0001140361-16-085393.txt : 20161108 0001140361-16-085393.hdr.sgml : 20161108 20161108153336 ACCESSION NUMBER: 0001140361-16-085393 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 57 CONFORMED PERIOD OF REPORT: 20160930 FILED AS OF DATE: 20161108 DATE AS OF CHANGE: 20161108 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: 161981138 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 9-30-2016

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 September 30, 2016

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 792,387 outstanding as of October 31, 2016.
 


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
       
 
57
       
 
59
     
PART II. - OTHER INFORMATION
 
       
 
60
       
 
60
       
 
61
       
 
61
       
 
61
       
 
61
       
 
61
       
 
62
       
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)
                 
   
Sept. 30,
2016
   
December 31,
2015
   
Sept. 30,
2015
 
Assets
 
(Unaudited)
         
(Unaudited)
 
Cash and Cash Equivalents:
                 
Cash and Due from Banks
 
$
56,376
   
$
49,913
   
$
41,595
 
Interest Bearing Deposits with Banks
   
42,927
     
9,533
     
8,705
 
Total Cash and Cash Equivalents
   
99,303
     
59,446
     
50,300
 
                         
Investment Securities:
                       
Available-for-Sale
   
358,857
     
369,137
     
344,728
 
Held-to-Maturity
   
58,905
     
61,396
     
66,257
 
Total Investment Securities
   
417,762
     
430,533
     
410,985
 
                         
Loans & Leases
   
2,079,670
     
1,996,359
     
1,910,270
 
Less: Allowance for Credit Losses
   
44,446
     
41,523
     
39,090
 
Loans & Leases, Net
   
2,035,224
     
1,954,836
     
1,871,180
 
                         
Premises and Equipment, Net
   
26,058
     
26,575
     
26,856
 
Bank Owned Life Insurance
   
57,320
     
55,898
     
55,418
 
Interest Receivable and Other Assets
   
91,899
     
88,057
     
85,332
 
Total Assets
 
$
2,727,566
   
$
2,615,345
   
$
2,500,071
 
                         
Liabilities
                       
Deposits:
                       
Demand
 
$
672,351
   
$
711,029
   
$
603,430
 
Interest Bearing Transaction
   
433,220
     
377,594
     
373,193
 
Savings and Money Market
   
702,441
     
707,885
     
672,052
 
Time
   
547,625
     
481,024
     
483,967
 
Total Deposits
   
2,355,637
     
2,277,532
     
2,132,642
 
                         
Federal Home Loan Bank Advances
   
-
     
-
     
5,500
 
Subordinated Debentures
   
10,310
     
10,310
     
10,310
 
Interest Payable and Other Liabilities
   
89,221
     
75,668
     
100,495
 
Total Liabilities
   
2,455,168
     
2,363,510
     
2,248,947
 
                         
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, 792,387, 790,787 and 788,982 Shares Issued and Outstanding at September 30, 2016, December 31, 2015 and September 30, 2015, Respectively
   
8
     
8
     
8
 
Additional Paid-In Capital
   
82,004
     
81,164
     
80,217
 
Retained Earnings
   
186,920
     
170,068
     
167,996
 
Accumulated Other Comprehensive Income
   
3,466
     
595
     
2,903
 
Total Shareholders' Equity
   
272,398
     
251,835
     
251,124
 
Total Liabilities and Shareholders' Equity
 
$
2,727,566
   
$
2,615,345
   
$
2,500,071
 

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 September 30,
   
Nine Months
Ended September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Interest Income
                       
Interest and Fees on Loans & Leases
 
$
23,523
   
$
20,915
   
$
67,909
   
$
59,648
 
Interest on Deposits with Banks
   
51
     
36
     
133
     
159
 
Interest on Investment Securities:
                               
Taxable
   
1,210
     
1,574
     
4,113
     
4,742
 
Exempt from Federal Tax
   
478
     
513
     
1,447
     
1,538
 
Total Interest Income
   
25,262
     
23,038
     
73,602
     
66,087
 
                                 
Interest Expense
                               
Deposits
   
1,004
     
777
     
2,691
     
2,243
 
Borrowed Funds
   
14
     
-
     
18
     
-
 
Subordinated Debentures
   
92
     
83
     
272
     
244
 
Total Interest Expense
   
1,110
     
860
     
2,981
     
2,487
 
                                 
Net Interest Income
   
24,152
     
22,178
     
70,621
     
63,600
 
Provision for Credit Losses
   
250
     
-
     
2,850
     
650
 
Net Interest Income After Provision for Credit Losses
   
23,902
     
22,178
     
67,771
     
62,950
 
                                 
Non-Interest Income
                               
Service Charges on Deposit Accounts
   
877
     
840
     
2,517
     
2,603
 
Net Gain (Loss) on Sale of Investment Securities
   
3
     
266
     
(286
)
   
272
 
Increase in Cash Surrender Value of Life Insurance
   
474
     
485
     
1,422
     
1,428
 
Debit Card and ATM Fees
   
847
     
808
     
2,540
     
2,389
 
Net Gain on Deferred Compensation Investments
   
1,630
     
224
     
1,969
     
773
 
Other
   
722
     
1,087
     
1,987
     
3,735
 
Total Non-Interest Income
   
4,553
     
3,710
     
10,149
     
11,200
 
                                 
Non-Interest Expense
                               
Salaries and Employee Benefits
   
10,272
     
9,980
     
32,061
     
29,645
 
Net Gain on Deferred Compensation Investments
   
1,630
     
224
     
1,969
     
773
 
Occupancy
   
786
     
757
     
2,240
     
2,142
 
Equipment
   
853
     
786
     
2,552
     
2,294
 
Marketing
   
267
     
665
     
929
     
987
 
FDIC Insurance
   
320
     
302
     
960
     
883
 
Gain on Sale of ORE
   
-
     
-
     
(5,941
)
   
(299
)
Other
   
2,286
     
1,774
     
8,400
     
5,042
 
Total Non-Interest Expense
   
16,414
     
14,488
     
43,170
     
41,467
 
                                 
Income Before Income Taxes
   
12,041
     
11,400
     
34,750
     
32,683
 
Provision for Income Taxes
   
4,503
     
4,360
     
12,708
     
12,491
 
Net Income
 
$
7,538
   
$
7,040
   
$
22,042
   
$
20,192
 
Basic Earnings Per Common Share
 
$
9.51
   
$
8.96
   
$
27.82
   
$
25.70
 

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 September 30,
   
Nine Months
Ended September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Net Income
 
$
7,538
   
$
7,040
   
$
22,042
   
$
20,192
 
                                 
Other Comprehensive Income
                               
Change in Net Unrealized (Loss) Gain on Available-for-Sale Securities
   
(709
)
   
2,460
     
4,667
     
910
 
Deferred Tax Expense (Benefit) Related to Unrealized Gains
   
299
     
(1,033
)
   
(1,962
)
   
(382
)
Reclassification Adjustment for Realized (Gain) Loss on Available-for-Sale Securities Included in Net Income
   
(3
)
   
(266
)
   
286
     
(272
)
Deferred Tax  (Benefit) Expense Related to Reclassification Adjustment
   
(409
)
   
111
     
(120
)
   
114
 
Change in Net Unrealized Gain on Available-for-Sale Securities, Net of Tax
   
(822
)
   
1,272
     
2,871
     
370
 
                                 
Total Other Comprehensive Income
   
(822
)
   
1,272
     
2,871
     
370
 
                                 
Comprehensive Income
 
$
6,716
   
$
8,312
   
$
24,913
   
$
20,562
 

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, 2015
   
784,082
   
$
8
   
$
77,804
   
$
152,833
   
$
2,533
   
$
233,178
 
Net Income
           
-
     
-
     
20,192
     
-
     
20,192
 
Cash Dividends Declared on Common Stock ($6.40 per share)
           
-
     
-
     
(5,029
)
   
-
     
(5,029
)
Issuance of Common Stock
   
4,900
     
-
     
2,413
     
-
     
-
     
2,413
 
Change in Net Unrealized Gain on Securities Available-for-Sale, Net of Tax
           
-
     
-
     
-
     
370
     
370
 
Balance, September 30, 2015
   
788,982
   
$
8
   
$
80,217
   
$
167,996
   
$
2,903
   
$
251,124
 
                                                 
Balance, January 1, 2016
   
790,787
   
$
8
   
$
81,164
   
$
170,068
   
$
595
   
$
251,835
 
Net Income
           
-
     
-
     
22,042
     
-
     
22,042
 
Cash Dividends Declared on Common Stock ($6.55 per share)
           
-
     
-
     
(5,190
)
   
-
     
(5,190
)
Issuance of Common Stock
   
1,600
     
-
     
840
     
-
     
-
     
840
 
Change in Net Unrealized Gain on Securities Available-for-Sale, Net of Tax
           
-
     
-
     
-
     
2,871
     
2,871
 
Balance, September 30, 2016
   
792,387
   
$
8
   
$
82,004
   
$
186,920
   
$
3,466
   
$
272,398
 

The accompanying notes are an integral part of these unaudited consolidated financial statements
 
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Cash Flows (Unaudited)
   
Nine Months
Ended September 30,
 
(in thousands)
 
2016
   
2015
 
Operating Activities:
           
Net Income
 
$
22,042
   
$
20,192
 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
               
Provision for Credit Losses
   
2,850
     
650
 
Depreciation and Amortization
   
1,425
     
1,184
 
Net Amortization of Investment Security Premiums & Discounts
   
1,104
     
1,163
 
Net Loss (Gain) on Sale of Investment Securities
   
286
     
(272
)
Net Loss (Gain) on Sale of Property & Equipment
   
4
     
(392
)
Net Gain on Sale of Other Real Estate
   
(5,941
)
   
(299
)
Net Change in Operating Assets & Liabilities:
               
Net (Increase) Decrease  in Interest Receivable and Other Assets
   
(3,821
)
   
2,898
 
Net Decrease in Interest Payable and Other Liabilities
   
2,890
     
56,826
 
Net Cash Provided by Operating Activities
   
20,839
     
81,950
 
Investing Activities:
               
Purchase of Investment Securities Available-for-Sale
   
(288,874
)
   
(134,407
)
Proceeds from Sold, Matured or Called Securities Available-for-Sale
   
314,726
     
156,214
 
Purchase of Investment Securities Held-to-Maturity
   
(1,807
)
   
(12,015
)
Proceeds from Matured or Called Securities Held-to-Maturity
   
4,260
     
9,574
 
Net Loans & Leases Paid, Originated or Acquired
   
(83,440
)
   
(198,093
)
Principal Collected on Loans & Leases Previously Charged Off
   
202
     
3,106
 
Additions to Premises and Equipment
   
(912
)
   
(2,498
)
Purchase of Other Investments
   
(6,334
)
   
(1,523
)
Proceeds from Sale of Property & Equipment
   
-
     
671
 
Proceeds from Sale of Other Real Estate
   
8,282
     
1,156
 
Net Cash Used by Investing Activities
   
(53,897
)
   
(177,815
)
Financing Activities:
               
Net Increase in Deposits
   
78,105
     
68,569
 
Net Changes in Other Borrowings
   
-
     
5,500
 
Cash Dividends
   
(5,190
)
   
(5,029
)
Net Cash Provided by Financing Activities
   
72,915
     
69,040
 
Increase (Decrease) in Cash and Cash Equivalents
   
39,857
     
(26,825
)
Cash and Cash Equivalents at Beginning of Period
   
59,446
     
77,125
 
Cash and Cash Equivalents at End of Period
 
$
99,303
   
$
50,300
 
Supplementary Data
               
Loans Transferred to Foreclosed Assets (ORE)
 
$
538
   
$
-
 
Cash Payments Made for Income Taxes
 
$
9,591
   
$
5,175
 
Issuance of Common Stock to the Bank’s Non-Qualified Retirement Plans
 
$
840
   
$
2,413
 
Interest Paid
 
$
2,813
   
$
2,275
 
 
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, 2015. The results of operations for the three-month and nine-month periods ended September 30, 2016 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-period 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.

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.

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 on the Company’s financial statement.

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 would be reflected as a liability for unrecognized tax benefits in the 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. As of September 30, 2016 and 2015, the Company had no interest expense or penalties associated with unrecognized tax benefits.

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 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. Therefore, the Company reports one segment.

Low Income Housing Tax Credit Investments (LIHTC)
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.
 
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
   
Gross Unrealized
   
Fair/Book
 
September 30, 2016
 
Cost
   
Gains
   
Losses
   
Value
 
Government Agency & Government-Sponsored Entities
 
$
83,129
   
$
165
   
$
1
   
$
83,293
 
US Treasury Notes
   
85,470
     
211
     
-
     
85,681
 
Mortgage Backed Securities (1)
   
183,268
     
5,605
     
-
     
188,873
 
Other
   
1,010
     
-
     
-
     
1,010
 
Total
 
$
352,877
   
$
5,981
   
$
1
   
$
358,857
 
                                 
   
Amortized
   
Gross Unrealized
   
Fair/Book
 
December 31, 2015
 
Cost
   
Gains
   
Losses
   
Value
 
Government Agency & Government-Sponsored Entities
 
$
33,536
   
$
134
   
$
419
   
$
33,251
 
US Treasury Notes
   
73,048
     
-
     
164
     
72,884
 
Mortgage Backed Securities (1)
   
261,016
     
2,708
     
1,231
     
262,493
 
Other
   
509
     
-
     
-
     
509
 
Total
 
$
368,109
   
$
2,842
   
$
1,814
   
$
369,137
 
                                 
   
Amortized
   
Gross Unrealized
   
Fair/Book
 
September 30, 2015
 
Cost
   
Gains
   
Losses
   
Value
 
Government Agency & Government-Sponsored Entities
 
$
41,448
   
$
65
   
$
-
   
$
41,513
 
US Treasury Notes
   
30,069
     
231
     
-
     
30,300
 
Mortgage Backed Securities (1)
   
251,483
     
5,024
     
312
     
256,195
 
Corporate Securities
   
16,235
     
-
     
-
     
16,235
 
Other
   
485
     
-
     
-
     
485
 
Total
 
$
339,720
   
$
5,320
   
$
312
   
$
344,728
 

(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
   
Gross Unrealized
   
Fair
 
September 30, 2016
 
Value
   
Gains
   
Losses
   
Value
 
Obligations of States and Political Subdivisions
 
$
58,905
   
$
1,549
   
$
-
   
$
60,454
 
Total
 
$
58,905
   
$
1,549
   
$
-
   
$
60,454
 
                                 
   
Book
   
Gross Unrealized
   
Fair
 
December 31, 2015
 
Value
   
Gains
   
Losses
   
Value
 
Obligations of States and Political Subdivisions
 
$
61,396
   
$
993
   
$
1
   
$
62,388
 
Total
 
$
61,396
   
$
993
   
$
1
   
$
62,388
 
                                 
   
Book
   
Gross Unrealized
   
Fair
 
September 30, 2015
 
Value
   
Gains
   
Losses
   
Value
 
Obligations of States and Political Subdivisions
 
$
64,134
   
$
658
   
$
26
   
$
64,766
 
Other
   
2,123
     
-
     
-
     
2,123
 
Total
 
$
66,257
   
$
658
   
$
26
   
$
66,889
 

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 September 30, 2016 by contractual maturity are shown in the following table (in thousands):

   
Available-for-Sale
   
Held-to-Maturity
 
September 30, 2016
 
Amortized
Cost
   
Fair/Book
Value
   
Book
Value
   
Fair
Value
 
Within one year
 
$
100,999
   
$
100,998
   
$
1,211
   
$
1,213
 
After one year through five years
   
68,610
     
68,986
     
10,906
     
10,943
 
After five years through ten years
   
-
     
-
     
11,644
     
11,878
 
After ten years
   
-
     
-
     
35,144
     
36,420
 
     
169,609
     
169,984
     
58,905
     
60,454
 
                                 
Investment securities not due at a single maturity date:
                               
Mortgage Backed Securities
   
183,268
     
188,873
     
-
     
-
 
                                 
Total
 
$
352,877
   
$
358,857
   
$
58,905
   
$
60,454
 

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  tables below 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
 
September 30, 2016
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
                                     
Securities Available-for-Sale
                                   
Government Agency & Government-Sponsored Entities
 
$
59,993
   
$
1
   
$
-
   
$
-
   
$
59,993
   
$
1
 
Total
 
$
59,993
   
$
1
   
$
-
   
$
-
   
$
59,993
   
$
1
 
                                                 
   
Less Than 12 Months
   
12 Months or More
   
Total
 
December 31, 2015
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
                                                 
Securities Available-for-Sale
                                               
Government Agency & Government-Sponsored Entities
 
$
29,944
   
$
419
   
$
-
   
$
-
   
$
29,944
   
$
419
 
US Treasury Notes
   
44,887
     
164
     
-
     
-
     
44,887
     
164
 
Mortgage Backed Securities
   
78,899
     
1,089
     
7,277
     
142
     
86,176
     
1,231
 
Total
 
$
153,730
   
$
1,672
   
$
7,277
   
$
142
   
$
161,007
   
$
1,814
 
                                                 
Securities Held-to-Maturity
                                               
Obligations of States and Political Subdivisions
 
$
839
   
$
1
   
$
-
   
$
-
   
$
839
   
$
1
 
Total
 
$
839
   
$
1
   
$
-
   
$
-
   
$
839
   
$
1
 
                                                 
   
Less Than 12 Months
   
12 Months or More
   
Total
 
September 30, 2015
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
                                                 
Securities Available-for-Sale
                                               
Mortgage Backed Securities
 
$
36,898
   
$
256
   
$
7,593
   
$
56
   
$
44,491
   
$
312
 
Total
 
$
36,898
   
$
256
   
$
7,593
   
$
56
   
$
44,491
   
$
312
 
                                                 
Securities Held-to-Maturity
                                               
Obligations of States and Political Subdivisions
 
$
1,991
   
$
26
   
$
-
   
$
-
   
$
1,991
   
$
26
 
Total
 
$
1,991
   
$
26
   
$
-
   
$
-
   
$
1,991
   
$
26
 

As of September 30, 2016, the Company held 244 investment securities  which 3 were in a loss position for less than twelve months. No securities were 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 – The unrealized losses on the Company’s investment in securities of government agency and government sponsored entities were $1, $419,000, and $0 at September 30, 2016, December 31, 2015 and September 30, 2015, respectively. 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 September 30, 2016, December 31, 2015, and September 30, 2015.
 
Mortgage Backed Securities – The unrealized losses on the Company's investment in mortgage backed securities were $0, $1.2 million, and $312,000 at September 30, 2016, December 31, 2015, September 30, 2015, 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 September 30, 2016, December 31, 2015 and September 30, 2015, respectively.

Obligations of States and Political Subdivisions - As of September 30, 2016, 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 $0, $1,400, and $26,000 at September 30, 2016, December 31, 2015 and September 30, 2015, 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 September 30, 2016, December 31, 2015 and September 30, 2015, respectively.

US Treasury Notes – The unrealized losses on the Company's investments in US treasury notes were $0, $164,000, and $0 at September 30, 2016, December 31, 2015 and September 30, 2015, 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 September 30, 2016, December 31, 2015 and September 30, 2015, respectively.

Proceeds from sales and calls of securities were as follows:

   
Three Months
   
Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
(in thousands)
 
2016
   
2015
   
2016
   
2015
 
Proceeds
 
$
1,855
   
$
53,465
   
$
104,750
   
$
58,000
 
Gains
   
3
     
266
     
248
     
272
 
Losses
   
-
     
-
     
534
     
-
 

Pledged Securities
As of September 30, 2016, securities carried at $185.1 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 $189.2 million at December 31, 2015, and $197.8 million at September 30, 2015.
 
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):

September 30, 2016
 
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, 2016
 
$
10,063
   
$
6,881
   
$
2,485
   
$
789
   
$
2,146
   
$
6,308
   
$
7,836
   
$
175
   
$
3,294
   
$
1,546
   
$
41,523
 
Charge-Offs
   
-
     
-
     
-
     
(7
)
   
(46
)
   
-
     
-
     
(77
)
   
-
     
-
     
(130
)
Recoveries
   
2
     
-
     
-
     
13
     
102
     
-
     
45
     
41
     
-
     
-
     
203
 
Provision
   
57
     
2,490
     
(27
)
   
34
     
(7
)
   
(86
)
   
(281
)
   
40
     
250
     
380
     
2,850
 
Ending Balance- September 30, 2016
 
$
10,122
   
$
9,371
   
$
2,458
   
$
829
   
$
2,195
   
$
6,222
   
$
7,600
   
$
179
   
$
3,544
   
$
1,926
   
$
44,446
 
Third Quarter Allowance for Credit Losses:
                                                                         
Beginning Balance- July 1, 2016
 
$
10,236
   
$
9,501
   
$
2,442
   
$
837
   
$
2,149
   
$
6,223
   
$
7,849
   
$
170
   
$
3,442
   
$
1,269
   
$
44,118
 
Charge-Offs
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(25
)
   
-
     
-
     
(25
)
Recoveries
   
-
     
-
     
-
     
4
     
69
     
-
     
16
     
14
     
-
     
-
     
103
 
Provision
   
(114
)
   
(130
)
   
16
     
(12
)
   
(23
)
   
(1
)
   
(265
)
   
20
     
102
     
657
     
250
 
Ending Balance- September 30, 2016
 
$
10,122
   
$
9,371
   
$
2,458
   
$
829
   
$
2,195
   
$
6,222
   
$
7,600
   
$
179
   
$
3,544
   
$
1,926
   
$
44,446
 
Ending Balance Individually Evaluated for Impairment
   
-
     
-
     
-
     
74
     
18
     
129
     
620
     
7
     
-
     
-
     
848
 
Ending Balance Collectively Evaluated for Impairment
   
10,122
     
9,371
     
2,458
     
755
     
2,177
     
6,093
     
6,980
     
172
     
3,544
     
1,926
     
43,598
 
Loans & Leases:
                                                                                       
Ending Balance
 
$
627,114
   
$
439,972
   
$
175,045
   
$
238,376
   
$
32,513
   
$
274,704
   
$
214,086
   
$
6,975
   
$
70,885
   
$
-
   
$
2,079,670
 
Ending Balance Individually Evaluated for Impairment
   
4,324
     
513
     
-
     
2,173
     
409
     
640
     
4,509
     
11
     
-
     
-
     
12,579
 
Ending Balance Collectively Evaluated for Impairment
 
$
622,790
   
$
439,459
   
$
175,045
   
$
236,203
   
$
32,104
   
$
274,064
   
$
209,577
   
$
6,964
   
$
70,885
   
$
-
   
$
2,067,091
 
 
December 31, 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
)
   
(84
)
   
-
     
-
     
(96
)
Recoveries
   
2,939
     
-
     
2,225
     
8
     
87
     
4
     
136
     
69
     
-
     
-
     
5,468
 
Provision
   
(718
)
   
2,696
     
(1,409
)
   
(241
)
   
(367
)
   
200
     
(483
)
   
(28
)
   
1,083
     
17
     
750
 
Ending Balance- December 31, 2015
 
$
10,063
   
$
6,881
   
$
2,485
   
$
789
   
$
2,146
   
$
6,308
   
$
7,836
   
$
175
   
$
3,294
   
$
1,546
   
$
41,523
 
Ending Balance Individually Evaluated for Impairment
   
61
     
-
     
-
     
69
     
35
     
115
     
905
     
28
     
-
     
-
     
1,213
 
Ending Balance Collectively Evaluated for Impairment
   
10,002
     
6,881
     
2,485
     
720
     
2,111
     
6,193
     
6,931
     
147
     
3,294
     
1,546
     
40,310
 
Loans & Leases:
                                                                                       
Ending Balance
 
$
603,650
   
$
424,034
   
$
151,974
   
$
206,405
   
$
33,056
   
$
293,966
   
$
210,804
   
$
6,592
   
$
65,878
   
$
-
   
$
1,996,359
 
Ending Balance Individually Evaluated for Impairment
   
3,420
     
-
     
-
     
2,010
     
1,214
     
606
     
4,760
     
34
     
-
     
-
     
12,044
 
Ending Balance Collectively Evaluated for Impairment
   
600,230
     
424,034
     
151,974
     
204,395
     
31,842
     
293,360
     
206,044
     
6,558
     
65,878
     
-
     
1,984,315
 
                                                                                         
September 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
)
   
(55
)
   
-
     
-
     
(67
)
Recoveries
   
2,939
     
-
     
-
     
4
     
85
     
3
     
24
     
51
     
-
     
-
     
3,106
 
Provision
   
(1,536
)
   
3,295
     
719
     
(274
)
   
(356
)
   
(969
)
   
38
     
2
     
860
     
(1,129
)
   
650
 
Ending Balance- September 30, 2015
 
$
9,245
   
$
7,480
   
$
2,388
   
$
752
   
$
2,155
   
$
5,138
   
$
8,245
   
$
216
   
$
3,071
   
$
400
   
$
39,090
 
Third Quarter Allowance for Credit Losses:
                                                                         
Beginning Balance- July 1, 2015
 
$
8,591
   
$
7,272
   
$
2,177
   
$
731
   
$
2,073
   
$
5,046
   
$
8,878
   
$
217
   
$
2,532
   
$
1,520
   
$
39,037
 
Charge-Offs
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(21
)
   
-
     
-
     
(21
)
Recoveries
   
-
     
-
     
-
     
3
     
37
     
1
     
20
     
13
     
-
     
-
     
74
 
Provision
   
654
     
208
     
211
     
18
     
45
     
91
     
(653
)
   
7
     
539
     
(1,120
)
   
-
 
Ending Balance- September 30, 2015
 
$
9,245
   
$
7,480
   
$
2,388
   
$
752
   
$
2,155
   
$
5,138
   
$
8,245
   
$
216
   
$
3,071
   
$
400
   
$
39,090
 
Ending Balance Individually Evaluated for Impairment
   
61
     
-
     
-
     
70
     
35
     
120
     
879
     
31
     
-
     
-
     
1,196
 
Ending Balance Collectively Evaluated for Impairment
   
9,184
     
7,480
     
2,388
     
682
     
2,120
     
5,018
     
7,366
     
185
     
3,071
     
400
     
37,894
 
Loans & Leases:
                                                                                       
Ending Balance
 
$
558,743
   
$
432,610
   
$
161,762
   
$
196,893
   
$
31,833
   
$
249,783
   
$
210,491
   
$
6,735
   
$
61,420
   
$
-
   
$
1,910,270
 
Ending Balance Individually Evaluated for Impairment
   
4,120