10-Q 1 cvcy-20163312016q110q.htm 10-Q 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
(Mark One)
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED March 31, 2016
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM                        TO
 
COMMISSION FILE NUMBER: 000—31977
 
CENTRAL VALLEY COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
 
California
 
77-0539125
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
7100 N. Financial Dr., Suite 101, Fresno, California
 
93720
(Address of principal executive offices)
 
(Zip code)
 
Registrant’s telephone number (559) 298-1775
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer ý
 
 
 
Non-accelerated filer o
 
Small reporting company o
(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  o No  ý
As of May 5, 2016 there were 11,027,979 shares of the registrant’s common stock outstanding.

1




CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
 
2016 QUARTERLY REPORT ON FORM 10-Q
 
TABLE OF CONTENTS
 
 


2


PART 1: FINANCIAL INFORMATION
 

ITEM 1: FINANCIAL STATEMENTS

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(In thousands, except share amounts)
 
March 31, 2016
 
December 31, 2015
 
 
 
 
 
ASSETS
 
 

 
 

Cash and due from banks
 
$
22,525

 
$
23,339

Interest-earning deposits in other banks
 
55,824

 
70,988

Federal funds sold
 
307

 
290

Total cash and cash equivalents
 
78,656

 
94,617

Available-for-sale investment securities (Amortized cost of $488,425 at March 31, 2016 and $470,080 at December 31, 2015)
 
501,978

 
477,554

Held-to-maturity investment securities (Fair value of $35,142 at December 31, 2015)
 

 
31,712

Loans, less allowance for credit losses of $10,136 at March 31, 2016 and $9,610 at December 31, 2015
 
598,864

 
588,501

Bank premises and equipment, net
 
9,002

 
9,292

Bank owned life insurance
 
20,847

 
20,702

Federal Home Loan Bank stock
 
4,823

 
4,823

Goodwill
 
29,917

 
29,917

Core deposit intangibles
 
990

 
1,024

Accrued interest receivable and other assets
 
26,466

 
18,594

Total assets
 
$
1,271,543

 
$
1,276,736

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Deposits:
 
 

 
 

Non-interest bearing
 
$
408,080

 
$
428,773

Interest bearing
 
695,399

 
687,494

Total deposits
 
1,103,479

 
1,116,267

 
 
 
 
 
Junior subordinated deferrable interest debentures
 
5,155

 
5,155

Accrued interest payable and other liabilities
 
17,130

 
15,991

Total liabilities
 
1,125,764

 
1,137,413

Commitments and contingencies (Note 8)
 


 


Shareholders’ equity:
 
 

 
 

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

 

Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 11,026,229 at March 31, 2016 and 10,996,773 at December 31, 2015
 
54,624

 
54,424

Retained earnings
 
83,180

 
80,437

Accumulated other comprehensive income, net of tax
 
7,975

 
4,462

Total shareholders’ equity
 
145,779

 
139,323

Total liabilities and shareholders’ equity
 
$
1,271,543

 
$
1,276,736

 
See notes to unaudited consolidated financial statements.

3



CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
 
For the Quarter
Ended March 31,
(In thousands, except share and per share amounts) 
 
 
2016
 
2015
INTEREST INCOME:
 
 
 

 
 

Interest and fees on loans
 
 
$
7,733

 
$
7,286

Interest on deposits in other banks
 
 
74

 
46

Interest and dividends on investment securities:
 
 
 
 
 
Taxable
 
 
1,523

 
1,107

Exempt from Federal income taxes
 
 
1,523

 
1,538

Total interest income
 
 
10,853

 
9,977

INTEREST EXPENSE:
 
 
 

 
 

Interest on deposits
 
 
221

 
233

Interest on junior subordinated deferrable interest debentures
 
 
29

 
24

Total interest expense
 
 
250

 
257

Net interest income before provision for credit losses
 
 
10,603

 
9,720

(REVERSAL OF) PROVISION FOR CREDIT LOSSES
 
 
(250
)
 

Net interest income after provision for credit losses
 
 
10,853

 
9,720

NON-INTEREST INCOME:
 
 
 

 
 

Service charges
 
 
749

 
871

Appreciation in cash surrender value of bank owned life insurance
 
 
145

 
154

Interchange fees
 
 
279

 
278

Net realized gains on sales of investment securities
 
 
1,130

 
726

Other-than-temporary impairment loss on investment securities
 
 
(136
)
 

Federal Home Loan Bank dividends
 
 
97

 
86

Loan placement fees
 
 
191

 
298

Other income
 
 
249

 
278

Total non-interest income
 
 
2,704

 
2,691

NON-INTEREST EXPENSES:
 
 
 

 
 

Salaries and employee benefits
 
 
5,254

 
5,163

Occupancy and equipment
 
 
1,207

 
1,150

Professional services
 
 
336

 
481

Data processing
 
 
347

 
281

Regulatory assessments
 
 
143

 
336

ATM/Debit card expenses
 
 
122

 
137

License and maintenance contracts
 
 
132

 
138

Directors’ expenses
 
 
171

 
128

Advertising
 
 
159

 
159

Internet banking expense
 
 
161

 
203

Amortization of core deposit intangibles
 
 
34

 
84

Other
 
 
910

 
1,028

Total non-interest expenses
 
 
8,976

 
9,288

Income before provision for income taxes
 
 
4,581

 
3,123

Provision for income taxes
 
 
1,178

 
657

Net income available to common shareholders
 
 
$
3,403

 
$
2,466

Earnings per common share:
 
 
 

 
 

Basic earnings per share
 
 
$
0.31

 
$
0.23

Weighted average common shares used in basic computation
 
 
10,953,845

 
10,923,590

Diluted earnings per share
 
 
$
0.31

 
$
0.22

Weighted average common shares used in diluted computation
 
 
11,040,790

 
11,002,976

Cash dividend per common share
 
 
$
0.06

 
$

 
See notes to unaudited consolidated financial statements.

4



CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
For the Quarter
Ended March 31,
(In thousands)
 
2016
 
2015
Net income
 
$
3,403

 
$
2,466

Other Comprehensive Income:
 
 
 
 
Unrealized gains on securities:
 
 
 
 
Unrealized holdings gains arising during the period
 
4,002

 
2,384

Less: reclassification for net gains included in net income
 
434

 
726

Less: reclassification for other-than-temporary impairment loss included in net income
 
(136
)
 

Transfer of investment securities from held-to-maturity to available-for-sale
 
2,647

 

Amortization of net unrealized gains transferred
 
(64
)
 
(1
)
Other comprehensive income, before tax
 
6,015

 
1,657

Tax (expense) benefit related to items of other comprehensive income
 
(2,502
)
 
(682
)
Total other comprehensive income
 
3,513

 
975

Comprehensive income
 
$
6,916

 
$
3,441


See notes to unaudited consolidated financial statements.




5


CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
 
For the Quarter
Ended March 31,
(In thousands)
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income
 
$
3,403

 
$
2,466

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

Net decrease in deferred loan fees
 
(293
)
 
(117
)
Depreciation
 
349

 
339

Accretion
 
(301
)
 
(248
)
Amortization
 
1,995

 
2,054

Stock-based compensation
 
52

 
61

Excess tax benefit from exercise of stock options
 
(5
)
 

(Reversal of) provision for credit losses
 
(250
)
 

Other than temporary impairment losses on investment securities
 
136

 

Net realized gains on sales of available-for-sale investment securities
 
(434
)
 
(726
)
Net realized gains on sales of held-to-maturity securities
 
(696
)
 

Net loss on disposal of premises and equipment
 

 
2

Increase in bank owned life insurance, net of expenses
 
(145
)
 
(154
)
Net decrease (increase) in accrued interest receivable and other assets
 
54

 
1,471

Net (decrease) increase in accrued interest payable and other liabilities
 
1,139

 
(108
)
Provision for deferred income taxes
 
(723
)
 
(33
)
Net cash provided by operating activities
 
4,281

 
5,007

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Purchases of available-for-sale investment securities
 
(34,357
)
 
(45,842
)
Proceeds from sales or calls of available-for-sale investment securities
 
15,654

 
38,933

Proceeds from sales or calls of held-to-maturity investment securities
 
9,257

 

Proceeds from maturity and principal repayments of available-for-sale investment securities
 
12,384

 
12,161

Net increase in loans
 
(9,821
)
 
(4,424
)
Purchases of premises and equipment
 
(59
)
 
(178
)
Purchases of bank owned life insurance
 

 
(325
)
Net cash (used in) provided by investing activities
 
(6,942
)
 
325

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Net increase (decrease) in demand, interest bearing and savings deposits
 
(6,461
)
 
4,772

Net decrease in time deposits
 
(6,327
)
 
(2,061
)
Proceeds from exercise of stock options
 
143

 

Excess tax benefit from exercise of stock options
 
5

 

Cash dividend payments on common stock
 
(660
)
 

Net cash (used in) provided by financing activities
 
(13,300
)
 
2,711

(Decrease) increase in cash and cash equivalents
 
(15,961
)
 
8,043

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
94,617

 
77,328

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
78,656

 
$
85,371

 
 
 
For the Quarter
Ended March 31,
(In thousands)
 
2016
 
2015
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
 
 

 
 

Cash paid during the period for:
 
 

 
 

Interest
 
$
249

 
$
260

Income taxes
 
$
690

 
$

Non-cash investing and financing activities:
 
 

 
 

Foreclosure of loan collateral and recognition of other real estate owned
 
$

 
$
227

Assumption of other real estate owned liabilities
 
$

 
$
121

Transfer of securities from held-to-maturity to available-for-sale
 
$
23,131

 
$

Unrealized gain on transfer of securities from held-to-maturity to available-for-sale
 
$
526

 
$

Sale of available-for-sale investment securities, not yet settled
 
$
9,699

 
$

See notes to unaudited consolidated financial statements.

Note 1.  Basis of Presentation
 

6


The interim unaudited condensed consolidated financial statements of Central Valley Community Bancorp and subsidiary have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). These interim condensed consolidated financial statements include the accounts of Central Valley Community Bancorp and its wholly owned subsidiary Central Valley Community Bank (the Bank) (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation.  Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted. The Company believes that the disclosures are adequate to make the information presented not misleading. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2015 Annual Report to Shareholders on Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position at March 31, 2016, and the results of its operations and its cash flows for the three month interim periods ended March 31, 2016 and 2015 have been included. Certain reclassifications have been made to prior year amounts to conform to the 2016 presentation. Reclassifications had no effect on prior period net income or shareholders’ equity. The results of operations for interim periods are not necessarily indicative of results for the full year.
     The preparation of these interim unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
     Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment, and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank.
The Company terminated its interest in Central Valley Community Insurance Service, LLC (CVCIS) at the beginning of the third quarter of 2015. The Bank’s interest in CVCIS was originally established in 2006 for the purpose of providing health, commercial property and casualty insurance products and services primarily to business customers. The termination of this entity did not have a material impact on the Company’s financial statements.
Impact of New Financial Accounting Standards:

FASB Accounting Standards Update (ASU) 2015-03 - Interest-Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs: ASU 2015-03 requires the debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by the amendments in ASU 2015-03. ASU 2015-03 was effective for the Company on January 1, 2016, and did not have a significant impact on the Company’s consolidated financial statements, results of operations, cash flows, or disclosures.

FASB Accounting Standards Update (ASU) 2015-16 - Business Combinations (Subtopic 805) - Simplifying the Accounting for Measurement-Period Adjustments: ASU 2015-16 requires that adjustments to provisional amounts that are identified during the measurement period of a business combination be recognized in the reporting period in which the adjustment amounts are determined. Furthermore, the income statement effects of such adjustments, if any, must be calculated as if the accounting had been completed at the acquisition date. The portion of the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date is required to be reported separately on the face of the income statement, or disclosed within the footnotes to the financial statements. Under previous guidance, adjustments to provisional amounts identified during the measurement period are to be recognized retrospectively. ASU 2015-16 was effective for the Company on January 1, 2016, and did not have a significant impact on the Company’s consolidated financial statements, results of operations, cash flows, or disclosures.

FASB Accounting Standards Update (ASU) 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, was issued January 2016. ASU 2016-01 addresses certain aspects of recognition, measurement presentation, and disclosure of financial instruments. Most notably the ASU changes the income statement impact of equity investments held by the Company and the requirement for the Company to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The Company will be required to adopt the provisions of ASU 2016-01 on January 1, 2018. Management is evaluating the impact that this ASU will have on the Company’s financial statements.

FASB Accounting Standards Update (ASU) 2016-02 - Leases - Overall (Subtopic 845): was issued February 2016. ASU 2016-02 requires the lessee to recognize most leases on the balance sheet thereby resulting in the recognition of lease assets and

7


liabilities for those leases currently classified as operating leases. The accounting for lessors is largely unchanged. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 with early adoption permitted. Management is evaluating the impact that this ASU will have on the Company’s financial statements.

FASB Accounting Standards Update (ASU) 2016-09 - Compensation - Stock Compensation (Subtopic 718): Improvements to Employee Share-Based Payment Accounting, was issued March 2016. ASU 2016-09 addresses simplification of several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. Management is evaluating the impact that this ASU will have on the Company’s financial statements.

Note 2.  Fair Value Measurements
 
Fair Value Hierarchy
 
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In accordance with applicable guidance, the Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  Valuations within these levels are based upon:
 
Level 1 — Quoted market prices (unadjusted) for identical instruments traded in active exchange markets that the Company has the ability to access as of the measurement date.
 
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.
 
Level 3 — Model-based techniques that use at least one significant assumption not observable in the market.  These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability.  Valuation techniques include management judgment and estimation which may be significant.
Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, we report the transfer at the beginning of the reporting period. The estimated carrying and fair values of the Company’s financial instruments are as follows (in thousands):
 
 
March 31, 2016
 
 
Carrying
Amount
 
Fair Value
(In thousands)
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets:
 
 

 
 

 
 

 
 
 
 

Cash and due from banks
 
$
22,525

 
$
22,525

 
$

 
$

 
$
22,525

Interest-earning deposits in other banks
 
55,824

 
55,824

 

 

 
55,824

Federal funds sold
 
307

 
307

 

 

 
307

Available-for-sale investment securities
 
501,978

 
7,648

 
494,330

 

 
501,978

Loans, net
 
598,864

 

 

 
594,624

 
594,624

Federal Home Loan Bank stock
 
4,823

 
N/A

 
N/A

 
N/A

 
N/A

Accrued interest receivable
 
5,634

 
23

 
3,047

 
2,564

 
5,634

Financial liabilities:
 
 

 
 

 
 

 
 
 
 

Deposits
 
1,103,479

 
971,439

 
134,236

 

 
1,105,675

Junior subordinated deferrable interest debentures
 
5,155

 

 

 
3,100

 
3,100

Accrued interest payable
 
102

 

 
73

 
29

 
102



8


 
 
December 31, 2015
 
 
Carrying
Amount
 
Fair Value
(In thousands)
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
23,339

 
$
23,339

 
$

 
$

 
$
23,339

Interest-earning deposits in other banks
 
70,988

 
70,988

 

 

 
70,988

Federal funds sold
 
290

 
290

 

 

 
290

Available-for-sale investment securities
 
477,554

 
7,536

 
470,018

 

 
477,554

Held-to-maturity investment securities
 
31,712

 

 
35,142

 

 
35,142

Loans, net
 
588,501

 

 

 
585,737

 
585,737

Federal Home Loan Bank stock
 
4,823

 
N/A

 
N/A

 
N/A

 
N/A

Accrued interest receivable
 
6,355

 
27

 
3,414

 
2,914

 
6,355

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
1,116,267

 
976,433

 
139,353

 

 
1,115,786

Junior subordinated deferrable interest debentures
 
5,155

 

 

 
3,200

 
3,200

Accrued interest payable
 
101

 

 
76

 
25

 
101


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

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

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

(c) Loans — Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Purchased credit impaired (PCI) loans are measured at estimated fair value on the date of acquisition. Carrying value is calculated as the present value of expected cash flows and approximates fair value. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are initially valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

(d) FHLB Stock — It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

9



(e) Other real estate owned — OREO is measured at fair value less estimated costs to sell when acquired, establishing a new cost basis. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process to adjust for differences between the comparable sales and income data available. The Company records OREO as non-recurring with level 3 measurement inputs.

(f) Deposits — Fair value of demand deposit, savings, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount), resulting in a Level 1 classification. Fair value for fixed and variable rate certificates of deposit are estimated using discounted cash flow analyses using interest rates offered at each reporting date by the Company for certificates with similar remaining maturities resulting in a Level 2 classification.

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

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

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

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

(j) Off-Balance Sheet Instruments — Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not considered significant for financial reporting purposes.
 
Assets Recorded at Fair Value
 
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2016:
 
Recurring Basis
 
The Company is required or permitted to record the following assets at fair value on a recurring basis as of March 31, 2016 (in thousands). 
Description
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Available-for-sale securities
 
 

 
 

 
 

 
 

Debt Securities:
 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
51,558

 
$

 
$
51,558

 
$

Obligations of states and political subdivisions
 
214,757

 

 
214,757

 

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
224,641

 

 
224,641

 

Private label residential mortgage backed securities
 
3,374

 

 
3,374

 

Other equity securities
 
7,648

 
7,648

 

 

Total assets measured at fair value on a recurring basis
 
$
501,978

 
$
7,648

 
$
494,330

 
$

 
Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets.  Fair values for available-for-sale investment securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the three months ended March 31, 2016, no transfers between levels occurred.

10


There were no Level 3 assets measured at fair value on a recurring basis at or during the three months ended March 31, 2016. Also there were no liabilities measured at fair value on a recurring basis at March 31, 2016.

Non-recurring Basis
 
The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at March 31, 2016 (in thousands).
Description
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Impaired loans:
 
 

 
 

 
 

 
 

Commercial:
 
 

 
 

 
 

 
 

Commercial and industrial
 
$
482

 
$

 
$

 
$
482

Total commercial
 
482

 

 

 
482

Consumer:
 
 

 
 

 
 

 
 

Equity loans and lines of credit
 
$
120

 
$

 
$

 
$
120

Total impaired loans
 
602

 

 

 
602

Other real estate owned
 

 

 

 

Total assets measured at fair value on a non-recurring basis
 
$
602

 
$

 
$

 
$
602


At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. The fair value of impaired loans is based on the fair value of the collateral. Impaired loans were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements. Impaired loans evaluated under the discounted cash flow method are excluded from the table above. The discounted cash flow methods as prescribed by ASC Topic 310 is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate which is not a market rate. There were no changes in valuation techniques used during the three month period ended March 31, 2016.
Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value is compared with independent data sources such as recent market data or industry-wide statistics.    
Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $1,270,000 with a valuation allowance of $668,000 at March 31, 2016, resulting in fair value of $602,000.  The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans.
During the three months ended March 31, 2016, specific allocation for the allowance for credit losses related to loans carried at fair value was $635,000 compared to none during 2015 related to loans carried at fair value.. There were no charge-offs related to loans carried at fair value at March 31, 2016 and 2015
There were no liabilities measured at fair value on a non-recurring basis at March 31, 2016.
    

11


The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2016 (dollars in thousands):
Description
 
Fair Value
 
Valuation Technique(s)
 
Significant Unobservable Input(s)
 
Range (Weighted Average)
Commercial and industrial
 
$
482

 
Sales comparison
 
Appraiser adjustments on sales comparable data
 
0%-20%
 
 
 
 
Management estimates
 
Management adjustments for depreciation in values depending on property types
 
65%
Equity loans and lines of credit
 
$
120

 
Sales comparison
 
Appraiser adjustments on sales comparable data
 
3%-22%
 
 
 
 
Management estimates
 
Management adjustments for depreciation in values depending on property types
 
58%

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 2015:

Recurring Basis
 
The Company is required or permitted to record the following assets at fair value on a recurring basis as of December 31, 2015 (in thousands).
Description
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Available-for-sale securities
 
 

 
 

 
 

 
 

Debt Securities:
 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
52,901

 
$

 
$
52,901

 
$

Obligations of states and political subdivisions
 
188,268

 

 
188,268

 

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
225,259

 

 
225,259

 

Private label residential mortgage backed securities
 
3,590

 

 
3,590

 

Other equity securities
 
7,536

 
7,536

 

 

Total assets measured at fair value on a recurring basis
 
$
477,554

 
$
7,536

 
$
470,018

 
$

 
Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets.  Fair values for available-for-sale investment securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators.
     Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the year ended December 31, 2015, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at or during the year ended December 31, 2015. Also there were no liabilities measured at fair value on a recurring basis at December 31, 2015.


12


Non-recurring Basis
 
The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis.  These include assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at December 31, 2015 (in thousands).
Description
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Impaired loans:
 
 

 
 

 
 

 
 

Commercial:
 
 

 
 

 
 

 
 

Commercial and industrial
 
$

 
$

 
$

 
$

Total commercial
 

 

 

 

Consumer:
 
 

 
 

 
 

 
 

Equity loans and lines of credit
 
$
132

 
$

 
$

 
$
132

Total consumer
 
132

 

 

 
132

Total impaired loans
 
132

 

 

 
132

Total assets measured at fair value on a non-recurring basis
 
$
132

 
$

 
$

 
$
132


At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. The fair value of impaired loans is based on the fair value of the collateral. Impaired loans were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements. Impaired loans evaluated under the discounted cash flow method are excluded from the table above. The discounted cash flow method as prescribed by ASC Topic 310 is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate which is not a market rate. There were no changes in valuation techniques used during the year ended December 31, 2015.
Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value is compared with independent data sources such as recent market data or industry-wide statistics.    
Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $166,000 with a valuation allowance of $34,000 at December 31, 2015, resulting in fair value of $132,000. The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans.
During the year ended December 31, 2015, there was no provision for credit losses related to loans carried at fair value. During the year ended December 31, 2015, there was no net charge-offs related to loans carried at fair value.
There were no liabilities measured at fair value on a non-recurring basis at December 31, 2015.
Note 3.  Investments
 
The investment portfolio consists primarily of U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations, private label residential mortgage backed securities (PLRMBS), and obligations of states and political subdivisions securities.  As of March 31, 2016, $114,784,000 of these securities were held as collateral for borrowing arrangements, public funds, and for other purposes.
     The fair value of the available-for-sale investment portfolio reflected a net unrealized gain of $13,553,000 at March 31, 2016 compared to an unrealized gain of $7,474,000 at December 31, 2015. The unrealized gain recorded is net of $5,578,000 and $3,076,000 in tax liabilities as accumulated other comprehensive income within shareholders’ equity at March 31, 2016 and December 31, 2015, respectively.
     The following table sets forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands): 

13


 
 
March 31, 2016
Available-for-Sale Securities
 
Amortized Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
 Fair Value
Debt securities:
 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
51,194

 
$
499

 
$
(135
)
 
$
51,558

Obligations of states and political subdivisions
 
204,242

 
10,611

 
(96
)
 
214,757

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
223,234

 
1,990

 
(583
)
 
224,641

Private label residential mortgage backed securities
 
2,255

 
1,119

 

 
3,374

Other equity securities
 
7,500

 
148

 

 
7,648

Total available-for-sale
 
$
488,425

 
$
14,367

 
$
(814
)
 
$
501,978


 

December 31, 2015
Available-for-Sale Securities
 
Amortized Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Debt securities:
 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
52,803

 
$
315

 
$
(217
)
 
$
52,901

Obligations of states and political subdivisions
 
181,785

 
6,779

 
(296
)
 
188,268

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
225,636

 
1,042

 
(1,419
)
 
225,259

Private label residential mortgage backed securities
 
2,356

 
1,234

 

 
3,590

Other equity securities
 
7,500

 
36

 

 
7,536

Total available-for-sale
 
$
470,080

 
$
9,406

 
$
(1,932
)
 
$
477,554


 
 
December 31, 2015
Held-to-Maturity Securities
 
Amortized Cost
 
Gross
Unrecognized
 Gains
 
Gross
Unrecognized
Losses
 
Estimated
 Fair Value
Debt securities:
 
 

 
 

 
 

 
 

Obligations of states and political subdivisions
 
$
31,712

 
$
3,431

 
$
(1
)
 
$
35,142


Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended March 31, 2016 and 2015 are shown below (in thousands):
 
 
For the Quarter
Ended March 31,
Available-for-Sale Securities
 
2016

2015
Proceeds from sales or calls
 
$
25,353

 
$
38,933

Gross realized gains from sales or calls
 
545

 
765

Gross realized losses from sales or calls
 
(111
)
 
(39
)

 
 
For the Quarter
Ended March 31,
Held-to-Maturity Securities
 
2016
 
2015
Proceeds from sales or calls
 
$
9,257

 
$

Gross realized gains from sales or calls
 
696

 

Gross realized losses from sales or calls
 

 



14


During 2014, to better manage our interest rate risk, the Company transferred from available-for-sale to held-to-maturity selected municipal securities in our portfolio having a book value of approximately $31 million, a market value of approximately $32 million, and a net unrecognized gain of approximately $163,000.  This transfer was completed after careful consideration of our intent and ability to hold these securities to maturity. During the first quarter of 2016, management sold certain investment securities of which management discovered, through the proper operation of the Company’s internal control, that five of the thirteen securities sold were previously designated as held-to-maturity (HTM). Through an oversight during the portfolio restructuring analysis related to this transaction, management unintentionally sold these five HTM securities. The book value of the HTM securities sold was $8.5 million. The gain realized on the sale of the HTM securities was $696,000. As such, management was required to reclassify the remaining HTM securities with a fair value of $23.1 million were reclassified to the AFS designation. At March 31, 2016 and December 31, 2015 the remaining unaccreted balance of these HTM securities associated with the original transfer from AFS to HTM and included in accumulated other comprehensive income was $0 and $64,000, respectively.
Losses recognized in 2016 and 2015 were incurred in order to reposition the investment securities portfolio based on the current rate environment.  The securities which were sold at a loss were acquired when the rate environment was not as volatile.  The securities which were sold were primarily purchased several years ago to serve a purpose in the rate environment in which the securities were purchased.  The Company is addressing risks in the security portfolio by selling these securities and using proceeds to purchase securities that fit with the Company’s current risk profile.
The provision for income taxes includes $465,000 and $299,000 income tax impact from the reclassification of unrealized net gains on securities to realized net gains on securities for the quarter ended March 31, 2016 and 2015, respectively.
Investment securities, aggregated by investment category, with unrealized losses as of the dates indicated are summarized and classified according to the duration of the loss period as follows (in thousands): 
 
 
March 31, 2016
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Available-for-Sale Securities
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
10,899

 
$
(56
)
 
$
3,785

 
$
(79
)
 
$
14,684

 
$
(135
)
Obligations of states and political subdivisions
 
9,791

 
(82
)
 
4,319

 
(14
)
 
14,110

 
(96
)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
79,876

 
(366
)
 
12,531

 
(217
)
 
92,407

 
(583
)
Total available-for-sale
 
$
100,566

 
$
(504
)

$
20,635

 
$
(310
)
 
$
121,201

 
$
(814
)

 
 
December 31, 2015
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Available-for-Sale Securities
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
21,348

 
$
(125
)
 
$
3,954

 
$
(92
)
 
$
25,302

 
$
(217
)
Obligations of states and political subdivisions
 
40,016

 
(296
)
 

 

 
40,016

 
(296
)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
124,688

 
(1,109
)
 
16,234

 
(310
)
 
140,922

 
(1,419
)
Total available-for-sale
 
$
186,052

 
$
(1,530
)
 
$
20,188

 
$
(402
)
 
$
206,240

 
$
(1,932
)
 
 
December 31, 2015
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
 
Fair
 
Unrecognized
 
Fair
 
Unrecognized
 
Fair
 
Unrecognized
Held-to-Maturity Securities
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
 
$
1,053

 
$
(1
)
 
$

 
$

 
$
1,053

 
$
(1
)

15



     We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations.  The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings.  The discount rate in this analysis is the original yield expected at time of purchase.
     As of March 31, 2016, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all individual available-for-sale investment securities with an unrealized loss at March 31, 2016 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at March 31, 2016 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000.  Management also analyzed any securities that may have been downgraded by credit rating agencies. 
For those bonds that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds.  For those bonds that were obligations of states and political subdivisions with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded that $136,000 credit related impairment related to one security with a fair value of $2,995,000 and a pre-impairment amortized cost of $3,131,000 existed. The Company recorded an other-than-temporary impairment loss of $136,000 during the three months ended March 31, 2016.

U.S. Government Agencies

At March 31, 2016, the Company held 17 U.S. Government agency securities, of which four were in a loss position for less than 12 months and one was in a loss position or had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in direct obligations of U.S. government agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell, those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2016.

Obligations of States and Political Subdivisions
 
At March 31, 2016, the Company held 148 obligations of states and political subdivision securities of which 6 were in a loss position for less than 12 months and two were in a loss position or had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability to hold and does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2016.
 
U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations
 
At March 31, 2016, the Company held 179 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 31 were in a loss position for less than 12 months and 13 have been in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability to hold and does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2016.
 
Private Label Residential Mortgage Backed Securities
 
At March 31, 2016, the Company had a total of 17 PLRMBS with a remaining principal balance of $2,255,000 and a net unrealized gain of approximately $1,119,000None of these securities was recorded with an unrealized loss at March 31, 2016Twelve of these PLRMBS with a remaining principal balance of $2,027,000 had credit ratings below investment grade.  The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary.


16


Other Equity Securities
 
At March 31, 2016, the Company had one mutual fund equity investment. The equity investment was not recorded with an unrealized loss at March 31, 2016.
 
The following tables provide a roll forward for the three month periods ended March 31, 2016 and 2015 of investment securities credit losses recorded in earnings. The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods.  Additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred on securities for which OTTI credit losses have been previously recognized. 
 
 
For the Quarter
Ended March 31,
(In thousands)
 
2016
 
2015
Beginning balance
 
$
747

 
$
747

Amounts related to credit loss for which an OTTI charge was not previously recognized
 
136

 

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

 

Realized losses for securities sold
 

 

Ending balance
 
$
883

 
$
747


The amortized cost and estimated fair value of available-for-sale investment securities at March 31, 2016 by contractual maturity is shown below (in thousands).  Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
March 31, 2016
Available-for-Sale Securities
 
Amortized Cost

Estimated Fair
Value
Within one year
 
$

 
$

After one year through five years
 
13,635

 
14,185

After five years through ten years
 
38,100

 
39,642

After ten years
 
152,507

 
160,930

 
 
204,242

 
214,757

Investment securities not due at a single maturity date:
 
 

 
 

U.S. Government agencies
 
51,194

 
51,558

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
223,234

 
224,641

Private label residential mortgage backed securities
 
2,255

 
3,374

Other equity securities
 
7,500

 
7,648

Total available-for-sale
 
$
488,425

 
$
501,978

 


17


Note 4.  Loans and Allowance for Credit Losses
 
Outstanding loans are summarized as follows:
Loan Type (Dollars in thousands)
 
March 31, 2016
 
% of Total
Loans
 
December 31, 2015
 
% of Total
Loans
Commercial:
 
 

 
 

 
 

 
 

   Commercial and industrial
 
$
98,996

 
16.3
%
 
$
102,197

 
17.1
%
   Agricultural land and production
 
23,736

 
3.9
%
 
30,472

 
5.1
%
Total commercial
 
122,732

 
20.2
%
 
132,669

 
22.2
%
Real estate:
 
 

 
 

 
 

 
 

   Owner occupied
 
168,671

 
27.8
%
 
168,910

 
28.2
%
   Real estate construction and other land loans
 
42,165

 
6.9
%
 
38,685

 
6.5
%
   Commercial real estate
 
118,611

 
19.5
%
 
117,244

 
19.6
%
   Agricultural real estate
 
87,354

 
14.3
%
 
74,867

 
12.5
%
   Other real estate
 
10,593

 
1.7
%
 
10,520

 
1.8
%
Total real estate
 
427,394

 
70.2
%
 
410,226

 
68.6
%
Consumer:
 
 

 
 

 
 

 
 

   Equity loans and lines of credit
 
42,103

 
7.0
%
 
42,296

 
7.1
%
   Consumer and installment
 
16,062

 
2.6
%
 
12,503

 
2.1
%
Total consumer
 
58,165

 
9.6
%
 
54,799

 
9.2
%
Net deferred origination costs
 
709

 
 

 
417

 
 

Total gross loans
 
609,000

 
100.0
%
 
598,111

 
100.0
%
Allowance for credit losses
 
(10,136
)
 
 

 
(9,610
)
 
 

Total loans
 
$
598,864

 
 

 
$
588,501

 
 

 
The table above includes loans acquired at fair value on July 1, 2013 when the Company acquired Visalia Community Bank (VCB), in a combined cash and stock transaction. The acquired VCB assets and liabilities were recorded at fair value at the date of acquisition. Loans acquired in the VCB acquisition had outstanding balances of $60,793,000 and $62,395,000 as of March 31, 2016 and December 31, 2015, respectively.
At March 31, 2016 and December 31, 2015, loans originated under Small Business Administration (SBA) programs totaling $14,630,000 and $10,704,000, respectively, were included in the real estate and commercial categories, of which, $10,743,000 and $7,295,000, respectively, are secured by government guarantees.
The allowance for credit losses (the “Allowance”) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. The Allowance is established through a provision for credit losses which is charged to expense. Additions to the Allowance are expected to maintain the adequacy of the total Allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the Allowance. Cash received on previously charged-off credits is recorded as a recovery to the Allowance. The overall Allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired.
For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer data) over the most recent 20 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

18


The following table shows the summary of activities for the Allowance as of and for the three months ended March 31, 2016 and 2015 by portfolio segment (in thousands):
 
 
Commercial
 
Real Estate
 
Consumer
 
Unallocated
 
Total
Allowance for credit losses:
 
 

 
 

 
 

 
 

 
 

Beginning balance, January 1, 2016
 
$
3,562

 
$
5,204

 
$
734

 
$
110

 
$
9,610

(Reversal) Provision charged to operations
 
(152
)
 
(340
)
 
134

 
108

 
(250
)
Losses charged to allowance
 
(4
)
 

 
(9
)
 

 
(13
)
Recoveries
 
337

 
417

 
35

 

 
789

Ending balance, March 31, 2016
 
$
3,743

 
$
5,281

 
$
894

 
$
218

 
$
10,136

 
 
 
 
 
 
 
 
 
 
 
Allowance for credit losses:
 
 

 
 

 
 

 
 

 
 

Beginning balance, January 1, 2015
 
$
3,130

 
$
4,058

 
$
1,078

 
$
42

 
$
8,308

(Reversal) Provision charged to operations
 
308

 
391

 
(705
)
 
6

 

Losses charged to allowance
 
(410
)
 

 
(31
)
 

 
(441
)
Recoveries
 
101

 
8

 
423

 

 
532

Ending balance, March 31, 2015
 
$
3,129

 
$
4,457

 
$
765

 
$
48

 
$
8,399

 
The following is a summary of the Allowance by impairment methodology and portfolio segment as of March 31, 2016 and December 31, 2015 (in thousands):
 
 
Commercial
 
Real Estate
 
Consumer
 
Unallocated
 
Total
Allowance for credit losses:
 
 

 
 

 
 

 
 

 
 

Ending balance, March 31, 2016
 
$
3,743

 
$
5,281

 
$
894

 
$
218

 
$
10,136

Ending balance: individually evaluated for impairment
 
$
565

 
$
124

 
$
106

 
$

 
$
795

Ending balance: collectively evaluated for impairment
 
$
3,178

 
$
5,157

 
$
788

 
$
218

 
$
9,341

 
 
 
 
 
 
 
 
 
 
 
Ending balance, December 31, 2015
 
$
3,562

 
$
5,204

 
$
734

 
$
110

 
$
9,610

Ending balance: individually evaluated for impairment
 
$
1

 
$
128

 
$
35

 
$

 
$
164

Ending balance: collectively evaluated for impairment
 
$
3,561

 
$
5,076

 
$
699

 
$
110

 
$
9,446


The following table shows the ending balances of loans as of March 31, 2016 and December 31, 2015 by portfolio segment and by impairment methodology (in thousands):
 
 
Commercial
 
Real Estate
 
Consumer
 
Total
Loans:
 
 

 
 

 
 

 
 

Ending balance, March 31, 2016
 
$
122,732

 
$
427,394

 
$
58,165

 
$
608,291

Ending balance: individually evaluated for impairment
 
$
1,159

 
$
5,278

 
$
1,500

 
$
7,937

Ending balance: collectively evaluated for impairment
 
$
121,573

 
$
422,116

 
$
56,665

 
$
600,354

 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

Ending balance, December 31, 2015
 
$
132,669

 
$
410,226

 
$
54,799

 
$
597,694

Ending balance: individually evaluated for impairment
 
$
30

 
$
5,199

 
$
1,470

 
$
6,699

Ending balance: collectively evaluated for impairment
 
$
132,639

 
$
405,027

 
$
53,329

 
$
590,995



19


The following table shows the loan portfolio by class allocated by management’s internal risk ratings at March 31, 2016 (in thousands):
 
 
Pass
 
Special Mention
 
Sub-Standard
 
Doubtful
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
   Commercial and industrial
 
$
82,223

 
$
9,609

 
$
7,164

 
$

 
$
98,996

   Agricultural land and production
 
20,368

 
1,900

 
1,468

 

 
23,736

Real Estate:
 
 
 
 
 
 
 
 
 
 
   Owner occupied
 
162,727

 
4,007

 
1,937

 

 
168,671

   Real estate construction and other land loans
 
39,101

 

 
3,064

 

 
42,165

   Commercial real estate
 
114,613

 
1,668

 
2,330

 

 
118,611

   Agricultural real estate
 
61,697

 
3,900

 
21,757

 

 
87,354

   Other real estate
 
10,593

 

 

 

 
10,593

Consumer: