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, 2018

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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer ý
Non-accelerated filer o	(Do not check if a smaller reporting company)
	Small reporting company o
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  o

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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 4, 2018 there were 13,757,937 shares of the registrant’s common stock outstanding.

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

2018 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

PART 1	FINANCIAL INFORMATION	3
ITEM 1	FINANCIAL STATEMENTS (Unaudited)	4
ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32
ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	54
ITEM 4	CONTROLS AND PROCEDURES	54
PART II	OTHER INFORMATION	55
ITEM 1	LEGAL PROCEEDINGS	55
ITEM 1A	RISK FACTORS	55
ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	55
ITEM 3	DEFAULTS UPON SENIOR SECURITIES	55
ITEM 4	MINE SAFETY DISCLOSURES	55
ITEM 5	OTHER INFORMATION	55
ITEM 6	EXHIBITS	56
SIGNATURES		57

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PART 1: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share amounts)	March 31, 2018			December 31, 2017
ASSETS
Cash and due from banks	$	26,092		$	38,286
Interest-earning deposits in other banks	16,016			62,080
Federal funds sold	115			17
Total cash and cash equivalents	42,223			100,383
Available-for-sale debt securities	537,389			535,281
Equity securities	7,296			7,423
Loans, less allowance for credit losses of $8,788 at March 31, 2018 and $8,778 at December 31, 2017	908,701			891,901
Bank premises and equipment, net	9,429			9,398
Bank-owned life insurance	27,978			27,807
Federal Home Loan Bank stock	6,843			6,843
Goodwill	53,777			53,777
Core deposit intangibles	2,934			3,027
Accrued interest receivable and other assets	26,427			25,815
Total assets	$	1,622,997		$	1,661,655
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	561,490		$	585,039
Interest bearing	829,420			840,648
Total deposits	1,390,910			1,425,687
Junior subordinated deferrable interest debentures	5,155			5,155
Accrued interest payable and other liabilities	18,989			21,254
Total liabilities	1,415,054			1,452,096
Commitments and contingencies (Note 7)
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: 13,752,037 at March 31, 2018 and 13,696,722 at December 31, 2017	103,980			103,314
Retained earnings	107,544			103,419
Accumulated other comprehensive income (loss), net of tax	(3,581		)	2,826
Total shareholders’ equity	207,943			209,559
Total liabilities and shareholders’ equity	$	1,622,997		$	1,661,655

See notes to unaudited consolidated financial statements.

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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)	2018		2017
INTEREST INCOME:
Interest and fees on loans	$	12,006	$	10,090
Interest on deposits in other banks	98		75
Interest and dividends on investment securities:
Taxable	2,559		1,303
Exempt from Federal income taxes	1,067		2,122
Total interest income	15,730		13,590
INTEREST EXPENSE:
Interest on deposits	238		245
Interest on junior subordinated deferrable interest debentures	43		33
Other	23		4
Total interest expense	304		282
Net interest income before provision for credit losses	15,426		13,308
PROVISION FOR (REVERSAL OF) CREDIT LOSSES	—		(100		)
Net interest income after provision for credit losses	15,426		13,408
NON-INTEREST INCOME:
Service charges	755		747
Appreciation in cash surrender value of bank-owned life insurance	171		148
Interchange fees	345		324
Net realized gains on sales of investment securities	815		482
Federal Home Loan Bank dividends	121		128
Loan placement fees	166		91
Other income	398		326
Total non-interest income	2,771		2,246
NON-INTEREST EXPENSES:
Salaries and employee benefits	6,416		5,855
Occupancy and equipment	1,537		1,179
Professional services	438		420
Data processing	480		424
Regulatory assessments	162		175
ATM/Debit card expenses	201		166
License and maintenance contracts	212		146
Directors’ expenses	90		229
Advertising	189		170
Internet banking expense	195		169
Acquisition and integration	217		—
Amortization of core deposit intangibles	94		47
Other	1,137		1,133
Total non-interest expenses	11,368		10,113
Income before provision for income taxes	6,829		5,541
Provision for income taxes	1,538		1,291
Net income	$	5,291	$	4,250
Earnings per common share:
Basic earnings per share	$	0.39	$	0.35
Weighted average common shares used in basic computation	13,669,976		12,167,810
Diluted earnings per share	$	0.38	$	0.35
Weighted average common shares used in diluted computation	13,804,480		12,317,579
Cash dividend per common share	$	0.07	$	0.06

See notes to unaudited consolidated financial statements.

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	For the Quarter Ended March 31,
(In thousands)	2018			2017
Net income	$	5,291		$	4,250
Other Comprehensive Income:
Unrealized gains (losses) on securities:
Unrealized holding (losses) gains arising during the period	(8,571		)	3,935
Less: reclassification of net gains included in net income	815			482
Other comprehensive (loss) income, before tax	(9,386		)	3,453
Tax benefit (expense) related to items of other comprehensive income	2,775			(1,452		)
Total other comprehensive (loss) income	(6,611		)	2,001
Comprehensive (loss) income	$	(1,320	)	$	6,251

See notes to unaudited consolidated financial statements.

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Quarter Ended March 31,
(In thousands)	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,291		$	4,250
Adjustments to reconcile net income to net cash provided by operating activities:
Net (increase) decrease in deferred loan costs	(80		)	267
Depreciation	426			332
Accretion	(218		)	(218		)
Amortization	1,972			2,201
Stock-based compensation	74			203
(Reversal of) provision for credit losses	—			(100		)
Net realized gains on sales of available-for-sale investment securities	(815		)	(482		)
Increase in bank-owned life insurance, net of expenses	(171		)	(148		)
Net decrease in accrued interest receivable and other assets	1,489			2,192
Net decrease in accrued interest payable and other liabilities	(2,266		)	(821		)
Benefit for deferred income taxes	646			298
Net cash provided by operating activities	6,348			7,974
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale investment securities	(92,189		)	(14,947		)
Proceeds from sales or calls of available-for-sale investment securities	69,315			24,922
Proceeds from maturity and principal repayments of available-for-sale investment securities	10,688			10,561
Net increase in loans	(16,720		)	(8,041		)
Purchases of premises and equipment	(457		)	(87		)
Net cash provided by (used in) investing activities	(29,363		)	12,408
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand, interest bearing and savings deposits	(27,615		)	23,260
Net decrease in time deposits	(7,161		)	(11,923		)
Repayments of borrowings from other financial institutions	—			(400		)
Proceeds from stock issued under employee stock purchase plan	43			—
Proceeds from exercise of stock options	549			371
Cash dividend payments on common stock	(961		)	(730		)
Net cash (used in) provided by financing activities	(35,145		)	10,578
Decrease in cash and cash equivalents	(58,160		)	30,960
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	100,383			38,568
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	42,223		$	69,528

	For the Quarter Ended March 31,
(In thousands)	2018		2017
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest	$	297	$	290
Income taxes	$	180	$	70

See notes to unaudited consolidated financial statements.

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Note 1.  Basis of Presentation

The interim unaudited condensed consolidated financial statements of Central Valley Community Bancorp and subsidiary have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). These interim condensed consolidated financial statements include the accounts of Central Valley Community Bancorp and its wholly owned subsidiary Central Valley Community Bank (the Bank) (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation.  Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted. The Company believes that the disclosures are adequate to make the information presented not misleading. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2017 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, 2018, and the results of its operations and its cash flows for the three month interim periods ended March 31, 2018 and 2017 have been included. The results of operations for interim periods are not necessarily indicative of results for the full year.

The preparation of these interim unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

    Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment, and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank.

Impact of New Financial Accounting Standards:

FASB Accounting Standards Update (ASU) 2014-09 - Revenue from Contracts with Customers(Topic 606): Revenue from Contracts with Customers was issued in May 2014. This ASU is the result of a joint project initiated by the FASB and the International Accounting Standards Board (IASB) to clarify the principles for recognizing revenue, and to develop common revenue standards and disclosure requirements that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosures; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required with regard to contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods therein, with early adoption permitted for reporting periods beginning after December 15, 2016. The Company adopted ASU 2014-09 on January 1, 2018 utilizing the modified retrospective approach. Since the guidance does not apply to revenue associated with financial instruments such as loans and investments, which are accounted for under other provisions of GAAP, there was no impact to interest income, our largest component of income. The Company adopted this ASU effective January 1, 2018 and it did not have a material impact on the Company’s consolidated financial position, cash flows or results of operations. No cumulative adjustment was required upon adoption.

The Company performed an overall assessment of revenue streams potentially affected by the ASU, including certain deposit related fees and interchange fees, to determine the potential impact of this guidance on our consolidated financial statements. Approximately 91% of our revenue, including all of our net interest income and a portion of our noninterest income, is out of scope of the guidance. The contracts that are in scope of the guidance are primarily related to service charges and fees on deposit accounts, debit card fees, ATM processing fees, and other service charges, commissions and fees. We have completed analyzing the individual contracts in scope and determined our revenue recognition practices within the scope of the ASU as described below did not change in any material regard upon adoption of the ASU.

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Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Merchant and Debit Card Fees: The Company earns interchange fees from cardholder transactions conducted through the payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

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. The main provisions of the update are to eliminate the available-for-sale classification of accounting for equity securities and to adjust the fair value disclosures for financial instruments carried at amortized costs such that the disclosed fair values represent an exit price as opposed to an entry price. The provisions of this update will require that equity securities be carried at fair market value on the balance sheet and any periodic changes in value will be adjustments to the income statement. A practical expedient is provided for equity securities without a readily determinable fair value, such that these securities can be carried at cost less any impairment. ASU No. 2016-01 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The impact of adoption of this ASU by the Company was not material, but did result in a reclassification of an equity investment from securities available-for-sale to equity securities. The Company was required to adopt the ASU provisions on January 1, 2018, and for those equity securities with readily determinable fair values, the Company elected the modified retrospective transition approach with a cumulative effect adjustment to the balance sheet. The impact of the adoption of this accounting standard on the Company’s consolidated financial statements will be subject to the price volatility of the equity investments. As a result of the adoption, $204,000 of after-tax unrealized losses on equity securities was reclassified on January 1, 2018, from accumulated other comprehensive income to retained earnings. In addition, the fair value disclosures for financial instruments in Note 3 are computed using an exit price notion as required by the ASU.

FASB Accounting Standards Update (ASU) 2016-02 - Leases - Overall (Subtopic 845), was issued February 2016. The update requires all leases, with the exception of short-term leases that have contractual terms of no greater than one year, to be recorded on the balance sheet. Under the provisions of the update, leases classified as operating will be reflected on the balance sheet with the recognition of both a right-of-use asset and a lease liability. Under the update, a distinction will exist between finance and operating type leases and the rules for determining which classification a lease will fall into are similar to existing rules. For public business entities, the amendments of this update are effective for interim and annual periods beginning after December 15, 2018. The update requires a modified retrospective transition under which comparative balance sheets from the earliest historical period presented will be revised to reflect what the financials would have looked like were the provisions of the update applied consistently in all prior periods. The Company is currently evaluating the provisions of ASU No. 2016-02 and has determined that the provisions of ASU No. 2016-02 will result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities; however, the Company does not expect this to have a material impact on the Company’s results of operations or cash flows.

FASB Accounting Standards Update (ASU) 2016-13 - Measurement of Credit Losses on Financial Instruments (Subtopic 326): Financial Instruments - Credit Losses, commonly referred to as “CECL,” was issued June 2016. The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to be based on an incurred loss methodology. Under CECL, reserves required for financial assets measured at amortized cost will reflect an organization’s estimate of all expected credit losses over the contractual term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (“HTM”) debt securities. Under the provisions of the update, credit losses recognized on available for sale (“AFS”) debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP a purchased loan’s contractual balance is adjusted to fair value through a credit discount and no reserve is recorded on the purchased loan upon acquisition. Since under CECL reserves will be established for purchased loans at the time of acquisition, the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. The FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage disclosures. For public business entities that are SEC filers, the amendments of the update will become effective beginning January 1, 2020. While the Company is currently evaluating the provisions of ASU No. 2016-13 to determine the

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potential impact the new standard will have on the Company’s Consolidated Financial Statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, and evaluating its current IT systems. Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the first reporting period in which the new standard is effective, but cannot yet estimate the magnitude of the one-time adjustment or the overall impact of the new guidance on the Company’s financial position, results of operations or cash flows.

FASB Accounting Standards Update (ASU) 2017-04 - Intangibles Goodwill and Other (Subtopic 350): Simplifying the Test for Goodwill Impairment, was issued January 2017. The provisions of the update eliminate the existing second step of the goodwill impairment test which provides for the allocation of reporting unit fair value among existing assets and liabilities, with the net leftover amount representing the implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update will provide that impairment should be recognized as the excess of any of the reporting unit’s goodwill over the fair value of the reporting unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the reporting unit’s goodwill. For public business entities that are SEC filers, the amendments of the update will become effective in fiscal years beginning after December 15, 2019.

FASB Accounting Standards Update (ASU) 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued March 2017. The provisions of the update require premiums recognized upon the purchase of callable debt securities to be amortized to the earliest call date in order to avoid losses recognized upon call. For public business entities that are SEC filers, the amendments of the update will become effective in fiscal years beginning after December 15, 2018. Management does not expect the requirements of this update to have a material impact on the Company’s financial position, results of operations or cash flows.

FASB Accounting Standards Update (ASU) 2017-09 - Compensation - Stock Compensation (Subtopic 718): Scope ofModification Accounting, was issued May 2017. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless all of the following conditions are met: the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The amendments in this Update are effective for annual periods, and interim periods within those annual periods, beginning after December 31, 2017. The Company adopted this ASU effective January 1, 2018 and it did not have a material impact on the Company’s Consolidated Financial Statements.

Note 2.  ACQUISITIONS

On October 1, 2017, the Company completed the acquisition of Folsom Lake Bank (“FLB”) for an aggregate transaction value of $28,475,000. FLB was merged into the Bank, and the Company issued 1,276,888 shares of common stock to the former shareholders of FLB. The Company also assumed the outstanding FLB stock options. With the FLB acquisition, the Company added two full service branches, located in Folsom, and Rancho Cordova, California. The FLB Roseville branch was consolidated with the Company’s Roseville branch in October 2017. FLB’s assets as of October 1, 2017 totaled approximately $196,148,000.

In accordance with GAAP guidance for business combinations, the Company recorded $13,466,000 of goodwill and $1,879,000 of other intangible assets on the acquisition date. The other intangible assets are primarily related to core deposits and are being amortized using a straight-line method over a period of ten years with no significant residual value. For tax purposes, purchase accounting adjustments including goodwill are all non-taxable and/or non-deductible. Acquisition related costs of $217,000 are included in the income statement for the quarter ended March 31, 2018.

The acquisition was consistent with the Company’s strategy to build a regional presence in Central California. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region. Goodwill arising from the acquisition consisted largely of synergies and the expected cost savings resulting from the combined operations.     

Pro Forma Results of Operations

The following table presents pro forma results of operations information for the periods presented as if the acquisition had occurred on January 1, 2017 after giving effect to certain adjustments. The unaudited pro forma results of operations for the three months endedMarch 31, 2017 include the historical accounts of the Company and FLB and pro forma adjustments as

10

may be required, including the amortization of intangibles with definite lives and the amortization or accretion of any premiums or discounts arising from fair value adjustments for assets acquired and liabilities assumed. The pro forma information is intended for informational purposes only and is not necessarily indicative of the Company’s future operating results or operating results that would have occurred had the acquisition been completed at the beginning of 2017. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. (In thousands, except per-share amounts):

Pro Forma Results of Operations	For the Quarter Ended March 31,
(In thousands, except per share amounts)	2017
Net interest income	$	14,907
(Reversal of) Provision for credit losses	(100		)
Non-interest income	2,298
Non-interest expense	11,303
Income before provision for income taxes	6,002
Provision for income taxes	1,481
Net income	$	4,521
Basic earnings per common share	$	0.37
Diluted earnings per common share	$	0.37

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Note 3.  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, 2018
	Carrying Amount		Fair Value
(In thousands)			Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	26,092	$	26,092	$	—	$	—	$	26,092
Interest-earning deposits in other banks	16,016		16,016		—		—		16,016
Federal funds sold	115		115		—		—		115
Available-for-sale debt securities	537,389		—		537,389		—		537,389
Equity securities	7,296		7,296		—		—		7,296
Loans, net	908,701		—		—		900,986		900,986
Federal Home Loan Bank stock	6,843		N/A		N/A		N/A		N/A
Accrued interest receivable	6,159		22		2,939		3,198		6,159
Financial liabilities:
Deposits	1,390,910		1,268,148		120,978		—		1,389,126
Junior subordinated deferrable interest debentures	5,155		—		—		3,950		3,950
Accrued interest payable	110		—		72		38		110

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	December 31, 2017
	Carrying Amount		Fair Value
(In thousands)			Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	38,286	$	38,286	$	—	$	—	$	38,286
Interest-earning deposits in other banks	62,080		62,080		—		—		62,080
Federal funds sold	17		17		—		—		17
Available-for-sale debt securities	535,281		—		535,281		—		535,281
Equity securities	7,423		7,423		—		—		7,423
Loans, net	891,901		—		—		899,191		899,191
Federal Home Loan Bank stock	6,843		N/A		N/A		N/A		N/A
Accrued interest receivable	7,168		57		3,256		3,855		7,168
Financial liabilities:
Deposits	1,425,687		1,296,048		127,966		—		1,424,014
Junior subordinated deferrable interest debentures	5,155		—		—		3,550		3,550
Accrued interest payable	110		—		72		38		110

These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments.  In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

These estimates are made at a specific point in time based on relevant market data and information about the financial instruments.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the fair values presented.

The methods and assumptions used to estimate fair values are described as follows:

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

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

(c) Loans — Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Purchased credit impaired (PCI) loans are measured at estimated fair value on the date of acquisition. Carrying value is calculated as the present value of expected cash flows and approximates fair value and included in Level 3. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are initially valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The estimated fair values of financial instruments disclosed above as of March 31, 2018 follow the guidance in ASU 2016-01 which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity, and marketability factors. The fair values shown as of December 31, 2017 and prior use an “entry price” approach.

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

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

(f) 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.

(g) 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.

(h) 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, 2018:

Recurring Basis

The Company is required or permitted to record the following assets at fair value on a recurring basis as of March 31, 2018 (in thousands). 

Description	Fair Value		Level 1		Level 2		Level 3
Available-for-sale debt securities:
U.S. Treasury securities	$	32,607	$	—	$	32,607	$	—
U.S. Government agencies	69,852		—		69,852		—
Obligations of states and political subdivisions	140,626		—		140,626		—
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	203,717		—		203,717		—
Private label mortgage and asset backed securities	90,587		—		90,587		—
Equity securities	7,296		7,296		—		—
Total assets measured at fair value on a recurring basis	$	544,685	$	7,296	$	537,389	$	—

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

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the three months ended March 31, 2018, no transfers between levels occurred.

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There were no Level 3 assets measured at fair value on a recurring basis at or during the three months ended March 31, 2018. Also there were no liabilities measured at fair value on a recurring basis at March 31, 2018.

Non-recurring Basis

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at March 31, 2018.

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 months month period ended March 31, 2018.

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 $165,000 with a valuation allowance of $165,000 at March 31, 2018, resulting in fair value of $0. The valuation allowance represent specific allocation for the allowance for credit losses for impaired loans.

There were no charge-offs related to loans carried at fair value during the three months ended March 31, 2018 and 2017. Activity related to changes in the allowance for loan losses related to impaired loans for the three months ended March 31, 2018 and 2017 was not considered significant for disclosure purposes. There were no liabilities measured at fair value on a non-recurring basis at March 31, 2018.

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, 2017:

Recurring Basis

The Company is required or permitted to record the following assets at fair value on a recurring basis as of December 31, 2017 (in thousands).

Description	Fair Value		Level 1		Level 2		Level 3
Available-for-sale debt securities:
U.S. Government agencies	$	66,587	$	—	$	66,587	$	—
Obligations of states and political subdivisions	143,105		—		143,105		—
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	234,908		—		234,908		—
Private label mortgage and asset backed securities	90,681		—		90,681		—
Equity securities	7,423		7,423		—		—
Total assets measured at fair value on a recurring basis	$	542,704	$	7,423	$	535,281	$	—

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

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     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, 2017, 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, 2017. Also there were no liabilities measured at fair value on a recurring basis at December 31, 2017.

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, 2017 (in thousands).

Description	Fair Value		Level 1		Level 2		Level 3
Other repossessed assets	70		—		—		70
Total assets measured at fair value on a non-recurring basis	$	70	$	—	$	—	$	70

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 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, 2017.

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.

As of December 31, 2017, there were no loans measured using the fair value of the collateral for collateral dependent loans.

During the year ended December 31, 2017 specific allocation for the allowance for credit losses related to loans carried at fair value was $0. During the year ended December 31, 2017, 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, 2017.

Note 4.  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, 2018, $87,955,000 of these securities were held as collateral for borrowing arrangements, public funds, and for other purposes. The Company adopted ASU 2016-01 on January 1, 2018, and applied it prospectively without prior period amounts restated. Upon adoption, equity securities included in the available-for-sale portfolio were reclassified to equity securities. The December 31, 2017 cost and fair value of the equity securities transferred were $7,500,000 and $7,423,000, respectively.

     The fair value of the available-for-sale investment portfolio reflected a net unrealized loss of $5,171,000 at March 31, 2018 compared to an unrealized gain of $4,089,000 at December 31, 2017. The unrealized gain/(loss) recorded is net of $(1,590,000) and $1,186,000 in tax (benefits) liabilities as accumulated other comprehensive income within shareholders’ equity at March 31, 2018 and December 31, 2017, respectively.

     The following table sets forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands): 

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	March 31, 2018
Available-for-Sale Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
U.S. Treasury securities	$	32,638	$	—	$	(31	)	$	32,607
U.S. Government agencies	69,563		543		(254		)	69,852
Obligations of states and political subdivisions	138,422		3,116		(912		)	140,626
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	208,730		196		(5,209		)	203,717
Private label mortgage and asset backed securities	93,207		875		(3,495		)	90,587
Total available-for-sale	$	542,560	$	4,730	$	(9,901	)	$	537,389

	December 31, 2017
Available-for-Sale Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
U.S. Government agencies	$	65,994	$	667	$	(74	)	$	66,587
Obligations of states and political subdivisions	136,955		6,240		(90		)	143,105
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	237,210		601		(2,903		)	234,908
Private label mortgage and asset backed securities	91,033		924		(1,276		)	90,681
Total available-for-sale	$	531,192	$	8,432	$	(4,343	)	$	535,281

Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended March 31, 2018 and 2017 are shown below (in thousands):

	For the Quarter Ended March 31,
Available-for-Sale Securities	2018			2017
Proceeds from sales or calls	$	69,315		$	24,922
Gross realized gains from sales or calls	1,067			732
Gross realized losses from sales or calls	(252		)	(250		)

Losses recognized in 2017 and 2018 were incurred in order to reposition the investment securities portfolio based on the current rate environment.  The securities which were sold at a loss were acquired when the rate environment was not as volatile.  As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using proceeds to purchase securities that fit with the Company’s current risk profile is appropriate and beneficial to the Company.

The provision for income taxes includes $241,000 and $203,000 income tax impact from the reclassification of unrealized net gains on available-for-sale securities to realized net gains on available-for-sale securities for the three months ended March 31, 2018 and 2017, respectively.

Investment securities, aggregated by investment category, with unrealized losses as of the dates indicated are summarized and classified according to the duration of the loss period as follows (in thousands): 

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	March 31, 2018
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Available-for-Sale Securities	Value		Losses			Value		Losses			Value		Losses
Debt securities:
U.S. Treasury securities	$	32,607	$	(31	)	$	—	$	—		$	32,607	$	(31	)
U.S. Government agencies	21,626		(232		)	2,518		(22		)	24,144		(254		)
Obligations of states and political subdivisions	40,931		(760		)	3,282		(152		)	44,213		(912		)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	106,725		(2,783		)	35,105		(2,426		)	141,830		(5,209		)
Private label mortgage and asset backed securities	85,827		(3,495		)	—		—			85,827		(3,495		)
Total available-for-sale	$	287,716	$	(7,301	)	$	40,905	$	(2,600	)	$	328,621	$	(9,901	)

	December 31, 2017
	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	$	8,201	$	(47	)	$	6,741	$	(27	)	$	14,942	$	(74	)
Obligations of states and political subdivisions	1,627		(3		)	3,357		(87		)	4,984		(90		)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	82,604		(822		)	64,488		(2,081		)	147,092		(2,903		)
Private label mortgage and asset backed securities	88,312		(1,276		)	—		—			88,312		(1,276		)
Total available-for-sale	$	180,744	$	(2,148	)	$	74,586	$	(2,195	)	$	255,330	$	(4,343	)

The Company periodically evaluates each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations.  The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings.  The discount rate in this analysis is the original yield expected at time of purchase.

     As of March 31, 2018, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). The Company evaluated all individual available-for-sale investment securities with an unrealized loss at March 31, 2018 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at March 31, 2018 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000.  The Company also analyzed any securities that may have been downgraded by credit rating agencies. 

For those investment securities that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those investment securities.  For those bonds that were obligations of states and political subdivisions with an investment grade rating by the rating agencies, the Company also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded there were no OTTI losses recorded during the three months ended March 31, 2018. There were no OTTI losses recorded during the three months ended March 31, 2017.

U.S. Treasury Securities

At March 31, 2018, the Company held one U.S. Treasury security, which had been in a loss position for less than 12 months. The unrealized loss on the Company’s investment in direct obligations of U.S. Treasury securities is associated with the general fluctuation of market interest rates and are not an indication of any deterioration in the credit quality of the security issuer. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell, those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2018.

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U.S. Government Agencies

At March 31, 2018, the Company held 23 U.S. Government agency securities, of which six 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 the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2018.

Obligations of States and Political Subdivisions

At March 31, 2018, the Company held 82 obligations of states and political subdivision securities of which 13 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 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, 2018.

U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations

At March 31, 2018, the Company held 139 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 51 were in a loss position for less than 12 months and 18 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, 2018.

Private Label Mortgage and Asset Backed Securities

At March 31, 2018, the Company had a total of 29 PLMBS with a remaining principal balance of $93,207,000 and a net unrealized loss of approximately $2,620,000.  Nine of these PLMBS with a remaining principal balance of $1,306,000 had credit ratings below investment grade.  17 of the PLMBS securities were in a loss position for less than 12 months at March 31, 2018. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell, those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2018. The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary.

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The following tables provide a roll forward for the three months month periods ended March 31, 2018 and 2017 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)	2018		2017
Beginning balance	$	874	$	874
Amounts related to credit loss for which an OTTI charge was not previously recognized	—		—
Increases to the amount related to credit loss for which OTTI was previously recognized	—		—
Realized gain for securities sold	—		—
Ending balance	$	874	$	874

The amortized cost and estimated fair value of available-for-sale investment securities at March 31, 2018 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, 2018
Available-for-Sale Securities	Amortized Cost		Estimated Fair Value
Within one year	$	34,567	$	34,560
After one year through five years	5,255		5,382
After five years through ten years	23,031		23,266
After ten years	108,207		110,025
	171,060		173,233
Investment securities not due at a single maturity date:
U.S. Government agencies	69,563		69,852
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	208,730		203,717
Private label mortgage and asset backed securities	93,207		90,587
Total available-for-sale	$	542,560	$	537,389

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Note 5.  Loans and Allowance for Credit Losses

Outstanding loans are summarized as follows:

Loan Type (Dollars in thousands)	March 31, 2018			% of Total Loans		December 31, 2017			% of Total Loans
Commercial:
Commercial and industrial	$	99,101		10.8	%	$	100,856		11.2	%
Agricultural land and production	15,317			1.7	%	14,956			1.7	%
Total commercial	114,418			12.5	%	115,812			12.9	%
Real estate:
Owner occupied	202,416			22.1	%	204,452			22.7	%
Real estate construction and other land loans	87,571			9.5	%	96,460			10.7	%
Commercial real estate	300,642			32.8	%	269,254			29.9	%
Agricultural real estate	73,540			8.0	%	76,081			8.4	%
Other real estate	32,082			3.5	%	31,220			3.5	%
Total real estate	696,251			75.9	%	677,467			75.2	%
Consumer:
Equity loans and lines of credit	74,952			8.2	%	76,404			8.5	%
Consumer and installment	30,429			3.4	%	29,637			3.4	%
Total consumer	105,381			11.6	%	106,041			11.9	%
Net deferred origination costs	1,439					1,359
Total gross loans	917,489			100.0	%	900,679			100.0	%
Allowance for credit losses	(8,788		)			(8,778		)
Total loans	$	908,701				$	891,901

At March 31, 2018 and December 31, 2017, loans originated under Small Business Administration (SBA) programs totaling $25,798,000 and $25,925,000, respectively, were included in the real estate and commercial categories, of which, $19,174,000 or 74% and $19,182,000 or 74%, respectively, are secured by government guarantees.

Purchased Credit Impaired Loans

The Company has loans that were acquired in acquisitions for which there was at acquisition evidence of deterioration of credit quality since origination, and for which it was probable at acquisition that all contractually required payments would not be collected.

The carrying amount of those loans is included in the balance sheet amounts of loans receivable at March 31, 2018 and December 31, 2017. The amounts of loans at March 31, 2018 and December 31, 2017 are as follows (in thousands):

	March 31, 2018		December 31, 2017
Commercial	$	340	$	383
Outstanding balance	$	340	$	383
Carrying amount, net of allowance of $0	$	340	$	383

Purchased credit impaired (PCI) loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. The Company estimates the amount and timing of expected cash flows for each loan and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

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Certain of the loans acquired by the Company that are within the scope of Topic ASC 310-30 are not accounted for using the income recognition model of the Topic because the Company cannot reliably estimate cash flows expected to be collected. The carrying amounts of such loans (which are included in the carrying amount, net of allowance, described above) are as follows.

	March 31, 2018		December 31, 2017
Loans acquired during the year	$	—	$	—
Loans at the end of the period	$	340	$	383

Allowance for Credit Losses

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.

The following table shows the summary of activities for the Allowance as of and for the three months ended March 31, 2018 and 2017 by portfolio segment (in thousands):

	Commercial			Real Estate			Consumer			Unallocated		Total
Allowance for credit losses:
Beginning balance, January 1, 2018	$	2,071		$	5,795		$	825		$	87	$	8,778
(Reversal) provision charged to operations	(356		)	331			3			22		—
Losses charged to allowance	(50		)	—			(42		)	—		(92		)
Recoveries	71			5			26			—		102
Ending balance, March 31, 2018	$	1,736		$	6,131		$	812		$	109	$	8,788
Allowance for credit losses:
Beginning balance, January 1, 2017	$	2,180		$	6,200		$	852		$	94	$	9,326
(Reversal) provision charged to operations	(237		)	43			(5		)	99		(100		)
Losses charged to allowance	(44		)	(22		)	(116		)	—		(182		)
Recoveries	122			4			44			—		170
Ending balance, March 31, 2017	$	2,021		$	6,225		$	775		$	193	$	9,214

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The following is a summary of the Allowance by impairment methodology and portfolio segment as of March 31, 2018 and December 31, 2017 (in thousands):

	Commercial		Real Estate		Consumer		Unallocated		Total
Allowance for credit losses:
Ending balance, March 31, 2018	$	1,736	$	6,131	$	812	$	109	$	8,788
Ending balance: individually evaluated for impairment	$	2	$	166	$	32	$	—	$	200
Ending balance: collectively evaluated for impairment	$	1,734	$	5,965	$	780	$	109	$	8,588
Ending balance, December 31, 2017	$	2,071	$	5,795	$	825	$	87	$	8,778
Ending balance: individually evaluated for impairment	$	1	$	1	$	34	$	—	$	36
Ending balance: collectively evaluated for impairment	$	2,070	$	5,794	$	791	$	87	$	8,742

	Commercial		Real Estate		Consumer		Total
Loans:
Ending balance, March 31, 2018	$	114,418	$	696,251	$	105,381	$	916,050
Ending balance: individually evaluated for impairment	$	397	$	6,076	$	1,192	$	7,665
Ending balance: collectively evaluated for impairment	$	114,021	$	690,175	$	104,189	$	908,385
Loans:
Ending balance, December 31, 2017	$	115,812	$	677,467	$	106,041	$	899,320
Ending balance: individually evaluated for impairment	$	377	$	4,846	$	1,143	$	6,366
Ending balance: collectively evaluated for impairment	$	115,435	$	672,621	$	104,898	$	892,954

The following table shows the loan portfolio by class allocated by management’s internal risk ratings at March 31, 2018 (in thousands):

	Pass		Special Mention		Sub-Standard		Doubtful		Total
Commercial:
Commercial and industrial	$	87,076	$	10,811	$	1,214	$	—	$	99,101
Agricultural land and production	9,192		86		6,039		—		15,317
Real Estate:
Owner occupied	198,571		3,144		701		—		202,416
Real estate construction and other land loans	82,126		1,554		3,891		—		87,571
Commercial real estate	293,149		5,484		2,009		—		300,642
Agricultural real estate	48,100		—		25,440		—		73,540
Other real estate	30,917		—		1,165		—		32,082
Consumer:
Equity loans and lines of credit	72,908		601		1,443		—		74,952
Consumer and installment	30,427		—		2		—		30,429
Total	$	852,466	$	21,680	$	41,904	$	—	$	916,050

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The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2017 (in thousands):

	Pass		Special Mention		Sub-Standard		Doubtful		Total
Commercial:
Commercial and industrial	$	84,745	$	8,217	$	7,894	$	—	$	100,856
Agricultural land and production	10,848		206		3,902		—		14,956
Real Estate:
Owner occupied	196,838		4,795		2,819		—		204,452
Real estate construction and other land loans	90,927		1,625		3,908		—		96,460
Commercial real estate	261,746		4,147		3,361		—		269,254
Agricultural real estate	48,274		1,270		26,537		—		76,081
Other real estate	29,867		1,165		188		—		31,220
Consumer:
Equity loans and lines of credit	74,535		483		1,386		—		76,404
Consumer and installment	29,634		—		3		—		29,637
Total	$	827,414	$	21,908	$	49,998	$	—	$	899,320

The following table shows an aging analysis of the loan portfolio by class and the time past due at March 31, 2018 (in thousands):

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days Accruing		Non-accrual
Commercial:
Commercial and industrial	$	—	$	—	$	—	$	—	$	99,101	$	99,101	$	—	$	340
Agricultural land and production	—		—		—		—		15,317