Residential 1st Mortgages and Home Equity Lines and Loans – These loans are generally considered to possess a low inherent risk of loss, although this is not always true as evidenced by the correction in residential real estate values that occurred between 2007 and 2012. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

Consumer & Other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company's and Bank's regulators, including the Federal Reserve Board (“FRB”), the California Department of Business Oversight (“DBO”) and the Federal Deposit Insurance Corporation (“FDIC”), as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations. See Note 8 “Recent Accounting Pronouncements” for a discussion of ASU 2016-13 and the accounting changes which will impact our allowance for credit losses in 2020.

Acquired Loans

Loans acquired through purchase or through a business combination are recorded at their fair value at the acquisition date. Credit discounts, which reflect estimates of credit losses, expected to be incurred over the life of the loan, are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.

Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures

The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in Interest Payable and Other Liabilities on the Company’s Consolidated Balance Sheet.

Premises and Equipment

Premises, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. Estimated useful lives of buildings range from 30 to 40 years, and for furniture and equipment from 3 to 7 years. Leasehold improvements are amortized over the lesser of the terms of the respective leases, or their useful lives, which are generally 5 to 10 years. Remodeling and capital improvements are capitalized while maintenance and repairs are charged directly to occupancy expense.

Other Real Estate

Other real estate, which is included in other assets, is expected to be sold and is comprised of properties no longer utilized for business operations and property acquired through foreclosure in satisfaction of indebtedness. These properties are recorded at fair value less estimated selling costs upon acquisition. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Initial losses on properties acquired through full or partial satisfaction of debt are treated as credit losses and charged to the allowance for credit losses at the time of acquisition.

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Subsequent declines in value from the recorded amounts, routine holding costs, and gains or losses upon disposition, if any, are included in non-interest expense as incurred.

~~Table of Contents~~

Income Taxes

The Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current year.

The Company follows the standards set forth in the “Income Taxes” topic of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company accounts for leases with Investment Tax Credits (ITC) under the deferred method as established in ASC 740-10. ITC are viewed and accounted for as a reduction of the cost of the related assets and presented as deferred income tax on the Company’s financial statement.

The Company accounts for its interest in LIHTC using the cost method as established in ASC 323-740. As an investor, the Company obtains income tax credits and deductions from the operating losses of these tax credit entities. The income tax credits and deductions are allocated to the investors based on their ownership percentages and are recorded as a reduction of income tax expense (or an increase to income tax benefit) and a reduction of federal income taxes payable.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

~~Interest expense~~At March 31, 2019 and 2018, the Company has no material uncertain tax positions and recognized no interest or penalties. The Company's policy is to recognize interest and penalties ~~associated with unrecognized tax benefits, if any, are included~~related to income taxes in the provision for income taxes in the Consolidated ~~Statements~~Statement of Income.

Basic and Diluted Earnings Per Common Share

The Company’s common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. There are no common stock equivalent shares. Therefore, ~~there is no presentation of~~basic and diluted ~~basic~~ earnings per common ~~share.~~share are reflected as the same amounts. See Note 6 for additional information.

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Segment Reporting

The “Segment Reporting” topic of the FASB ASC requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is a holding company for a community bank, which offers a wide array of products and services to its customers. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. As a result, the Company is not organized around discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change.

~~Low Income Housing Tax Credit Investments (LIHTC)~~

~~Table of Contents~~

Comprehensive Income

The “Comprehensive Income” topic of the FASB ASC establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income ~~(loss)~~ refers to revenues, expenses, gains, and losses that U.S. GAAP recognize as changes in value to an enterprise but are excluded from net income. For the Company, comprehensive income includes net income and changes in fair value of its available-for-sale investment securities.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Business Combinations And Related Matters

Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the fair value over the purchase price of net assets and other identifiable intangible assets acquired is recorded as bargain purchase gain. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of operations from the date of acquisition. Acquisition-related costs, including conversion charges, are expensed as incurred. The Company applied this guidance to the acquisition of Bank of Rio Vista (BRV) which was consummated on October 10, 2018. The Company's consolidated financial statements reflect the operations of Bank of Rio Vista beginning October 11, 2018.

Goodwill and Other Intangible Assets

~~Intangible assets are comprised~~: Goodwill is determined as the excess of ~~core deposit intangibles acquired~~the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the ~~Delta National Bancorp acquisition.~~acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill that arises from a business combination is periodically evaluated for impairment at the reporting unit level, at least annually. Intangible assets with definite useful lives are amortized over their ~~respective~~ estimated useful ~~lives.~~lives to their estimated residual values. Core deposit intangible ("CDI") represents the estimated future benefit of deposits related to an acquisition and is booked separately from the related deposits and evaluated periodically for impairment. The CDI asset is amortized on a straight-line method over its estimated useful life of ten years. At March 31, 2019, the future estimated amortization expense for the CDI arising from our past acquisitions is as follows:

(in thousands)		2019				2020				2021				2022				2023				Thereafter				Total
Core Deposit Intangible Amortization		$	480			$	626			$	611			$	593			$	573			$	2,236			$	5,119

We make a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit where goodwill is assigned is less than its carrying amount. If we conclude that it is more likely than not that the fair value is more than its carrying amount, no impairment is recorded. Goodwill is tested for impairment on an interim basis if circumstances change or an event occurs between annual tests that ~~indicates~~would more likely than not reduce the fair value of the reporting unit below its carrying amount. The qualitative assessment includes adverse events or circumstances identified that could negatively affect the reporting units’ fair value as well as positive and mitigating events. Such indicators may include, among others, a significant change in legal factors or in the general business climate, significant change in our stock price and market capitalization, unanticipated competition, and an action or assessment by a regulator. If the fair value of a reporting unit is less than its carrying amount, an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value is recognized. The loss recognized should not exceed the total amount of ~~an intangible asset may not be recoverable, management reviews the asset for impairment.~~goodwill allocated to that reporting unit.

2.	15 Table of Contents 2. Investment Securities

The amortized cost, fair values, and unrealized gains and losses of the securities available-for-saleare as follows

(in thousands):

September 30, 2018	Amortized Cost		Gross Unrealized				Fair/Book Value
September 30, 2018	Amortized Cost		Gains		Losses		Fair/Book Value
									Amortized		Gross Unrealized				Fair/Book
March 31, 2019									Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	3,045	$	7	$	-	$	3,052	$	3,021	$	6	$	-	$	3,027
US Treasury Notes		164,671		-		463		164,208		164,660		48		34		164,674
US Govt SBA		17,144		6		177		16,973		14,554		5		147		14,412
Mortgage Backed Securities⁽¹⁾		279,757		265		8,955		271,067		303,895		1,764		1,639		304,020
Other		3,011		-		-		3,011		5,156		-		-		5,156
Total	$	467,628	$	278	$	9,595	$	458,311	$	491,286	$	1,823	$	1,820	$	491,289

December 31, 2017	Amortized Cost		Gross Unrealized				Fair/Book Value
December 31, 2017	Amortized Cost		Gains		Losses		Fair/Book Value
									Amortized		Gross Unrealized				Fair/Book
December 31, 2018									Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	3,080	$	48	$	-	$	3,128	$	3,033	$	6	$	-	$	3,039
US Treasury Notes		144,606		-		442		144,164		164,672		-		158		164,514
US Govt SBA		29,559		29		208		29,380		15,601		6		160		15,447
Mortgage Backed Securities⁽¹⁾		302,502		939		1,527		301,914		310,982		1,196		5,133		307,045
Other		3,010		-		-		3,010		5,351		-		-		5,351
Total	$	482,757	$	1,016	$	2,177	$	481,596	$	499,639	$	1,208	$	5,451	$	495,396

~~Table of Contents~~

September 30, 2017	Amortized Cost		Gross Unrealized				Fair/Book Value
September 30, 2017	Amortized Cost		Gains		Losses		Fair/Book Value
									Amortized		Gross Unrealized				Fair/Book
March 31, 2018									Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	3,091	$	78	$	-	$	3,169	$	3,068	$	27	$	-	$	3,095
US Treasury Notes		144,657		2		249		144,410		144,147		3		741		143,409
US Govt SBA		31,732		45		86		31,691		27,786		12		261		27,537
Mortgage Backed Securities (1)		274,877		1,985		819		276,043		324,251		393		5,881		318,763
Other		1,010		-		-		1,010		3,010		-		-		3,010
Total	$	455,367	$	2,110	$	1,154	$	456,323	$	502,262	$	435	$	6,883	$	495,814

⁽¹⁾All Mortgage Backed Securities consist of securities collateralized by residential real estate and were issued by an agency or government sponsored entity of the U.S. government.

The book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as follows (in thousands):

September 30, 2018	Book Value		Gross Unrealized				Fair Value
September 30, 2018	Book Value		Gains		Losses		Fair Value
									Book		Gross Unrealized				Fair
March 31, 2019									Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	51,459	$	97	$	174	$	51,382	$	54,412	$	571	$	1	$	54,982
Total	$	51,459	$	97	$	174	$	51,382	$	54,412	$	571	$	1	$	54,982

December 31, 2017	Book Value		Gross Unrealized				Fair Value
December 31, 2017	Book Value		Gains		Losses		Fair Value
									Book		Gross Unrealized				Fair
December 31, 2018									Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	54,460	$	776	$	-	$	55,236	$	53,566	$	211	$	39	$	53,738
Total	$	54,460	$	776	$	-	$	55,236	$	53,566	$	211	$	39	$	53,738

September 30, 2017	Book Value		Gross Unrealized				Fair Value
September 30, 2017	Book Value		Gains		Losses		Fair Value
									Book		Gross Unrealized				Fair
March 31, 2018									Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	55,542	$	749	$	-	$	56,291	$	53,527	$	274	$	56	$	53,745
Total	$	55,542	$	749	$	-	$	56,291	$	53,527	$	274	$	56	$	53,745

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Fair values are based on quoted market prices or dealer quotes. If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities.

The amortized cost and estimated fair values of investment securities at ~~September 30, 2018~~March 31, 2019 by contractual maturity are shown in the following table (in thousands):

	Available-for-Sale				Held-to-Maturity				Available-for-Sale				Held-to-Maturity
September 30, 2018	Amortized Cost		Fair/Book Value		Book Value		Fair Value

March 31, 2019									Amortized Cost		Fair/Book Value		Book Value		Fair Value
Within one year	$	156,111	$	155,934	$	2,085	$	2,086	$	156,785	$	156,762	$	760	$	761
After one year through five years		15,601		15,319		6,730		6,733		16,814		16,856		3,329		3,330
After five years through ten years		1,566		1,563		20,230		20,210		1,387		1,386		24,797		25,189
After ten years		14,593		14,428		22,414		22,353		12,405		12,265		25,526		25,702
		187,871		187,244		51,459		51,382		187,391		187,269		54,412		54,982

Investment securities not due at a single maturity date:
Mortgage-backed securities		279,757		271,067		-		-		303,895		304,020		-		-

Total	$	467,628	$	458,311	$	51,459	$	51,382	$	491,286	$	491,289	$	54,412	$	54,982

Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

~~Table of Contents~~

The following tables show those investments with gross unrealized losses and their market value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at the dates indicated (in thousands):

	Less Than 12 Months				12 Months or More				Total				Less Than 12 Months				12 Months or More				Total
September 30, 2018	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
March 31, 2019													Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

Securities Available-for-Sale
US Treasury Notes	$	84,315	$	290	$	24,902	$	173	$	109,217	$	463	$	149,962	$	28	$	4,909	$	6	$	154,871	$	34
US Govt SBA		4,965		62		8,467		115		13,432		177		1,310		-		10,823		147		12,133		147
Mortgage Backed Securities		182,243		5,772		78,272		3,183		260,515		8,955		5,434		25		190,452		1,614		195,886		1,639
Total	$	271,523	$	6,124	$	111,641	$	3,471	$	383,164	$	9,595	$	156,706	$	53	$	206,184	$	1,767	$	362,890	$	1,820

Securities Held-to-Maturity
Obligations of States and Political Subdivisions	$	15,309	$	174	$	-	$	-	$	15,309	$	174	$	229	$	1	$	360	$	-	$	589	$	1
Total	$	15,309	$	174	$	-	$	-	$	15,309	$	174	$	229	$	1	$	360	$	-	$	589	$	1

	Less Than 12 Months				12 Months or More				Total				Less Than 12 Months				12 Months or More				Total
December 31, 2017	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
December 31, 2018													Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

Securities Available-for-Sale
US Treasury Notes	$	94,281	$	144	$	49,883	$	298	$	144,164	$	442	$	124,985	$	7	$	39,529	$	151	$	164,514	$	158
US Govt SBA		8,379		51		12,900		157		21,279		208		3,250		28		8,618		132		11,868		160
Mortgage Backed Securities		126,863		932		43,208		595		170,071		1,527		52,289		528		207,271		4,605		259,560		5,133
Total	$	229,523	$	1,127	$	105,991	$	1,050	$	335,514	$	2,177	$	180,524	$	563	$	255,418	$	4,888	$	435,942	$	5,451

Securities Held-to-Maturity
Obligations of States and Political Subdivisions													$	6,052	$	23	$	849	$	16	$	6,901	$	39
Total													$	6,052	$	23	$	849	$	16	$	6,901	$	39

~~There were no HTM investments with gross unrealized losses at December 31, 2017~~

Less Than 12 Months 12 Months or More Total
September 30, 2017
Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Securities Available-for-Sale

US Treasury Notes $ 74,414 $ 249 $ - $ - $ 74,414 $ 249
US Govt SBA 18,669 86 - - 18,669 86
Mortgage Backed Securities 122,887 819 - - 122,887 819
Total $ 215,970 $ 1,154 $ - $ - $ 215,970 $ 1,154

~~There were no HTM investments with gross unrealized losses at September 30, 2017~~Table of Contents

	Less Than 12 Months				12 Months or More				Total
March 31, 2018	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

Securities Available-for-Sale
US Treasury Notes	$	23,551	$	436	$	59,866	$	305	$	83,417	$	741
US Govt SBA		10,848		82		11,737		179		22,585		261
Mortgage Backed Securities		259,314		4,606		41,230		1,275		300,544		5,881
Total	$	293,713	$	5,124	$	112,833	$	1,759	$	406,546	$	6,883

Securities Held-to-Maturity
Obligations of States and Political Subdivisions	$	7,654	$	56	$	-	$	-	$	7,654	$	56
Total	$	7,654	$	56	$	-	$	-	$	7,654	$	56

As of ~~September 30, 2018,~~March 31, 2019, the Company held ~~431~~588 investment securities of which ~~132~~26 were in an unrealized loss position for less than twelve months. 88133 securities were in ~~a loss~~an unrealized position for twelve months or more. Management periodically evaluates each investment security for other-than-temporary impairment relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities.

Securities of Government Agency and Government Sponsored Entities – At ~~September 30, 2018, December~~March 31, ~~2017 and September 30, 2017,~~2019, no securities of government agency and government sponsored entities were in an unrealized loss position for less than 12 ~~months or~~months. No securities were in an unrealized loss position for 12 months or more. The unrealized losses on the Company's investments in securities of government agency and government sponsored entities were $0 at March 31, 2019, December 31, 2018 and at March 31, 2018.

~~Table of Contents~~

U.S. Treasury Notes – At ~~September 30, 2018, ten~~March 31, 2019, 15 U.S. Treasury Note security investments were in an unrealized loss position for less than 12 months and ~~one~~1 was in aan unrealized loss position for 12 months or more. The unrealized losses on the Company's investment in U.S. Treasury Notes were ~~$463,000, $442,000,~~$34,000 at March 31, 2019 and ~~$249,000~~$158,000 at ~~September 30, 2018,~~ December 31, ~~2017,~~2018, and ~~September 30, 2017, respectively.~~$741,000 at March 31, 2018. The unrealized losses were caused by interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at ~~September 30, 2018,~~March 31, 2019, December 31, ~~2017,~~2018, and ~~September 30, 2017.~~March 31, 2018.

U.S. Government SBA – At ~~September 30, 2018, 27~~March 31, 2019, 4 U.S. Government SBA security investments were in an unrealized loss position for less than 12 months and 4568 were in aan unrealized loss position for 12 months or more. The unrealized losses on the Company's investment in U.S. Government SBA securities were ~~$177,000, $208,000,~~$147,000 at March 31, 2019 and ~~$86,000~~$160,000 at ~~September 30, 2018,~~ December 31, ~~2017,~~2018, and ~~September 30, 2017, respectively.~~$261,000 at March 31, 2018. The unrealized losses were caused by interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at ~~September 30, 2018,~~March 31, 2019, December 31, ~~2017,~~2018, and ~~September 30, 2017.~~March 31, 2018.

Mortgage Backed Securities – At ~~September 30, 2018, 56~~March 31, 2019, 6 mortgage backed security investments were in an unrealized loss position for less than 12 months and 4263 were in aan unrealized loss position for 12 months or more. The unrealized losses on the Company's investment in mortgage backed securities were ~~$8.9~~$1.6 million, ~~$1.5~~$5.1 million, and ~~$819,000~~$5.9 million at ~~September 30, 2018,~~March 31, 2019, December 31, ~~2017,~~2018, and ~~September 30, 2017,~~March 31, 2018, respectively. The unrealized losses on the Company’s investment in ~~mortgage-backed~~mortgage backed securities were caused by interest rate fluctuations. The contractual cash flows of these investments are guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at ~~September 30, 2018,~~March 31, 2019, December 31, ~~2017~~2018, and ~~September 30, 2017.~~March 31, 2018.

Table of Contents

Obligations of States and Political Subdivisions - At ~~September 30, 2018, 39 obligations~~March 31, 2019, one obligation of states and political subdivisions were in an unrealized loss position for less than 12 months. ~~None~~One were in aan unrealized loss position for 12 months or more. As of ~~September 30, 2018,~~March 31, 2019, over ninety-nine percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or issuer level, and all of these ratings are “investment grade.” The Company monitors the status of the one percent of the portfolio that is not rated and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.

The unrealized losses on the Company’s investment in obligations of states and political subdivisions were ~~$174,000, $0~~$1,000, $39,000 and $0$56,000 at ~~September 30, 2018,~~March 31, 2019, December 31, ~~2017~~2018 and ~~September 30, 2017,~~March 31, 2018, respectively. Management believes that any unrealized losses on the Company's investments in obligations of states and political subdivisions were primarily caused by interest rate fluctuations. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at ~~September 30,~~March 31, 2019, December 31, 2018, and March 31, 2018.

~~Proceeds~~There were no proceeds from sales and calls of securities ~~were as follows:~~for the period ending March 31, 2019 and March 31, 2018.

Three Months
Ended September 30,

Nine Months
Ended September 30,

(in thousands)
2018 2017 2018 2017
Proceeds $ - $ - $ 31,370 $ 7,831
Gains - - 8 143
Losses - - 1,338 12

~~Table of Contents~~

Pledged Securities

As of ~~September 30, 2018,~~March 31, 2019, securities carried at ~~$241.8~~$262.1 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. This amount was ~~$214.5~~$268.8 million at December 31, ~~2017,~~2018, and ~~$201.8~~$245.4 million at ~~September 30, 2017.~~March 31, 2018.

3.	3. Loans & Leases and Allowance for Credit Losses

The following tables show the allocation of the allowance for credit losses by portfolio segment and by impairment methodology at the dates indicated (in thousands):

September 30, 2018
Commercial Real
Estate

Agricultural
Real Estate

Real Estate
Construction

Residential 1st
Mortgages

Home Equity
Lines & Loans
Agricultural Commercial
Consumer &
Other
Leases Unallocated Total

Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2018 $ 10,922 $ 12,085 $ 1,846 $ 815 $ 2,324 $ 8,159 $ 9,197 $ 209 $ 3,363 $ 1,422 $ 50,342
Charge-Offs - - - (12 ) (14 ) - (613 ) (84 ) - - (723 )
Recoveries - - - 12 4 40 19 40 - - 115
Provision (31 ) 1,422 (372 ) 59 284 4 1,029 142 430 366 3,333
Ending Balance- September 30, 2018 $ 10,891 $ 13,507 $ 1,474 $ 874 $ 2,598 $ 8,203 $ 9,632 $ 307 $ 3,793 $ 1,788 $ 53,067
Third Quarter Allowance for Credit Losses:
Beginning Balance- July 1, 2018 $ 10,783 $ 13,314 $ 1,616 $ 864 $ 2,548 $ 7,658 $ 9,436 $ 270 $ 3,400 $ 1,248 $ 51,137
Charge-Offs - - - - (10 ) - (599 ) (25 ) - - (634 )
Recoveries - - - 6 2 27 16 13 - - 64
Provision 108 193 (142 ) 4 58 518 779 49 393 540 2,500
Ending Balance- September 30, 2018 $ 10,891 $ 13,507 $ 1,474 $ 874 $ 2,598 $ 8,203 $ 9,632 $ 307 $ 3,793 $ 1,788 $ 53,067
Ending Balance Individually Evaluated for Impairment 314 - - 121 15 - 192 7 - - 649
Ending Balance Collectively Evaluated for Impairment 10,577 13,507 1,474 753 2,583 8,203 9,440 300 3,793 1,788 52,418
Loans & Leases:
Ending Balance $ 767,410 $ 553,608 $ 92,521 $ 263,549 $ 38,490 $ 287,821 $ 304,333 $ 7,723 $ 101,147 $ - $ 2,416,602
Ending Balance Individually Evaluated for Impairment 4,713 7,238 - 2,426 305 - 1,670 7 - - 16,359
Ending Balance Collectively Evaluated for Impairment $ 762,697 $ 546,370 $ 92,521 $ 261,123 $ 38,185 $ 287,821 $ 302,663 $ 7,716 $ 101,147 $ - $ 2,400,243

~~Table of Contents~~

December 31, 2017
Commercial Real
Estate

Agricultural
Real Estate

Real Estate
Construction

Residential 1st
Mortgages

Home Equity
Lines & Loans
Agricultural Commercial
Consumer &
Other
Leases Unallocated Total

Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2017 $ 11,110 $ 9,450 $ 3,223 $ 865 $ 2,140 $ 7,381 $ 8,515 $ 200 $ 3,586 $ 1,449 $ 47,919
Charge-Offs (109 ) - - (53 ) (3 ) (374 ) - (146 ) - - (685 )
Recoveries 109 - - 40 8 17 8 76 - - 258
Provision (188 ) 2,635 (1,377 ) (37 ) 179 1,135 674 79 (223 ) (27 ) 2,850
Ending Balance- December 31, 2017 $ 10,922 $ 12,085 $ 1,846 $ 815 $ 2,324 $ 8,159 $ 9,197 $ 209 $ 3,363 $ 1,422 $ 50,342
Ending Balance Individually Evaluated for Impairment 366 - - 73 17 - 220 8 - - 684
Ending Balance Collectively Evaluated for Impairment 10,556 12,085 1,846 742 2,307 8,159 8,977 201 3,363 1,422 49,658
Loans & Leases:
Ending Balance $ 684,961 $ 499,231 $ 100,206 $ 260,751 $ 34,525 $ 273,582 $ 265,703 $ 6,656 $ 89,680 $ - $ 2,215,295
Ending Balance Individually Evaluated for Impairment 4,822 - - 2,373 340 - 1,734 10 - - 9,279
Ending Balance Collectively Evaluated for Impairment $ 680,139 $ 499,231 $ 100,206 $ 258,378 $ 34,185 $ 273,582 $ 263,969 $ 6,646 $ 89,680 $ - $ 2,206,016

September 30, 2017		Commercial Real Estate			Agricultural Real Estate		Real Estate Construction			Residential 1st Mortgages		Home Equity Lines & Loans		Agricultural			Commercial			Consumer & Other			Leases			Unallocated		Total
March 31, 2019																																Commercial Real Estate			Agricultural Real Estate		Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases			Unallocated		Total

Year-To-Date Allowance for Credit Losses:	Year-To-Date Allowance for Credit Losses:																														Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2017		$	11,110		$	9,450	$	3,223		$	865	$	2,140	$	7,381		$	8,515		$	200		$	3,586		$	1,449	$	47,919
Beginning Balance- January 1, 2019																																$	11,609		$	14,092	$	1,249		$	880		$	2,761		$	8,242		$	11,656		$	494		$	4,022		$	261	$	55,266
Charge-Offs			(109	)		-		-			-		-		(7	)		-			(114	)		-			-		(230	)			-			-		-			-			-			-			(379	)		(21	)		-			-		(400	)
Recoveries			110			-		-			37		6		-			6			46			-			-		205				-			-		-			3			6			6			12			14			-			-		41
Provision			(14	)		1,946		(473	)		95		115		(14	)		539			77			(392	)		971		2,850				(209	)		401		(42	)		(20	)		(29	)		(800	)		644			(20	)		(14	)		89		-
Ending Balance- September 30, 2017		$	11,097		$	11,396	$	2,750		$	997	$	2,261	$	7,360		$	9,060		$	209		$	3,194		$	2,420	$	50,744
Third Quarter Allowance for Credit Losses:
Beginning Balance- July 1, 2017		$	11,242		$	10,265	$	2,687		$	872	$	2,170	$	7,236		$	9,544		$	205		$	2,952		$	1,891	$	49,064
Charge-Offs			-			-		-			-		-		-			-			(54	)		-			-		(54	)
Recoveries			99			-		-			18		1		-			2			14			-			-		134
Provision			(244	)		1,131		63			107		90		124			(486	)		44			242			529		1,600
Ending Balance- September 30, 2017		$	11,097		$	11,396	$	2,750		$	997	$	2,261	$	7,360		$	9,060		$	209		$	3,194		$	2,420	$	50,744
Ending Balance- March 31, 2019																																$	11,400		$	14,493	$	1,207		$	863		$	2,738		$	7,448		$	11,933		$	467		$	4,008		$	350	$	54,907
Ending Balance Individually Evaluated for Impairment			385			-		-			61		17		69			231			5			-			-		768				214			-		-			124			13			98			172			6			-			-		627
Ending Balance Collectively Evaluated for Impairment			10,712			11,396		2,750			936		2,244		7,291			8,829			204			3,194			2,420		49,976				11,186			14,493		1,207			739			2,725			7,350			11,761			461			4,008			350		54,280
Loans & Leases:
Loans:
Ending Balance		$	683,037		$	470,738	$	162,167		$	257,920	$	33,350	$	259,127		$	257,951		$	7,312		$	85,177		$	-	$	2,216,779			$	815,366		$	603,601	$	99,837		$	258,359		$	40,072		$	257,004		$	364,439		$	18,418		$	106,872		$	-	$	2,563,968
Ending Balance Individually Evaluated for Impairment			4,855			-		-			1,887		369		368			1,752			7			-			-		9,238				4,638			7,238		-			2,469			255			200			1,591			6			-			-		16,397
Ending Balance Collectively Evaluated for Impairment		$	678,182		$	470,738	$	162,167		$	256,033	$	32,981	$	258,759		$	256,199		$	7,305		$	85,177		$	-	$	2,207,541			$	810,728		$	596,363	$	99,837		$	255,890		$	39,817		$	256,804		$	362,848		$	18,412		$	106,872		$	-	$	2,547,571

Table of Contents

December 31, 2018	Commercial Real Estate		Agricultural Real Estate		Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural		Commercial			Consumer & Other			Leases		Unallocated			Total
																								��
Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2018	$	10,922	$	12,085	$	1,846		$	815		$	2,324		$	8,159	$	9,197		$	209		$	3,363	$	1,422		$	50,342
Charge-Offs		-		-		-			(31	)		(8	)		-		(613	)		(115	)		-		-			(767	)
Recoveries		2		-		-			15			6			61		20			54			-		-			158
Provision		685		2,007		(597	)		81			439			22		3,052			346			659		(1,161	)		5,533
Ending Balance- December 31, 2018	$	11,609	$	14,092	$	1,249		$	880		$	2,761		$	8,242	$	11,656		$	494		$	4,022	$	261		$	55,266
Ending Balance Individually Evaluated for Impairment		234		-		-			125			15			-		185			6			-		-			565
Ending Balance Collectively Evaluated for Impairment		11,375		14,092		1,249			755			2,746			8,242		11,471			488			4,022		261			54,701
Loans & Leases:
Ending Balance	$	826,549	$	584,625	$	98,568		$	259,736		$	40,789		$	290,463	$	343,834		$	19,412		$	107,265	$	-		$	2,571,241
Ending Balance Individually Evaluated for Impairment		4,676		7,238		-			2,491			297			-		1,639			6			-		-			16,347
Ending Balance Collectively Evaluated for Impairment		821,873		577,387		98,568			257,245			40,492			290,463		342,195			19,406			107,265		-			2,554,894

March 31, 2018	Commercial Real Estate		Agricultural Real Estate		Real Estate Construction		Residential 1st Mortgages		Home Equity Lines & Loans			Agricultural			Commercial		Consumer & Other			Leases		Unallocated		Total

Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2018	$	10,922	$	12,085	$	1,846	$	815	$	2,324		$	8,159		$	9,197	$	209		$	3,363	$	1,422	$	50,342
Charge-Offs		-		-		-		-		(4	)		-			-		(17	)		-		-		(21	)
Recoveries		-		-		-		3		1			6			2		11			-		-		23
Provision		156		157		27		9		22			(297	)		175		36			27		21		333
Ending Balance- March 31, 2018	$	11,078	$	12,242	$	1,873	$	827	$	2,343		$	7,868		$	9,374	$	239		$	3,390	$	1,443	$	50,677
Ending Balance Individually Evaluated for Impairment		335		-		-		76		17			-			205		8			-		-		641
Ending Balance Collectively Evaluated for Impairment		10,743		12,242		1,873		751		2,326			7,868			9,169		231			3,390		1,443		50,036
Loans:
Ending Balance	$	698,349	$	508,400	$	96,315	$	264,137	$	34,691		$	261,427		$	274,682	$	6,685		$	90,397	$	-	$	2,235,083
Ending Balance Individually Evaluated for Impairment		4,784		-		-		2,427		332			-			1,713		9			-		-		9,265
Ending Balance Collectively Evaluated for Impairment	$	693,565	$	508,400	$	96,315	$	261,710	$	34,359		$	261,427		$	272,969	$	6,676		$	90,397	$	-	$	2,225,818

The ending balance of loans individually evaluated for impairment includes restructured loans in the amount of ~~$2.8~~$2.7 million at ~~September 30, 2018, $3.0~~March 31, 2019, $2.8 million at December 31, ~~2017~~2018 and ~~$3.0~~$2.9 million at ~~September 30, 2017,~~March 31, 2018, which are no longer classified as TDRs.

~~The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews~~

Table of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans & leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:Contents

~~Pass – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.~~

Special Mention – A special mention loan or lease has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company's credit position at some future date. Special mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – A substandard loan or lease is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans or leases classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans or leases classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance.

The following tables show the loan & lease portfolio allocated by management’s internal risk ratings at the dates indicated (in thousands):

September 30, 2018	Pass		Special Mention		Substandard		Total Loans & Leases
March 31, 2019									Pass		Special Mention		Substandard		Total Loans & Leases
Loans & Leases:
Commercial Real Estate	$	764,839	$	2,571	$	-	$	767,410	$	813,090	$	2,276	$	-	$	815,366
Agricultural Real Estate		537,027		3,271		13,310		553,608		587,444		2,847		13,310		603,601
Real Estate Construction		92,521		-		-		92,521		99,837		-		-		99,837
Residential 1st Mortgages		262,946		-		603		263,549		257,878		-		481		258,359
Home Equity Lines & Loans		38,443		-		47		38,490		40,028		-		44		40,072
Agricultural		281,698		4,635		1,488		287,821		250,630		6,167		207		257,004
Commercial		303,507		171		655		304,333		360,525		2,983		931		364,439
Consumer & Other		7,552		-		171		7,723		18,263		-		155		18,418
Leases		101,147		-		-		101,147		106,872		-		-		106,872
Total	$	2,389,680	$	10,648	$	16,274	$	2,416,602	$	2,534,567	$	14,273	$	15,128	$	2,563,968

December 31, 2018	Pass		Special Mention		Substandard		Total Loans
Loans & Leases:
Commercial Real Estate	$	823,983	$	2,566	$	-	$	826,549
Agricultural Real Estate		566,612		4,703		13,310		584,625
Real Estate Construction		98,568		-		-		98,568
Residential 1st Mortgages		259,208		-		528		259,736
Home Equity Lines and Loans		40,744		-		45		40,789
Agricultural		284,561		5,433		469		290,463
Commercial		343,085		163		586		343,834
Consumer & Other		19,229		-		183		19,412
Leases		107,265		-		-		107,265
Total	$	2,543,255	$	12,865	$	15,121	$	2,571,241

March 31, 2018	Pass		Special Mention		Substandard		Total Loans & Leases
Loans & Leases:
Commercial Real Estate	$	691,537	$	6,812	$	-	$	698,349
Agricultural Real Estate		495,936		8,537		3,927		508,400
Real Estate Construction		86,779		9,536		-		96,315
Residential 1st Mortgages		263,101		-		1,036		264,137
Home Equity Lines & Loans		34,643		-		48		34,691
Agricultural		252,553		6,286		2,588		261,427
Commercial		268,745		5,460		477		274,682
Consumer & Other		6,565		-		120		6,685
Leases		88,320		2,077		-		90,397
Total	$	2,188,179	$	38,708	$	8,196	$	2,235,083

~~Table~~See “Note 1. Significant Accounting Policies - Allowance for Credit Losses” for a description of ~~Contents~~

December 31, 2017 Pass
Special
Mention
Substandard Total Loans
Loans & Leases:
Commercial Real Estate $ 677,636 $ 6,843 $ 482 $ 684,961
Agricultural Real Estate 488,672 6,529 4,030 499,231
Real Estate Construction 90,728 9,478 - 100,206
Residential 1st Mortgages 259,795 41 915 260,751
Home Equity Lines and Loans 34,476 - 49 34,525
Agricultural 264,425 6,439 2,718 273,582
Commercial 260,565 4,610 528 265,703
Consumer & Other 6,498 - 158 6,656
Leases 87,497 2,183 - 89,680
Total $ 2,170,292 $ 36,123 $ 8,880 $ 2,215,295

September 30, 2017 Pass
Special
Mention
Substandard
Total Loans
&Leases

Loans & Leases:
Commercial Real Estate $ 678,083 $ 4,458 $ 496 $ 683,037
Agricultural Real Estate 465,427 1,281 4,030 470,738
Real Estate Construction 152,989 9,178 - 162,167
Residential 1st Mortgages 256,906 43 971 257,920
Home Equity Lines & Loans 33,297 - 53 33,350
Agricultural 250,372 5,331 3,424 259,127
Commercial 253,144 4,184 623 257,951
Consumer & Other 7,142 - 170 7,312
Leases 82,889 2,288 - 85,177
Total $ 2,180,249 $ 26,763 $ 9,767 $ 2,216,779

the internal risk ratings used by the Company. There were no loans or leases outstanding at ~~September 30, 2018,~~March 31, 2019, December 31, ~~2017,~~2018, and ~~September 30, 2017,~~March 31, 2018, rated doubtful or loss.

Table of Contents

The following tables show an aging analysis of the loan & lease portfolio by the time past due at the dates indicated

~~(in~~ (in thousands):

September 30, 2018	30-59 Days Past Due		60-89 Days Past Due		90 Days and Still Accruing		Nonaccrual		Total Past Due		Current		Total Loans & Leases
March 31, 2019															30-59 Days Past Due		60-89 Days Past Due		90 Days and Still Accruing		Nonaccrual		Total Past Due		Current		Total Loans & Leases
Loans & Leases:
Commercial Real Estate	$	-	$	-	$	-	$	-	$	-	$	767,410	$	767,410	$	-	$	-	$	-	$	-	$	-	$	815,366	$	815,366
Agricultural Real Estate		-		-		-		-		-		553,608		553,608		-		-		-		-		-		603,601		603,601
Real Estate Construction		-		-		-		-		-		92,521		92,521		-		-		-		-		-		99,837		99,837
Residential 1st Mortgages		167		-		-		-		167		263,382		263,549		707		-		-		-		707		257,652		258,359
Home Equity Lines & Loans		-		-		-		-		-		38,490		38,490		-		-		-		-		-		40,072		40,072
Agricultural		150		-		-		-		150		287,671		287,821		-		-		-		-		-		257,004		257,004
Commercial		21		-		-		-		21		304,312		304,333		-		-		-		-		-		364,439		364,439
Consumer & Other		17		-		-				17		7,706		7,723		20		-		-		-		20		18,398		18,418
Leases		-		-		-				-		101,147		101,147		-		-		-		-		-		106,872		106,872
Total	$	355	$	-	$	-	$	-	$	355	$	2,416,247	$	2,416,602	$	727	$	-	$	-	$	-	$	727	$	2,563,241	$	2,563,968

December 31, 2018	30-59 Days Past Due		60-89 Days Past Due		90 Days and Still Accruing		Nonaccrual		Total Past Due		Current		Total Loans & Leases
Loans & Leases:
Commercial Real Estate	$	-	$	731	$	-	$	-	$	731	$	825,818	$	826,549
Agricultural Real Estate		-		-		-		-		-		584,625		584,625
Real Estate Construction		327		-		-		-		327		98,241		98,568
Residential 1st Mortgages		367		-		-		-		367		259,369		259,736
Home Equity Lines and Loans		-		-		-		-		-		40,789		40,789
Agricultural		-		-		-		-		-		290,463		290,463
Commercial		-		-		-		-		-		343,834		343,834
Consumer & Other		13		-		-		-		13		19,399		19,412
Leases		-		-		-		-		-		107,265		107,265
Total	$	707	$	731	$	-	$	-	$	1,438	$	2,569,803	$	2,571,241

March 31, 2018	30-59 Days Past Due		60-89 Days Past Due		90 Days and Still Accruing		Nonaccrual		Total Past Due		Current		Total Loans & Leases
Loans & Leases:
Commercial Real Estate	$	-	$	-	$	-	$	-	$	-	$	698,349	$	698,349
Agricultural Real Estate		-		-		-		-		-		508,400		508,400
Real Estate Construction		-		-		-		-		-		96,315		96,315
Residential 1st Mortgages		14		49		-		81		144		263,993		264,137
Home Equity Lines & Loans		20		-		-		-		20		34,671		34,691
Agricultural		-		-		-		-		-		261,427		261,427
Commercial		-		14		-		-		14		274,668		274,682
Consumer & Other		8		-		-		-		8		6,677		6,685
Leases		-		-		-		-		-		90,397		90,397
Total	$	42	$	63	$	-	$	81	$	186	$	2,234,897	$	2,235,083

2122

Table of Contents

December 31, 2017
30-59 Days
Past Due

60-89 Days
Past Due

90 Days and
Still Accruing
Nonaccrual
Total Past
Due
Current
Total
Loans & Leases

Loans & Leases:
Commercial Real Estate $ - $ - $ - $ - $ - $ 684,961 $ 684,961
Agricultural Real Estate - - - - - 499,231 499,231
Real Estate Construction - - - - - 100,206 100,206
Residential 1st Mortgages 448 - - - 448 260,303 260,751
Home Equity Lines and Loans 10 - - - 10 34,515 34,525
Agricultural - - - - - 273,582 273,582
Commercial 180 - - - 180 265,523 265,703
Consumer & Other 7 - - - 7 6,649 6,656
Leases - - - - - 89,680 89,680
Total $ 645 $ - $ - $ - $ 645 $ 2,214,650 $ 2,215,295

September 30, 2017
30-59 Days
Past Due

60-89 Days
Past Due

90 Days and
Still Accruing
Nonaccrual
Total Past
Due
Current
Total
Loans & Leases

Loans & Leases:
Commercial Real Estate $ - $ - $ - $ - $ - $ 683,037 $ 683,037
Agricultural Real Estate - - - - - 470,738 470,738
Real Estate Construction - - - - - 162,167 162,167
Residential 1st Mortgages - - - - - 257,920 257,920
Home Equity Lines & Loans - - - - - 33,350 33,350
Agricultural - - - - - 259,127 259,127
Commercial - 3 - - 3 257,948 257,951
Consumer & Other 16 - - 4 20 7,292 7,312
Leases - - - - - 85,177 85,177
Total $ 16 $ 3 $ - $ 4 $ 23 $ 2,216,756 $ 2,216,779

The following tables show information related to impaired loans & leases for the periods indicated (in thousands):

September 30, 2018							Three Months Ended September 30, 2018				Nine Months Ended September 30, 2018
September 30, 2018	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
March 31, 2019															Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate	$	98	$	98	$	-	$	99	$	2	$	101	$	6	$	93	$	93	$	-	$	94	$	2
Agricultural Real Estate		7,239		7,238		-		3,620		6		804		6		7,239		7,238		-		7,239		73
Residential 1st Mortgages		-		-		-		-		-		553		8
	$	7,337	$	7,336	$	-	$	3,719	$	8	$	1,458	$	20	$	7,332	$	7,331	$	-	$	7,333	$	75
With an allowance recorded:
Commercial Real Estate	$	2,920	$	2,910	$	314	$	2,929	$	24	$	2,950	$	72	$	2,883	$	2,875	$	214	$	2,893	$	23
Residential 1st Mortgages		1,562		1,739		77		1,630		12		989		32		1,625		1,829		81		1,633		21
Home Equity Lines & Loans		75		85		4		76		1		76		3		73		83		4		74		1
Agricultural																201		200		98		101		-
Commercial		1,675		1,670		192		1,986		14		1,879		44		1,596		1,590		172		1,620		14
Consumer & Other		7		7		7		7		-		8		-		6		7		6		6		-
	$	6,239	$	6,411	$	594	$	6,628	$	51		5,902	$	151	$	6,384	$	6,584	$	575	$	6,327	$	59
Total	$	13,576	$	13,747	$	594	$	10,347	$	59	$	7,360	$	171	$	13,716	$	13,915	$	575	$	13,660	$	134

~~Table of Contents~~

December 31, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2018											Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate	$	104	$	104	$	-	$	107	$	11	$	95	$	96	$	-	$	99	$	8
Agricultural Real Estate		-		-		-		488		-		7,239		7,238		-		3,620		119
Residential 1st Mortgages		911		1,012		-		532		11		-		-		-		226		8
Home Equity Lines and Loans		-		-		-		16		-
Agricultural		-		-		-		30		-
	$	1,015	$	1,116	$	-	$	1,173	$	22	$	7,334	$	7,334	$	-	$	3,945	$	135
With an allowance recorded:
Commercial Real Estate	$	2,973	$	2,961	$	366	$	2,999	$	104	$	2,902	$	2,892	$	234	$	2,929	$	96
Residential 1st Mortgages		508		571		25		469		16		1,640		1,838		82		1,371		48
Home Equity Lines and Loans		73		89		4		74		3		74		84		4		76		4
Agricultural		-		-		-		409		21
Commercial		1,741		1,734		220		1,693		59		1,644		1,639		185		1,834		58
Consumer & Other		8		9		8		11		-		6		7		6		7		-
	$	5,303	$	5,364	$	623	$	5,655	$	203	$	6,266	$	6,460	$	511	$	6,217	$	206
Total	$	6,318	$	6,480	$	623	$	6,828	$	225	$	13,600	$	13,794	$	511	$	10,162	$	341

							Three Months Ended September 30, 2017				Nine Months Ended September 30, 2017
September 30, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
March 31, 2018															Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate	$	106	$	107	$	-	$	107	$	2	$	121	$	9	$	102	$	102	$	-	$	103	$	2
Agricultural Real Estate		-		-		-		488		-		868		-
Residential 1st Mortgages		399		456		-		403		3		415		6		903		1,005		-		907		8
Home Equity Lines & Loans		-		-		-		-		-		21		-
Agricultural		-		-		-		30		-		40		-
Commercial		-		-		-		-		-		504		-
	$	505	$	563	$	-	$	1,028	$	5	$	1,969	$	15	$	1,005	$	1,107	$	-	$	1,010	$	10
With an allowance recorded:
Commercial Real Estate	$	2,991	$	2,977	$	384	$	3,000	$	25		2,509	$	80	$	2,955	$	2,943	$	335	$	2,964	$	24
Residential 1st Mortgages		519		574		26		472		3		442		12		583		649		29		546		7
Home Equity Lines & Loans		83		90		4		67		-		76		2		78		88		4		76		1
Agricultural		367		367		69		499		7		588		21
Commercial		1,760		1,752		234		1,696		14		1,624		44		1,720		1,713		205		1,731		15
Consumer & Other		4		11		4		14		-		12		-		8		8		8		8		-
	$	5,724	$	5,771	$	721	$	5,748	$	49		5,251	$	159	$	5,344	$	5,401	$	581	$	5,325	$	47
Total	$	6,229	$	6,334	$	721	$	6,776	$	54	$	7,220	$	174	$	6,349	$	6,508	$	581	$	6,335	$	57

Total recorded investment shown in the prior table will not equal the total ending balance of loans & leases individually evaluated for impairment on the allocation of allowance table. This is because this table does not include impaired loans that were previously modified in a troubled debt restructuring at a market rate, are currently performing and are no longer disclosed or classified as TDR’s.

Table of Contents

At ~~September 30, 2018,~~March 31, 2019, there were no formal foreclosure proceedings in process for consumer mortgage loans secured by residential real estate properties.

At ~~September 30, 2018,~~March 31, 2019, the Company allocated ~~$594,000~~$575,000 of specific reserves to ~~$13.6~~$13.7 million of troubled debt restructured loans & leases, all of which were performing. The Company had no commitments at ~~September 30, 2018~~March 31, 2019 to lend additional amounts to customers with outstanding loans or leases that are classified as TDRs.

During the ~~nine-month periods ending September 30, 2018, there were two loans & leases~~three-month period ended March 31, 2019, the terms of one loan was modified as a troubled debt restructuring. ~~When a loan is restructured, the~~The modification of the terms can include one or a combination of the following: a reduction of the stated interest rate; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

~~Modifications involving~~involved a reduction of the stated interest rate ~~were~~of the loan for 5 ~~years. Modifications involving~~years and an extension of the maturity date ~~was~~for 10 years.

~~Table of Contents~~

The following table presents loans or leases by class modified as ~~troubled debt restructured loans or leases~~TDRs during the ~~three and nine-month periods~~three-month period ended ~~September 30, 2018~~March 31, 2019 (in thousands)::

	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018						March 31, 2019
Troubled Debt Restructurings	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Agricultural Real Estate		1	$	7,239	$	7,239		1	$	7,239	$	7,239
Residential 1st Mortgages		-		-		-		1		175		163
Agricultural														1	$	201	$	201
Total		1	$	7,239	$	7,239		2	$	7,414	$	7,402		1	$	201	$	201

The ~~TDRs~~troubled debt restructurings described above ~~had minimal impact on~~increased the allowance for credit losses by $84,000 for the three ~~and nine-month periods ending September 30, 2018.~~months ended March 31, 2019.

During the three ~~and nine-months~~months ended ~~September 30, 2018,~~March 31, 2019, the twelve months ended December 31, ~~2017,~~2018, and the three ~~and nine-month periods ending September 30, 2017~~months ended March 31, 2018, there were no payment defaults on loans or leases modified as troubled debt restructurings within twelve months following the modification. The Company considers a loan or lease to be in payment default once it is greater than 90 days contractually past due under the modified terms.

~~The following table presents loans by class modified as~~At December 31, 2018, the Company allocated $511,000 of specific reserves to $13.6 million of troubled debt restructured loans, ~~for the period ended December 31, 2017~~ ~~(in thousands)~~:

December 31, 2017
Troubled Debt Restructurings
Number of
Loans

Pre-Modification
Outstanding
Recorded
Investment

Post-Modification
Outstanding
Recorded
Investment

Residential 1st Mortgages 2 673 630
Home Equity Lines and Loans 1 32 32
Commercial 2 138 138
Consumer & Other 1 9 8
Total 6 $ 852 $ 808

~~The troubled debt restructurings described above had minimal impact on the on the allowance for credit losses and resulted in charge-offs~~all of ~~$44,000 for the twelve months ended December 31, 2017.~~

which were performing. At December 31, 2017, the Company allocated $623,000 of specific reserves to $6.3 million of troubled debt restructured loans, all of which were performing. The Company had no commitments at December 31, 2018 and December 31, 2017 to lend additional amounts to customers with outstanding loans that are classified as troubled debt ~~restructurings~~restructurings.

During the period ending December 31, ~~2017,~~2018, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan were for 5 years. Modifications involving an extension of the maturity date were for 10 years.

Table of Contents

The following table presents loans ~~or leases~~ by class modified as troubled debt restructured loans ~~or leases during~~for the ~~three and nine-month periods~~period ended ~~September 30, 2017~~December 31, 2018 (in thousands):

	Three Months Ended September 30, 2017						Nine Months Ended September 30, 2017						December 31, 2018
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Agricultural Real Estate														1	$	7,239	$	7,239
Residential 1st Mortgages		1	$	112	$	112		1	$	112	$	112		2		286		255
Home Equity Lines & Loans		1		32		32		1		32		32
Commercial		2		138		138		2		138		138
Total		4	$	282	$	282		4	$	282	$	282		3	$	7,525	$	7,494

The ~~TDRs~~troubled debt restructurings described above had minimal impact on the allowance for credit losses and resulted in charge-offs of $31,000 for the ~~three and nine-month periods ending September 30, 2017.~~twelve months ended December 31, 2018.

At ~~September 30, 2017,~~March 31, 2018, the Company allocated ~~$721,000~~$577,000 of specific reserves to $6.2 million of troubled debt restructured loans & leases, all of which were performing. The Company had no commitments at ~~September 30, 2017~~March 31, 2018 to lend additional amounts to customers with outstanding loans or leases that are classified as TDRs.

During the ~~three and nine-month periods~~three-month period ending ~~September 30, 2017,~~March 31, 2018, there were ~~four~~no loans & leases modified as a troubled debt restructuring. When a loan is restructured, the modification of the terms can include one or a combination of the following: a reduction of the stated interest rate; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

~~Modifications involving a reduction of the stated interest rate were for 5 years. Modifications involving an extension of the maturity date ranged from 7 to 10 years.~~

4.	4. Fair Value Measurements

The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC, which establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. This standard applies whenever other standards require, or permit, assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, this standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

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, the transfer is reported at the beginning of the reporting period.

~~Table of Contents~~

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.

Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.

Table of Contents

The Company does not record ~~all~~originated loans & leases at fair value on a recurring basis. However, from time to time, a loan or lease is considered impaired and an allowance for credit losses is established. Once a loan or lease is identified as individually impaired, management measures impairment in accordance with the “Receivable” topic of the FASB ASC. The fair value of impaired loans or leases is estimated using one of several methods, including collateral value when the loan is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows. Impaired loans & leases not requiring an allowance represent loans & leases for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans & leases. Impaired loans & leases where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The fair value of collateral dependent impaired loans is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take into account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring impaired loans is primarily the sales comparison approach less selling costs of 10%.

Other Real Estate (“ORE”) is reported at fair value on a non-recurring basis. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take into account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring ORE is primarily the sales comparison approach less selling costs of 10%.

The following tables present information about the Company’s assets ~~and liabilities~~ measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated.

			Fair Value Measurements At September 30, 2018, Using								Fair Value Measurements At March 31, 2019, Using
(in thousands)	Fair Value Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-Sale Securities:
Government Agency & Government-Sponsored Entities	$	3,052	$	-	$	3,052	$	-	$	3,027	$	-	$	3,027	$	-
US Treasury Notes		164,208		164,208		-		-		164,674		164,674		-		-
US Govt SBA		16,973		-		16,973		-		14,412		-		14,412		-
Mortgage Backed Securities		271,067		-		271,067		-		304,020		-		304,020		-
Other		3,011		201		310		2,500		5,156		203		310		4,643
Total Assets Measured at Fair Value On a Recurring Basis	$	458,311	$	164,409	$	291,402	$	2,500	$	491,289	$	164,877	$	321,769	$	4,643

Table of Contents

			Fair Value Measurements At December 31, 2017, Using								Fair Value Measurements At December 31, 2018, Using
(in thousands)	Fair Value Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Available-for-Sale Securities:
Government Agency & Government-Sponsored Entities	$	3,128	$	-	$	3,128	$	-	$	3,039	$	-	$	3,039	$	-
US Treasury Notes		144,164		144,164		-		-		164,514		164,514		-		-
US Govt SBA		29,380		-		29,380		-		15,447		-		15,447		-
Mortgage Backed Securities		301,914		-		301,914		-		307,045		-		307,045		-
Other		3,010		200		310		2,500		5,351		202		310		4,839
Total Assets Measured at Fair Value On a Recurring Basis	$	481,596	$	144,364	$	334,732	$	2,500	$	495,396	$	164,716	$	325,841	$	4,839

			Fair Value Measurements At September 30, 2017, Using								Fair Value Measurements At March 31, 2018, Using
(in thousands)	Fair Value Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-Sale Securities:
Government Agency & Government-Sponsored Entities	$	3,169	$	-	$	3,169	$	-	$	3,095	$	-	$	3,095	$	-
US Treasury Notes		144,410		144,410		-		-		143,409		143,409		-		-
US Govt SBA		31,691		-		31,691		-		27,537		-		27,537		-
Mortgage Backed Securities		276,043		-		276,043		-		318,763		-		318,763		-
Other		1,010		200		310		500		3,010		200		310		2,500
Total Assets Measured at Fair Value On a Recurring Basis	$	456,323	$	144,610	$	311,213	$	500	$	495,814	$	143,609	$	349,705	$	2,500

Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the ~~three and nine-months~~period ended ~~September 30, 2018 and 2017,~~March 31, 2019, there were no transfers in orour out of ~~Level~~level 1, 2, or 3.

~~The available for sale investment security~~Certain equity securities, categorized as a Level 3 ~~asset~~assets as of March 31, 2019 consisted ~~of one investment~~of: (1) $3.0 million in a limited liability ~~company~~companies (LLC) that ~~purchases~~invest in CRA qualified SBA ~~loans.~~loans; (2) $1.4 million in registered warrants issued by California reclamation districts; and (3) $200,000 in The ~~balances in the investment were $2.5M, $2.5M~~Independent Bankers’ Bank stock. These securities are not readily tradeable, and ~~$500,000~~are carried at ~~September 30, 2018, December 31, 2017 and September 30, 2017, respectively. This security is not actively traded and is owned by a few investors for CRA purposes.~~cost, plus/minus observable price changes, less impairment. The significant unobservable data reflected in the fair value measurement include dealer quotes, projected prepayment speeds/average lives and credit ~~information, among other things.~~information. There were no gains, or losses or transfers in or out of level 3 during the three-month period ended ~~September 30, 2018, December~~March 31, ~~2017, and September 30, 2017.~~2019.

Table of Contents

Level 3 Valuations

The following table presents a reconciliation of the level 3 fair value category measured at fair value on a recurring basis:

							Net Realized / Unrealized Gains (Losses)

(in thousands)	Balance at Beginning of Period		Purchases / Additions		Sales / Reductions		Realized		Unrealized		Balance at End of Period
Three months ended March 31, 2019
Available-for-sale debt securities:	$	1,593	$	479	$	675	$	-	$	-	$	1,397
Equity securities:	$	3,246	$	-	$	-	$	-	$	-	$	3,246
Total	$	4,839	$	479	$	675	$	-	$	-	$	4,643

The following tables present information about the Company’s other real estate and impaired loans or leases, classes of assets or liabilities that the Company carries at fair value on a non-recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated. Not all impaired loans or leases are carried at fair value. Impaired loans or leases are only included in the following tables when their fair value is based upon a current appraisal of the collateral, and if that appraisal results in a partial charge-off or the establishment of a specific reserve.

Fair Value Measurements
At September 30, 2018, Using

(in thousands)
Fair Value
Total

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Impaired Loans
Commercial Real Estate $ 2,596 $ - $ - $ 2,596
Residential 1st Mortgage 1,476 - - 1,476
Home Equity Lines and Loans 71 - - 71
Commercial 1,478 - - 1,478
Total Impaired Loans 5,621 - - 5,621
Other Real Estate
Real Estate Construction 873 - - 873
Total Other Real Estate 873 - - 873
Total Assets Measured at Fair Value On a Non-Recurring Basis $ 6,494 $ - $ - $ 6,494

											Fair Value Measurements At March 31, 2019, Using
			Fair Value Measurements At December 31, 2017, Using						Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Fair Value Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		(Level 1)		(Level 2)		(Level 3)
Impaired Loans:
Impaired Loans
Commercial Real Estate	$	2,595	$	-	$	-	$	2,595	$	2,660	$	-	$	-	$	2,660
Residential 1st Mortgage		997		-		-		997		1,540		-		-		1,540
Home Equity Lines and Loans		75		-		-		75		69		-		-		69
Agricultural										102		-		-		102
Commercial		1,514		-		-		1,514		1,418		-		-		1,418
Total Impaired Loans		5,181		-		-		5,181		5,789		-		-		5,789
Other Real Estate:
Other Real Estate
Real Estate Construction		873		-		-		873		873		-		-		873
Total Other Real Estate		873		-		-		873		873		-		-		873
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	6,054	$	-	$	-	$	6,054	$	6,662	$	-	$	-	$	6,662

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											Fair Value Measurements At December 31, 2018, Using
			Fair Value Measurements At September 30, 2017, Using						Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Fair Value Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
Impaired Loans:
Commercial Real Estate	$	2,594	$	-	$	-	$	2,594	$	2,658	$	-	$	-	$	2,658
Residential 1st Mortgage		491		-		-		491		1,550		-		-		1,550
Home Equity Lines and Loans		78		-		-		78		70		-		-		70
Agricultural		298		-		-		298
Commercial		1,519		-		-		1,519		1,454		-		-		1,454
Total Impaired Loans		4,980		-		-		4,980		5,732		-		-		5,732
Other Real Estate
Other Real Estate:
Real Estate Construction		873		-		-		873		873		-		-		873
Total Other Real Estate		873		-		-		873		873		-		-		873
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	5,853	$	-	$	-	$	5,853	$	6,605	$	-	$	-	$	6,605

			Fair Value Measurements At March 31, 2018, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
Commercial Real Estate	$	2,608	$	-	$	-	$	2,608
Residential 1st Mortgage		475		-		-		475
Home Equity Lines and Loans		74		-		-		74
Commercial		1,508		-		-		1,508
Total Impaired Loans		4,665		-		-		4,665
Other Real Estate
Real Estate Construction		873		-		-		873
Total Other Real Estate		873		-		-		873
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	5,538	$	-	$	-	$	5,538

The Company’s property appraisals are primarily based on the sales comparison approach and the income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property.

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The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at ~~September 30, 2018:~~March 31, 2019:

(in thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Range, Weighted Avg.			Fair Value		Valuation Technique	Unobservable Inputs	Range, Weighted Avg.
Impaired Loans
Commercial Real Estate	$	2,596	Income Approach	Capitalization Rate		3.25%, 3.25	%	$	2,660	Income Approach	Capitalization Rate		3.25%, 3.25	%
Residential 1st Mortgage	$	1,476	Sales Comparison Approach	Adjustment for Difference Between Comparable Sales		1% -4%, 3	%	$	1,540	Sales Comparison Approach	Adjustment for Difference Between Comparable Sales		1% - 4%, 2.85	%
Home Equity Lines and Loans	$	71	Sales Comparison Approach	Adjustment for Difference Between Comparable Sales		1% - 2%, 1	%	$	69	Sales Comparison Approach	Adjustment for Difference Between Comparable Sales		1% - 2%, 1.50	%
Agricultural								$	102	Income Approach	Capitalization Rate		5.10%, 5.10	%
Commercial	$	1,478	Income Approach	Capitalization Rate		2.95% - 8.70%, 3.40	%	$	1,418	Income Approach	Capitalization Rate		3.25% - 8.70%, 3.40	%

Other Real Estate
Real Estate Construction	$	873	Sales Comparison Approach	Adjustment for Difference Between Comparable Sales		10%, 10	%	$	873	Sales Comparison Approach	Adjustment for Difference Between Comparable Sales		10%, 10	%

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5.	Fair Value of Financial Instruments

U.S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to ~~estimate that value.~~estimate. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation ~~methodologies.~~methodologies pursuant to ASC 820, Fair Value Measurements. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period of time between origination of the instrument and its expected realization. The valuation of loans held for investment was impacted by the adoption of ASU 2016-01. In accordance with ASU 2016-01, the fair value of loans held for investment, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are considered a Level 3 classification.

The following tables summarize the book value and estimated fair value of financial instruments for the periods indicated:

			Fair Value of Financial Instruments Using										Fair Value of Financial Instruments Using
September 30, 2018 (in thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Estimated Fair Value
March 31, 2019 (in thousands)											Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Estimated Fair Value
Assets:
Cash and Cash Equivalents	$	110,781	$	110,781	$	-	$	-	$	110,781	$	97,810	$	97,810	$	-	$	-	$	97,810

Investment Securities Available-for-Sale		458,311		164,409		291,402		2,500		458,311		491,289		164,877		321,769		4,643		491,289

Investment Securities Held-to-Maturity		51,459		-		35,716		15,663		51,379		54,412		-		36,705		18,276		54,981

FHLB Stock		10,877		N/A		N/A		N/A		N/A
Loans & Leases, Net of Deferred Fees & Allowance		2,363,535		-		-		2,317,185		2,317,185		2,509,061		-		-		2,490,197		2,490,197
Accrued Interest Receivable		14,612		-		14,612		-		14,612		12,524		-		12,524		-		12,524

Liabilities:
Deposits		2,776,923		2,314,600		457,526		-		2,772,126		3,008,040		2,483,258		521,321		-		3,004,579
Subordinated Debentures		10,310		-		7,579		-		7,579		10,310		-		7,600		-		7,600
Accrued Interest Payable		1,227		-		1,227		-		1,227		2,193		-		2,193		-		2,193

			Fair Value of Financial Instruments Using										Fair Value of Financial Instruments Using
December 31, 2017 (in thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Estimated Fair Value
December 31, 2018 (in thousands)											Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Estimated Fair Value
Assets:
Cash and Cash Equivalents	$	187,149	$	187,149	$	-	$	-	$	187,149	$	145,564	$	145,564	$	-	$	-	$	145,564

Investment Securities Available-for-Sale		481,596		144,364		334,732		2,500		481,596		495,396		164,716		325,841		4,839		495,396

Investment Securities Held-to-Maturity		54,460		-		38,492		16,744		55,236		53,566		-		35,083		18,655		53,738

FHLB Stock		10,342		N/A		N/A		N/A		N/A
Loans & Leases, Net of Deferred Fees & Allowance		2,164,953		-		-		2,137,987		2,137,987		2,515,975		-		-		2,485,182		2,485,182
Accrued Interest Receivable		10,999		-		10,999		-		10,999		14,098		-		14,098		-		14,098

Liabilities:
Deposits		2,723,228		2,247,831		472,671		-		2,720,502		3,062,832		2,572,805		485,766		-		3,058,571
Subordinated Debentures		10,310		-		7,428		-		7,428		10,310		-		7,745		-		7,745
Accrued Interest Payable		1,137		-		1,137		-		1,137		1,365		-		1,365		-		1,365

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			Fair Value of Financial Instruments Using										Fair Value of Financial Instruments Using
September 30, 2017 (in thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Estimated Fair Value
March 31, 2018 (in thousands)											Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Estimated Fair Value
Assets:
Cash and Cash Equivalents	$	193,270	$	193,270	$	-	$	-	$	193,270	$	134,984	$	134,984	$	-	$	-	$	134,984

Total Investment Securities Available-for-Sale		456,323		144,610		311,213		500		456,323
Investment Securities Available-for-Sale												495,814		143,609		349,705		2,500		495,814

Total Investment Securities Held-to-Maturity		55,542		-		39,254		17,037		56,291
Investment Securities Held-to-Maturity												53,527		-		37,028		16,717		53,745

FHLB Stock		10,342		N/A		N/A		N/A		N/A
Total Loans & Leases, Net of Deferred Fees & Allowance		2,166,035		-		-		2,148,524		2,148,524
Loans & Leases, Net of Deferred Fees & Allowance												2,184,406		-		-		2,152,504		2,152,504
Accrued Interest Receivable		11,498		-		11,498		-		11,498		9,237		-		9,237		-		9,237

Liabilities:
Total Deposits		2,709,427		2,159,654		547,796		-		2,707,450
Deposits												2,701,405		2,218,642		478,846		-		2,697,488
Subordinated Debentures		10,310		-		6,589		-		6,589		10,310		-		7,751		-		7,751
Accrued Interest Payable		939		-		939		-		939		909		-		909		-		909

6.	Dividends and Basic Earnings Per Common Share

Farmers & Merchants Bancorp common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. ~~On May 8, 2018,~~No cash dividends were declared during the ~~Board~~first quarter of Directors declared a mid-year cash dividend of $6.90 per share, a 2.2% increase over the $6.75 per share paid on July 1, 2017. The cash dividend was paid on July 2, 2018, to shareholders of record on June 8,2019 or 2018.

Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. The Company has no securities or other contracts, such as stock options, that could require the issuance of common stock. Accordingly, diluted earnings per share ~~are not presented.~~is the same amount as basic earnings per share. The following table calculates the basic earnings per common share for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018.

	Three Months Ended September 30,				Nine Months Ended September 30,
(net income in thousands)	2018		2017		2018		2017		2019		2018
Net Income	$	12,000	$	8,581	$	32,491	$	24,589	$	13,549	$	9,941
Weighted Average Number of Common Shares Outstanding		793,418		810,291		807,129		809,002		784,438		812,304
Basic Earnings Per Common Share Amount	$	15.12	$	10.59	$	40.26	$	30.39	$	17.27	$	12.24

7.	~~Shareholders’ Equity~~Leases

~~During the nine months ended September 30, 2018,~~Lessee – Operating Leases

Effective January 1, 2019, the Company ~~issued~~adopted the provisions of Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842),” (ASU 2016-02), for all open leases with a ~~combined total 13,520 shares~~term greater than one year as of ~~common stock~~the adoption date, using the modified retrospective approach. Prior comparable periods are presented in accordance with previous guidance under Accounting Standards Codification (ASC) 840, “Leases.”

Operating leases in which we are the lessee are recorded as operating lease ROU assets and operating lease liabilities, included in other assets and other liabilities, respectively, on our consolidated balance sheets. We do not currently have any significant finance leases in which we are the lessee.

Operating lease ROU assets represent our right to ~~the Bank’s non-qualified defined contribution retirement plans. There were also 2,400 shares issued to individuals~~use an underlying asset during the ~~third quarter of 2018. All~~lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the ~~shares were issued~~remaining lease payments using a discount rate that represents our incremental borrowing rate at ~~prices ranging from $635.00 to $690.00 per share based upon valuations completed during~~ the ~~quarter~~lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of ~~issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2)~~amortization of the ~~Securities Act of 1933, as amended,~~ROU asset and the ~~regulations promulgated thereunder. The proceeds were contributed to~~implicit interest accreted on the ~~Bank as equity capital.~~

~~On July 31, 2018, Farmers & Merchants Bancorp purchased 44,503 shares~~operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in net occupancy expense in the consolidated statements of the Company’s Common Stock from the estate of a former Director. The purchase price was $700.00 per share for a total consideration of Thirty One Million One Hundred Fifty-Two Thousand One Hundred Dollars ($31,152,100). After the transaction, the Company remained “well capitalized” under the regulatory framework for prompt corrective action.income.

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~~During~~Our leases relate primarily to office space and bank branches with remaining lease terms of generally 1 to 10 years. Certain lease arrangements contain extension options which typically range from 5 to 10 years at the then fair market rental rates. ASC 842 requires lessees to evaluate whether option periods, if available, will be exercised in order to determine the full life of the lease. The Company has elected to use data including the first option period, unless it is a relatively new lease that has a long initial lease term or other extenuating circumstances. As of March 31, 2019, operating lease ROU assets and ~~third quarters~~liabilities were $4.55 million and $4.56 million, respectively. Operating leases that were in scope of ~~2017,~~ASU 2016-02 have a total cost of $207,000 at March 31, 2019.

The table below summarizes the information related to our operating leases:

(in thousands except for percent and period data)	Three Months ended March 31, 2019
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating Cash Flow from Operating Leases	$	196
Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities		4,729
Weighted-Average Remaining Lease Term - Operating Leases, in Years		7.70
Weighted-Average Discount Rate - Operating Leases		2.8	%

The table below summarizes the maturity of remaining lease liability:

(in thousands)	March 31, 2019
2019	$	587
2020		792
2021		694
2022		548
2023		542
2024 and thereafter		1,916
Total Lease Payments		5,079
Less: Interest		(515	)
Present Value of Lease Liabilities	$	4,564

As of March 31, 2019, we have no additional operating leases for office space that have not yet commenced or that are anticipated to commence during the second quarter of 2019.

Lessor - Direct Financing Leases

The Company is the lessor in direct finance lease arrangements. Leases are recorded at the principal balance outstanding, net of unearned income and charge-offs. Interest income is recognized using the interest method. Leases typically have a maturity of three to ten years, and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk. Credit risks are underwritten using the same credit criteria the Company ~~issued~~would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a ~~combined total 4,975 shares~~lease. The impact of ~~common stock~~adopting Topic 842 for lessor accounting was not significant.

Lease payments due to the ~~Bank’s non-qualified defined contribution retirement plans. These shares were issued at prices ranging~~Company are typically fixed and paid in equal installments over the lease term. Variable lease payments that do not depend on an index or a rate (e.g., property taxes) that are paid directly by the Company are minimal. The majority of property taxes are paid directly by the client to a third party and are not considered part of variable payments and therefore are not recorded by the Company. The Company has made a policy election to exclude from ~~$590.00~~consideration in contracts all collections from sales and other similar taxes due to ~~$595.00 per share based upon valuations completed during~~immateriality.

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As a lessor, the ~~quarter~~Company leases certain types of ~~issuance by a nationally recognized bank consulting~~agriculture equipment, solar equipment, construction equipment and ~~advisory firm and~~other equipment to its customers. At March 31, 2019, the Company's net investment in ~~reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.~~direct financing leases was $106.9 million.

8.	~~Investment In Bank of Rio Vista~~

~~Over the past year, Farmers & Merchants Bancorp acquired 1,586, or 39.65%, of the outstanding common shares of Bank of Rio Vista for $12.0 million.~~

On March 26, 2018, Farmers & Merchants Bancorp and Bank of Rio Vista announced that a definitive agreement had been signed by both parties for the acquisition of the remaining 40.35% of the outstanding common shares of Bank of Rio Vista. The transaction closed on October 10, 2018. See Note 10 – Subsequent Events for further information.

As a result of signing a definitive agreement with Bank of Rio Vista, Farmers & Merchants Bancorp is accounting for the 39.65% of the outstanding common shares of Bank of Rio Vista that it currently owns under the equity method of accounting, in accordance with ASC 323-10 effective first quarter 2018. During the nine months ended September 30, 2018, the Company’s recorded investment in Bank of Rio Vista increased by $381,000, based upon the earnings of Bank of Rio Vista that are attributed to the Company’s ownership.

9.	Recent Accounting Pronouncements

Recently Adopted Accounting Guidance

The following paragraphs provide descriptions of recently adopted accounting standards that may have had a material effect on the Company’s financial position or results of operations.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts and debit card and ATM fees, did not change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company elected to use the modified retrospective transition method which requires application of ASU 2014-09 to uncompleted contracts at the date of adoption however, periods prior to the date of adoption will not be retrospectively revised as the impact of the ASU on uncompleted contracts at the date of adoption was not material.

~~In January 2016, the FASB issued ASU 2016-01,~~ ~~Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities~~. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, the ASU changes the income statement impact of equity investments held by the Company and the requirement for the Company to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The Company adopted the ASU provisions on January 1, 2018. The adoption of the ASU resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 5 – Fair Value of Financial Instruments for further information regarding the valuation of these loans.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the newly enacted Tax Cuts and Jobs Act (“Tax Act”). The amount of the reclassification consists of the difference between the historical corporate income tax rates and the newly enacted 21 percent corporate federal income tax rate. The amendments are effective for all entities for the interim and annual reporting periods beginning after December 15, 2018 and early adoption is permitted, including interim periods in those years. The Company adopted the amendments as of December 31, 2017, which resulted in a net reclassification of $144,000 between AOCI and retained earnings.

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Accounting Guidance Pending Adoption at ~~September 30, 2018~~March 31, 2019

The following paragraphs provide descriptions of newly issued but not yet effective accounting standards that could have a material effect on the Company’s financial position or results of operations.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU will require the earlier recognition of credit losses on loans and other financial instruments based on an expected loss model, replacing the incurred loss model that is currently in use. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at amortized cost. The impairment model for available-for-sale debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary. The new guidance is effective on January 1, 2020, with early adoption permitted on January 1, 2019. The Company has selected a vendor to analyze our loan data and has chosen an implementation team. The Company is currently ~~working with~~gathering and analyzing the ~~vendor~~loan and ~~our IT department to establish the~~lease data ~~transmission interface. While the~~on a monthly basis. The Company has ~~not quantified the impact of this ASU, it is evaluating historical loan level data requirements necessary for the~~completed its preliminary implementation of the model, ~~as well as various methodologies for determining expected credit losses.~~and believes final implementation will not have a significant impact on the Bank’s ALLL.

~~In February 2016, the FASB issued ASU 2016-02,~~ 34~~Leases (Topic 842)~~. The new standard is being issued to increase the transparency and comparability around lease obligations. Previously unrecorded off-balance sheet obligations will now be brought more prominently to light by presenting lease liabilities on the face

Table of ~~the balance sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements.~~ This ASU applies to leasing arrangements exceeding a twelve-month term. 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 method upon adoption. Early application of the amendments is permitted. The Company is currently evaluating the provisions of this ASU to determine the potential impact the new standard will have on the Company’s consolidated financial statements. 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 these leases.Contents

~~10.~~

~~Subsequent Events~~

On October 10, 2018, Farmers & Merchants Bancorp completed the acquisition of the Bank of Rio Vista. In the transaction, the shareholders of Bank of Rio Vista owning 2,414 shares, or 60.35% of the outstanding common shares, received $28.7 million in cash. Over the past year, Farmers & Merchants Bancorp acquired 1,586, or 39.65%, of the outstanding common shares of Bank of Rio Vista for $12.0 million. As a result, the total price paid for all common shares of Bank of Rio Vista is $40.7 million.

Item 2.

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

The following is management’s discussion and analysis of the major factors that influenced our financial performance for the three ~~and nine~~ months ended ~~September 30, 2018.~~March 31, 2019. This analysis should be read in conjunction with our ~~2017~~2018 Annual Report to Shareholders on Form 10-K, and with the unaudited financial statements and notes as set forth in this report.

Forward–Looking Statements

This Form 10-Q contains various forward-looking statements, usually containing the words “estimate,” “project,” “expect,” “objective,” “goal,” or similar expressions and includes assumptions concerning Farmers & Merchants Bancorp’s (together with its subsidiaries, the “Company” or “we”) operations, future results, and prospects. These forward-looking statements are based upon current expectations and are subject to risks and uncertainties. In connection with the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors which could cause the actual results of events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.

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Such factors include, but are not limited to, the following: (1) economic conditions in the Central Valley of California; (2) significant changes in interest rates and loan prepayment speeds; (3) credit risks of lending and investment activities; (4) changes in federal and state banking laws or regulations; (5) competitive pressure in the banking industry; (6) changes in governmental fiscal or monetary policies; (7) uncertainty regarding the economic outlook resulting from the continuing war on terrorism, as well as actions taken or to be taken by the U.S. or other governments as a result of further acts or threats of terrorism; (8) water management issues in California and the resulting impact on the Company’s agricultural customers; (9) expansion into new geographic markets and new lines of business; and (10) other factors discussed in Item 1A. Risk Factors located in the Company’s ~~2017~~2018 Annual Report on Form 10-K.

Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.

Introduction

Farmers & Merchants Bancorp, or the Company, is a bank holding company formed March 10, 1999. Its subsidiary, Farmers & Merchants Bank of Central California, or the Bank, is a California state-chartered bank formed in 1916. Banking services are provided in ~~twenty-eight locations~~thirty branches in the Company's service area. The service area includes Sacramento, San Joaquin, Stanislaus, Merced and Contra ~~Costa~~Costa. Napa and Solano Counties with branches in Sacramento, Elk Grove, Galt, Lodi, Stockton, Linden, Modesto, Turlock, Hilmar, Merced, Manteca, Riverbank, Napa, Walnut Creek, ~~and Concord. In January 2018, the Company opened a loan production office (“LPO”) in Napa, California which was converted to a full service branch in the third quarter of 2018.~~

~~In March 2018 the Company announced that it had entered into a definitive agreement to purchase Bank of~~Concord, Rio Vista, ~~(“BORV”). This transaction closed on October 10, 2018 (see Note 10 for additional information).~~Walnut Grove and Lockeford.

As a bank holding company, the Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System (“FRB”). As a California, state-chartered, non-fed member bank, the Bank is subject to regulation and examination by the California Department of Business Oversight (“DBO”) and the Federal Deposit Insurance Corporation (“FDIC”).

Overview

Although the Company has initiated efforts to expand its geographic footprint into the East Bay area of San Francisco and Napa, California (see Item 1: Business – Service Area), the Company’s primary service area remains the mid Central Valley of California, a region that can be significantly impacted by the seasonal needs of the agricultural industry. Accordingly, discussion of the Company’s Financial Condition and Results of Operations is influenced by the seasonal banking needs of its agricultural customers (e.g., during the spring and summer customers draw down their deposit balances and increase loan borrowing to fund the purchase of equipment and planting of crops. Correspondingly, deposit balances are replenished and loans repaid in late fall and winter as crops are harvested and sold).

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The State of California experienced drought conditions from 2013 through most of 2016. ~~Then, in late~~Since 2016, ~~and early 2017 significant~~reasonable levels of rain and snow have alleviated drought conditions in many areas of California, including those in the Company’s primary service area. ~~In late 2017 and early 2018 rain levels exceeded 80% of seasonal averages, but snow levels were modest. Fortunately,~~As a result, reservoir levels are high and the availability of water ~~this fall~~ in our primary service area should not be an issue. However, the weather patterns over the past 5 years further reinforce the fact that the long-term risks associated with the availability of water are significant.

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019, Farmers & Merchants Bancorp reported net income of $13,549,000, earnings per share of $17.27 and return on average assets of 1.60%. Return on average shareholders’ equity was 16.96% for the three months ended March 31, 2019.

For the three months ended March 31, 2018, Farmers & Merchants Bancorp reported net income of ~~$12,000,000 and $32,491,000,~~$9,941,000, earnings per share of ~~$15.12 and $40.26~~$12.24 and return on average assets of ~~1.55% and 1.41%, respectively.~~1.31%. Return on average shareholders’ equity was ~~15.97% and 14.24%~~13.14% for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018.

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For the three and nine months ended September 30, 2017, Farmers & Merchants Bancorp reported net income of $8,581,000 and $24,589,000, earnings per share of $10.59 and $30.39 and return on average assets of 1.13% and 1.10%, respectively. Return on average shareholders’ equity was 11.54% and 11.28% for the three and nine months ended September 30, 2017.

The following is a summary of the financial results for the ~~nine-month~~three-month period ended ~~September 30, 2018~~March 31, 2019 compared to ~~September 30, 2017.~~March 31, 2018.

Net income increased 36.3% to $13,549,000 from $9,941,000.

·	~~Net income increased 32.1% to $32.5 million from $24.6 million.~~

Earnings per share increased 41.1% to $17.27 from $12.24.

Total assets increased 11.0% to $3.4 billion from $3.1 billion.

·	~~Earnings per share increased 32.5% to $40.26 from $30.39.~~

Total loans & leases increased 14.7% to $2.6 billion from $2.2 billion.

Total deposits increased 11.4% to $3.0 billion from $2.7 billion.

·	~~Total assets increased 3.6% to $3.2 billion from $3.1 billion.~~

·	~~Total loans & leases increased 9.0% to $2.4 billion from $2.2 billion.~~

·	~~Total deposits increased 2.5% to $2.8 billion from $2.7 billion.~~

The primary reasons for the Company’s ~~$3.7~~$3.6 million or ~~9.6%~~36.3% increase in ~~pre-tax~~net income in the first ~~nine months~~quarter of ~~2018~~2019 as compared to the same period of ~~2017~~2018 were:

A $5.3 million increase in net interest income related to both the growth in earning assets and increased interest rates.

·	~~A $11.4 million increase in net interest income related to the growth in earning assets and the improvement in the net interest margin.~~

A $333,000 decrease in the provision for credit losses

~~This~~These positive ~~impact was~~impacts were partially offset by:

A $429,000 increase in legal expense and a $724,000 decrease in other non-interest income related to non-recurring income received in 2018.

·	~~A $1.5 million increase in the net loss on the sale of investment securities.~~

A $1.3 million increase in the provision for income taxes.

·	~~A $2.8 million increase in salaries and employee benefits.~~

·	~~A $1.6 million increase in legal and other expenses primarily related to the acquisition of the Bank of Rio Vista.~~

·	~~A $900,000 decrease in the gain on sale of fixed assets due to the sale of one of our properties in the first half of the prior year (2017).~~

·	~~A $414,000 increase in non-interest expense related to a non-recurring gain on sale of ORE in the prior year (2017) and was recorded as a reduction to non-interest expense.~~

·	~~A $483,000 increase in the provision for credit losses.~~

Results of Operations

Net Interest Income / Net Interest Margin

The tables on the following pages reflect the Company's average balance sheets and volume and rate analysis for the three ~~and nine-month~~month periods ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018.

The average yields on earning assets and average rates paid on interest-bearing liabilities have been computed on an annualized basis for purposes of comparability with full year data. Average balance amounts for assets and liabilities are the computed average of daily balances.

Net interest income is the amount by which the interest and fees on loans & leases and other ~~interest earning~~interest-earning assets exceed the interest paid on ~~interest bearing~~interest-bearing sources of funds. For the purpose of analysis, the interest earned on tax-exempt investments and municipal loans is adjusted to an amount comparable to interest subject to normal income taxes. This adjustment is referred to as ~~“taxable~~“tax equivalent” adjustment and is noted wherever applicable. The presentation of net interest income and net interest margin on a tax equivalent basis is a common practice within the banking industry.

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The Volume and Rate Analysis of Net Interest Income summarizes the changes in interest income and interest expense based on changes in average asset and liability balances (volume) and changes in average rates (rate). For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to: (1) changes in volume (change in volume multiplied by initial rate); (2) changes in rate (change in rate multiplied by initial volume); and (3) changes in rate/volume, also called “changes in mix” (allocated in proportion to the respective volume and rate components).

The Company’s earning assets and rate sensitive liabilities are subject to repricing at different times, which exposes the Company to income fluctuations when interest rates change. In order to minimize income fluctuations, the Company attempts to match asset and liability maturities. However, some maturity mismatch is inherent in the asset and liability mix. See “Item 3. Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk.”

~~Table of Contents~~

~~Farmers & Merchants Bancorp~~

~~Quarterly Average Balances and Interest Rates~~

~~(Interest and Rates on a Taxable Equivalent Basis)~~

~~(in thousands)~~

Three Months Ended Sept 30,
2018

Three Months Ended Sept 30,
2017

Assets Balance Interest Rate Balance Interest Rate
Interest Bearing Deposits with Banks $ 127,570 $ 638 1.98 % $ 189,647 $ 648 1.36 %
Investment Securities:
U.S. Treasuries 49,530 181 1.46 % 80,985 224 1.11 %
U.S. Govt SBA 18,136 97 2.14 % 32,458 162 2.00 %
Government Agency & Government-Sponsored Entities 3,052 22 2.88 % 3,098 22 2.84 %
Obligations of States and Political Subdivisions - Non-Taxable 51,667 497 3.85 % 56,036 663 4.73 %
Mortgage Backed Securities 287,599 1,754 2.44 % 282,477 1,623 2.30 %
Other 3,011 21 2.79 % 1,010 6 2.38 %
Total Investment Securities 412,995 2,572 2.49 % 456,064 2,700 2.37 %

Loans & Leases:
Real Estate 1,666,801 21,416 5.10 % 1,565,218 18,889 4.79 %
Home Equity Lines & Loans 38,193 533 5.54 % 32,705 430 5.22 %
Agricultural 283,078 3,760 5.27 % 260,398 3,083 4.70 %
Commercial 290,588 3,867 5.28 % 258,574 3,041 4.67 %
Consumer 6,298 98 6.17 % 5,872 73 4.93 %
Other 1,382 8 2.30 % 1,678 9 2.13 %
Leases 98,316 1,277 5.15 % 80,629 966 4.75 %
Total Loans & Leases 2,384,656 30,959 5.15 % 2,205,074 26,491 4.77 %
Total Earning Assets 2,925,221 $ 34,169 4.63 % 2,850,785 $ 29,839 4.15 %

Unrealized (Loss) Gain on Securities Available-for-Sale (7,668 ) 1,334
Allowance for Credit Losses (51,831 ) (49,889 )
Cash and Due From Banks 47,381 45,084
All Other Assets 191,562 198,054
Total Assets $ 3,104,665 $ 3,045,368

Liabilities & Shareholders' Equity
Interest Bearing Deposits:
Interest Bearing DDA $ 619,697 $ 509 0.33 % $ 553,394 $ 321 0.23 %
Savings and Money Market 830,680 467 0.22 % 812,749 340 0.17 %
Time Deposits 467,443 1,044 0.89 % 579,527 982 0.67 %
Total Interest Bearing Deposits 1,917,820 2,020 0.42 % 1,945,670 1,643 0.34 %
Federal Home Loan Bank Advances 46 - 0.00 % 0 0 0.00 %
Subordinated Debentures 10,310 137 5.27 % 10,310 115 4.43 %
Total Interest Bearing Liabilities 1,928,176 $ 2,157 0.44 % 1,955,980 $ 1,758 0.36 %
Interest Rate Spread 4.19 % 3.80 %
Demand Deposits (Non-Interest Bearing) 832,752 741,839
All Other Liabilities 43,239 50,210
Total Liabilities 2,804,167 2,748,029

Shareholders' Equity 300,498 297,339
Total Liabilities & Shareholders' Equity $ 3,104,665 $ 3,045,368
Impact of Non-Interest Bearing Deposits and Other Liabilities 0.15 % 0.11 %
Net Interest Income and Margin on Total Earning Assets 32,012 4.34 % 28,081 3.91 %
Tax Equivalent Adjustment (104 ) (231 )
Net Interest Income $ 31,908 4.33 % $ 27,850 3.88 %

Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis. Loan interest income includes fee income and unearned discount in the amount of $1.3 million and $1.4 million for the quarters ended September 30, 2018 and 2017, respectively. Yields on securities available-for-sale are based on historical cost.

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Farmers & Merchants Bancorp

Year-to-Date Average Balances and Interest Rates

(Interest and Rates on a Taxable Equivalent Basis)

(in thousands)

																			Three Months Ended March 31,									Three Months Ended March 31,
				Nine Months Ended Sept. 30, 2018									Nine Months Ended Sept. 30, 2017									2019									2018
Assets	Balance			Interest			Rate			Balance			Interest			Rate			Balance			Interest			Annualized Yield/Rate			Balance			Interest			Annualized Yield/Rate
Interest Bearing Deposits with Banks	$	131,509		$	1,737			1.77	%	$	142,717		$	1,155			1.08	%
Investment Securities:
Interest Bearing Deposits With Banks																			$	187,461		$	1,125			2.43	%	$	152,936		$	585			1.54	%
Investment Securities
U.S. Treasuries		69,374			728			1.40	%		82,441			665			1.08	%		46,617			195			1.67	%		92,107			297			1.29	%
U.S. Govt SBA		24,559			339			1.84	%		34,125			412			1.61	%		15,251			99			2.60	%		28,750			123			1.71	%
Government Agency & Government-Sponsored Entities		3,063			66			2.87	%		3,109			66			2.83	%		3,028			22			2.91	%		3,074			22			2.86	%
Obligations of States and Political Subdivisions - Non-Taxable		53,120			1,536			3.86	%		56,945			2,026			4.74	%		54,079			559			4.13	%		54,689			529			3.87	%
Mortgage Backed Securities		308,835			5,578			2.41	%		291,179			5,013			2.30	%		307,072			2,044			2.66	%		322,296			1,920			2.38	%
Other		3,010			60			2.66	%		1,010			17			2.24	%		5,183			67			5.17	%		3,010			18			2.39	%
Total Investment Securities		461,961			8,307			2.40	%		468,809			8,199			2.33	%		431,230			2,986			2.77	%		503,926			2,909			2.31	%

Loans & Leases:
Loans & Leases
Real Estate		1,607,127			60,612			5.04	%		1,561,675			55,021			4.71	%		1,778,866			22,694			5.17	%		1,548,359			19,044			4.95	%
Home Equity Lines & Loans		36,221			1,464			5.40	%		32,109			1,217			5.07	%
Home Equity Line & Loans																				39,610			596			6.10	%		34,735			448			5.19	%
Agricultural		265,812			10,127			5.09	%		266,205			9,015			4.53	%		259,108			3,628			5.68	%		251,784			3,028			4.84	%
Commercial		281,664			10,933			5.19	%		233,853			8,064			4.61	%		343,448			4,521			5.34	%		268,032			3,311			4.97	%
Consumer		5,795			240			5.54	%		5,592			221			5.28	%		17,773			254			5.80	%		5,293			76			5.77	%
Other		1,382			23			2.23	%		1,679			28			2.23	%		1,079			6			2.26	%		1,382			8			2.33	%
Leases		93,484			3,531			5.05	%		77,508			2,704			4.66	%		107,867			1,479			5.56	%		91,222			1,129			4.98	%
Total Loans & Leases		2,291,485			86,930			5.07	%		2,178,621			76,270			4.68	%		2,547,751			33,178			5.28	%		2,200,807			27,044			4.94	%
Total Earning Assets		2,884,955		$	96,974			4.49	%		2,790,147		$	85,624			4.10	%		3,166,442		$	37,289			4.78	%		2,857,669		$	30,538			4.30	%

Unrealized Gain on Securities Available-for-Sale		(7,064	)								746
Unrealized (Loss) Gain on Securities Available-for-Sale																				(4,019	)								(4,832	)
Allowance for Credit Losses		(51,113	)								(48,887	)								(55,238	)								(50,612	)
Cash and Due From Banks		46,448									44,896									56,206									46,527
All Other Assets		190,733									190,732									217,842									187,290
Total Assets	$	3,063,959								$	2,977,634								$	3,381,233								$	3,036,042

Liabilities & Shareholders' Equity
Interest Bearing Deposits:
Interest Bearing Deposits
Interest Bearing DDA	$	596,872		$	1,086			0.24	%	$	516,867		$	723			0.19	%	$	667,465		$	552			0.34	%	$	585,176		$	272			0.19	%
Savings and Money Market		823,595			1,130			0.18	%		802,778			954			0.16	%		910,793			730			0.33	%		825,514			330			0.16	%
Time Deposits		472,460			2,738			0.77	%		584,773			2,675			0.61	%		513,853			1,539			1.21	%		478,740			803			0.67	%
Total Interest Bearing Deposits		1,892,927			4,954			0.35	%		1,904,418			4,352			0.31	%		2,092,111			2,821			0.55	%		1,889,430			1,405			0.30	%
Federal Home Loan Bank Advances		16			-			0.00	%		1			-			0.00	%		4			-			0.00	%		4			-			0.00	%
Subordinated Debentures		10,310			385			4.99	%		10,310			320			4.15	%		10,310			145			5.70	%		10,310			117			4.56	%
Total Interest Bearing Liabilities		1,903,253		$	5,339			0.38	%		1,914,729		$	4,672			0.33	%		2,102,425		$	2,966			0.57	%		1,899,744		$	1,522			0.32	%
Interest Rate Spread								4.12	%								3.78	%								4.20	%								3.98	%
Demand Deposits (Non-Interest Bearing)		813,129									721,808									915,907									795,261
All Other Liabilities		43,352									50,394									43,375									38,464
Total Liabilities		2,759,734									2,686,931									3,061,707									2,733,469

Shareholders' Equity		304,225									290,703									319,526									302,573
Total Liabilities & Shareholders' Equity	$	3,063,959								$	2,977,634								$	3,381,233								$	3,036,042
Impact of Non-Interest Bearing Deposits and Other Liabilities								0.13	%								0.10	%
Net Interest Income and Margin on Total Earning Assets					91,635			4.25	%					80,952			3.88	%					34,323			4.40	%					29,016			4.12	%
Tax Equivalent Adjustment					(320	)								(705	)								(116	)								(110	)
Net Interest Income				$	91,315			4.23	%				$	80,247			3.85	%				$	34,207			4.38	%				$	28,906			4.07	%

Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis. Loan & lease interest income includes fee income and unearned discount in the amount of ~~$4.2~~$1.0 million and ~~$3.6~~$1.5 million for the ~~nine months~~quarters ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively. Yields on securities available-for-sale are based on historical cost.

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Farmers & Merchants Bancorp

Volume and Rate Analysis of Net Interest Revenue

(Interest and Rates on a Taxable Equivalent Basis)

(in thousands)	Three Months Ended Sept. 30, 2018 compared to Sept. 30, 2017									Nine Months Ended Sept. 30, 2018 compared to Sept. 30, 2017									Three Months Ended Mar. 31, 2019 compared to Mar. 31, 2018

Interest Earning Assets	Volume			Rate			Net Chg.			Volume			Rate			Net Chg.			Volume			Rate		Net Chg.
Interest Bearing Deposits with Banks	$	(250	)	$	239		$	(11	)		(97	)		679		$	582
Investment Securities:
Interest Bearing Deposits With Banks																			$	153			387	$	540
Investment Securities
U.S. Treasuries		(102	)		59			(43	)		(116	)		179			63			(174	)		72		(102	)
U.S. Govt SBA		(76	)		11			(65	)		(126	)		53			(73	)		(72	)		48		(24	)
Government Agency & Government-Sponsored Entities		-			-			-			(1	)		1			-			-			-		-
Obligations of States and Political Subdivisions - Non-Taxable		(49	)		(116	)		(165	)		(130	)		(359	)		(489	)		(6	)		36		30
Mortgage Backed Securities		29			102			131			312			253			565			(93	)		217		124
Other		14			2			16			39			4			43			19			30		49
Total Investment Securities		(184	)		58			(126	)		(22	)		131			109			(326	)		404		77

Loans & Leases:
Loans & Leases
Real Estate		1,265			1,262			2,527			1,635			3,956			5,591			2,920			730		3,650
Home Equity Lines & Loans		76			27			103			163			85			247
Home Equity Line & Loans																				68			80		148
Agricultural		282			395			677			(13	)		1,125			1,112			91			509		600
Commercial		400			426			826			1,777			1,092			2,869			981			229		1,210
Consumer		5			20			25			8			11			19			178			-		178
Other		(2	)		1			(1	)		(5	)		-			(5	)		(2	)		-		(2	)
Leases		225			85			310			591			235			826			220			130		350
Total Loans & Leases		2,251			2,216			4,467			4,156			6,504			10,659			4,455			1,678		6,134
Total Earning Assets		1,817			2,513			4,330			4,037			7,314			11,350			4,282			2,469		6,751

Interest Bearing Liabilities
Interest Bearing Deposits:
Interest Bearing DDA		42			146			188			123			240			363
Interest Bearing Deposits
Transaction																				42			238		280
Savings and Money Market		8			119			127			25			151			176			37			363		400
Time		(211	)		273			62			(573	)		636			63
Time Deposits																				64			672		736
Total Interest Bearing Deposits		(161	)		538			377			(425	)		1,027			602			143			1,273		1,416
Other Borrowed Funds																				-			-		-
Subordinated Debentures		-			22			22			-			65			65			-			28		28
Total Interest Bearing Liabilities		(161	)		560			399			(425	)		1,092			667			143			1,301		1,444
Total Change on a Tax Equivalent Basis	$	1,978		$	1,953		$	3,931		$	4,462		$	6,222		$	10,683
Total Change																			$	4,139		$	1,168	$	5,307

Notes: Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total "net change." The above figures have been rounded to the nearest whole number.

~~Table of Contents~~

~~Third Quarter 2018 vs. Third Quarter 2017~~

Net interest income increased $5.3 million or 18.3% to $34.2 million during the first quarter of 2019 compared to $28.9 million for the ~~third~~first quarter of ~~2018 increased 14.6% or $4.1 million to $31.9 million.~~2018. On a fully ~~taxable~~tax equivalent basis, net interest income increased ~~14.0%~~18.9% and totaled ~~$32~~$34.3 million ~~for the third quarter of~~at March 31, 2019, compared to $29.0 million at March 31, 2018. As more fully discussed below, the increase in net interest income was primarily due ~~primarily~~ to a ~~$74.4~~$308.8 million increase in average earning assets ~~and~~combined with a 4344 basis point increase in the net interest margin.

Net interest income on a taxable equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin. For the quarter ended ~~September 30, 2018,~~March 31, 2019, the Company’s net interest margin was ~~4.34%~~4.40% compared to ~~3.91%~~4.12% for the quarter ended ~~September 30, 2017.~~March 31, 2018. This increase in net interest margin was primarily due ~~primarily~~ to ana 48 basis point increase in the yield ~~received~~ on earning assets offset ~~somewhat~~ by ana 25 basis point increase in the ~~rates paid on~~cost of interest bearing liabilities.

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Average loans & leases totaled ~~$2.4~~$2.5 billion for the quarter ended ~~September 30, 2018;~~March 31, 2019; an increase of ~~$179.6~~$346.9 million compared to the average balance for the quarter ended ~~September 30, 2017.~~March 31, 2018. Loans & leases increased from ~~77.4%~~77.0% of average earning assets at ~~September 30, 2017~~March 31, 2018 to ~~81.5%~~80.5% at ~~September 30, 2018.~~March 31, 2019. The annualized yield on the Company’s loan ~~& lease~~ portfolio increased to ~~5.15%~~5.28% for the quarter ended ~~September 30, 2018,~~March 31, 2019, compared to ~~4.77%~~4.94% for the quarter ended ~~September 30, 2017.~~March 31, 2018. This increase in yield was primarily due to an increase in market interest rates. Overall, ~~the positive impact on interest revenue from~~ the increase in loan & lease balances and ~~rising~~the increase in yields resulted in interest revenue from loans & leases increasing ~~16.9%~~22.7% to ~~$31~~$33.2 million for quarter ended ~~September 30, 2018.~~March 31, 2019. The Company ~~has been experiencing~~continues to experience aggressive competitor pricing for loans & leases to which it may need to continue to respond in order to retain key customers. This could place negative pressure on future loan & lease yields and net interest margin.

The investment portfolio is the other main component of the Company’s earning assets. Historically, the Company invested primarily in: (1) mortgage-backed securities issued by government-sponsored entities; (2) debt securities issued by the U.S. Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times the Company selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 5 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent ~~maturity without subjecting the Company to the interest rate risk associated with mortgage-backed securities.~~maturity. Since the risk factor for these types of investments is generally lower than that of loans & leases, the yield earned on investments is generally less than that of loans & leases.

Average investment securities totaled ~~$413.0~~$431.2 million for the quarter ended ~~September 30, 2018; a~~March 31, 2019; an decrease of ~~$43.1~~$72.7 million compared to the average balance for the quarter ended ~~September 30, 2017.~~March 31, 2018. Tax equivalent interest income on securities ~~decreased $126,000~~increased $77,000 to ~~$2.6~~$3.0 million for the quarter ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$2.7~~$2.9 million for the quarter ended ~~September 30, 2017.~~March 31, 2018. The average investment portfolio yield, on a tax equivalent (TE) basis, was ~~2.49%~~2.77% for the quarter ended ~~September 30, 2018,~~March 31, 2019, compared to ~~2.37%~~2.31% for the quarter ended ~~September 30, 2017.~~March 31, 2018. This overall increase in yield was caused primarily by an increase in market interest rates offset by a decline in the TE yield on municipal securities due to a decrease in the federal corporate tax rate. See “Financial Condition – Investment Securities” for a discussion of the Company’s investment strategy in ~~2018.~~2019. Net interest income on the Schedule of Year-to-Date Average Balances and Interest Rates is shown on a tax equivalent basis, which is higher than net interest income as reflected on the Consolidated ~~Statement~~Statements of Income because of adjustments that relate to income on securities that are exempt from federal income taxes.

Interest bearing deposits with banks and overnight investments in Federal Funds Sold are additional earning assets available to the Company. Interest bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB ~~currently~~ earn interest at ~~2.20%.~~the Fed Funds rate, which was 2.40% in March 2019 compared to 1.75% in March 2018. Average interest bearing deposits with banks for the quarter ended ~~September 30, 2018, were $127.6~~March 31, 2019, was $187.5 million, ~~a decrease~~an increase of ~~$62.1~~$34.5 million compared to the average balance for the quarter ended ~~September 30, 2017.~~March 31, 2018. Interest income on interest bearing deposits with banks for the quarter ended ~~September 30, 2018, decreased $11,000~~March 31, 2019, increased $540,000 to ~~$637,000~~$1.1 million compared to the quarter ended ~~September 30, 2017.~~March 31, 2018.

Average interest-bearing liabilities ~~decreased $27.8~~increased $202.7 million or ~~1.4%~~10.67% during the ~~third~~first quarter of ~~2018.~~2019. Of that ~~decrease:~~increase: (1) interest-bearing transaction deposits increased ~~$66.3~~$82.3 million; (2) savings and money market deposits increased ~~$17.9~~$85.3 million; (3) time deposits ~~decreased $112.1~~increased $35.1 million (see “Financial Condition – Deposits”); (4) ~~Federal Home Loan Bank (“FHLB”) Advances increased $46,000~~FHLB advances remained unchanged (see “Financial Condition – Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings”); and (5) subordinated debt remained unchanged (see “Financial Condition – Subordinated Debentures”).

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Total interest expense on interest bearing deposits was ~~$2.0~~$2.8 million for the ~~third~~first quarter of ~~2018~~2019 as compared to ~~$1.6~~$1.4 million for the ~~third~~first quarter of ~~2017.~~2018. The average rate paid on interest-bearing deposits was ~~0.42%~~0.55% for the ~~third~~first quarter of ~~2018~~2019 compared to ~~0.34%~~0.30% for the ~~third~~first quarter of ~~2017.~~2018. As a result of the increase in market interest rates over the past 2736 months, the Company is ~~beginning to experience~~experiencing more aggressive competitor rates on interest bearing deposits which it may need to meet in order to retain key customers. This could place negative pressure on future deposit rates and net interest margin.

~~Nine Months Ending September 30, 2018 vs. Nine Months Ending September 30, 2017~~40

~~During the first nine months~~

Table of 2018, net interest income increased 13.8% to $91.3 million, compared to $80.2 million at September 30, 2017. On a fully taxable equivalent basis, net interest income increased 13.2% and totaled $91.6 million at September 30, 2018, compared to $81.0 million at September 30, 2017. The increase in net interest income was due primarily to a $94.8 million increase in average earning assets, and a 37 basis point increase in the net interest margin.Contents

For the nine months ended September 30, 2018, the Company’s net interest margin was 4.25% compared to 3.88% for the same period in 2017. This increase in net interest margin was due primarily to an increase in the yield received on earning assets, offset somewhat by an increase in the rates paid on interest bearing liabilities.

The average balance of loans & leases increased by $112.9 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The yield on the loan & lease portfolio increased 39 basis points to 5.07% for the nine months ended September 30, 2018 compared to 4.68% for the nine months ended September 30, 2017. This increase in yield was enhanced by the increase in the average balance of loans resulting in interest income from loans & leases increasing 14.0% or $10.7 million for the first nine months of 2018.

Average investment securities were $462 million for the nine months ended September 30, 2018 compared to $468.8 million for the same period in 2017. The average tax equivalent yield for the nine months ended September 30, 2018 was 2.40% compared to 2.33% for the nine months ended September 30, 2017. This overall increase in yield was caused primarily by an increase in market interest rates offset by a decline in the TE yield on municipal securities due to a decrease in the federal corporate tax rate. See “Financial Condition – Investment Securities” for a discussion of the Company’s investment strategy in 2018. Net interest income on the Schedule of Year-to-Date Average Balances and Interest Rates is shown on a tax equivalent basis, which is higher than net interest income as reflected on the Consolidated Statement of Income because of adjustments that relate to income on securities that are exempt from federal income taxes.

~~Average interest bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB currently~~ earn interest at 2.20%. Average interest bearing deposits with banks for the nine-months ended September 30, 2018, was $131.5 million, a decrease of $11.2 million compared to the average balance for the nine-months ended September 30, 2017. Interest income on interest bearing deposits with banks for the nine-months ended September 30, 2018, increased $582,000 to $1.7 million compared to the nine-months ended September 30, 2017.

Average interest-bearing liabilities decreased $11.5 million or 0.60% during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. Of that decrease: (1) interest-bearing transaction deposits increased $80.0 million; (2) savings and money market deposits increased $20.8 million; (3) time deposits decreased $112.3 million (see “Financial Condition – Deposits”); and (4) subordinated debt remained unchanged (see “Financial Condition – Subordinated Debentures”).

Total interest expense on interest bearing deposits was $5.0 million for the first nine months of 2018 as compared to $4.4 million for the first nine months of 2017. The average rate paid on interest-bearing deposits was 0.35% in the first nine months of 2018 and 0.31% in the first nine months of 2017.

Provision and Allowance for Credit Losses

As a financial institution that assumes lending and credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The Company has established credit management policies and procedures that govern both the approval of new loans & leases and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction), and by restricting loans & leases made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. Management reports regularly to the Board of Directors regarding trends and conditions in the loan & lease portfolio and regularly conducts credit reviews of individual loans & leases. Loans & leases that are performing but have shown some signs of weakness are subject to more stringent reporting and oversight.

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Allowance for Credit Losses

The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio as of the balance sheet date. The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to impaired loans & leases; general reserves for inherent losses related to loans & leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors.

A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Loans & leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.

A restructuring of a loan or lease constitutes a troubled debt restructuring (“TDR”) under ASC 310-40, if the Company for economic or legal reasons related to the borrower's financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans or leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become TDR, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment.

The determination of the general reserve for loans or leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors that include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1^st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer & other; and (9) equipment leases. See “Financial Condition – Loans & Leases” for examples of loans & leases made by the Company. The allowance for credit losses attributable to each portfolio segment, which includes both impaired loans & leases and loans & leases that are not impaired, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.

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The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans & leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The ~~risk ratings can be grouped into five major categories, defined as follows:~~

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~~Pass – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.~~

Special Mention – A special mention loan or lease has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease position at some future date. Special mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Bank will estimate its probable loss and immediately charge-off some or all of the balance.

~~The~~ general reserve component of the allowance for credit losses also consists of reserve factors that are based on ~~management's~~management’s assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio ~~segment described below:~~

Commercial Real Estate – Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the abilitysegment. See “Note 1 Significant Accounting Policies - Allowance for ~~properties to produce sufficient cash flow to service debt obligations.~~

Real Estate Construction – Real estate construction loans, including land loans, are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial – These loans are generally considered to possess a moderate inherent risk of loss because they are shorter-term; typically made to relationship customers; generally underwritten to existing cash flows of operating businesses; and may be collateralized by fixed assets, inventory and/or accounts receivable. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Agricultural Real Estate and Agricultural – These loans are generally considered to possess a moderate inherent risk of loss since they are typically made to relationship customers and are secured by crop production, livestock and related real estate. These loans are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.

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Leases – Equipment leases are generally considered to possess a moderate inherent risk of loss. As Lessor, the company is subject to both the credit risk of the borrower and the residual value risk of the equipment. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

Residential 1st Mortgages and Home Equity Lines and Loans – These loans are generally considered to possess a low inherent risk of loss, although this is not always true as evidenced by the weakness in residential real estate values over the past five years. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

In addition, the Company's and Bank's regulators, including the FRB, DBO and FDIC, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

Provision for Credit Losses

Changes in the provision for credit losses between years are the result of management’s evaluation, based upon information currently available, of the adequacy of the allowance for credit losses relative to factors such as the credit quality of the loan & lease portfolio, loan & lease growth, current credit losses, and the prevailing economic climate and its effect on borrowers’ ability to repay loans & leases in accordance with the terms of the notes.

The Central Valley of California was one of the hardest hit areas in the country during the recession. In many areas, housing prices declined as much as 60% and unemployment reached 15% or more. Although the economy has improved throughout most of the Central Valley, in many of the Company’s market segments housing prices remain below peak levels and unemployment rates remain above those in other areas of the state and country. While, in management’s opinion, the Company’s levels of net charge-offs and non-performing assets as of ~~September 30, 2018,~~March 31, 2019, compare very favorably to our peers at the present time, carefully managing credit risk remains a key focus of the Company.

~~The Company made a $3.3 million~~Based upon the results of the Company’s credit loss review and analysis, no provision was required for credit losses during the first ~~nine months~~quarter of ~~2018~~2019 compared to ~~$2.9 million for~~$333,000 during the ~~same period in 2017.~~first quarter of 2018. Net charge-offs during the first ~~nine months~~quarter of ~~2018~~2019 were ~~$608,000~~$360,000 compared to net ~~charge-offs~~recoveries of ~~$25,000~~$2,000 in the first ~~nine months~~quarter of ~~2017.~~2018. See “Overview – Looking Forward: ~~2018~~2019 and Beyond”, “Critical Accounting Policies and Estimates – Allowance for Credit Losses” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk” located in the Company’s ~~2017~~2018 Annual Report on Form 10-K.

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After reviewing all factors above, ~~based upon information currently available,~~ management concluded that the allowance for credit losses, as of ~~September 30,~~March 31, 2019, and March 31, 2018 ~~was~~were adequate.

Three Months Ended
September 30,

Nine Months Ended
September 30,

(in thousands) 2018 2017 2018 2017
Balance at Beginning of Period $ 51,137 $ 49,064 $ 50,342 $ 47,919
Charge-Offs (634 ) (54 ) (723 ) (230 )
Recoveries 64 134 115 205
Provision 2,500 1,600 3,333 2,850
Balance at End of Period $ 53,067 $ 50,744 $ 53,067 $ 50,744

	Three Months Ended March 31,
Allowance for Credit Losses (in thousands)	2019			2018
Balance at Beginning of Period	$	55,266		$	50,342
Loans or Leases Charged Off		(400	)		(21	)
Recoveries of Loans or Leases Previously Charged Off		41			23
Provision Charged to Expense		0			333
Balance at End of Period	$	54,907		$	50,677

The table below breaks out current quarter activity by portfolio segment (in thousands):

March 31, 2019	Commercial Real Estate			Agricultural Real Estate		Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases			Unallocated		Total

Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2019	$	11,609		$	14,092	$	1,249		$	880		$	2,761		$	8,242		$	11,656		$	494		$	4,022		$	261	$	55,266
Charge-Offs		-			-		-			-			-			-			(379	)		(21	)		-			-		(400	)
Recoveries		-			-		-			3			6			6			12			14			-			-		41
Provision		(209	)		401		(42	)		(20	)		(29	)		(800	)		644			(20	)		(14	)		89		-
Ending Balance- March 31, 2019	$	11,400		$	14,493	$	1,207		$	863		$	2,738		$	7,448		$	11,933		$	467		$	4,008		$	350	$	54,907

The Allowance for Credit Losses at ~~September 30, 2018 increased $2.7 million~~March 31, 2019 decreased $359,000 from December 31, ~~2017.~~2018. . The allowance allocated to the following portfolio ~~segments~~segment changed materially during the first ~~nine~~three months of ~~2018:~~2019:

The allowance for agricultural loans decreased $794,000 primarily due to balance decreases in this portfolio segment.

The allowance for agricultural real estate loans increased $1.4 million due to balance increases in this portfolio segment, along with a $9.3 million increase in substandard loans related primarily to one borrower.

~~The allowance for commercial loans increased $1.0 million primarily due to balance increases in this portfolio segment.~~

See “Management’s Discussion and Analysis - Financial Condition – Classified Loans & Leases and Non-Performing Assets” for further discussion regarding these loan categories.

See “Note 3. Allowance for Credit Losses” for additional details regarding the provision and allowance for credit losses.

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Non-Interest Income

Non-interest income includes: (1) service charges and fees from deposit accounts; (2) net gains and losses from investment securities; (3) increases in the cash surrender value of bank owned life insurance; (4) debit card and ATM fees; (5) net gains and losses on non-qualified deferred compensation plans; and (6) fees from other miscellaneous business services.

~~Third Quarter 2018 vs. Third Quarter 2017~~

~~Non-interest~~Overall, non-interest income ~~increased $570,000~~decreased $201,000 or ~~15.7%~~4.3% for the three months ended ~~September 30, 2018,~~March 31, 2019, compared to the same period of ~~2017. This increase was due to a $205,000 increase in the net gain on~~ ~~deferred compensation investments, and $217,000~~ ~~related to the Company’s portion of the income of BORV, which is accounted for on the equity method. See Note 8 for additional information.~~

~~Nine Months Ending September 30, 2018 vs. Nine Months Ending September 30, 2017~~

~~Non‑interest income decreased $1.4 million or 11.3% for the nine months ended September 30, 2018 compared to the same period of 2017.~~2018. This decrease was primarily due to a ~~$1.5 million~~$724,000 decrease ~~resulting from~~related to non-recurring income received in 2018, somewhat offset by: (1) a ~~loss on the sale of investment securities. This decrease was partially offset by a $201,000~~$263,000 increase in the net gain on deferred compensation investments (Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and ~~increased~~stock prices. Although Generally Accepted Accounting Principles require these investment gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effect on the Company’s net income); (2) a $161,000 increase in debit card and ATM ~~fees.~~fees; (3) a $59,000 increase in service charges; and (5) a $40,000 increase in cash surrender value of life insurance.

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Non-Interest Expense

Non-interest expense for the Company includes expenses for: (1) salaries and employee benefits; (2) net gains and losses on non-qualified deferred compensation plan investments; (3) occupancy; (4) equipment; (5) supplies; (6) legal fees; (7) professional services; (8) data processing; (9) marketing; (10) deposit insurance; (11) ORE carrying costs and gains/losses on sale; and (12) other miscellaneous expenses.

~~Third Quarter 2018 vs. Third Quarter 2017~~

Overall, non-interest expense increased ~~$2.3 million~~$509,000 or ~~14.2%~~2.6% for the three months ended ~~September 30, 2018,~~March 31, 2019, compared to the same period in ~~2017.~~2018. This increase was primarily comprised of: (1) a ~~$1.5 million~~$263,000 increase in the net gain on deferred compensation investments (Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although Generally Accepted Accounting Principles require these investment gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effect on the Company’s net income); (2) increased legal fees of $429,000; and (3) a $252,000 increase in occupancy and equipment expenses. These increases were partially offset by: (1) a $103,000 decrease in salaries and employee benefits; and (2) a ~~$241,000 increase~~decrease in ~~occupancy and equipment; (3) a $210,000 increase~~“Other” expenses of $332,000, primarily due to decreases in ~~legal expense primarily related to the acquisition of BORV; and (4) a $190,000 write-off of capitalized development costs for a branch construction project that has been postponed.~~

~~Nine Months Ending September 30, 2018 vs. Nine Months Ending September 30, 2017~~

Non-interest expense increased $5.4 million or 10.6% for the nine months ended September 30, 2018, compared to the same period of 2017. This increase was primarily comprised of: (1) a $2.8 million increase in salaries and employee benefits; (2) a $1.6 million increase in legalprofessional fees and other expenses primarily related to the acquisition of BORV; and (3) a $414,000 increase in non-interest expense related to a non-recurring gain on sale of ORE in the prior year (2017) that was recorded as a reduction to non-interest expense.miscellaneous expenses.

Income Taxes

~~On December 22, 2017, the Tax Cuts and Jobs act was signed into law changing the Bank’s Federal corporate tax rate from 35% to 21%.~~ The Bank’s provision for income taxes ~~decreased 40.1%~~increased 39.2% to ~~$3.0~~$4.7 million for the ~~third~~first quarter of ~~2018~~2019 compared to the ~~third~~first quarter of ~~2017~~2018 primarily as a result ~~of: (1) the Federal corporate tax rate change and (2) as a result~~ of ~~tax planning, the Company has amended and plans to amend tax returns in open tax years resulting in a reduction of $990,000 in the company’s tax provision this quarter.~~ ~~See “Note 1. Significant Accounting Policies~~ ~~- Out of Period Adjustment.”~~increase income over prior year. The effective tax rate for the ~~third~~first quarter of ~~2018~~2019 was ~~20.0%~~25.7% compared to ~~36.8% for the third quarter of 2017.~~

~~The provision for income taxes decreased 29.7% to $9.9 million~~25.3% for the first ~~nine months~~quarter of 2018. ~~The Company’s effective tax rate for the first nine months of 2018 was 23.4% compared to 36.5% for the same period in 2017.~~

The Company’s effective tax rate fluctuates from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the combined Federal and State statutory rate of ~~42%~~30% due primarily to benefits regarding the cash surrender value of life insurance; credits associated with low income housing tax credit investments (LIHTC); and tax-exempt interest income on municipal securities and loans.

~~Current~~With the exception of the one-time DTA re-measurement that took place in 2017, tax law causes the Company’s ~~current~~ taxes payable to approximate or exceed the current provision for taxes on the income statement. Three provisions have had a significant effect on the Company’s current income tax liability: (1) the restrictions on the deductibility of credit losses; (2) deductibility of ~~retirement~~pension and other long-term employee benefits only when paid; and (3) the statutory deferral of deductibility of California franchise taxes on the Company’s federal return.

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Financial Condition

This section discusses material changes in the Company’s balance sheet at ~~September 30, 2018,~~March 31, 2019, as compared to December 31, ~~2017~~2018 and to ~~September 30, 2017.~~March 31, 2018. As previously discussed (see “Overview”) the Company’s financial condition can be influenced by the seasonal banking needs of its agricultural customers.

Investment Securities and Federal Funds Sold

The investment portfolio provides the Company with an income alternative to loans & leases. The debt securities in the Company’s investment portfolio have historically been comprised primarily of: (1) mortgage-backed securities issued by federal government-sponsored entities; (2) debt securities issued by US Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times, the Company has selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 5 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity without subjecting the Company to the interest rate risk associated with mortgage-backed securities.

The Company’s investment portfolio at ~~September 30, 2018~~March 31, 2019 was ~~$509.8~~$545.7 million compared to ~~$536.1~~$549.0 million at the end of ~~2017,~~2018, a decrease of ~~$26.3~~$3.3 million or ~~4.9%~~.06%. At ~~September 30, 2017,~~March 31, 2018, the investment portfolio totaled ~~$511.9~~$549.3 million. To protect against future increases in market interest rates, while at the same time generating some reasonable level of current yields, the Company currently invests most of its available funds in either shorter term U.S. Treasury, government agency & government-sponsored entity securities or shorter term (10, 15, and 20 year) mortgage-backed securities.

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The Company's total investment portfolio currently represents ~~16.0%~~16.1% of the Company’s total assets as compared to ~~17.4%~~16.0% at December 31, ~~2017,~~2018, and ~~16.7%~~17.9% at ~~September 30, 2017.~~March 31, 2018.

As of ~~September 30, 2018,~~March 31, 2019, the Company held ~~$51.5~~$54.4 million of municipal investments, of which ~~$35.8~~$35.7 million were bank-qualified municipal bonds, all classified as HTM. In order to comply with Section 939A of the Dodd-Frank Act, the Company performs its own credit analysis on new purchases of municipal bonds. As of ~~September 30, 2018,~~March 31, 2019, ninety-nine percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or issuer level, and all of these ratings are “investment grade.” The Company monitors the status of all municipal investments with particular attention paid to the approximately one percent ($~~295,000)~~400,000) of the portfolio that is not rated, and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.

Not included in the investment portfolio are interest bearing deposits with banks and overnight investments in Federal Funds Sold. Interest bearing deposits with banks consisted ~~primarily~~ of FRB deposits. The FRB currently pays interest on the deposits that banks maintain in their FRB accounts, ~~(currently 2.20%),~~ whereas historically banks had to sell these Federal Funds to other banks in order to earn interest. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Interest bearing deposits with banks totaled ~~$58.1~~$43.4 million at ~~September 30, 2018, $121.2~~March 31, 2019, $84.5 million at December 31, ~~2017~~2018 and ~~$149.1~~$97.0 million at ~~September 30, 2017.~~March 31, 2018.

The Company classifies its investments as HTM, trading, or AFS. Securities are classified as HTM and are carried at amortized cost when the Company has the intent and ability to hold the securities to maturity. Trading securities are securities acquired for short-term appreciation and are carried at fair value, with unrealized gains and losses recorded in non-interest income. As of ~~September 30, 2018,~~March 31, 2019, December 31, ~~2017~~2018 and ~~September 30, 2017,~~March 31, 2018, there were no securities in the trading portfolio. Securities classified as AFS include securities, which may be sold to effectively manage interest rate risk exposure, prepayment risk, satisfy liquidity demands and other factors. These securities are reported at fair value with aggregate, unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, net of related income taxes.

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Loans & Leases

Loans & leases can be categorized by borrowing purpose and use of funds. Common examples of loans & leases made by the Company include:

Commercial and Agricultural Real Estate - These are loans secured by farmland, commercial real estate, multifamily residential properties, and other non-farm, non-residential properties generally within our market area. Commercial mortgage term loans can be made if the property is either income producing or scheduled to become income producing based upon acceptable pre-leasing, and the income will be the Bank's primary source of repayment for the loan. Loans are made both on owner occupied and investor properties; generally do not exceed 10 years (and may have pricing adjustments on a shorter timeframe); have debt service coverage ratios of 1.00 or better with a target of greater than 1.25; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

Real Estate Construction - These are loans for development and construction (the Company generally requires the borrower to fund the land acquisition) and are secured by commercial or residential real estate. These loans are generally made only to experienced local developers with whom the Bank has a successful track record; for projects in our service area; with Loan To Value (LTV) below 75%; and where the property can be developed and sold within 2 years. Commercial construction loans are made only when there is a written take-out commitment from the Bank or an acceptable financial institution or government agency. Most acquisition, development and construction loans are tied to the prime rate or LIBOR with an appropriate spread based on the amount of perceived risk in the loan.

Residential 1^st Mortgages - These are loans primarily made on owner occupied residences; generally underwritten to income and LTV guidelines similar to those used by FNMA and FHLMC; however, we will make loans on rural residential properties up to 40 acres. Most residential loans have terms from ten to twenty years and carry fixed rates priced off of treasury rates. The Company has always underwritten mortgage loans based upon traditional underwriting criteria and does not make loans that are known in the industry as “subprime,” “no or low doc,” or “stated income.”

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Home Equity Lines and Loans - These are loans made to individuals for home improvements and other personal needs. Generally, amounts do not exceed $250,000; Combined Loan To Value (CLTV) does not exceed 80%; FICO scores are at or above 670; Total Debt Ratios do not exceed 43%; and in some situations the Company is in a 1^st lien position.

Agricultural - These are loans and lines of credit made to farmers to finance agricultural production. Lines of credit are extended to finance the seasonal needs of farmers during peak growing periods; are usually established for periods no longer than 12 to 36 months; are often secured by general filing liens on livestock, crops, crop proceeds and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a processing plant, or orchard/vineyard development; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

Commercial - These are loans and lines of credit to businesses that are sole proprietorships, partnerships, LLC’s and corporations. Lines of credit are extended to finance the seasonal working capital needs of customers during peak business periods; are usually established for periods no longer than 12 to 24 months; are often secured by general filing liens on accounts receivable, inventory and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a plant or purchase of a business; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

Consumer - These are loans to individuals for personal use, and primarily include loans to purchase automobiles or recreational vehicles, and unsecured lines of credit. The Company has a very minimal consumer loan portfolio, and loans are primarily made as an accommodation to deposit customers.

Leases –These are leases to businesses or individuals, for the purpose of financing the acquisition of equipment. They can be either “finance leases” where the lessee retains the tax benefits of ownership but obtains 100% financing on their equipment purchases; or “true tax leases” where the Company, as lessor, places reliance on equipment residual value and in doing so obtains the tax benefits of ownership. Leases typically have a maturity of three to ten years, and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

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See “Item 3. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk” for a discussion about the credit risks the Company assumes and its overall credit risk management practices.

Each loan or lease type involves risks specific to the: (1) borrower; (2) collateral; and (3) loan & lease structure. See “Results of Operations - Provision and Allowance for Credit Losses” for a more detailed discussion of risks by loan & lease type. The Company’s current underwriting policies and standards are designed to mitigate the risks involved in each loan & lease type. The Company’s policies require that loans & leases are approved only to those borrowers exhibiting a clear source of repayment and the ability to service existing and proposed debt. The Company’s underwriting procedures for all loan & lease types require careful consideration of the borrower, the borrower’s financial condition, the borrower’s management capability, the borrower’s industry, and the economic environment affecting the loan or lease.

Most loans & leases made by the Company are secured, but collateral is the secondary or tertiary source of repayment; cash flow is our primary source of repayment. The quality and liquidity of collateral are important and must be confirmed before the loan is made.

In order to be responsive to borrower needs, the Company prices loans & leases: (1) on both a fixed rate and adjustable rate basis; (2) over different terms; and (3) based upon different rate indices; as long as these structures are consistent with the Company’s interest rate risk management policies and ~~procedures (see Item~~procedures. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk-Interest Rate ~~Risk).~~Risk” for further details.

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Overall, the Company's loan & lease portfolio at ~~September 30, 2018~~March 31, 2019 totaled ~~$2.4~~$2.6 billion, an increase of ~~$199.8~~$328.9 million or ~~9.0%~~14.7% over ~~September 30, 2017.~~March 31, 2018. This increase ~~has~~ occurred as a result of: (1) the Company’s ~~intensified~~ business development efforts directed toward credit-qualified borrowers; (2) ~~entry into~~expansion in the equipment leasing business; ~~and~~ (3) expansion of our service area into ~~Walnut Creek, Concord~~the East Bay of San Francisco and ~~Napa.~~Napa; and (4) the acquisition of the Bank of Rio Vista which added $80.5 million to loan balances. No assurances can be made that this growth in the loan & lease portfolio will continue.

Loans & leases at ~~September 30, 2018 increased $201.3~~March 31, 2019 decreased $7.3 million from ~~$2.2~~$2.6 billion at December 31, ~~2017.~~2018. This relatively small overall decrease was primarily a result of $33.5 million in normal seasonal pay downs of loans made to the Company’s agricultural customers, somewhat offset by growth in other portfolio segments.

The following table sets forth the distribution of the loan & lease portfolio by type and percent as of the periods indicated.

Loan & Lease Portfolio	September 30, 2018				December 31, 2017				September 30, 2017				March 31, 2019				December 31, 2018				March 31, 2018
(in thousands)	$		%		$		%		$		%		$		%		$		%		$		%
Commercial Real Estate	$	774,837	31.9	%	$	691,639	31.1	%	$	689,732	31.0	%	$	823,028	32.0	%	$	834,476	32.4	%	$	705,063	31.5	%
Agricultural Real Estate		553,608	22.8	%		499,231	22.5	%		470,738	21.2	%		603,601	23.5	%		584,625	22.7	%		508,400	22.7	%
Real Estate Construction		92,521	3.8	%		100,206	4.5	%		162,167	7.3	%		99,837	3.9	%		98,568	3.8	%		96,315	4.3	%
Residential 1st Mortgages		263,549	10.9	%		260,751	11.7	%		257,920	11.6	%		258,359	10.1	%		259,736	10.1	%		264,137	11.8	%
Home Equity Lines and Loans		38,490	1.6	%		34,525	1.6	%		33,350	1.5	%		40,072	1.6	%		40,789	1.6	%		34,691	1.5	%
Agricultural		287,821	11.9	%		273,582	12.3	%		259,127	11.7	%		257,004	10.0	%		290,463	11.3	%		261,427	11.7	%
Commercial		304,333	12.6	%		265,703	12.0	%		257,951	11.6	%		364,439	14.2	%		343,834	13.3	%		274,682	12.3	%
Consumer & Other		7,723	0.3	%		6,656	0.3	%		7,312	0.3	%		18,418	0.7	%		19,412	0.8	%		6,685	0.3	%
Leases		101,081	4.2	%		88,957	4.0	%		84,485	3.8	%		105,823	4.0	%		106,217	4.0	%		89,678	3.9	%
Total Gross Loans & Leases		2,423,963	100.0	%		2,221,250	100.0	%		2,222,782	100.0	%		2,570,581	100.0	%		2,578,120	100.0	%		2,241,078	100.0	%
Less: Unearned Income		7,361				5,955				6,003				6,613				6,879				5,995
Subtotal		2,416,602				2,215,295				2,216,779				2,563,968				2,571,241				2,235,083
Less: Allowance for Credit Losses		53,067				50,342				50,744				54,907				55,266				50,677
Net Loans & Leases	$	2,363,535			$	2,164,953			$	2,166,035			$	2,509,061			$	2,515,975			$	2,184,406

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Classified Loans & Leases and Non-Performing Assets

All loans & leases are assigned a credit risk grade using grading standards developed by bank regulatory agencies. See “Results of Operations - Provision and Allowance for Credit Losses” for more detail on risk grades. The Company utilizes the services of a third-party independent loan review firm to perform evaluations of individual loans & leases and review the credit risk grades the Company places on loans & leases. Loans & leases that are judged to exhibit a higher risk profile are referred to as “classified loans & leases,” and these loans & leases receive increased management attention. As of ~~September 30, 2018,~~March 31, 2019, classified loans totaled ~~$16.3~~$15.1 million compared to ~~$8.9~~$14.7 million at December 31, ~~2017~~2018 and ~~$9.8~~$8.2 million at ~~September 30, 2017.~~March 31, 2018.

Classified loans & leases with higher levels of credit risk can be further designated as “impaired” loans & leases. A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. See “Results of Operations - Provision and Allowance for Credit Losses” for further details. Impaired loans & leases consist of: (1) non-accrual loans & leases; and/or (2) restructured loans & leases that are still performing (i.e., accruing interest).

Non-Accrual Loans & ~~Leases~~leases - Accrual of interest on loans & leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to interest or principal. When loans & leases are 90 days past due, but in management's judgment are well secured and in the process of collection, they may not be classified as non-accrual. When a loan or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans & leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. ~~At September 30, 2018 and December 31, 2017,~~There were no non-accrual loans & leases ~~totaled $0. At September 30, 2017, non-accrual loans & leases totaled $4,000~~at March 31, 2019, December 31, 2018 or March 31, 2018.

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Restructured Loans & Leases - A restructuring of a loan or lease constitutes a TDR under ASC 310-40, if the Company for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. Restructured loans or leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become TDR loans, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment.

As of ~~September 30, 2018,~~March 31, 2019, restructured loans & leases on accrual totaled ~~$13.6~~$13.7 million as compared to ~~$6.3~~$13.6 million at December 31, ~~2017.~~2018. Restructured loans on accrual at ~~September 30, 2017~~March 31, 2018 were $6.2 million.

Other Real Estate - Loans where the collateral has been repossessed are classified as other real estate ("ORE") or, if the collateral is personal property, the loan is classified as other assets on the Company's financial statements.

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The following table sets forth the amount of the Company's non-performing loans & leases (defined as non-accrual loans & leases plus accruing loans & leases past due 90 days or more) and ORE as of the dates indicated.

Non-Performing Assets

(in thousands)	September 30, 2018			Dec. 31, 2017			September 30, 2017			March 31, 2019			Dec. 31, 2018			March 31, 2018
Non-Performing Loans & Leases	$	0		$	0		$	4		$	0		$	0		$	81
Other Real Estate		873			873			873			873			873			873
Total Non-Performing Assets	$	873		$	873		$	877		$	873		$	873		$	954

Non-Performing Loans & Leases as a % of Total Loans & Leases		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Restructured Loans & Leases (Performing)	$	13,551		$	6,301		$	6,202		$	13,697		$	13,577		$	6,246

Although management believes that non-performing loans & leases are generally well-secured and that potential losses are provided for in the Company’s allowance for credit losses, there can be no assurance that future deterioration in economic conditions and/or collateral values will not result in future credit losses. Specific reserves of $0, $0, and $4,000 have been established for non-performing loans & leases at ~~September 30, 2018,~~March 31, 2019, December 31, ~~2017~~2018 and ~~September 30, 2017,~~March 31, 2018, respectively.

Foregone interest income on non-accrual loans & leases, which would have been recognized during the period, if all such loans & leases had been current in accordance with their original terms, totaled $0 for the ~~nine months~~periods ended ~~September 30, 2018, $0 for the year ended~~March 31, 2019, December 31, ~~2017, and $483 for the nine months ended~~ ~~September 30, 2017~~.2018, March 31, 2018.

The Company reported $873,000 of ORE at ~~September 30, 2018~~, March 31, 2019, December 31, ~~2017,~~ ~~September 30, 2017~~.2018, and at March 31, 2018.

Except for those classified and non-performing loans & leases discussed above, the Company’s management is not aware of any loans & leases as of ~~September 30, 2018,~~March 31, 2019, for which known financial problems of the borrower would cause serious doubts as to the ability of these borrowers to materially comply with their present loan or lease repayment terms, or any known events that would result in the loan or lease being designated as non-performing at some future date. However:

The Central Valley was one of the hardest hit areas in the country during the recession. In many areas, housing prices declined as much as 60% and unemployment reached 15% or more. Although the economy has strengthened throughout most of the Central Valley, for the most part housing prices remain below peak levels and unemployment levels remain above those in other areas of the state and country.

The Central Valley was one of the hardest hit areas in the country during the recession. In many areas housing prices declined as much as 60% and unemployment reached 15% or more. Although the economy has strengthened throughout most of the Central Valley, for the most part housing prices remain below peak levels and unemployment levels remain above those in other areas of the state and country.

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The State of California experienced drought conditions from 2013 through most of 2016. Then, in late 2016 and early 2017 significant levels of rain and snow alleviated drought conditions in many areas of California, including those in the Company’s primary service area. In late 2017 and early 2018 rain levels exceeded 80% of seasonal averages, but snow levels were modest. Fortunately, reservoir levels are high and the availability of water this fall in our primary service area should not be an issue. However, the weather patterns over the past 5 years further reinforce the fact that the long-term risks associated with the availability of water are significant.

The State of California experienced drought conditions from 2013 through most of 2016. Since 2016, reasonable levels of rain and snow have alleviated drought conditions in many areas of California, including those in the Company’s primary service area. As a result, reservoir levels are high and the availability of water in our primary service area should not be an issue. However, the weather patterns over the past 5 years further reinforce the fact that the long-term risks associated with the availability of water are significant.

The agricultural industry is facing challenges associated with: (1) weakness in export markets due to a stronger dollar and proposed changes in trade policies; (2) tight labor markets and higher wages due to legislative changes at the state and federal levels; and (3) proposed changes in immigration policy and the resulting impact on the labor pool.

~~In addition to the other information set forth in this report, readers should carefully consider the factors discussed in~~See “Part I, Item 1A. Risk Factors” in the Company’s ~~2017~~2018 Annual Report on Form 10-K.

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Deposits

One of the key sources of funds to support earning assets is the generation of deposits from the Company’s customer base. The ability to grow the customer base, and subsequently deposits, is a significant element in the performance of the Company.

The Company's deposit balances at ~~September 30, 2018~~March 31, 2019 have increased ~~$67.5~~$306.6 million or ~~2.5%~~11.4% compared to ~~September 30, 2017.~~March 31, 2018. In addition to the Company’s ongoing business development activities for deposits, the following factors positively impacted year-over-year deposit growth: (1) the Company’s strong financial results and position and F&M Bank’s reputation as one of the most safe and sound banks in its market area; (2) the Company’s expansion of its service area into Walnut Creek and ~~Concord.~~Concord; and (3) the acquisition of the Bank of Rio Vista which added $191.6 million in deposit balances. Market interest rates have been increasing over the past 24 months, resulting in significant competitive pressures on deposit rates. The Company remains selective in how they respond to competitor rates, which may impact future deposit ~~growth~~growth.

Although total deposits have increased ~~2.5%~~11.4% since ~~September 30, 2017,~~March 31, 2018, importantly, low cost transaction accounts ~~have grown~~continue to grow at a strong ~~pace:~~pace as well:

Demand and interest-bearing transaction accounts increased $183.0 million or 13.2% since March 31, 2018.

·	~~Demand and interest-bearing transaction accounts increased $138.0 million or 10.36% since September 30, 2017.~~

Savings and money market accounts have increased $81.7 million or 9.8% since March 31, 2018.

·	~~Savings and money market accounts have increased $17.0 million or 2.0% since September 30, 2017.~~

Time deposit accounts have increased $42.0 million or 8.7% since March 31, 2018.

·	Time deposit accounts have decreased $87.4 million or 15.9% since September 30, 2017, primarily due to the Company’s decision not to renew $55.0 million in high rate public funds time deposit accounts from the State of California.

The Company's deposit balances at ~~September 30, 2018~~March 31, 2019 have ~~increased $53.7~~decreased $54.8 million or ~~2.0%~~1.79% compared to December 31, ~~2017.~~2018. Savings and money market deposits increased ~~3.8%~~1.0% or ~~$30.9~~$9.3 million while demand and interest-bearing transaction accounts ~~increased~~decreased by ~~$35.9~~$98.9 million or ~~2.5%~~5.9% and time deposit accounts ~~decreased~~increased by ~~$13.1~~$34.8 million or ~~2.7%~~7.1%. Deposit trends in the first ~~nine months~~half of the year can be impacted by the seasonal needs of our agricultural customers.

Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings

Lines of credit with the Federal Reserve Bank and the Federal Home Loan Bank are other key sources of funds to support earning assets. These sources of funds are also used to manage the Company’s interest rate risk exposure, and as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio. There were no FHLB Advances at ~~September 30, 2018,~~March 31, 2019, December 31, ~~2017,~~2018, or ~~September 30, 2017.~~March 31, 2018. There were no Federal Funds purchased or advances from the FRB at ~~September 30, 2018,~~March 31, 2019, December 31, ~~2017~~2018 or ~~September 30, 2017.~~March 31, 2018.

As of ~~September 30, 2018,~~March 31, 2019 the Company has additional borrowing capacity of ~~$537.6~~$563.6 million with the Federal Home Loan Bank and ~~$433.5~~$463.8 million with the Federal Reserve Bank. Any borrowings under these lines would be collateralized with loans that have been accepted for pledging at the FHLB and FRB.

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Long-Term Subordinated Debentures

On December 17, 2003, the Company raised $10 million through an offering of trust-preferred securities (“TPS”). See Note 1413 located in “Item 8. Financial Statements and Supplementary Data” of the Company’s ~~2017~~2018 Annual Report on Form 10-K. Although this amount is reflected as subordinated debt on the Company’s balance sheet, under current regulatory guidelines, our TPS will continue to qualify as regulatory capital (See “Capital”). These securities accrue interest at a variable rate based upon 3-month LIBOR plus 2.85%. Interest rates reset quarterly and were ~~5.18%~~5.46% as of ~~September 30, 2018, 4.45%~~March 31, 2019, 5.64% at December 31, ~~2017~~2018 and ~~4.17%~~5.03% at ~~September 30, 2017.~~March 31, 2018. The average rate paid for these securities for the first ~~nine months~~quarter of ~~2018~~2019 was ~~4.99%~~5.66% and ~~4.15%~~4.56% for the first ~~nine months~~quarter of ~~2017.~~2018. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.

Capital

The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders’ Equity totaled ~~$300.1~~$330.3 million at ~~September 30, 2018, $299.7~~March 31, 2019, $311.2 million at December 31, ~~2017,~~2018, and ~~$302.6~~$305.9 million at ~~September 30, 2017.~~March 31, 2018.

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The Company and the Bank are subject to various ~~federal~~ regulatory capital requirements ~~under~~administered by the ~~Basel III Capital Rules.~~federal banking agencies. Failure to meet minimum capital requirements can initiate certain ~~mandatory, and possibly discretionary,~~ actions by regulators that, if undertaken, could have a ~~direct~~ material effect on the ~~Company’s~~Company and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the ~~Company~~Company’s and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The ~~Company~~Company’s and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The implementation of Basel III requirements ~~will increase~~increased the required capital levels that the Company and the Bank must maintain. The final rules include new minimum risk-based capital and leverage ratios, which ~~would be~~were fully phased in ~~over time.~~on January 1, 2019. The new minimum capital level requirements applicable to the Company and the Bank under the final rules ~~will be:~~are: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets (“RWA”); (ii) a Tier 1 capital ratio of 6% of RWA; (iii) a total capital ratio of 8% of RWA; and (iv) a Tier 1 leverage ratio of 4% of total assets. The final rules ~~also establish~~established a "capital conservation buffer" of 2.5% above each of the new regulatory minimum capital ratios, which ~~would result~~results in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0% of RWA; (ii) a Tier 1 capital ratio of 8.5% of RWA; and (iii) a total capital ratio of 10.5% of RWA. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. The final rules also permit the Company’s subordinated debentures issued in 2003 to continue to be counted as Tier 1 capital.

~~The final rules became effective as applied to the Company and the Bank on January 1, 2015, with a phase in period through January 1, 2019.~~ The Company ~~believes that it~~ is currently in compliance with all of these new capital requirements ~~(as fully phased-in)~~ and ~~that~~ they ~~will~~do not result in any restrictions on the Company’s business activity.

In addition, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. ~~To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables.~~ There are no conditions or events since that notification that management believes have changed the Bank’s category.

(in thousands) Actual
Current
Regulatory
Capital
Requirements

Well Capitalized
Under Prompt
Corrective Action

The Company: Amount Ratio Amount Ratio Amount Ratio
As of September 30, 2018
Total Capital Ratio $ 351,093 12.37 % $ 227,048 8.0 % N/A N/A
Common Equity Tier 1 Capital Ratio $ 305,397 10.76 % $ 127,714 4.5 % N/A N/A
Tier 1 Capital Ratio $ 315,397 11.11 % $ 170,286 6.0 % N/A N/A
Tier 1 Leverage Ratio $ 315,397 10.12 % $ 124,718 3.0 % N/A N/A

(in thousands)	Actual					Current Regulatory Capital Requirements					Well Capitalized Under Prompt Corrective Action
The Bank:	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2018
(in thousands)																Actual					Current Regulatory Capital Requirements					Well Capitalized Under Prompt Corrective Action
The Company:																Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2019
Total Capital Ratio	$	338,695		11.99	%	$	226,049		8.0	%	$	282,562		10.0	%	$	363,213		11.89	%	$	244,342		8.0	%		N/A		N/A
Common Equity Tier 1 Capital Ratio	$	303,153		10.73	%	$	127,153		4.5	%	$	183,665		6.5	%	$	314,824		10.31	%	$	137,443		4.5	%		N/A		N/A
Tier 1 Capital Ratio	$	303,153		10.73	%	$	169,537		6.0	%	$	226,049		8.0	%	$	324,824		10.64	%	$	183,257		6.0	%		N/A		N/A
Tier 1 Leverage Ratio	$	303,153		9.78	%	$	123,985		3.0	%	$	154,982		5.0	%	$	324,824		9.64	%	$	134,786		3.0	%		N/A		N/A

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(in thousands)	Actual					Current Regulatory Capital Requirements					Well Capitalized Under Prompt Corrective Action
The Bank:	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2019
Total Capital Ratio	$	362,846		11.88	%	$	244,329		8.0	%	$	305,411		10.0	%
Common Equity Tier 1 Capital Ratio	$	324,459		10.62	%	$	137,435		4.5	%	$	198,517		6.5	%
Tier 1 Capital Ratio	$	324,459		10.62	%	$	183,247		6.0	%	$	244,329		8.0	%
Tier 1 Leverage Ratio	$	324,459		9.63	%	$	134,758		3.0	%	$	168,448		5.0	%

As previously discussed (see “Long-Term Subordinated Debentures”), in order to supplement its regulatory capital base, during December 2003 the Company issued $10 million of trust preferred securities. On March 1, 2005, the Federal Reserve Board issued its final rule effective April 11, 2005, concerning the regulatory capital treatment of trust preferred securities (“TPS”) by bank holding companies (“BHCs”). Under the final rule BHCs may include TPS in Tier 1 capital in an amount equal to 25% of the sum of core capital net of goodwill. Any portion of trust-preferred securities not qualifying as Tier 1 capital would qualify as Tier 2 capital subject to certain limitations. The Company has received notification from the Federal Reserve Bank of San Francisco that all of the Company’s trust preferred securities currently qualify as Tier 1 capital.

The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.

In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, on November 6, 2018, the Board of Directors approved an extension of the $20 million stock repurchase program over the three-year period ending December 31, 2021. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of the Company’s ~~2017~~2018 Annual Report on Form 10-K for additional information.

There were no stock repurchases ~~in 2017 and in~~during the ~~third~~first quarter of ~~2018 the Company repurchased $31.2 million of shares.~~2019 or 2018. The remaining dollar value of shares that may yet be purchased under the Company’s Common Stock Repurchase Plan is approximately $20 million.

On August 5, 2008, the Board of Directors approved a Share Purchase Rights Plan (the “Rights Plan”), pursuant to which the Company entered into a Rights Agreement dated August 5, 2008, with Computershare as Rights Agent. The Rights Plan was set to expire on August 5, 2018. On November 19, 2015, the Board of Directors approved a seven-year extension of the term of the Rights Plan. Pursuant to an Amendment to the Rights Agreement dated February 18, 2016, the term of the Rights Plan was extended from August 5, 2018 to August 5, 2025. The extension of the term of the Rights Plan was intended as a means to continue to guard against abusive takeover tactics and was not in response to any particular proposal. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of the Company’s ~~2017~~2018 Annual Report on Form 10-K for further explanation.

During the ~~second and third quarters~~first quarter of ~~2018,~~2019, the Company issued ~~a combined total 13,520~~3,586 shares of common stock to the Bank’s non-qualified defined contribution retirement plans. ~~There were also 2,400 shares issued to individuals during the third quarter of 2018. All of the~~These shares were issued at ~~prices ranging from $635.00 to $690.00~~a price of $715.00 per share based upon ~~valuations~~a valuation completed ~~during the quarter of issuance~~ by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital. There were no shares issued during the first quarter of 2018.

Critical Accounting Policies and Estimates

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the Company’s financial statements management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These judgments govern areas such as the allowance for credit losses, the fair value of financial instruments and accounting for income taxes.

Table of Contents

For a full discussion of the Company’s critical accounting policies and estimates see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s ~~2017~~2018 Annual Report on Form 10-K.

~~Table of Contents~~

Off Balance Sheet Commitments

In the normal course of business the Company enters into financial instruments with off balance sheet risks in order to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit, letters of credit and other types of financial guarantees. The Company had the following off balance sheet commitments as of the dates indicated.

(in thousands) September 30, 2018 December 31, 2017 September 30, 2017
Commitments to Extend Credit $ 789,169 $ 735,678 $ 700,747
Letters of Credit 20,176 20,061 19,225
Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties
- 759 1,479

(in thousands)	March 31, 2019		December 31, 2018		March 31, 2018
Commitments to Extend Credit	$	829,080	$	828,539	$	767,718
Letters of Credit		19,192		19,108		19,729
Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties		472		-		-

The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer's creditworthiness are performed on a case-by-case basis.

Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third party. Most standby letters of credit are issued for 12 months or less. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Additionally, the Company maintains a reserve for off balance sheet commitments, which totaled ~~$267,000~~$315,000 at ~~September 30, 2018,~~March 31, 2019 and December 31, ~~2017, and September 30, 2017.~~2018. At March 31, 2018, the reserve was $267,000. We do not anticipate any material losses as a result of these transactions.

~~Other Matter~~

~~During the 3~~^rd quarter of 2018, Moss Adams, the Company’s independent registered public accounting firm, identified that the concurring review partner who performed the initial engagement quality review on the March and June 2018 Interim Financial Statements had completed five consecutive years of service, and therefore, was not eligible to serve in this role.

Upon identification of the matter, the lead audit partner advised the Company’s Executive Vice President & Chief Financial Officer and Audit Committee Chairman of the independence violation and Moss Adams’ plans for reperforming the engagement quality review.

On October 1, 2018, another Moss Adams audit partner commenced the reperformance of the engagement quality reviews of the March and June 2018 Interim Financial Statements in accordance with AS 1220. The results of the review reaffirmed the original conclusions reached.

On October 9, 2018, the Company’s Audit Committee held a meeting and discussed the independence violation. The Committee’s conclusions were that: (i) notwithstanding the circumstances, they believed Moss Adams maintained appropriate objectivity and impartiality in performance of the reviews; (ii) a reasonable investor would conclude that the independence violation did not impair Moss Adams’ ability to be objective and exercise impartial judgment in connection with its reviews of the 2018 Interim Financial Statements; and (iii) a reasonable investor would conclude that Moss Adams continuing to serve as auditor of the Company is appropriate.

~~Accordingly, the Company will continue to engage Moss Adams to perform its 2018 independent audit.~~

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management

The Company has adopted risk management policies and procedures, which aim to ensure the proper control and management of all risk factors inherent in the operation of the Company, most importantly credit risk, interest rate risk and liquidity risk. These risk factors are not mutually exclusive. It is recognized that any product or service offered by the Company may expose the Company to one or more of these risk factors.

Credit Risk

Credit risk is the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer, or borrower performance.

Credit risk in the investment portfolio and correspondent bank accounts is addressed through defined limits in the Company’s policy statements. In addition, certain securities carry insurance to enhance credit quality of the bond.

In order to control credit risk in the loan & lease portfolio the Company has established credit management policies and procedures that govern both the approval of new loans & leases and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower, and by restricting loans & leases made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. However, as a financial institution that assumes credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The allowance for credit losses is maintained at a level considered by management to be adequate to provide for risks inherent in the loan & lease portfolio. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs.

5552

Table of Contents

The Company’s methodology for assessing the appropriateness of the allowance is applied on a regular basis and considers all loans & leases. The systematic methodology consists of three parts.

Part 1 - includes a detailed analysis of the loan & lease portfolio in two phases. The first phase is conducted in accordance with the “Receivables” topic of the FASB ASC. Individual loans & leases are reviewed to identify them for impairment. A loan or lease is impaired when principal and interest are deemed uncollectible in accordance with the original contractual terms of the loan or lease. Impairment is measured as either the expected future cash flows discounted at each loan’s or lease’s effective interest rate, the fair value of the loan’s or lease’s collateral if the loan or lease is collateral dependent, or an observable market price of the loan or lease, if one exists. Upon measuring the impairment, the Company will ensure an appropriate level of allowance is present or established.

Central to the first phase of the analysis of the loan & lease portfolio is the risk rating system. The originating credit officer assigns each borrower an initial risk rating, which is based primarily on a thorough analysis of that borrower’s financial position in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior credit administration personnel. Credits are monitored by credit administration personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary. Risk ratings are reviewed by both the Company’s independent third-party credit examiners and bank examiners from the DBO and FDIC.

Based on the risk rating system, specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates that the loan or lease is impaired and there is a probability of loss. Management performs a detailed analysis of these loans & leases, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral, and assessment of the guarantors. Management then determines the inherent loss potential and allocates a portion of the allowance for losses as a specific allowance for each of these credits.

The second phase is conducted by segmenting the loan & lease portfolio by risk rating and into groups of loans & leases with similar characteristics in accordance with the “Contingency” topic of the FASB ASC. In this second phase, groups of loans & leases with similar characteristics are reviewed and the appropriate allowance factor is applied based on the historical average charge-off rate for each particular group of loans or leases.

Part 2 - considers qualitative internal and external factors that may affect a loan or lease’s collectability, is based upon management’s evaluation of various conditions, the effects of which are not directly measured in the determination of the historical and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the second element of the analysis of the allowance include, but are not limited to the following conditions that existed as of the balance sheet date:

§●	general economic and business conditions affecting the key service areas of the Company;

§●	credit quality trends (including trends in collateral values, delinquencies and non-performing loans & leases);

§●	loan & lease volumes, growth rates and concentrations;

§●	loan & lease portfolio seasoning;

§●	specific industry and crop conditions;

§●	recent loss experience; and

§●	duration of the current business cycle.

Part 3 - An unallocated allowance ~~often~~generally occurs due to the imprecision in estimating and allocating allowance balances associated with macro factors such as: (1) the ~~continuing sluggish~~improving but still challenging economic conditions in the Central Valley; and (2) the ~~long term impact~~long-term risks associated with the availability of ~~drought conditions currently being experienced~~water in ~~California.~~the Central Valley.

Table of Contents

Management reviews all of these conditions in discussion with the Company’s senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable impaired credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable impaired credit or portfolio segment as of the evaluation date, management’s evaluation of the inherent loss related to such condition is reflected in the second element of the allowance or in the unallocated allowance.

~~Table of Contents~~

Management believes, that based upon the preceding methodology, and using information currently available, the allowance for credit losses at ~~September 30, 2017~~March 31, 2019 was adequate. No assurances can be given that future events may not result in increases in delinquencies, non-performing loans & leases, or net loan & lease charge-offs that would require increases in the provision for credit losses and thereby adversely affect the results of operations.

Interest Rate Risk

The mismatch between maturities of interest sensitive assets and liabilities results in uncertainty in the Company’s earnings and economic value and is referred to as interest rate risk. The Company does not attempt to predict interest rates and positions the balance sheet in a manner, which seeks to minimize, to the extent possible, the effects of changing interest rates.

The Company measures interest rate risk in terms of potential impact on both its economic value and earnings. The methods for governing the amount of interest rate risk include: (1) analysis of asset and liability mismatches (Gap analysis); (2) the utilization of a simulation model; and (3) limits on maturities of investment, loan & lease, and deposit products, which reduces the market volatility of those instruments.

The Gap analysis measures, at specific time intervals, the divergence between earning assets and interest bearing liabilities for which repricing opportunities will occur. A positive difference, or Gap, indicates that earning assets will reprice faster than interest-bearing liabilities. This will generally produce a greater net interest margin during periods of rising interest rates and a lower net interest margin during periods of declining interest rates. Conversely, a negative Gap will generally produce a lower net interest margin during periods of rising interest rates and a greater net interest margin during periods of decreasing interest rates.

The interest rates paid on deposit accounts do not always move in unison with the rates charged on loans & leases. In addition, the magnitude of changes in the rates charged on loans & leases is not always proportionate to the magnitude of changes in the rate paid for deposits. Consequently, changes in interest rates do not necessarily result in an increase or decrease in the net interest margin solely as a result of the differences between repricing opportunities of earning assets or interest bearing liabilities.

The Company also utilizes the results of a dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The sensitivity of the Company’s net interest income is measured over a rolling one-year horizon.

The simulation model estimates the impact of changing interest rates on interest income from all interest-earning assets and the interest expense paid on all interest-bearing liabilities reflected on the Company’s balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and a ~~200~~100 basis point downward shift in interest rates. A shift in rates over a 12-month period is assumed. Results that exceed policy limits, if any, are analyzed for risk tolerance and reported to the Board with appropriate recommendations. At ~~September 30,~~March 31, 2019, the Company’s estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was an increase in net interest income of 2.18% if rates increase by 200 basis points and a decrease in net interest income of 5.33% if rates decline 200 basis points. Comparatively, at December 31, 2018, the Company’s estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was an increase in net interest income of ~~2.72%~~2.25% if rates increase by 200 basis points and a decrease in net interest income of ~~6.52%~~5.80% if rates decline 200 basis points. ~~Comparatively, at December 31, 2017, the Company’s estimated net interest income sensitivity to changes in interest rates, as a percent~~

Table of ~~net interest income was an increase in net interest income of 2.83% if rates increase by 200 basis points and a decrease in net interest income of 4.42% if rates decline 100 basis points.~~Contents

The estimated sensitivity does not necessarily represent a Company forecast and the results may not be indicative of actual changes to the Company’s net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape; prepayments on loans & leases and securities; pricing strategies on loans & leases and deposits; replacement of asset and liability cash flows; and other assumptions. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.

~~Table of Contents~~

Liquidity Risk

Liquidity risk is the risk to earnings or capital resulting from the Company’s inability to meet its obligations when they come due without incurring unacceptable losses. It includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect the Company’s ability to liquidate assets or acquire funds quickly and with minimum loss of value. The Company endeavors to maintain a cash flow adequate to fund operations, handle fluctuations in deposit levels, respond to the credit needs of borrowers, and to take advantage of investment opportunities as they arise.

The Company’s principal operating sources of liquidity include (see “Item 8. Financial Statements and Supplementary Data – Consolidated Statements of Cash Flows” of the Company’s ~~2017~~2018 Annual Report on Form 10-K) cash and cash equivalents, cash provided by operating activities, principal payments on loans & leases, proceeds from the maturity or sale of investments, and growth in deposits. To supplement these operating sources of funds the Company maintains Federal Funds credit lines of $78 million and repurchase lines of $130 million with major banks. As of ~~September 30, 2018,~~March 31, 2019, the Company has additional borrowing capacity of ~~$537.6~~$564 million with the FHLB and ~~$433.5~~$464 million with the FRB. Borrowings under these lines are collateralized with loans or securities that have been accepted for pledging at the FHLB and FRB.

At ~~September 30, 2018,~~March 31, 2019, the Company had available sources of liquidity, which included cash and cash equivalents and unpledged investment securities AFS of approximately ~~$247~~$304 million, which represents ~~7.75%~~8.94% of total assets.

ITEM 4.

CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to ensure that information is recorded and reported in all filings of financial reports. Such information is reported to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer to allow timely and accurate disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In designing these controls and procedures, management recognizes that they can only provide reasonable assurance of achieving the desired control objectives. Management also evaluated the cost-benefit relationship of possible controls and procedures.

As of the end of the period covered by this report, the Company carried out an evaluation of the effectiveness of Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. The evaluation was based, in part, upon reports and affidavits provided by a number of executives. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls over financial reporting subsequent to the date the Company completed its evaluation.

~~PART II.~~

PART II.

OTHER INFORMATION

ITEM 1. Legal Proceedings

Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against the Company or its subsidiaries. Based upon information available to the Company, its review of such lawsuits and claims and consultation with its counsel, the Company believes the liability relating to these actions, if any, would not have a material adverse effect on its consolidated financial statements.

There are no material proceedings adverse to the Company to which any director, officer or affiliate of the Company is a party.

Table of Contents

ITEM 1A. Risk Factors

See “Item 1A. Risk Factors” in the Company’s ~~2017~~2018 Annual Report to Shareholders on Form 10-K. In management’s opinion, there have been no material changes in risk factors since the filing of the ~~2017~~2018 Form 10-K.

~~Table of Contents~~

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were ~~44,503~~no shares repurchased by Farmers & Merchants Bancorp during the first ~~nine months~~quarter of ~~2018.~~

2019. The ~~common stock~~remaining dollar value of ~~Farmers & Merchants Bancorp is not widely held or listed on any exchange. However, trades are reported on the OTCQX~~shares that may yet be purchased under the ~~symbol “FMCB.” Additionally, management~~Company’s Stock Repurchase Plan is ~~aware that there are private transactions in the Company’s common stock.~~

During the nine months ended September 30, 2018, the Company issued a combined total 13,520 shares of common stock to the Bank’s non-qualified defined contribution retirement plans. There were also 2,400 shares issued to individuals during the third quarter of 2018. All of the shares were issued at prices ranging from $635.00 to $690.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.

During the first and third quarters of 2017, the Company issued a combined total 4,975 shares of common stock to the Bank’s non-qualified defined contribution retirement plans. These shares were issued at prices ranging from $590.00 to $595.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.approximately $20.0 million.

During the first quarter of ~~2017,~~2019, the Company issued ~~1,375~~3,586 shares of common stock to the Bank’s non-qualified defined contribution retirement plans. These shares were issued at a price of ~~$590.00~~$715.00 per share based upon a valuation completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital. There were no shares issued during the first quarter of 2018.

The common stock of Farmers & Merchants Bancorp is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB.” Additionally, management is aware that there are private transactions in the Company’s common stock.

ITEM 3. Defaults Upon Senior Securities

Not applicable

ITEM 4. Mine Safety Disclosures

Not applicable

ITEM 5. Other Information

None

ITEM 6. Exhibits

	Exhibit No.	Description

	31(a)	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31(b)	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101.INS	XBRL Instance Document
	101.SCH	XBRL Schema Document
	101.CAL	XBRL Calculation Linkbase Document
	101.LAB	XBRL Label Linkbase Document
	101.PRE XBRL	Presentation Linkbase Document
~~101.DEF XBRL~~	101.DEF	XBRL Definition Linkbase Document

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SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FARMERS & MERCHANTS BANCORP

Date: ~~November 8, 2018~~	~~/s/ Kent A. Steinwert~~ May 9, 2019
	/s/ Kent A. Steinwert
	Kent A. Steinwert
	Chairman, President
	& Chief Executive Officer
	(Principal Executive Officer)

	Date: May 9, 2019
~~Date: November 8, 2018~~	/s/ Stephen W. Haley

	Stephen W. Haley
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial & Accounting Officer)

6057

Delaware		94-3327828
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

111 W. Pine Street, Lodi, California		95240
(Address of principal ~~Executive~~executive offices)		(Zip Code)

Large accelerated filer ☐	Accelerated filer ☒

Non-accelerated filer ☐ ~~(Do not check if a smaller reporting company)~~
Smaller Reporting Company ☐

	Emerging growth company ☐

PART I. - FINANCIAL INFORMATION			Page


	Item 1 - Financial Statements

		Consolidated Balance Sheets (Unaudited) as of ~~September 30, 2018,~~March 31, 2019, December 31, ~~2017~~2018 and ~~September 30, 2017.~~March 31, 2018.	3

		Consolidated Statements of Income (Unaudited) for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017.~~	4

		Consolidated Statements of Comprehensive Income (Unaudited) for the Three ~~and Nine~~ Months Ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018.	5

		Consolidated Statements of Changes in Shareholders' Equity (Unaudited) for the ~~Nine~~Three Months Ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018.	6

		Consolidated Statements of Cash Flows (Unaudited) for the ~~Nine~~Three Months Ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018.	7

		Notes to the Consolidated Financial Statements (Unaudited)	8

	Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations		3335

	Item 3 - Quantitative and Qualitative Disclosures About Market Risk		5552

	Item 4 - Controls and Procedures		58 55

PART II. - OTHER INFORMATION

	Item 1 - Legal Proceedings		5855

	Item 1A – Risk Factors		5856

	Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds		5956

	Item 3 - Defaults Upon Senior Securities		5956

	Item 4 – Mine Safety Disclosures		5956

	Item 5 - Other Information		5956

	Item 6 - Exhibits		5956

Signatures			6057

									March 31, 2019		December 31, 2018			March 31, 2018
Assets	Sept. 30, 2018 (Unaudited)			December 31, 2017			Sept. 30, 2017 (Unaudited)		(Unaudited)					(Unaudited)
Cash and Cash Equivalents:
Cash and Due from Banks	$	52,709		$	65,956		$	44,166	$	54,444	$	61,058		$	37,974
Interest Bearing Deposits with Banks		58,072			121,193			149,104		43,366		84,506			97,010
Total Cash and Cash Equivalents		110,781			187,149			193,270		97,810		145,564			134,984

Investment Securities:
Available-for-Sale		458,311			481,596			456,323		491,289		495,396			495,814
Held-to-Maturity		51,459			54,460			55,542		54,412		53,566			53,527
Total Investment Securities		509,770			536,056			511,865		545,701		548,962			549,341

Loans & Leases:		2,416,602			2,215,295			2,216,779		2,563,968		2,571,241			2,235,083
Less: Allowance for Credit Losses		53,067			50,342			50,744		54,907		55,266			50,677
Loans & Leases, Net		2,363,535			2,164,953			2,166,035		2,509,061		2,515,975			2,184,406

Premises and Equipment, Net		29,614			28,679			28,734		32,380		32,623			28,491
Bank Owned Life Insurance		60,968			59,583			59,128		65,609		65,117			60,035
Interest Receivable and Other Assets		108,794			99,032			112,743		145,354		126,002			102,726
Total Assets	$	3,183,462		$	3,075,452		$	3,071,775	$	3,395,915	$	3,434,243		$	3,059,983

Liabilities
Deposits:
Demand	$	867,552		$	832,652		$	767,162	$	915,164	$	974,756		$	797,435
Interest Bearing Transaction		602,494			601,476			564,904		655,117		694,384			589,883
Savings and Money Market		844,553			813,703			827,588		912,977		903,665			831,324
Time		462,324			475,397			549,773		524,782		490,027			482,763
Total Deposits		2,776,923			2,723,228			2,709,427		3,008,040		3,062,832			2,701,405

Subordinated Debentures		10,310			10,310			10,310		10,310		10,310			10,310
Interest Payable and Other Liabilities		96,138			42,254			49,409		47,247		49,886			42,392
Total Liabilities		2,883,371			2,775,792			2,769,146		3,065,597		3,123,028			2,754,107

Shareholders' Equity
Preferred Stock: No Par Value, 1,000,000 Shares Authorized, None Issued or Outstanding		-			-			-		-		-			-
Common Stock: Par Value $0.01, 7,500,000 Shares Authorized, 783,721, 812,304 and 812,304
Shares Issued and Outstanding at September 30, 2018, December 31, 2017 and September 30, 2017, Respectively		8			8			8
Common Stock: Par Value $0.01, 7,500,000 Shares Authorized, 787,307, 783,721 and 812,304, Shares Issued and Outstanding at March 31, 2019, December 31, 2018 and March 31, 2018, Respectively										8		8			8
Additional Paid-In Capital		72,974			93,624			93,624		75,538		72,974			93,624
Retained Earnings		233,671			206,845			208,443		254,770		241,221			216,786
Accumulated Other Comprehensive (Loss) Income, Net Of Taxes		(6,562	)		(817	)		554
Accumulated Other Comprehensive Loss										2		(2,988	)		(4,542	)
Total Shareholders' Equity		300,091			299,660			302,629		330,318		311,215			305,876
Total Liabilities and Shareholders' Equity	$	3,183,462		$	3,075,452		$	3,071,775	$	3,395,915	$	3,434,243		$	3,059,983

Title of each class:		Trading Symbol(s)		Name of each exchange on which registered:
Common Stock		FMCB		OTCQX

(in thousands except per share data)	Three Months Ended September 30,				Nine Months Ended September 30,						Three Months Ended March 31,
	2018		2017		2018			2017			2019		2018
Interest Income
Interest and Fees on Loans & Leases	$	30,959	$	26,491	$	86,930		$	76,270		$	33,177	$	27,044
Interest on Deposits with Banks		638		648		1,737			1,155			1,125		585
Interest on Investment Securities:
Taxable		2,074		2,038		6,770			6,174			2,427		2,381
Exempt from Federal Tax		394		432		1,217			1,321			444		418
Total Interest Income		34,065		29,609		96,654			84,920			37,173		30,428

Interest Expense
Deposits		2,020		1,644		4,954			4,353			2,821		1,405
Subordinated Debentures		137		115		385			320			145		117
Total Interest Expense		2,157		1,759		5,339			4,673			2,966		1,522

Net Interest Income		31,908		27,850		91,315			80,247			34,207		28,906
Provision for Credit Losses		2,500		1,600		3,333			2,850			-		333
Net Interest Income After Provision for Credit Losses		29,408		26,250		87,982			77,397			34,207		28,573

Non-Interest Income
Service Charges on Deposit Accounts		915		897		2,574			2,591			876		817
Net (Loss) Gain on Sale of Investment Securities		-		-		(1,330	)		131
Increase in Cash Surrender Value of Life Insurance		473		458		1,385			1,367			492		452
Debit Card and ATM Fees		1,101		990		3,213			2,877			1,177		1,016
Net Gain on Deferred Compensation Investments		715		510		1,904			1,703			1,045		782
Other		1,004		783		3,410			3,914			874		1,598
Total Non-Interest Income		4,208		3,638		11,156			12,583			4,464		4,665

Non-Interest Expense
Salaries and Employee Benefits		12,329		10,809		37,509			34,751			13,424		13,527
Net Gain on Deferred Compensation Investments		715		510		1,904			1,703			1,045		782
Occupancy		984		864		2,833			2,580			1,040		942
Equipment		1,078		957		3,119			2,970			1,177		1,023
Marketing		257		329		976			867			380		329
Legal		261		51		1,553			309			869		440
FDIC Insurance		227		233		693			694			241		239
Gain on Sale of ORE		-		-		-			(414	)
Other		2,770		2,554		8,115			7,794			2,269		2,654
Total Non-Interest Expense		18,621		16,307		56,702			51,254			20,445		19,936

Income Before Income Taxes		14,995		13,581		42,436			38,726			18,226		13,302
Provision for Income Taxes		2,995		5,000		9,945			14,137			4,677		3,361
Net Income	$	12,000	$	8,581	$	32,491		$	24,589		$	13,549	$	9,941
Basic Earnings Per Common Share	$	15.12	$	10.59	$	40.26		$	30.39
Basic and Diluted Earnings Per Common Share											$	17.27	$	12.24

(in thousands except share data)	Common Shares Outstanding			Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income, net			Total Shareholders' Equity
Balance, January 1, 2017		807,329		$	8	$	90,671		$	189,313		$	(11	)	$	279,981
Net Income							-			24,589			-			24,589
Cash Dividends Declared on																-
Common Stock ($6.75 per share)					-		-			(5,459	)		-			(5,459	)
Issuance of Common Stock		4,975			-		2,953			-			-			2,953
Change in Net Unrealized Gains on Securities Available-for-Sale, Net of Tax					-		-			-			565			565
Balance, September 30, 2017		812,304		$	8	$	93,624		$	208,443		$	554		$	302,629


Balance, January 1, 2018		812,304		$	8	$	93,624		$	206,845		$	(817	)	$	299,660
Net Income							-			32,491			-			32,491
Cash Dividends Declared on																-
Common Stock ($6.90 per share)					-		-			(5,665	)		-			(5,665	)
Repurchase of Common Stock		(44,503	)		-		(31,152	)		-			-			(31,152	)
Issuance of Common Stock		15,920			-		10,502			-			-			10,502
Change in Net Unrealized Loss on Securities Available-for-Sale, Net of Tax					-		-			-			(5,745	)		(5,745	)
Balance, September 30, 2018		783,721		$	8	$	72,974		$	233,671		$	(6,562	)	$	300,091

	Three Months Ended
(in thousands)	March 31, 2019			March 31, 2018
Operating Activities:
Net Income	$	13,549		$	9,941
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Credit Losses		-			333
Depreciation and Amortization		692			582
Net Amortization of Investment Security Premiums & Discounts		115			277
Amortization of Core Deposit Intangible		160			27
Accretion of Discount on Acquired Loans		(5	)		(18	)
Net (Gain) on Sale of Property & Equipment		-			(292	)
Net Change in Operating Assets & Liabilities:
Net (Increase) Decrease in Interest Receivable and Other Assets		6,456			(2,525	)
Net (Decrease) Increase in Interest Payable and Other Liabilities		(2,080	)		682
Net Cash Provided by Operating Activities		18,887			9,007
Investing Activities:
Purchase of Investment Securities Available-for-Sale		(155,798	)		(109,482	)
Proceeds from Sold, Matured or Called Securities Available-for-Sale		138,952			89,724
Purchase of Investment Securities Held-to-Maturity		(2,025	)		(1,952	)
Proceeds from Matured or Called Securities Held-to-Maturity		1,160			2,870
Net Loans & Leases Paid, Originated or Acquired		6,877			(19,791	)
Principal Collected on Loans & Leases Previously Charged Off		42			23
Additions to Premises and Equipment		(449	)		(1,085	)
Purchase of Other Investments		(608	)		(639	)
Proceeds from Sale of Property & Equipment		-			983
Net Cash Used in Investing Activities		(11,849	)		(39,349	)
Financing Activities:
Net Decrease in Deposits		(54,792	)		(21,823	)
Net Cash Used in Financing Activities		(54,792	)		(21,823	)
Decrease in Cash and Cash Equivalents		(47,754	)		(52,165	)
Cash and Cash Equivalents at Beginning of Period		145,564			187,149
Cash and Cash Equivalents at End of Period	$	97,810		$	134,984
Supplementary Data
Issuance of Common Stock to the Bank's Non-Qualified Retirement Plans	$	2,564		$	-
Interest Paid	$	2,128		$	1,750
Supplementary Noncash Disclosure
Security (purchases) sales settled in subsequent period	$	25,000		$	-

				Three Months Ended Sept 30, 2018									Three Months Ended Sept 30, 2017
Assets	Balance			Interest			Rate			Balance			Interest			Rate
Interest Bearing Deposits with Banks	$	127,570		$	638			1.98	%	$	189,647		$	648			1.36	%
Investment Securities:
U.S. Treasuries		49,530			181			1.46	%		80,985			224			1.11	%
U.S. Govt SBA		18,136			97			2.14	%		32,458			162			2.00	%
Government Agency & Government-Sponsored Entities		3,052			22			2.88	%		3,098			22			2.84	%
Obligations of States and Political Subdivisions - Non-Taxable		51,667			497			3.85	%		56,036			663			4.73	%
Mortgage Backed Securities		287,599			1,754			2.44	%		282,477			1,623			2.30	%
Other		3,011			21			2.79	%		1,010			6			2.38	%
Total Investment Securities		412,995			2,572			2.49	%		456,064			2,700			2.37	%

Loans & Leases:
Real Estate		1,666,801			21,416			5.10	%		1,565,218			18,889			4.79	%
Home Equity Lines & Loans		38,193			533			5.54	%		32,705			430			5.22	%
Agricultural		283,078			3,760			5.27	%		260,398			3,083			4.70	%
Commercial		290,588			3,867			5.28	%		258,574			3,041			4.67	%
Consumer		6,298			98			6.17	%		5,872			73			4.93	%
Other		1,382			8			2.30	%		1,678			9			2.13	%
Leases		98,316			1,277			5.15	%		80,629			966			4.75	%
Total Loans & Leases		2,384,656			30,959			5.15	%		2,205,074			26,491			4.77	%
Total Earning Assets		2,925,221		$	34,169			4.63	%		2,850,785		$	29,839			4.15	%

Unrealized (Loss) Gain on Securities Available-for-Sale		(7,668	)								1,334
Allowance for Credit Losses		(51,831	)								(49,889	)
Cash and Due From Banks		47,381									45,084
All Other Assets		191,562									198,054
Total Assets	$	3,104,665								$	3,045,368

Liabilities & Shareholders' Equity
Interest Bearing Deposits:
Interest Bearing DDA	$	619,697		$	509			0.33	%	$	553,394		$	321			0.23	%
Savings and Money Market		830,680			467			0.22	%		812,749			340			0.17	%
Time Deposits		467,443			1,044			0.89	%		579,527			982			0.67	%
Total Interest Bearing Deposits		1,917,820			2,020			0.42	%		1,945,670			1,643			0.34	%
Federal Home Loan Bank Advances		46			-			0.00	%		0			0			0.00	%
Subordinated Debentures		10,310			137			5.27	%		10,310			115			4.43	%
Total Interest Bearing Liabilities		1,928,176		$	2,157			0.44	%		1,955,980		$	1,758			0.36	%
Interest Rate Spread								4.19	%								3.80	%
Demand Deposits (Non-Interest Bearing)		832,752									741,839
All Other Liabilities		43,239									50,210
Total Liabilities		2,804,167									2,748,029

Shareholders' Equity		300,498									297,339
Total Liabilities & Shareholders' Equity	$	3,104,665								$	3,045,368
Impact of Non-Interest Bearing Deposits and Other Liabilities								0.15	%								0.11	%
Net Interest Income and Margin on Total Earning Assets					32,012			4.34	%					28,081			3.91	%
Tax Equivalent Adjustment					(104	)								(231	)
Net Interest Income				$	31,908			4.33	%				$	27,850			3.88	%

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2018			2017			2018			2017
Balance at Beginning of Period	$	51,137		$	49,064		$	50,342		$	47,919
Charge-Offs		(634	)		(54	)		(723	)		(230	)
Recoveries		64			134			115			205
Provision		2,500			1,600			3,333			2,850
Balance at End of Period	$	53,067		$	50,744		$	53,067		$	50,744