0001140361-15-030383.txt : 20150807 0001140361-15-030383.hdr.sgml : 20150807 20150807122826 ACCESSION NUMBER: 0001140361-15-030383 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 20150630 FILED AS OF DATE: 20150807 DATE AS OF CHANGE: 20150807 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMERS & MERCHANTS BANCORP CENTRAL INDEX KEY: 0001085913 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 943327828 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26099 FILM NUMBER: 151036064 BUSINESS ADDRESS: STREET 1: 121 WEST PINE ST CITY: LODI STATE: CA ZIP: 95240-2184 BUSINESS PHONE: 2093672411 MAIL ADDRESS: STREET 1: FARMERS AND MERCHANTS BANCORP STREET 2: 121 WEST PINE ST CITY: LODI STATE: CA ZIP: 95240-2184 10-Q 1 form10q.htm FARMERS AND MERCHANTS BANCORP 10-Q 6-30-2015

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, 2015

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 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer  ☐
Accelerated filer  ☒
Non-accelerated filer  ☐
Smaller Reporting Company ☐
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐    No ☒
 
Number of shares of common stock of the registrant 785,782 outstanding as of July 31, 2015.
 


FARMERS & MERCHANTS BANCORP

FORM 10-Q
TABLE OF CONTENTS

 
PART I. - FINANCIAL INFORMATION
Page
       
 
Item 1 - Financial Statements
 
       
   
3
     
   
4
     
   
5
     
   
6
       
   
7
       
   
8
       
   34
     
 
  56
     
 
59
       
PART II. - OTHER INFORMATION
 
       
 
59
       
 
59
       
 
60
       
 
60
       
 
61
       
 
61
       
 
61
       
61
       
 
62
 
31(a) Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32 Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements
 
FARMERS & MERCHANTS BANCORP
 
Consolidated Balance Sheets
 
  
   
  
   
  
 
(in thousands, except shares)  
June 30,
2015
   
December 31,
2014
   
June 30,
2014
 
Assets
 
(Unaudited)
   
  
   
(Unaudited)
 
Cash and Cash Equivalents:
           
Cash and Due from Banks
 
$
45,017
   
$
42,375
   
$
44,567
 
Interest Bearing Deposits with Banks
   
46,322
     
34,750
     
3,434
 
Total Cash and Cash Equivalents
   
91,339
     
77,125
     
48,001
 
                         
Investment Securities:
                       
Available-for-Sale
   
351,424
     
366,542
     
401,732
 
Held-to-Maturity
   
67,401
     
63,863
     
70,340
 
Total Investment Securities
   
418,825
     
430,405
     
472,072
 
                         
Loans & Leases
   
1,818,642
     
1,712,244
     
1,499,709
 
Less: Allowance for Credit Losses
   
39,037
     
35,401
     
34,290
 
Loans & Leases, Net
   
1,779,605
     
1,676,843
     
1,465,419
 
                         
Premises and Equipment, Net
   
27,195
     
25,821
     
23,918
 
Bank Owned Life Insurance
   
54,933
     
53,990
     
53,037
 
Interest Receivable and Other Assets
   
84,862
     
96,367
     
90,404
 
Total Assets
 
$
2,456,759
   
$
2,360,551
   
$
2,152,851
 
                         
Liabilities
                       
Deposits:
                       
Demand
 
$
613,042
   
$
610,133
   
$
499,133
 
Interest Bearing Transaction
   
349,404
     
341,397
     
313,879
 
Savings and Money Market
   
706,121
     
644,260
     
630,194
 
Time
   
494,569
     
468,283
     
418,829
 
Total Deposits
   
2,163,136
     
2,064,073
     
1,862,035
 
                         
Federal Home Loan Bank Advances
   
-
     
-
     
12,000
 
Subordinated Debentures
   
10,310
     
10,310
     
10,310
 
Interest Payable and Other Liabilities
   
42,149
     
52,990
     
46,684
 
Total Liabilities
   
2,215,595
     
2,127,373
     
1,931,029
 
                         
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, 785,782, 784,082 and 777,882
                       
Shares Issued and Outstanding at June 30, 2015, December 31, 2014 and June 30, 2014, Respectively
   
8
     
8
     
8
 
Additional Paid-In Capital
   
78,569
     
77,804
     
75,014
 
Retained Earnings
   
160,956
     
152,833
     
144,836
 
Accumulated Other Comprehensive Income
   
1,631
     
2,533
     
1,964
 
Total Shareholders' Equity
   
241,164
     
233,178
     
221,822
 
Total Liabilities and Shareholders' Equity
 
$
2,456,759
   
$
2,360,551
   
$
2,152,851
 
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,
 
   
2015
   
2014
   
2015
   
2014
 
Interest Income
               
Interest and Fees on Loans & Leases
 
$
19,606
   
$
16,741
   
$
38,733
   
$
33,012
 
Interest on Deposits with Banks
   
65
     
41
     
123
     
105
 
Interest on Investment Securities:
                               
Taxable
   
1,582
     
2,109
     
3,168
     
4,224
 
Exempt from Federal Tax
   
503
     
567
     
1,025
     
1,164
 
Total Interest Income
   
21,756
     
19,458
     
43,049
     
38,505
 
                                 
Interest Expense
                               
Deposits
   
754
     
598
     
1,466
     
1,198
 
Subordinated Debentures
   
81
     
80
     
161
     
160
 
Total Interest Expense
   
835
     
678
     
1,627
     
1,358
 
                                 
Net Interest Income
   
20,921
     
18,780
     
41,422
     
37,147
 
Provision for Credit Losses
   
50
     
-
     
650
     
-
 
Net Interest Income After Provision for Credit Losses
   
20,871
     
18,780
     
40,772
     
37,147
 
                                 
Non-Interest Income
                               
Service Charges on Deposit Accounts
   
865
     
984
     
1,763
     
1,922
 
Net Gain on Sale of Investment Securities
   
5
     
31
     
6
     
34
 
Increase in Cash Surrender Value of Life Insurance
   
479
     
473
     
943
     
928
 
Debit Card and ATM Fees
   
804
     
790
     
1,581
     
1,525
 
Net (Loss) Gain on Deferred Compensation Investments
   
(216
)
   
1,087
     
549
     
1,530
 
Other
   
889
     
578
     
2,648
     
1,166
 
Total Non-Interest Income
   
2,826
     
3,943
     
7,490
     
7,105
 
                                 
Non-Interest Expense
                               
Salaries and Employee Benefits
   
9,566
     
9,137
     
19,665
     
17,374
 
Net (Loss) Gain on Deferred Compensation Investments
   
(216
)
   
1,087
     
549
     
1,530
 
Occupancy
   
746
     
635
     
1,385
     
1,257
 
Equipment
   
776
     
700
     
1,508
     
1,403
 
FDIC Insurance
   
297
     
262
     
581
     
514
 
Other
   
1,592
     
1,213
     
3,291
     
2,596
 
Total Non-Interest Expense
   
12,761
     
13,034
     
26,979
     
24,674
 
                                 
Income Before Income Taxes
   
10,936
     
9,689
     
21,283
     
19,578
 
Provision for Income Taxes
   
4,187
     
3,585
     
8,131
     
7,192
 
Net Income
 
$
6,749
   
$
6,104
   
$
13,152
   
$
12,386
 
Basic Earnings Per Common Share
 
$
8.59
   
$
7.84
   
$
16.74
   
$
15.92
 
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,
 
   
2015
   
2014
   
2015
   
2014
 
Net Income
 
$
6,749
   
$
6,104
   
$
13,152
   
$
12,386
 
                                 
Other Comprehensive Income (Loss)
                               
Change in Net Unrealized Gain (Loss) on Available-for-Sale Securities
   
(3,177
)
   
4,633
     
(1,550
)
   
7,681
 
Deferred Tax Benefit (Expense) Related to Unrealized Gains
   
1,335
     
(1,947
)
   
651
     
(3,229
)
Reclassification Adjustment for Realized Gains on Available-for-Sale Securities Included in Net Income
   
(5
)
   
(31
)
   
(6
)
   
(34
)
Deferred Tax Benefit Related to Reclassification Adjustment
   
4
     
12
     
3
     
14
 
Change in Net Unrealized Gain (Loss) on Available-for-Sale Securities, Net of Tax
   
(1,843
)
   
2,667
     
(902
)
   
4,432
 
                                 
Total Other Comprehensive (Loss) Income
   
(1,843
)
   
2,667
     
(902
)
   
4,432
 
                                 
Comprehensive Income
 
$
4,906
   
$
8,771
   
$
12,250
   
$
16,818
 
The accompanying notes are an integral part of these unaudited consolidated financial statements
 
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Changes in Shareholders' Equity  (Unaudited)
(in thousands except share data)
 
Common
Shares
Outstanding
   
Common
Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss), net
   
Total
Shareholders'
Equity
 
Balance, January 1, 2014
   
777,882
   
$
8
   
$
75,014
   
$
137,350
   
$
(2,468
)
 
$
209,904
 
Net Income
           
-
     
-
     
12,386
     
-
     
12,386
 
Cash Dividends Declared on
                                           
-
 
Common Stock ($6.30 per share)
           
-
     
-
     
(4,900
)
   
-
     
(4,900
)
Change in Net Unrealized Gain (Loss) on Securities Available-for-Sale, Net of Tax
                                   
4,432
     
4,432
 
Balance, June 30, 2014
   
777,882
   
$
8
   
$
75,014
   
$
144,836
   
$
1,964
   
$
221,822
 
                                                 
                                                 
Balance, January 1, 2015
   
784,082
   
$
8
   
$
77,804
   
$
152,833
   
$
2,533
   
$
233,178
 
Net Income
           
-
     
-
     
13,152
     
-
     
13,152
 
Cash Dividends Declared on
                                           
-
 
Common Stock ($6.40 per share)
           
-
     
-
     
(5,029
)
   
-
     
(5,029
)
Issuance of Common Stock
   
1,700
     
-
     
765
     
-
     
-
     
765
 
Change in Net Unrealized Gain (Loss) on Securities Available-for-Sale, Net of Tax
                                   
(902
)
   
(902
)
Balance, June 30, 2015
   
785,782
   
$
8
   
$
78,569
   
$
160,956
   
$
1,631
   
$
241,164
 
The accompanying notes are an integral part of these unaudited consolidated financial statements
 
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)  
Six Months Ended
 
 
 
June 30,
2015
   
June 30,
2014
 
Operating Activities:
       
Net Income
 
$
13,152
   
$
12,386
 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
               
Provision for Credit Losses
   
650
     
-
 
Depreciation and Amortization
   
751
     
666
 
Net Amortization of Investment Security Premiums & Discounts
   
778
     
808
 
Net Gain on Sale of Investment Securities
   
(6
)
   
(34
)
Net Gain on Sale of Property & Equipment
   
-
     
(8
)
Net Change in Operating Assets & Liabilities:
               
Net Decrease (Increase) in Interest Receivable and Other Assets
   
526
     
(4,105
)
Net Increase (Decrease) in Interest Payable and Other Liabilities
   
427
     
(1,484
)
Net Cash Provided by Operating Activities
   
16,278
     
8,229
 
Investing Activities:
               
Purchase of Investment Securities Available-for-Sale
   
(80,210
)
   
(25,841
)
Proceeds from Sold, Matured or Called Securities Available-for-Sale
   
93,217
     
35,466
 
Purchase of Investment Securities Held-to-Maturity
   
(8,753
)
   
(12,194
)
Proceeds from Matured or Called Securities Held-to-Maturity
   
5,185
     
10,366
 
Net Loans & Leases Paid, Originated or Acquired
   
(106,444
)
   
(111,616
)
Principal Collected on Loans & Leases Previously Charged Off
   
3,032
     
159
 
Additions to Premises and Equipment
   
(2,125
)
   
(1,712
)
Proceeds from Sale of Property & Equipment
   
-
     
23
 
Net Cash Used by Investing Activities
   
(96,098
)
   
(105,349
)
Financing Activities:
               
Net Increase in Deposits
   
99,063
     
54,344
 
Net Changes in Other Borrowings
   
-
     
12,000
 
Cash Dividends
   
(5,029
)
   
(4,900
)
Net Cash Provided by Financing Activities
   
94,034
     
61,444
 
Increase (Decrease) in Cash and Cash Equivalents
   
14,214
     
(35,676
)
Cash and Cash Equivalents at Beginning of Period
   
77,125
     
83,677
 
Cash and Cash Equivalents at End of Period
 
$
91,339
   
$
48,001
 
Supplementary Data
               
Cash Payments Made for Income Taxes
 
$
3,055
   
$
7,500
 
Issuance of Common Stock to the Bank’s Non-Qualified Retirement Plans
 
$
765
   
$
-
 
Interest Paid
 
$
1,449
   
$
1,361
 
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 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. FMCB Statutory Trust I is a non-consolidated subsidiary per Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”) and was formed for the sole purpose of issuing Trust Preferred Securities and related subordinated debentures.

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.

These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The results of operations for the three-month and six-month periods ended June 30, 2015 may not necessarily be indicative of future operating results.

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. Actual results could differ from these estimates.

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. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the periods presented.
 
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 and Securities Purchased Under Agreements to Resell. For these instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities
Investment securities are 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.

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 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 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 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. For equity securities, the entire amount of impairment is recognized through earnings.

In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

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 or 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's 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 Bank (“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.

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.

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 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.

Interest expense and penalties associated with unrecognized tax benefits, if any, are included in the provision for income taxes in the Unaudited Consolidated Statements of Income.

Dividends and Basic 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, there is no presentation of diluted earnings per common share. See Note 6.

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. Therefore, the Company reports one segment.

Derivative Instruments and Hedging Activities
The “Derivatives and Hedging” topic of the FASB ASC establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. Changes in the fair value of those derivatives are accounted for depending on the intended use of the derivative and the resulting designation under specified criteria. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, designed to minimize interest rate risk, the effective portions of the change in the fair value of the derivative are recorded in other comprehensive income (loss), net of related income taxes. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.
 
From time to time, the Company utilizes derivative financial instruments such as interest rate caps, floors, swaps, and collars. These instruments are purchased and/or sold to reduce the Company’s exposure to changing interest rates. The Company marks to market the value of its derivative financial instruments and reflects gain or loss in earnings in the period of change or in other comprehensive income (loss). The Company was not utilizing any derivative instruments as of or for the periods ended June 30, 2015, December 31, 2014 or June 30, 3014.
 
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 financial statements. Other comprehensive income (loss) 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 financial statements.

2. Investment Securities

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

   
Amortized
Cost
   
Gross Unrealized
   
Fair/Book
Value
 
June 30, 2015
     
Gains
   
Losses
     
Government Agency & Government-Sponsored Entities
 
$
11,063
   
$
58
   
$
-
   
$
11,121
 
US Treasury Notes
   
80,212
     
85
     
59
     
80,238
 
Mortgage Backed Securities (1)
   
256,849
     
3,812
     
1,081
     
259,580
 
Other
   
485
     
-
     
-
     
485
 
Total
 
$
348,609
   
$
3,955
   
$
1,140
   
$
351,424
 

   
Amortized
Cost
   
Gross Unrealized
   
Fair/Book
Value
 
December 31, 2014
     
Gains
   
Losses
     
Government Agency & Government-Sponsored Entities
 
$
78,051
   
$
61
   
$
3
   
$
78,109
 
Mortgage Backed Securities (1)
   
283,636
     
4,969
     
657
     
287,948
 
Other
   
485
     
-
     
-
     
485
 
Total
 
$
362,172
   
$
5,030
   
$
660
   
$
366,542
 

   
Amortized
Cost
   
Gross Unrealized
   
Fair/Book
Value
 
June 30, 2014
     
Gains
   
Losses
     
Government Agency & Government-Sponsored Entities
 
$
18,230
   
$
194
   
$
-
   
$
18,424
 
Mortgage Backed Securities (1)
   
323,518
     
5,688
     
2,871
     
326,335
 
Corporate Securities
   
54,283
     
393
     
15
     
54,661
 
Other
   
2,312
     
-
     
-
     
2,312
 
Total
 
$
398,343
   
$
6,275
   
$
2,886
   
$
401,732
 

(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 investments classified as held-to-maturity are as follows (in thousands):

   
Book
Value
   
Gross Unrealized
   
Fair
Value
 
June 30, 2015
     
Gains
   
Losses
     
Obligations of States and Political Subdivisions
 
$
65,270
   
$
278
   
$
213
   
$
65,335
 
Other
   
2,131
     
-
     
-
     
2,131
 
Total
 
$
67,401
   
$
278
   
$
213
   
$
67,466
 

   
Book
Value
   
Gross Unrealized
   
Fair
Value
 
December 31, 2014
     
Gains
   
Losses
     
Obligations of States and Political Subdivisions
 
$
61,716
   
$
782
   
$
10
   
$
62,488
 
Other
   
2,147
     
-
     
-
     
2,147
 
Total
 
$
63,863
   
$
782
   
$
10
   
$
64,635
 

   
Book
Value
   
Gross Unrealized
   
Fair
Value
 
June 30, 2014
     
Gains
   
Losses
     
Obligations of States and Political Subdivisions
 
$
67,866
   
$
683
   
$
90
   
$
68,459
 
Other
   
2,474
     
-
     
-
     
2,474
 
Total
 
$
70,340
   
$
683
   
$
90
   
$
70,933
 

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.

In June 2014, the Company sold $375,000 of municipal bonds from a single issuer. The Company took this action under the provisions of ASC 320-10-25-6(a), which allow for the sale of HTM securities where there is “evidence of a significant deterioration in the issuer’s creditworthiness.” The resulting income statement impact was not material.

The amortized cost and estimated fair values of investment securities at June 30, 2015 by contractual maturity are shown in the following table (in thousands):

   
Available-for-Sale
   
Held-to-Maturity
 
June 30, 2015
 
Amortized
Cost
   
Fair/Book
Value
   
Book
Value
   
Fair
Value
 
Within one year
 
$
10,482
   
$
10,488
   
$
2,731
   
$
2,733
 
After one year through five years
   
71,151
     
71,242
     
18,364
     
18,462
 
After five years through ten years
   
10,127
     
10,114
     
9,097
     
9,166
 
After ten years
   
-
     
-
     
37,209
     
37,105
 
     
91,760
     
91,844
     
67,401
     
67,466
 
                                 
Investment securities not due at a single maturity date:
                               
Mortgage Backed Securities
   
256,849
     
259,580
     
-
     
-
 
                                 
Total
 
$
348,609
   
$
351,424
   
$
67,401
   
$
67,466
 

Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without 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, 2015
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
                         
Securities Available-for-Sale
                       
US Treasury Notes
 
$
35,117
   
$
59
   
$
-
   
$
-
   
$
35,117
   
$
59
 
Mortgage Backed Securities
   
42,839
     
942
     
7,796
     
139
     
50,635
     
1,081
 
Total
 
$
77,956
   
$
1,001
   
$
7,796
   
$
139
   
$
85,752
   
$
1,140
 
                                                 
Securities Held-to-Maturity
                                               
Obligations of States and Political Subdivisions
 
$
16,083
   
$
213
   
$
-
   
$
-
   
$
16,083
   
$
213
 
Total
 
$
16,083
   
$
213
   
$
-
   
$
-
   
$
16,083
   
$
213
 

   
Less Than 12 Months
   
12 Months or More
   
Total
 
December 31, 2014
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
                         
Securities Available-for-Sale
                       
Government Agency & Government-Sponsored Entities
 
$
66,980
   
$
3
   
$
-
   
$
-
   
$
66,980
   
$
3
 
Mortgage Backed Securities
   
14,487
     
151
     
33,574
     
506
     
48,061
     
657
 
Total
 
$
81,467
   
$
154
   
$
33,574
   
$
506
   
$
115,041
   
$
660
 
                                                 
Securities Held-to-Maturity
                                               
Obligations of States and Political Subdivisions
 
$
849
   
$
5
   
$
876
   
$
5
   
$
1,725
   
$
10
 
Total
 
$
849
   
$
5
   
$
876
   
$
5
   
$
1,725
   
$
10
 

   
Less Than 12 Months
   
12 Months or More
   
Total
 
June 30, 2014
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
                         
Securities Available-for-Sale
                       
Mortgage Backed Securities
 
$
-
   
$
-
   
$
92,992
   
$
2,871
     
92,992
   
$
2,871
 
Corporate Securities
   
8,390
     
4
     
2,738
     
11
     
11,128
     
15
 
Total
 
$
8,390
   
$
4
   
$
95,730
   
$
2,882
   
$
104,120
   
$
2,886
 
                                                 
Securities Held-to-Maturity
                                               
Obligations of States and Political Subdivisions
 
$
4,740
   
$
32
   
$
5,137
   
$
58
   
$
9,877
   
$
90
 
Total
 
$
4,740
   
$
32
   
$
5,137
   
$
58
   
$
9,877
   
$
90
 

As of June 30, 2015, the Company held 249 investment securities of which 51 were in a loss position for less than twelve months and 1 security was in a 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 – There were no unrealized losses on the Company’s investment in securities of government agency and government sponsored entities at June 30, 2015 and June 30, 2014. The unrealized losses on the Company’s investment in securities of government agency and government sponsored entities at December 31, 2014 were $3,000. The unrealized losses were caused by interest rate fluctuations. Repayment of these investments is 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 did not consider these investments to be other-than-temporarily impaired at December 31, 2014.
 
Mortgage Backed Securities – At June 30, 2015, seven mortgage backed security investments were in a loss position for less than 12 months and one was in a loss position for 12 months or more. The unrealized losses on the Company's investment in mortgage backed securities were $1.08 million, $657,000, and $2.9 million at June 30, 2015, December 31, 2014, and June 30, 2014, 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, 2015, December 31, 2014 and June 30, 2014, respectively.

Obligations of States and Political Subdivisions - At June 30, 2015, forty obligations of states and political subdivisions were in a loss position for less than 12 months. None were in a loss position for 12 months or more.  As of June 30, 2015, over ninety-eight 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 two 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 $213,000, $10,000, and $90,000 at June 30, 2015, December 31, 2014 and June 30, 2014, 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, 2015, December 31, 2014 and June 30, 2014, respectively.

Corporate Securities - The Company did not hold any corporate securities at June 30, 2015 or December 31, 2014. The unrealized losses on the Company’s investment in corporate securities at June 30, 2014 were $15,000. Changes in the prices of corporate securities are primarily influenced by: (1) changes in market interest rates; (2) changes in perceived credit risk in the general economy or in particular industries; (3) changes in the perceived credit risk of a particular company; and (4) day to day trading supply, demand and liquidity.

US Treasury Notes – At June 30, 2015, four US treasury notes were in a loss position for less than 12 months. None were in a loss position for 12 months or more. The unrealized losses on the Company's investments in US treasury notes were $59,000 at June 30, 2015. 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, 2015. The Company did not hold any US treasury notes at December 31, 2014 or June 30, 2014.
 
Proceeds from sales and calls of securities were as follows:
 
 
Three Months
Ended June 30,
   
Six Months
Ended June 30,
 
(in thousands)
 
2015
   
2014
   
2015
   
2014
 
Proceeds
 
$
4,060
   
$
6,969
   
$
4,535
   
$
9,917
 
Gains
   
5
     
31
     
6
     
34
 
Losses
   
-
     
-
     
-
     
-
 

Pledged Securities
As of June 30, 2015, securities carried at $189.5 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 $178.8 million at December 31, 2014, and $329.0 million at June 30, 2014.

The decrease in pledged securities since June 30, 2014 was due to the Company’s use of a $165 million standby Letter of Credit (“LC”) issued by the FHLB as collateral for Public Deposits. The LC was issued December 4, 2014, and matures December 2, 2016, with a maintenance fee of 10 basis points per annum.

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, 2015
 
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, 2015
 
$
7,842
   
$
4,185
   
$
1,669
   
$
1,022
   
$
2,426
   
$
6,104
   
$
8,195
   
$
218
   
$
2,211
   
$
1,529
   
$
35,401
 
Charge-Offs
   
-
     
-
     
-
     
-
     
-
     
-
     
(12
)
   
(34
)
   
-
     
-
     
(46
)
Recoveries
   
2,939
     
-
     
-
     
2
     
47
     
3
     
4
     
37
     
-
     
-
     
3,032
 
Provision
   
(2,190
)
   
3,087
     
508
     
(293
)
   
(400
)
   
(1,061
)
   
691
     
(4
)
   
321
     
(9
)
   
650
 
Ending Balance- June 30, 2015
 
$
8,591
   
$
7,272
   
$
2,177
   
$
731
   
$
2,073
   
$
5,046
   
$
8,878
   
$
217
   
$
2,532
   
$
1,520
   
$
39,037
 
Second Quarter Allowance for Credit Losses:
                                                                         
Beginning Balance- April 1, 2015
 
$
7,954
   
$
6,901
   
$
1,916
   
$
673
   
$
2,096
   
$
4,602
   
$
8,941
   
$
212
   
$
2,499
   
$
3,146
   
$
38,940
 
Charge-Offs
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(17
)
   
-
     
-
     
(17
)
Recoveries
   
1
     
-
     
-
     
2
     
42
     
2
     
2
     
15
     
-
     
-
     
64
 
Provision
   
636
     
371
     
261
     
56
     
(65
)
   
442
     
(65
)
   
7
     
33
     
(1,626
)
   
50
 
Ending Balance- June 30, 2015      
 
$
8,591
   
$
7,272
   
$
2,177
   
$
731
   
$
2,073
   
$
5,046
   
$
8,878
   
$
217
   
$
2,532
   
$
1,520
   
$
39,037
 
Ending Balance Individually Evaluated for Impairment
   
61
     
-
     
-
     
71
     
49
     
129
     
887
     
34
     
-
     
-
     
1,231
 
Ending Balance Collectively Evaluated for Impairment
   
8,530
     
7,272
     
2,177
     
660
     
2,024
     
4,917
     
7,991
     
183
     
2,532
     
1,520
     
37,806
 
Loans & Leases:
                                                                                       
Ending Balance
 
$
570,173
   
$
373,324
   
$
116,983
   
$
189,039
   
$
31,327
   
$
225,795
   
$
256,386
   
$
4,984
   
$
50,631
   
$
-
   
$
1,818,642
 
Ending Balance Individually Evaluated for Impairment
   
4,163
     
-
     
4,335
     
2,055
     
1,541
     
454
     
4,819
     
40
     
-
     
-
     
17,407
 
Ending Balance Collectively Evaluated for Impairment
 
$
566,010
   
$
373,324
   
$
112,648
   
$
186,984
   
$
29,786
   
$
225,341
   
$
251,567
   
$
4,944
   
$
50,631
   
$
-
   
$
1,801,235
 
 
December 31, 2014
 
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, 2014
 
$
5,178
   
$
3,576
   
$
654
   
$
1,108
   
$
2,767
   
$
12,205
   
$
5,697
   
$
176
   
$
639
   
$
2,274
   
$
34,274
 
Charge-Offs
   
-
     
-
     
-
     
(73
)
   
(70
)
   
-
     
(1
)
   
(132
)
   
-
     
-
     
(276
)
Recoveries
   
11
     
-
     
-
     
-
     
58
     
8
     
86
     
65
     
-
     
-
     
228
 
Provision
   
2,653
     
609
     
1,015
     
(13
)
   
(329
)
   
(6,109
)
   
2,413
     
109
     
1,572
     
(745
)
   
1,175
 
Ending Balance- December 31, 2014
 
$
7,842
   
$
4,185
   
$
1,669
   
$
1,022
   
$
2,426
   
$
6,104
   
$
8,195
   
$
218
   
$
2,211
   
$
1,529
   
$
35,401
 
Ending Balance Individually Evaluated for Impairment
   
377
     
-
     
-
     
422
     
329
     
114
     
914
     
41
     
-
     
-
     
2,197
 
Ending Balance Collectively Evaluated for Impairment          
   
7,465
     
4,185
     
1,669
     
600
     
2,097
     
5,990
     
7,281
     
177
     
2,211
     
1,529
     
33,204
 
Loans & Leases:
                                                                                       
Ending Balance
 
$
491,903
   
$
357,207
   
$
96,519
   
$
171,880
   
$
33,017
   
$
281,963
   
$
230,819
   
$
4,719
   
$
44,217
   
$
-
   
$
1,712,244
 
Ending Balance Individually Evaluated for Impairment
   
20,066
     
-
     
4,386
     
2,108
     
1,643
     
461
     
4,874
     
46
     
-
     
-
     
33,584
 
Ending Balance Collectively Evaluated for Impairment
 
$
471,837
   
$
357,207
   
$
92,133
   
$
169,772
   
$
31,374
   
$
281,502
   
$
225,945
   
$
4,673
   
$
44,217
   
$
-
   
$
1,678,660
 

June 30, 2014
 
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, 2014
 
$
5,178
   
$
3,576
   
$
654
   
$
1,108
   
$
2,767
   
$
12,205
   
$
5,697
   
$
176
   
$
639
   
$
2,274
   
$
34,274
 
Charge-Offs
   
-
     
-
     
-
     
(33
)
   
(65
)
   
-
     
-
     
(45
)
   
-
     
-
     
(143
)
Recoveries
   
-
     
-
     
-
     
-
     
51
     
2
     
77
     
29
     
-
     
-
     
159
 
Provision
   
1,813
     
101
     
636
     
19
     
(16
)
   
(3,916
)
   
1,603
     
33
     
469
     
(742
)
   
-
 
Ending Balance- June 30, 2014
 
$
6,991
   
$
3,677
   
$
1,290
   
$
1,094
   
$
2,737
   
$
8,291
   
$
7,377
   
$
193
   
$
1,108
   
$
1,532
   
$
34,290
 
Second Quarter Allowance for Credit Losses:
                                                                         
Beginning Balance- April 1, 2014
 
$
6,426
   
$
3,387
   
$
1,077
   
$
1,100
   
$
2,648
   
$
9,601
   
$
6,426
   
$
171
   
$
921
   
$
2,520
   
$
34,277
 
Charge-Offs
   
-
     
-
     
-
     
(30
)
   
(65
)
   
-
     
-
     
(18
)
   
-
     
-
     
(113
)
Recoveries
   
-
     
-
     
-
     
-
     
39
     
1
     
72
     
14
     
-
     
-
     
126
 
Provision
   
565
     
290
     
213
     
24
     
115
     
(1,311
)
   
879
     
26
     
187
     
(988
)
   
-
 
Ending Balance- June 30, 2014
 
$
6,991
   
$
3,677
   
$
1,290
   
$
1,094
   
$
2,737
   
$
8,291
   
$
7,377
   
$
193
   
$
1,108
   
$
1,532
   
$
34,290
 
Ending Balance Individually Evaluated for Impairment
   
218
     
-
     
241
     
329
     
315
     
118
     
807
     
45
     
-
     
-
     
2,073
 
Ending Balance Collectively Evaluated for Impairment          
   
6,773
     
3,677
     
1,049
     
765
     
2,422
     
8,173
     
6,570
     
148
     
1,108
     
1,532
     
32,217
 
Loans & Leases:
                                                                                       
Ending Balance
 
$
428,529
   
$
358,933
   
$
81,647
   
$
160,418
   
$
34,453
   
$
228,745
   
$
179,948