 2019
 
$
11,609
   
$
14,092
   
$
1,249
   
$
880
   
$
2,761
   
$
8,242
   
$
11,656
   
$
494
   
$
4,022
   
$
261
   
$
55,266
 
Charge-Offs
   
-
     
-
     
-
     
-
     
-
     
-
     
(379
)
   
(39
)
   
-
     
-
     
(418
)
Recoveries
   
-
     
-
     
-
     
6
     
11
     
11
     
23
     
26
     
-
     
-
     
77
 
Provision
   
(929
)
   
480
     
448
     
(22
)
   
(29
)
   
(772
)
   
967
     
(17
)
   
(922
)
   
996
     
200
 
Ending Balance- June 30, 2019
 
$
10,680
   
$
14,572
   
$
1,697
   
$
864
   
$
2,743
   
$
7,481
   
$
12,267
   
$
464
   
$
3,100
   
$
1,257
   
$
55,125
 
Second Quarter Allowance for Credit Losses:
                                                                         
Beginning Balance- April 1, 2019
 
$
11,400
   
$
14,493
   
$
1,207
   
$
863
   
$
2,738
   
$
7,448
   
$
11,933
   
$
467
   
$
4,008
   
$
350
   
$
54,907
 
Charge-Offs
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(18
)
   
-
     
-
     
(18
)
Recoveries
   
-
     
-
     
-
     
3
     
5
     
4
     
12
     
12
     
-
     
-
     
36
 
Provision
   
(720
)
   
79
     
490
     
(2
)
   
-
     
29
     
322
     
3
     
(908
)
   
907
     
200
 
Ending Balance- June 30, 2019
 
$
10,680
   
$
14,572
   
$
1,697
   
$
864
   
$
2,743
   
$
7,481
   
$
12,267
   
$
464
   
$
3,100
   
$
1,257
   
$
55,125
 
Ending Balance Individually Evaluated for Impairment
   
201
     
-
     
-
     
122
     
12
     
99
     
158
     
6
     
-
     
-
     
598
 
Ending Balance Collectively Evaluated for Impairment
   
10,479
     
14,572
     
1,697
     
742
     
2,731
     
7,382
     
12,109
     
458
     
3,100
     
1,257
     
54,527
 
Loans & Leases:
                                                                                       
Ending Balance
 
$
813,750
   
$
605,776
   
$
93,539
   
$
257,408
   
$
40,210
   
$
284,858
   
$
382,192
   
$
17,844
   
$
103,321
   
$
-
   
$
2,598,898
 
Ending Balance Individually Evaluated for Impairment
   
4,601
     
5,702
     
-
     
2,444
     
247
     
196
     
1,579
     
6
     
-
     
-
     
14,775
 
Ending Balance Collectively Evaluated for Impairment
 
$
809,149
   
$
600,074
   
$
93,539
   
$
254,964
   
$
39,963
   
$
284,662
   
$
380,613
   
$
17,838
   
$
103,321
   
$
-
   
$
2,584,123
 

December 31, 2018
 
Commercial Real
Estate
   
Agricultural
Real Estate
   
Real Estate
Construction
   
Residential 1st
Mortgages
   
Home Equity
Lines & Loans
   
Agricultural
   
Commercial
   
Consumer &
Other
   
Leases
   
Unallocated
   
Total