OVLY Q1 2017 10-Q

Oak Valley Bancorp (OVLY) SEC Quarterly Report (10-Q) for Q2 2017

OVLY Q3 2017 10-Q
OVLY Q1 2017 10-Q OVLY Q3 2017 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2017

OR

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-34142

OAK VALLEY BANCORP

(Exact name of registrant as specified in its charter)

California

26-2326676

State or other jurisdiction of

I.R.S. Employer

incorporation or organization

Identification No.

125 N. Third Ave., Oakdale, CA  95361

(Address of principal executive offices)

(209) 848-2265

Issuer's telephone number

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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     No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

(Do not check if a smaller reporting company)

Emerging growth company 

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  8,089,105 shares of common stock outstanding as of August 4, 2017.

Oak Valley Bancorp

June 30, 2017

Table of Contents

Page

PART I – FINANCIAL INFORMATION

3

Item 1.

Financial Statements

3

Condensed Consolidated Balance Sheets at June 30, 2017 (Unaudited) and December 31, 2016 (Unaudited)

3

Condensed Consolidated Statements of Income for the Three and Six month period Ended June 30, 2017 and June 30, 2017 (Unaudited)

4

Condensed Consolidated Statements of Comprehensive Income for the Three and Six month period Ended June 30, 2017 and June 30, 2016 (Unaudited)

5

Condensed Consolidated Statements of Changes of Shareholders' Equity for the Year Ended December 31, 2016 and the Six-month period Ended June 30, 2017 (Unaudited)

6

Condensed Consolidated Statements of Cash Flows for the Six-month periods Ended June 30, 2017 and June 30, 2016 (Unaudited)

7

Notes to Condensed Consolidated Financial Statements

8

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

Item 4.

Controls and Procedures

44

PART II – OTHER INFORMATION

45

Item 1.

Legal Proceedings

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3.

Defaults Upon Senior Securities

45

Item 4.

Mine Safety Disclosures

45

Item 5.

Other Information

45

Item 6.

Exhibits

46

2

PART I – FINANCIAL STATEMENTS

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(dollars in thousands)

June 30,

December 31,

2017

2016

ASSETS

Cash and due from banks

$ 171,179 $ 179,025

Federal funds sold

10,980 11,785

Cash and cash equivalents

182,159 190,810

Securities available for sale

175,252 160,333

Loans, net of allowance for loan loss of $7,854 and $7,832 at June 30, 2017 and December 31, 2016, respectively

614,082 601,104

Bank premises and equipment, net

13,223 13,688

Other real estate owned

1,210 1,210

Interest receivable and other assets

34,569 34,965
$ 1,020,495 $ 1,002,110

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits

$ 925,786 $ 914,093

Interest payable and other liabilities

6,609 5,567

Total liabilities

932,395 919,660

Commitments and contingencies

Shareholders' equity

Common stock, no par value; 50,000,000 shares authorized, 8,089,705 and 8,088,455 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively

24,698 24,682

Additional paid-in capital

3,528 3,473

Retained earnings

58,546 54,520

Accumulated other comprehensive income (loss), net of tax

1,328 (225 )

Total shareholders' equity

88,100 82,450
$ 1,020,495 $ 1,002,110

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

3

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(dollars in thousands, except per share amounts)

THREE MONTHS ENDED
JUNE 30,

SIX MONTHS ENDED
JUNE 30,

2017

2016

2017

2016

INTEREST INCOME

Interest and fees on loans

$ 7,230 $ 7,129 $ 14,152 $ 13,677

Interest on securities available for sale

1,102 1,016 2,176 1,993

Interest on federal funds sold

21 5 36 14

Interest on deposits with banks

372 147 672 323

Total interest income

8,725 8,297 17,036 16,007

INTEREST EXPENSE

Deposits

270 191 499 359

Total interest expense

270 191 499 359

Net interest income

8,455 8,106 16,537 15,648

Provision for loan losses

35 125 35 325

Net interest income after provision for loan losses

8,420 7,981 16,502 15,323

OTHER INCOME

Service charges on deposits

351 337 686 670

Earnings on cash surrender value of life insurance

128 95 256 203

Mortgage commissions

37 49 99 95

Gains on called securities

1 12 390 18

Other

1,519 563 2,076 1,107

Total non-interest income

2,036 1,056 3,507 2,093

OTHER EXPENSES

Salaries and employee benefits

3,457 3,370 7,069 6,725

Occupancy expenses

817 813 1,673 1,651

Data processing fees

409 440 755 911

Regulatory assessments (FDIC & DBO)

136 170 280 327

Other operating expenses

1,257 1,394 2,506 2,760

Total non-interest expense

6,076 6,187 12,283 12,374

Net income before provision for income taxes

4,380 2,850 7,726 5,042

PROVISION FOR INCOME TAXES

1,550 946 2,689 1,629

NET INCOME

$ 2,830 $ 1,904 $ 5,037 $ 3,413

NET INCOME PER COMMON SHARE

$ 0.35 $ 0.24 $ 0.63 $ 0.43

NET INCOME PER DILUTED COMMON SHARE

$ 0.35 $ 0.24 $ 0.62 $ 0.42

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

4

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

THREE MONTHS ENDED

JUNE 30,

SIX MONTHS ENDED
JUNE 30,

(in thousands)

2017

2016

2017

2016

Net income

$ 2,830 $ 1,904 $ 5,037 $ 3,413

Other comprehensive income:

Unrealized holding gains on securities arising during the current period, net of tax effect of $820 thousand and $1.2 million for the three and six month periods ended June 30, 2017, respectively, and $748 thousand and $816 thousand for the comparable 2016 periods

1,171 1,069 1,783 1,168

Reclassification adjustment due to net gains realized on sales and calls of securities, net of tax effect of $4 hundred and $160 thousand for the three and six months ended June 30, 2017, respectively, and $5 thousand and $7 thousand for the comparable 2016 periods

(1 ) (7 ) (230 ) (11 )

Other comprehensive income

1,170 1,062 1,553 1,157

Comprehensive income

$ 4,000 $ 2,966 $ 6,590 $ 4,570

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

5

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)

YEAR ENDED DECEMBER 31, 2016 AND SIX MONTHS ENDED JUNE 30, 2017

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Retained

Comprehensive

Shareholders'

(dollars in thousands)

Shares

Amount

Capital

Earnings

Income (Loss)

Equity

Balances, January 1, 2016

8,078,155 $ 24,682 $ 3,217 $ 48,795 $ 1,569 $ 78,263

Restricted stock issued

17,000 0

Restricted stock forfeited

(6,700 ) 0

Cash dividends declared

(1,940 ) (1,940 )

Stock based compensation

256 256

Other comprehensive loss

(1,794 ) (1,794 )

Net income

7,665 7,665

Balances, December 31, 2016

8,088,455 $ 24,682 $ 3,473 $ 54,520 $ (225 ) $ 82,450

Stock options exercised

1,500 16 16

Restricted stock issued

6,000 0

Restricted stock forfeited

(6,250 ) 0

Cash dividends declared

(1,011 ) (1,011 )

Stock based compensation

55 55

Other comprehensive income

1,553 1,553

Net income

5,037 5,037

Balances, June 30, 2017

8,089,705 $ 24,698 $ 3,528 $ 58,546 $ 1,328 $ 88,100

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

6

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDED JUNE 30,

(dollars in thousands)

2017

2016

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$ 5,037 $ 3,413

Adjustments to reconcile net earnings to net cash from operating activities:

Provision for loan losses

35 325

Increase (decrease) in deferred fees/costs, net

77 (132 )

Depreciation

560 646

Amortization of investment securities, net

393 164

Stock based compensation

55 129

Gain on sale of premises and equipment

0 (1 )

OREO loss on sales and write downs

0 88

Gain on sales and calls of available for sale securities

(390 ) (18 )

Earnings on cash surrender value of life insurance

(256 ) (203 )

Gain on BOLI death benefit

0 (2 )

Increase in interest payable and other liabilities

1,042 1,100

Increase in interest receivable

(58 ) (125 )

Increase in other assets

(37 ) (324 )

Net cash from operating activities

6,458 5,060

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of available for sale securities

(16,023 ) (32,286 )

Proceeds from maturities, calls, and principal paydowns of securities available for sale

3,741 15,353

Net increase in loans

(13,090 ) (39,467 )

Purchase of FHLB Stock

(340 ) (79 )

Proceeds from sale of OREO

0 746

Proceeds from redemption of BOLI policies

0 186

Proceeds from sales of premises and equipment

0 1

Net purchases of premises and equipment

(95 ) (291 )

Net cash used in investing activities

(25,807 ) (55,837 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Shareholder cash dividends paid

(1,011 ) (969 )

Net increase in demand deposits and savings accounts

14,602 22,180

Net (decrease) increase in time deposits

(2,909 ) 1,587

Proceeds from sale of common stock and exercise of stock options

16 0

Net cash from financing activities

10,698 22,798

NET DECREASE IN CASH AND CASH EQUIVALENTS

(8,651 ) (27,979 )

CASH AND CASH EQUIVALENTS, beginning of period

190,810 190,603

CASH AND CASH EQUIVALENTS, end of period

$ 182,159 $ 162,624

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the period for:

Interest

$ 500 $ 368

Income taxes

$ 2,087 $ 11

NON-CASH INVESTING ACTIVITIES:

Change in unrealized gain on available-for-sale securities

$ 2,640 $ 1,966

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

7

OAK VALLEY BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

On July 3, 2008 (the "Effective Date"), a bank holding company reorganization was completed whereby Oak Valley Bancorp ("the Company") became the parent holding company for Oak Valley Community Bank ( the "Bank").  On the Effective Date, a tax-free exchange was completed whereby each outstanding share of the Bank was converted into one share of the Company and the Company became the sole wholly-owned subsidiary of the holding company.

The consolidated financial statements include the accounts of the parent company and its wholly-owned bank subsidiary. Unless otherwise stated, the "Company" refers to the consolidated entity, Oak Valley Bancorp, while the "Bank" refers to Oak Valley Community Bank. All material intercompany transactions have been eliminated. In the opinion of Management, the consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations, changes in shareholders' equity and cash flows.  All adjustments are of a normal, recurring nature. The interim consolidated financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three and six month periods ended June 30, 2017 are not necessarily indicative of the results of a full year's operations. Certain prior year amounts have been reclassified to conform to the current year presentation. There was no effect on net income or shareholders' equity as a result of reclassifications. For further information, refer to the audited consolidated financial statements and footnotes included in the Company's Form 10-K for the year ended December 31, 2016.

Oak Valley Community Bank is a California state-chartered bank. The Company was incorporated under the laws of the State of California on May 31, 1990, and began operations in Oakdale on May 28, 1991. The Company operates branches in Oakdale, Sonora, Bridgeport, Bishop, Mammoth Lakes, Modesto, Manteca, Patterson, Turlock, Ripon, Stockton, and Escalon, California. The Bridgeport, Mammoth Lakes, and Bishop branches operate as a separate division, Eastern Sierra Community Bank. The Company's primary source of revenue is providing loans to customers who are predominantly middle-market businesses.

On December 23, 2015, the Company completed its acquisition of Mother Lode Bank ("MLB"), a California state-chartered bank headquartered in Sonora, California, in a transaction in which Mother Lode Bank was merged with and into the Bank, with the Bank as the surviving company in the transaction. The purchase price for Mother Lode Bank was approximately $7.3 million.

The preparation of 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 period. Significant accounting estimates reflected in the Company's consolidated financial statements include the allowance for loan losses, accounting for income taxes, fair value measurements, and the determination, recognition and measurement of impaired loans. Actual results could differ from these estimates.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is a converged standard involving FASB and International Financial Reporting Standards that provides a single comprehensive revenue recognition model for all contracts with customers across transactions and industries. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount and at a time that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Subsequent updates related to Revenue from Contracts with Customers (Topic 606) are as follows:

August 2015 ASU No. 2015-14 - Deferral of the Effective Date, institutes a one-year deferral of the effective date of this amendment to annual reporting periods beginning after December 15, 2017. Early application is permitted only as of annual periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

March 2016 ASU No. 2016-08 - Principal versus Agent Considerations (Reporting Revenue Gross versus Net), clarifies the implementation guidance on principal versus agent considerations and on the use of indicators that assist an entity in determining whether it controls a specified good or service before it is transferred to the customer.

April 2016 ASU No. 2016-10 - Identifying Performance Obligations and Licensing, provides guidance in determining performance obligations in a contract with a customer and clarifies whether a promise to grant a license provides a right to access or the right to use intellectual property.

May 2016 ASU No. 2016-12 - Narrow Scope Improvements and Practical Expedients, gives further guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition.

8

The adoption of this update is not expected to have a material impact on the Company's consolidated financial statements.

In September, 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement Period Adjustments (Topic 805). This ASU eliminates the requirement to restate prior period financial statements for measurement period adjustments to assets acquired and liabilities assumed in a business combination. The new guidance under this update requires the cumulative impact of measurement period adjustments be recognized in the period the adjustment is determined. This update does not change what constitutes a measurement period adjustment, nor does it change the length of the measurement period. The new standard is effective for interim annual periods beginning after December 15, 2015 and should be applied prospectively to measurement period adjustments that occur after the effective date. The adoption of this update is not expected to have a material impact on the Company's consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10) : Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU make improvements to GAAP related to financial instruments that include the following as applicable to us:

Equity investments, except for those accounted for under the equity method of accounting or those that result in consolidation of the investee, are required to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment - if impairment exists, this requires measuring the investment at fair value.

Eliminates the requirement for public companies to disclose the method(s) and significant assumptions used to estimate the fair value that is currently required to be disclosed for financial instruments measured at amortized cost on the balance sheet.

Public companies will be required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements.

The reporting entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.

ASU 2016-01 is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU will impact our financial statement disclosures, however, we do not expect this ASU to have a material impact on our financial condition or results of operations.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities, including leases classified as operating leases under previous GAAP, on the balance sheet and requiring additional disclosures of key information about leasing arrangements. ASU 2016-02 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2018 and requires a modified retrospective approach to adoption. Early application of the amendments is permitted. While the Company has not quantified the impact to its balance sheet, it does expect the adoption of this ASU will result in a gross-up in its balance sheet as a result of recording a right-of-use asset and a lease liability for each lease, which is expected to increase our leverage ratio by less than one percent.

In March 2016, FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.   The amendments in ASU 2016-09 simplify several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period. The Company adopted this ASU for the full fiscal year of 2016 and it did not have a significant impact on its consolidated financial statements.

9

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). This update changes the methodology used by financial institutions under current U.S. GAAP to recognize credit losses in the financial statements.  Currently, U.S. GAAP requires the use of the incurred loss model, whereby financial institutions recognize in current period earnings, incurred credit losses and those inherent in the financial statements, as of the date of the balance sheet.    This guidance results in a new model for estimating the allowance for loan and lease losses, commonly referred to as the Current Expected Credit Loss ("CECL") model.  Under the CECL model, financial institutions are required to estimate future credit losses and recognize those losses in current period earnings.  The amendments within the update are effective for fiscal years and all interim periods beginning after December 15, 2019, with early adoption permitted.  Upon adoption of the amendments within this update, the Company will be required to make a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Company is currently in the process of evaluating the impact the adoption of this update will have on its financial statements. While the Company has not quantified the impact of this ASU, it does expect changing from the current incurred loss model to an expected loss model will result in an earlier recognition of losses, and an increase to our allowance for loan losses.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (Topic 230). This update clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of the amendments within this update will have a material impact on the Company's financial statements.

In January 2017, FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.   These amendments apply to ASU 2014-9 (Revenue from Contracts with Customers), ASU 2016-02 (Leases), and ASU 2016-13 (Financial Instruments - Credit Losses).  The Company does not expect these amendments to have a significant impact on its consolidated financial statements.

NOTE 3 – SECURITIES

The amortized cost and estimated fair values of debt securities as of June 30, 2017 are as follows:

(dollars in thousands)

Amortized

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Fair Value

Available-for-sale securities:

U.S. agencies

$ 24,600 $ 552 $ (89 ) $ 25,063

Collateralized mortgage obligations

4,872 7 (17 ) 4,862

Municipalities

84,668 2,610 (85 ) 87,193

SBA pools

12,939 8 (33 ) 12,914

Corporate debt

21,354 99 (648 ) 20,805

Asset backed securities

21,257 93 (29 ) 21,321

Mutual fund

3,305 0 (211 ) 3,094
$ 172,995 $ 3,369 $ (1,112 ) $ 175,252

The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2017.

(dollars in thousands)

Less than 12 months

12 months or more

Total

Description of Securities

Fair

Value

Unrealized

Loss

Fair

Value

Unrealized

Loss

Fair

Value

Unrealized

Loss

U.S. agencies

$ 6,537 (89 ) $ 0 $ 0 $ 6,537 $ (89 )

Collateralized mortgage obligations

1,012 (17 ) 0 0 1,012 (17 )

Municipalities

9,698 (70 ) 1,877 (15 ) 11,575 (85 )

SBA pools

8,393 (24 ) 726 (9 ) 9,119 (33 )

Corporate debt

4,728 (271 ) 9,115 (377 ) 13,843 (648 )

Asset backed securities

1,920 (15 ) 3,141 (14 ) 5,061 (29 )

Mutual fund

0 0 3,094 (211 ) 3,094 (211 )

Total temporarily impaired securities

$ 32,288 $ (486 ) $ 17,953 $ (626 ) $ 50,241 $ (1,112 )

10

At June 30, 2017, there were three U.S municipalities, two SBA pools, seven corporate debts, three asset backed securities and one mutual fund that comprised the total securities in an unrealized loss position for greater than 12 months and five U.S. agencies, one collateralized mortgage obligation, nine municipalities, four SBA pools, three corporate debts and one asset backed security that make up the total securities in a loss position for less than 12 months. Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary. This evaluation encompasses various factors including, the nature of the investment, the cause of the impairment, the severity and duration of the impairment, credit ratings and other credit related factors such as third party guarantees and volatility of the security's fair value. Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due primarily to interest rate changes and the Company does not intend to sell the securities and it is not likely that we will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.

The amortized cost and estimated fair value of investment securities at June 30, 2017, by contractual maturity or call date, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(dollars in thousands)

Amortized

Fair

Cost

Value

Available-for-sale securities:

Due in one year or less

$ 12,771 $ 13,014

Due after one year through five years

51,484 51,883

Due after five years through ten years

61,040 62,336

Due after ten years

47,700 48,019
$ 172,995 $ 175,252

The amortized cost and estimated fair values of debt securities as of December 31, 2016, are as follows:

(dollars in thousands)

Amortized

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Fair Value

Available-for-sale securities:

U.S. agencies

$ 27,879 $ 616 $ (209 ) $ 28,286

Collateralized mortgage obligations

4,159 7 (57 ) 4,109

Municipalities

77,957 1,318 (946 ) 78,329

SBA pools

7,219 0 (51 ) 7,168

Corporate debt

21,349 81 (867 ) 20,563

Asset backed securities

18,888 32 (101 ) 18,819

Mutual fund

3,264 0 (205 ) 3,059
$ 160,715 $ 2,054 $ (2,436 ) $ 160,333

11

The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2016.

(dollars in thousands)

Less than 12 months

12 months or more

Total

Description of Securities

Fair

Value

Unrealized

Loss

Fair

Value

Unrealized

Loss

Fair

Value

Unrealized

Loss

U.S. agencies

$ 8,769 $ (208 ) $ 718 $ (1 ) $ 9,487 $ (209 )

Collateralized mortgage obligations

3,166 (57 ) 0 0 3,166 (57 )

Municipalities

45,137 (917 ) 402 (29 ) 45,539 (946 )

SBA pools

6,415 (46 ) 753 (5 ) 7,168 (51 )

Corporate debt

12,776 (757 ) 2,884 (110 ) 15,660 (867 )

Asset backed securities

2,576 (15 ) 8,272 (86 ) 10,848 (101 )

Mutual fund

0 0 3,059 (205 ) 3,059 (205 )

Total temporarily impaired securities

$ 78,839 $ (2,000 ) $ 16,088 $ (436 ) $ 94,927 $ (2,436 )

We recognized gross gains of $1,000 and $390,000 for the three and six month periods ended June 30, 2017, respectively, on certain available-for-sale securities that were called, which compares to $12,000 and $18,000 in the same periods of 2016. There were no securities sold during the first six months of 2017 or 2016.

Securities carried at $93,352,000 and $89,362,000 at June 30, 2017 and December 31, 2016, respectively, were pledged to secure deposits of public funds.

NOTE 4 – LOANS

Our customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. As of June 30, 2017, approximately 79% of the Company's loans are commercial real estate loans which include construction loans. Approximately 10% of the Company's loans are for general commercial uses including professional, retail, and small business. Additionally, 7% of the Company's loans are for residential real estate and other consumer loans. The remaining 4% are agriculture loans. Loan totals were as follows:

(in thousands)

June 30, 2017

December 31, 2016

Commercial real estate:

Commercial real estate- construction

$ 15,804 $ 23,378

Commercial real estate- mortgages

413,750 389,495

Land

10,016 9,823

Farmland

55,452 56,159

Commercial and industrial

63,854 64,201

Consumer

684 767

Consumer residential

39,301 38,672

Agriculture

24,948 28,454

Total loans

623,809 610,949

Less:

Deferred loan fees and costs, net

(1,873 ) (2,013 )

Allowance for loan losses

(7,854 ) (7,832 )

Net loans

$ 614,082 $ 601,104

12

Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentration of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower's management possesses sound ethics and solid business acumen, our management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company's commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company's exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At June 30, 2017 and December 31, 2016, commercial real estate loans equal to approximately 42.4% and 40.9%, respectively, of the outstanding principal balance of our commercial real estate loans were secured by owner-occupied properties.

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Agricultural production, real estate and development lending is susceptible to credit risks including adverse weather conditions, pest and disease, as well as market price fluctuations and foreign competition. Agricultural loan underwriting standards are maintained by following Company policies and procedures in place to minimize risk in this lending segment. These standards consist of limiting credit to experienced farmers who have demonstrated farm management capabilities, requiring cash flow projections displaying margins sufficient for repayment from normal farm operations along with equity injected as required by policy, as well as providing adequate secondary repayment and sponsorship including satisfactory collateral support. Credit enhancement obtained through government guarantee programs may also be used to provide further support as available. 

The Company originates consumer loans utilizing common underwriting criteria specified in policy. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for 1-4 family, home equity lines and loans follow bank policy, which include, but are not limited to, a maximum loan-to-value percentage of 80%, a maximum housing and total debt ratio of 36% and 42%, respectively and other specified credit and documentation requirements.

The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Bank's policies and procedures.

13

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Non-accrual loans, segregated by class of loans, were as follows:

(in thousands)

June 30, 2017

December 31, 2016

Commercial real estate:

Commercial real estate- construction

$ 0 $ 0

Commercial real estate- mortgages

0 0

Land

1,574 2,715

Farmland

0 0

Commercial and industrial

304 306

Consumer

0 0

Consumer residential

154 16

Agriculture

0 0

Total non-accrual loans

$ 2,032 $ 3,037

Excluded from the above non-accrual loan table is the $33,000 carrying value of one Purchased Credit Impaired loan acquired in the MLB Acquisition.

Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income of approximately $31,000 and $68,000 in the three and six month periods ended June 30, 2017, respectively, as compared to $38,000 and $79,000 in the same periods of 2016.

The following table analyzes past due loans including the non-accrual loans in the above table, segregated by class of loans, as of June 30, 2017 (in thousands):

June 30, 2017

30-59

Days

Past

Due

60-89

Days

Past

Due

Greater

Than 90

Days Past

Due

Total Past

Due

Current

Purchased

Credit

Impaired

Loans

Total

Greater

Than 90

Days

Past Due

and Still

Accruing

Commercial real estate:

Commercial R.E. - construction

$ 0 $ 0 $ 0 $ 0 $ 15,804 $ 0 $ 15,804 $ 0

Commercial R.E. - mortgages

0 0 0 0 413,750 0 413,750 0

Land

0 0 1,574 1,574 8,409 33 10,016 0

Farmland

0 0 0 0 55,452 0 55,452 0

Commercial and industrial

0 0 302 302 63,552 0 63,854 0

Consumer

0 0 0 0 684 0 684 0

Consumer residential

0 0 138 138 39,163 0 39,301 0

Agriculture

0 0 0 0 24,948 0 24,948 0

Total

$ 0 $ 0 $ 2,014 $ 2,014 $ 621,762 $ 33 $ 623,809 $ 0

14

The following table analyzes past due loans including the non-accrual loans in the above table, segregated by class of loans, as of December 31, 2016 (in thousands):

December 31, 2016

30-59

Days

Past Due

60-89

Days

Past Due

Greater

Than 90

Days

Past Due

Total

Past Due

Current

Purchased

Credit

Impaired

Loans

Total

Greater

Than 90

Days Past

Due and

Still Accruing

Commercial real estate:

Commercial R.E. - construction

$ 0 $ 0 $ 0 $ 0 $ 23,378 $ 0 23,378 $ 0

Commercial R.E. - mortgages

0 0 0 0 389,495 0 389,495 0

Land

0 0 2,715 2,715 7,075 33 9,823 0

Farmland

0 0 0 0 56,159 0 56,159 0

Commercial and industrial

0 0 302 302 63,899 0 64,201 0

Consumer

0 0 0 0 767 0 767 0

Consumer residential

0 0 16 16 38,656 0 38,672 0

Agriculture

0 0 0 0 28,454 0 28,454 0

Total

$ 0 $ 0 $ 3,033 $ 3,033 $ 607,883 $ 33 610,949 $ 0

Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. There was no interest income realized on impaired loans for the three and six months ended June 30, 2017 and 2016.

Impaired loans as of June 30, 2017 and December 31, 2016 are set forth in the following tables. PCI loans are excluded from the tables below, as they have not experienced post acquisition declines in cash flows expected to be collected.

(in thousands)

Unpaid

Contractual

Principal

Balance

Recorded

Investment

With No

Allowance

Recorded

Investment

With

Allowance

Total

Recorded

Investment

Related

Allowance

June 30, 2017

Commercial real estate:

Commercial R.E. - construction

$ 0 $ 0 $ 0 $ 0 $ 0

Commercial R.E. - mortgages

0 0 0 0 0

Land

1,891 0 1,574 1,574 680

Farmland

0 0 0 0 0

Commercial and Industrial

351 304 0 304 0

Consumer

0 0 0 0 0

Consumer residential

154 154 0 154 0

Agriculture

0 0 0 0 0

Total

$ 2,396 $ 458 $ 1,574 $ 2,032 $ 680

15

(in thousands)

Unpaid

Contractual

Principal

Balance

Recorded

Investment

With No

Allowance

Recorded

Investment

With

Allowance

Total

Recorded

Investment

Related

Allowance

December 31, 2016

Commercial real estate:

Commercial R.E. - construction

$ 0 $ 0 $ 0 $ 0 $ 0

Commercial R.E. - mortgages

0 0 0 0 0

Land

3,131 2,715 0 2,715 680

Farmland

0 0 0 0 0

Commercial and Industrial

353 4 302 306 0

Consumer

0 0 0 0 0

Consumer residential

16 16 0 16 0

Agriculture

0 0 0 0 0

Total

$ 3,500 $ 2,735 $ 302 $ 3,037 $ 680

Average recorded investment in impaired loans outstanding as of June 30, 2017 and 2016 is set forth in the following table.

Average Recorded Investment for the

(in thousands)

Three Months

Ended

Three Months

Ended

Six Months

Ended

Six Months

Ended

June 30, 2017

June 30, 2016

June 30, 2017

June 30, 2016

Commercial real estate:

Commercial R.E. - construction

$ 0 $ 0 $ 0 $ 0

Commercial R.E. - mortgages

0 0 0 0

Land

1,850 2,498 2,273 2,396

Farmland

0 0 0 0

Commercial and Industrial

304 318 305 316

Consumer

0 0 0 0

Consumer residential

154 0 107 0

Agriculture

0 0 0 0

Total

$ 2,308 $ 2,816 $ 2,685 $ 2,712

Troubled Debt Restructurings – In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company's internal underwriting policy.

At June 30, 2017, there were 5 loans that were considered to be troubled debt restructurings, all of which are considered non-accrual totaling $1,894,000. At December 31, 2016, there were 6 loans that were considered to be troubled debt restructurings, all of which are considered non-accrual totaling $3,037,000. At June 30, 2017 and December 31, 2016 there were no unfunded commitments on loans classified as a troubled debt restructures. We have allocated $680,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of June 30, 2017 and December 31, 2016.

The modification of the terms of such loans typically includes one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date; or a temporary payment modification in which the payment amount allocated towards principal was reduced. In some cases, a permanent reduction of the accrued interest on the loan is conceded.

During the three and six months ended June 30, 2017, no loans were modified as troubled debt restructurings, compared to one loan with a recorded investment of $473,000 that was modified as a troubled debt restructuring by extending the maturity date during the six month period ended March 31, 2016. This troubled debt restructuring did not increase the allowance for loan losses as a result of loan modifications. There were no charge-offs as a result of the loan modification, as the contractual balances outstanding were determined to be collectible.

16

There were no loans modified as troubled debt restructurings within the previous twelve months and for which there was a payment default during the three and six month periods ended June 30, 2017 and 2016. A loan is considered to be in payment default once it is ninety days contractually past due under the modified terms.

Loan Risk Grades Quality ratings (Risk Grades) are assigned to all commitments and stand-alone notes. Risk grades define the basic characteristics of commitments or stand-alone note in relation to their risk. All loans are graded using a system that maximizes the loan quality information contained in loan review grades, while ensuring that the system is compatible with the grades used by bank examiners.

We grade loans using the following letter system:

1 Exceptional Loan

2 Quality Loan

3A Better Than Acceptable Loan

3B Acceptable Loan

3C Marginally Acceptable Loan

4 (W) Watch Acceptable Loan

5 Other Loans Especially Mentioned

6 Substandard Loan

7 Doubtful Loan

8 Loss

1. Exceptional Loan - Loans with A+ credits that contain very little, if any, risk. Grade 1 loans are considered Pass. To qualify for this rating, the following characteristics must be present:

-A high level of liquidity and whose debt-servicing capacity exceeds expected obligations by a substantial margin.

-Where leverage is below average for the industry and earnings are consistent or growing without severe vulnerability to economic cycles.

-Also included in this rating (but not mandatory unless one or more of the preceding characteristics are missing) are loans that are fully secured and properly margined by our own time instruments or U.S. blue chip securities. To be properly margined cash collateral must be equal to, or greater than, 110% of the loan amount.

2. Quality Loan - Loans with excellent sources of repayment that conform in all respects to bank policy and regulatory requirements. These are also loans for which little repayment risk has been identified. No credit or collateral exceptions. Grade 2 loans are considered Pass. Other factors include:

-Unquestionable debt-servicing capacity to cover all obligations in the ordinary course of business from well-defined primary and secondary sources.

-Consistent strong earnings.

-A solid equity base.

3A. Better than Acceptable Loan - In the interest of better delineating the loan portfolio's true credit risk for reserve allocation, further granularity has been sought by splitting the grade 3 category into three classifications. The distinction between the three are bank-defined guidelines and represent a further refinement of the regulatory definition of a pass, or grade 3 loan. Grade 3A is the stronger third of the pass category, but is not strong enough to be a grade 2 and is characterized by:

-Strong earnings with no loss in last three years and ample cash flow to service all debt well above policy guidelines.

-Long term experienced management with depth and defined management succession.

-The loan has no exceptions to policy.

-Loan-to-value on real estate secured transactions is 10% to 20% less than policy guidelines.

-Very liquid balance sheet that may have cash available to pay off our loan completely.

-Little to no debt on balance sheet.

3B. Acceptable Loan - 3B loans are simply defined as all loans that are less qualified than 3A loans and are stronger than 3C loans. These loans are characterized by acceptable sources of repayment that conform to bank policy and regulatory requirements. Repayment risks are acceptable for these loans. Credit or collateral exceptions are minimal, are in the process of correction, and do not represent repayment risk. These loans:

-Are those where the borrower has average financial strengths, a history of profitable operations and experienced management.

-Are those where the borrower can be expected to handle normal credit needs in a satisfactory manner.

3C. Marginally Acceptable - 3C loans have similar characteristics as that of 3Bs with the following additional characteristics:

Requires collateral. A credit facility where the borrower has average financial strengths, but usually lacks reliable secondary sources of repayment other than the subject collateral. Other common characteristics can include some or all of the following: minimal background experience of management, lacking continuity of management, a start-up operation, erratic historical profitability (acceptable reasons-well identified), lack of or marginal sponsorship of guarantor, and government guaranteed loans.

17

4W Watch Acceptable - Watch grade will be assigned to any credit that is adequately secured and performing but monitored for a number of indicators. These characteristics may include any unexpected short-term adverse financial performance from budgeted projections or prior period's results (i.e., declining profits, sales, margins, cash flow, or increased reliance on leverage, including adverse balance sheet ratios, trade debt issues, etc.). Additionally, any managerial or personal problems of company management, decline in the entire industry or local economic conditions, or failure to provide financial information or other documentation as requested; issues regarding delinquency, overdrafts, or renewals; and any other issues that cause concern for the company. Loans to individuals or loans supported by guarantors with marginal net worth and/or marginal collateral. Weakness identified in a Watch credit is short-term in nature. Loans in this category are usually accounts the Bank would want to retain providing a positive turnaround can be expected within a reasonable time frame. Grade 4 loans are considered Pass.

5 Other Loans Especially Mentioned (Special Mention) - A special mention extension of credit is defined as having potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may, at some future date result in the deterioration of the repayment prospects for the credit or the institution's credit position. Extensions of credit that might be detailed in this category include the following:

-The lending officer may be unable to properly supervise the credit because of an inadequate loan or credit agreement.

-Questions exist regarding the condition of and/or control over collateral.

-Economic or market conditions may unfavorably affect the obligor in the future.

-A declining trend in the obligor's operations or an imbalanced position in the balance sheet exists, but not to the point that repayment is jeopardized.

6 Substandard Loan - A "substandard" extension of credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified substandard.

7 Doubtful Loan - An extension of credit classified "doubtful" has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral or refinancing plans. The entire loan need not be classified doubtful when collection of a specific portion appears highly probable. An example of proper use of the doubtful category is the case of a company being liquidated, with the trustee-in-bankruptcy indicating a minimum disbursement of 40 percent and a maximum of 65 percent to unsecured creditors, including the Bank. In this situation, estimates are based on liquidation value appraisals with actual values yet to be realized. By definition, the only portion of the credit that is doubtful is the 25 percent difference between 40 and 65 percent.

A proper classification of such a credit would show 40 percent substandard, 25 percent doubtful, and 35 percent loss. A credit classified as doubtful should be resolved within a ‘reasonable' period of time. Reasonable is generally defined as the period between examinations. In other words, a credit classified doubtful at an examination should be cleared up before the next exam. However, there may be situations that warrant continuation of the doubtful classification a while longer.

8 Loss - Extensions of credit classified "loss" are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off, even though partial recovery may be affected in the future. It should not be the Company's practice to attempt long-term recoveries while the credit remains on the books. Losses should be taken in the period in which they surface as uncollectible.

As of June 30, 2017 and December 31, 2016, there are no loans that are classified with a risk grade of 8- Loss.

18

The following table presents weighted average risk grades of our loan portfolio:

June 30, 2017

December 31, 2016

Weighted Average

Risk Grade

Weighted Average

Risk Grade

Commercial real estate:

Commercial real estate - construction

3.00 3.07

Commercial real estate - mortgages

3.07 3.08

Land

4.01 4.39

Farmland

3.09 3.09

Commercial and industrial

3.60 2.70

Consumer

2.23 2.28

Consumer residential

3.04 3.03

Agriculture

3.19 3.08

Total gross loans

3.14 3.06

The following table presents risk grade totals by class of loans as of June 30, 2017 and December 31, 2016. Risk grades 1 through 4 have been aggregated in the "Pass" line.

(in thousands)

Commercial R.E.

Construction

Commercial R.E.

Mortgages

Land (1)

Farmland

Commercial and Industrial

Consumer

Consumer Residential

Agriculture

Total

June 30, 2017

Pass

$ 15,804 $ 412,779 $ 7,978 $ 55,452 $ 58,562 $ 651 $ 38,785 $ 24,948 $ 614,959

Special mention

- 260 - - 4,087 - - - 4,347

Substandard

- 711 1,758 - 1,205 33 516 - 4,223

Doubtful

- - 280 - - - - - 280

Total loans

$ 15,804 $ 413,750 $ 10,016 $ 55,452 $ 63,854 $ 684 $ 39,301 $ 24,948 $ 623,809

December 31, 2016

Pass

$ 22,560 $ 388,365 $ 6,637 $ 56,159 $ 62,770 $ 738 $ 38,300 $ 28,454 $ 603,983

Special mention

818 1,063 - - 189 - - - 2,070

Substandard

- 67 2,906 1,242 29 372 - 4,616

Doubtful

- - 280 - - - - - 280

Total loans

$ 23,378 $ 389,495 $ 9,823 $ 56,159 $ 64,201 $ 767 $ 38,672 $ 28,454 $ 610,949

(1)

Included in the above table is Purchased Credit Impaired loans recorded at their fair value of $33,000 as of June 30, 2017 and December 31, 2016,   which were acquired in the MLB Acquisition.