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Section 1: 10-Q (10-Q)

10-Q
Table of Contents

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO             .

Commission file number: 000-32897

UNITED SECURITY BANCSHARES
(Exact name of registrant as specified in its charter)
 
CALIFORNIA
 
91-2112732
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2126 Inyo Street, Fresno, California
 
93721
(Address of principal executive offices)
 
(Zip Code)

Registrants telephone number, including area code    (559) 248-4943

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No  x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days. Yes x No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o           

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
 Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Small reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No  x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock, no par value
(Title of Class)

Shares outstanding as of October 31, 2015: 15,892,488

1

Table of Contents

TABLE OF CONTENTS

Facing Page

Table of Contents


PART I. Financial Information
 
 
 
 
 
 
Item 1. Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. Other Information
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 
 
 

2

Table of Contents

PART I. Financial Information


United Security Bancshares and Subsidiaries
Consolidated Balance Sheets – (unaudited)
September 30, 2015 and December 31, 2014
(in thousands except shares)
September 30, 2015
 
December 31, 2014
Assets
 
 
 
Cash and non-interest bearing deposits in other banks
$
23,458

 
$
21,348

Cash and due from Federal Reserve Bank
92,930

 
82,229

Cash and cash equivalents
116,388

 
103,577

Interest-bearing deposits in other banks
1,526

 
1,522

Investment securities available for sale (at fair value)
34,423

 
48,301

Loans
515,701

 
457,919

Unearned fees and unamortized loan origination costs, net
145

 
(324
)
Allowance for credit losses
(11,573
)
 
(10,771
)
Net loans
504,273

 
446,824

Accrued interest receivable
2,172

 
1,927

Premises and equipment – net
10,944

 
11,550

Other real estate owned
12,689

 
14,010

Goodwill
4,488

 
4,488

Cash surrender value of life insurance
18,106

 
17,717

Investment in limited partnerships
929

 
871

Deferred income taxes - net
6,712

 
6,853

Other assets
5,749

 
5,529

Total assets
$
718,399

 
$
663,169

 
 
 
 
Liabilities & Shareholders' Equity
 

 
 

Liabilities
 

 
 

Deposits
 

 
 

Noninterest bearing
$
258,678

 
$
215,439

Interest bearing
357,957

 
349,934

Total deposits
616,635

 
565,373

 
 
 
 
Accrued interest payable
30

 
40

Accounts payable and other liabilities
5,834

 
4,815

Junior subordinated debentures (at fair value)
7,880

 
10,115

Total liabilities
630,379

 
580,343

 
 
 
 
Shareholders' Equity
 

 
 

Common stock, no par value 20,000,000 shares authorized, 15,892,488 issued and outstanding at September 30, 2015, and 15,425,086 at December 31, 2014
51,726

 
49,271

Retained earnings
36,472

 
33,730

Accumulated other comprehensive loss
(178
)
 
(175
)
Total shareholders' equity
88,020

 
82,826

Total liabilities and shareholders' equity
$
718,399

 
$
663,169


3

Table of Contents

United Security Bancshares and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
(In thousands except shares and EPS)
2015
 
2014
 
2015
 
2014
Interest Income:
 
 
 
 
 
 
 
Loans, including fees
$
6,728

 
$
6,187

 
$
19,641

 
$
17,602

Investment securities – AFS – taxable
175

 
227

 
555

 
688

Interest on deposits in FRB
55

 
63

 
138

 
210

Interest on deposits in other banks
1

 
2

 
5

 
5

Total interest income
6,959

 
6,479

 
20,339

 
18,505

Interest Expense:
 

 
 

 
 

 
 

Interest on deposits
268

 
291

 
780

 
812

Interest on other borrowings
58

 
59

 
175

 
183

Total interest expense
326

 
350

 
955


995

Net Interest Income
6,633

 
6,129

 
19,384

 
17,510

(Recovery of Provision) Provision for Credit Losses
(23
)
 
39

 
434

 
(101
)
Net Interest Income after (Recovery of Provision) Provision for Credit Losses
6,656

 
6,090

 
18,950

 
17,611

Noninterest Income:
 

 
 

 
 

 
 

Customer service fees
963

 
957

 
2,661

 
2,639

Increase in cash surrender value of bank-owned life insurance
130

 
129

 
389

 
384

Gain (loss) on fair value of financial liability
148

 
95

 
346

 
(34
)
Gain on redemption of JR subordinated debentures
78

 

 
78

 

(Loss) gain on sale of investment in limited partnership
(23
)
 

 
(23
)
 
691

Gain on sale of premises and equipment

 

 

 
25

Other
153

 
130

 
463

 
428

Total noninterest income
1,449

 
1,311

 
3,914

 
4,133

Noninterest Expense:
 

 
 

 
 
 
 
Salaries and employee benefits
2,341

 
2,303

 
7,044

 
7,108

Occupancy expense
1,047

 
966

 
3,021

 
2,795

Data processing
29

 
32

 
90

 
101

Professional fees
277

 
452

 
877

 
959

Regulatory assessments
234

 
228

 
705

 
700

Director fees
78

 
59

 
202

 
176

Amortization of intangibles

 

 

 
62

Correspondent bank service charges
19

 
30

 
56

 
89

(Gain) Loss on California tax credit partnership
(1
)
 
(62
)
 
60

 
(15
)
Net cost on operation of OREO
401

 
116

 
594

 
480

Other
589

 
493

 
1,755

 
1,700

Total noninterest expense
5,014

 
4,617

 
14,404

 
14,155

Income Before Provision for Taxes
3,091

 
2,784

 
8,460

 
7,589

Provision for Taxes on Income
1,205

 
1,081

 
3,283

 
2,930

Net Income
$
1,886

 
$
1,703

 
$
5,177

 
$
4,659


 
 
 
 
 
 
 
Net Income per common share
 

 
 

 
 
 
 
Basic
$
0.12

 
$
0.11

 
$
0.33

 
$
0.29

Diluted
$
0.12

 
$
0.11

 
$
0.33

 
$
0.29

Shares on which net income per common shares were based
 

 
 

 
 
 
 
Basic
15,892,488

 
15,881,387

 
15,892,488

 
15,867,346

Diluted
15,894,532

 
15,886,397

 
15,894,444

 
15,874,192


4

Table of Contents

United Security Bancshares and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)

(In thousands)
Three Months Ended  
 September 30, 2015
 
Three Months Ended  
 September 30, 2014
 
Nine Months Ended 
 September 30, 2015
 
Nine Months Ended 
 September 30, 2014
Net Income
$
1,886

 
$
1,703

 
$
5,177

 
$
4,659

 
 
 
 
 
 
 
 
Unrealized holdings gains (losses) on securities
189

 
(95
)
 
(58
)
 
(87
)
Unrealized gains on unrecognized post-retirement costs
19

 
16

 
55

 
47

Other comprehensive income (loss), before tax
208

 
(79
)
 
(3
)
 
(40
)
Tax (expense) benefit related to securities
(76
)
 
38

 
23

 
35

Tax expense related to unrecognized post-retirement costs
(8
)
 
(6
)
 
(23
)
 
(20
)
Total other comprehensive income (loss)
124

 
(47
)
 
(3
)
 
(25
)
Comprehensive income
$
2,010

 
$
1,656

 
$
5,174

 
$
4,634



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Table of Contents

United Security Bancshares and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
 
Common stock
 
 
 
 
 
 
(In thousands except shares)
Number of Shares
 
Amount
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
 Total
 
 
 
 
Balance December 31, 2013
14,799,888

 
$
45,778

 
$
30,884

 
$
(119
)
 
$
76,543

 
 
 
 
 
 
 
 
 
 
  Other comprehensive loss
 

 
 

 
 

 
(25
)
 
(25
)
Common stock dividends
448,572

 
2,524

 
(2,524
)
 
 

 

Stock options exercised
23,922

 
95

 
 
 
 
 
95

Stock-based compensation expense
 

 
23

 
 

 
 

 
23

Net income
 

 
 

 
4,659

 
 

 
4,659

Balance September 30, 2014
15,272,382

 
$
48,420

 
$
33,019

 
$
(144
)
 
$
81,295

 
 
 
 
 
 
 
 
 
 
Other comprehensive loss
 

 
 

 
 

 
(31
)
 
(31
)
Common stock dividends
152,704

 
846

 
(846
)
 
 

 

   Stock-based compensation expense
 

 
5

 
 

 
 

 
5

Net income
 

 
 

 
1,557

 
 

 
1,557

Balance December 31, 2014
15,425,086

 
$
49,271

 
$
33,730

 
$
(175
)
 
$
82,826

 
 
 
 
 
 
 
 
 
 
  Other comprehensive loss
 

 
 

 
 

 
(3
)
 
(3
)
Common stock dividends
467,402

 
2,435

 
(2,435
)
 
 

 

Stock-based compensation expense
 

 
20

 
 

 
 

 
20

Net income
 

 
 

 
5,177

 
 

 
5,177

Balance September 30, 2015
15,892,488

 
$
51,726

 
$
36,472

 
$
(178
)
 
$
88,020



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Table of Contents

United Security Bancshares and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
 
Nine months ended September 30,
(In thousands)
2015
 
2014
Cash Flows From Operating Activities:
 
 
 
Net Income
$
5,177

 
$
4,659

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

 
 

Provision (recovery of provision) for credit losses
434

 
(101
)
Depreciation and amortization
1,101

 
1,011

Amortization of investment securities
205

 
190

Accretion of investment securities
(24
)
 
(26
)
Increase in accrued interest receivable
(245
)
 
(280
)
Decrease in accrued interest payable
(10
)
 
(2
)
Decrease in accounts payable and accrued liabilities
(165
)
 
(1,113
)
(Decrease) increase in unearned fees
(469
)
 
121

Increase in income taxes payable
1,181

 
2,936

Stock-based compensation expense
20

 
23

Benefit for deferred income taxes
142

 
(14
)
Gain on sale of other real estate owned
(17
)
 
(109
)
Write down on other real estate owned
188

 

Increase in cash surrender value of bank-owned life insurance
(389
)
 
(384
)
(Gain) Loss on fair value option of financial liabilities
(346
)
 
34

(Gain) on redemption of Jr subordinated debentures
(78
)
 

Loss (gain) on tax credit limited partnership interest
60

 
(15
)
Amortization of intangibles

 
62

Loss (gain) on sale of investment in limited partnership
23

 
(691
)
Gain on sale of premises and equipment

 
(25
)
Net decrease in other assets
(49
)
 
(170
)
Net cash provided by operating activities
6,739

 
6,106

 
 
 
 
Cash Flows From Investing Activities:
 

 
 

Net increase in interest-bearing deposits with banks
(4
)
 
(5
)
Purchase of correspondent bank stock
(147
)
 
(97
)
Purchases of available-for-sale securities

 
(10,192
)
Maturities of available-for-sale securities
9,000

 

Principal payments of available-for-sale securities
4,639

 
3,934

Net increase in loans
(57,456
)
 
(50,199
)
Cash proceeds from sales of other real estate owned
1,192

 
1,020

Investment in limited partnership
(119
)
 
(70
)
Cash proceeds from sale of investment in limited partnership

 
1,250

Capital expenditures of premises and equipment
(495
)
 
(628
)
Net cash used in investing activities
(43,390
)
 
(54,987
)
 
 
 
 
Cash Flows From Financing Activities:
 

 
 

Net increase in demand deposits and savings accounts
58,232

 
55,365

Net (decrease) in certificates of deposit
(6,970
)
 
(6,906
)
Redemption of Jr subordinated debentures
(1,800
)
 


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Table of Contents

Proceeds from exercise of stock options

 
95

Net cash provided by financing activities
49,462

 
48,554

 
 
 
 
Net increase (decrease) in cash and cash equivalents
12,811

 
(327
)
Cash and cash equivalents at beginning of period
103,577

 
135,212

Cash and cash equivalents at end of period
$
116,388

 
$
134,885

 

8

Table of Contents

United Security Bancshares and Subsidiaries - Notes to Consolidated Financial Statements - (Unaudited)
 
1.
Organization and Summary of Significant Accounting and Reporting Policies
 
The consolidated financial statements include the accounts of United Security Bancshares, and its wholly owned subsidiary United Security Bank (the “Bank”) and two bank subsidiaries, USB Investment Trust (the “REIT”) and United Security Emerging Capital Fund (collectively the “Company” or “USB”). Intercompany accounts and transactions have been eliminated in consolidation.

These unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information on a basis consistent with the accounting policies reflected in the audited financial statements of the Company included in its 2014 Annual Report on Form 10-K. These interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of a normal, recurring nature) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

Recently Issued Accounting Standards:

In January 2014, FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors.  The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.  Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.  An entity can elect to adopt the amendments in this ASU using either a modified retrospective transition method or a prospective transition method.  Early adoption is permitted.  The adoption of this update did not have a significant impact on the Company’s consolidated financial statements.

In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-01 Accounting for Investments in Qualified Affordable Housing Projects. This ASU provides "guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit." It allows the proportional amortization method to be used by a reporting entity if certain conditions are met. The ASU also defines when a qualified affordable housing project through a limited liability entity should be tested for impairment. If a qualified affordable housing project does not meet the conditions for using the proportional amortization method, the investment should be accounted for using an equity method investment or a cost method investment. The ASU is effective for fiscal years beginning after December 15, 2014, and interim periods therein. The Company will continue to account for our low-income housing tax credit investments using the equity method subsequent to the adoption of ASU 2014-01 and does not expect any impact on the Company's consolidated financial statements.

2.
Investment Securities

Following is a comparison of the amortized cost and fair value of securities available-for-sale, as of September 30, 2015 and December 31, 2014:
(in 000's)
 Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value (Carrying Amount)
September 30, 2015
 
 
 
Securities available for sale:
 
 
 
U.S. Government agencies
$
10,232

 
$
482

 
$
(112
)
 
$
10,602

U.S. Government collateralized mortgage obligations
19,704

 
270

 

 
19,974

Mutual Funds
4,000

 

 
(153
)
 
3,847

Total securities available for sale
$
33,936

 
$
752

 
$
(265
)
 
$
34,423


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Table of Contents

(in 000's)
 Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value (Carrying Amount)
December 31, 2014
 
 
 
Securities available for sale:
 
 
 
U.S. Government agencies
$
12,097

 
$
399

 
$

 
$
12,496

U.S. Government collateralized mortgage obligations
31,659

 
336

 
(13
)
 
31,982

Mutual Funds
4,000

 

 
(177
)
 
3,823

Total securities available for sale
$
47,756

 
$
735

 
$
(190
)
 
$
48,301

 
The amortized cost and fair value of securities available for sale at September 30, 2015, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties. Contractual maturities on collateralized mortgage obligations cannot be anticipated due to allowed paydowns. Mutual funds are included in the "due in one year or less" category below.
 
September 30, 2015
 
Amortized Cost
 
Fair Value (Carrying Amount)
(in 000's)
 
Due in one year or less
$
4,000

 
$
3,847

Due after one year through five years
17

 
17

Due after five years through ten years

 

Due after ten years
10,215

 
10,585

Collateralized mortgage obligations
19,704

 
19,974

 
$
33,936

 
$
34,423


There were no realized gains or losses on sales of available-for-sale securities for the three and nine month periods ended September 30, 2015 and September 30, 2014. There were no other-than-temporary impairment losses for the three and nine month periods ended September 30, 2015 and September 30, 2014.

At September 30, 2015, available-for-sale securities with an amortized cost of approximately $17,244,209 (fair value of $17,774,050) were pledged as collateral for FHLB borrowings and public funds balances.

The Company had no held-to-maturity or trading securities at September 30, 2015 or December 31, 2014.

Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary.


10

Table of Contents

The following summarizes temporarily impaired investment securities:
(in 000's)
Less than 12 Months
 
12 Months or More
 
Total
September 30, 2015
Fair Value (Carrying Amount)
 
 Unrealized Losses
 
Fair Value (Carrying Amount)
 
 Unrealized Losses
 
Fair Value (Carrying Amount)
 
 Unrealized Losses
Securities available for sale:
 
 
 
 
 
U.S. Government agencies
$

 
$

 
$
82

 
$
(112
)
 
$
82

 
$
(112
)
U.S. Government agency collateral mortgage obligations

 

 

 

 

 

Mutual Funds
3,847

 
(153
)
 

 

 
3,847

 
(153
)
Total impaired securities
$
3,847

 
$
(153
)
 
$
82

 
$
(112
)
 
$
3,929

 
$
(265
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 

 
 

 
 

 
 

 
 

 
 

Securities available for sale:
 

 
 

 
 

 
 

 
 

 
 

U.S. Government agencies
$

 
$

 
$

 
$

 
$

 
$

U.S. Government agency collateral mortgage obligations
6,478

 
(13
)
 

 

 
6,478

 
(13
)
Mutual Funds

 

 
3,823

 
(177
)
 
3,823

 
(177
)
Total impaired securities
$
6,478

 
$
(13
)
 
$
3,823

 
$
(177
)
 
$
10,301

 
$
(190
)
 
Temporarily impaired securities at September 30, 2015, were comprised of one mutual fund and one U.S. government agency security.

The Company evaluates investment securities for other-than-temporary impairment (OTTI) at least quarterly, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under ASC Topic 320, Investments – Debt and Equity Instruments. Certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, are evaluated under ASC Topic 325-40, Beneficial Interest in Securitized Financial Assets.

In the first segment, the Company considers many factors in determining OTTI, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to the Company at the time of the evaluation.
 
The second segment of the portfolio uses the OTTI guidance that is specific to purchased beneficial interests including private label mortgage-backed securities. Under this model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.
 
Additionally, other-than-temporary-impairment occurs when the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If the Company intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary-impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the other-than-temporary-impairment shall be separated into

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the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary-impairment related to the credit loss is recognized in earnings, and is determined based on the difference between the present value of cash flows expected to be collected and the current amortized cost of the security. The amount of the total other-than-temporary-impairment related to other factors shall be recognized in other comprehensive (loss) income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary-impairment recognized in earnings shall become the new amortized cost basis of the investment.

At September 30, 2015, the decline in market value of the impaired mutual fund and U.S. government agency security is attributable to changes in interest rates, and not credit quality. Because the Company does not have the intent to sell these impaired securities, and it is not more likely than not that it will be required to sell these securities before its anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2015.

3.
Loans

Loans are comprised of the following:
(in 000's)
September 30, 2015

 
December 31, 2014

Commercial and Business Loans
$
62,648

 
$
60,422

Government Program Loans
1,616

 
1,947

Total Commercial and Industrial
64,264

 
62,369

Real Estate – Mortgage:
 

 
 

Commercial Real Estate
165,065

 
154,672

Residential Mortgages
72,452

 
59,095

Home Improvement and Home Equity loans
960

 
1,110

Total Real Estate Mortgage
238,477

 
214,877

Real Estate Construction and Development
150,888

 
137,158

Agricultural
43,025

 
31,713

Installment
19,047

 
11,802

Total Loans
$
515,701

 
$
457,919

 
The Company's loans are predominantly in the San Joaquin Valley and the greater Oakhurst/East Madera County area, as well as the Campbell area of Santa Clara County. Although the Company does participate in loans with other financial institutions, they are primarily in the state of California.

Commercial and industrial loans represent 12.5% of total loans at September 30, 2015 and are generally made to support the ongoing operations of small-to-medium sized commercial businesses. Commercial and industrial loans have a high degree of industry diversification and provide working capital, financing for the purchase of manufacturing plants and equipment, or funding for growth and general expansion of businesses. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases, or other collateral including real estate. The remainder are unsecured; however, extensions of credit are predicated upon the financial capacity of the borrower. Repayment of commercial loans is generally from the cash flow of the borrower.

Real estate mortgage loans, representing 46.2% of total loans at September 30, 2015, are secured by trust deeds on primarily commercial property, but are also secured by trust deeds on single family residences. Repayment of real estate mortgage loans generally comes from the cash flow of the borrower.

Commercial real estate mortgage loans comprise the largest segment of this loan category and are available on all types of income producing and commercial properties, including: office buildings, shopping centers; apartments and motels; owner occupied buildings; manufacturing facilities and more. Commercial real estate mortgage loans can also be used to refinance existing debt. Although real estate associated with the business is the primary collateral for commercial real estate mortgage loans, the underlying real estate is not the source of repayment. Commercial real estate loans are made under the premise that the loan will be repaid from the borrower's business operations, rental income associated with the real property, or personal assets.


12

Table of Contents

Residential mortgage loans are provided to individuals to finance or refinance single-family residences. Residential mortgages are not a primary business line offered by the Company, and a majority are conventional mortgages that were purchased as a pool. Most residential mortgages originated by the Company are of a shorter term than conventional mortgages, with maturities ranging from 3 to 15 years on average.

Home Improvement and Home Equity loans comprise a relatively small portion of total real estate mortgage loans, and are offered to borrowers for the purpose of home improvements, although the proceeds may be used for other purposes. Home equity loans are generally secured by junior trust deeds, but may be secured by 1st trust deeds.

Real estate construction and development loans, representing 29.3% of total loans at September 30, 2015, consist of loans for residential and commercial construction projects, as well as land acquisition and development, or land held for future development. Loans in this category are secured by real estate including improved and unimproved land, as well as single-family residential, multi-family residential, and commercial properties in various stages of completion. All real estate loans have established equity requirements. Repayment on construction loans generally comes from long-term mortgages with other lending institutions obtained at completion of the project.

Agricultural loans represent 8.3% of total loans at September 30, 2015 and are generally secured by land, equipment, inventory and receivables. Repayment is from the cash flow of the borrower.

Installment loans represent 3.7% of total loans at September 30, 2015 and generally consist of loans to individuals for household, family and other personal expenditures such as credit cards, automobiles or other consumer items.

In the normal course of business, the Company is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. At September 30, 2015 and December 31, 2014, these financial instruments include commitments to extend credit of $112,665,000 and $105,434,000, respectively, and standby letters of credit of $3,009,000 and $3,800,000, respectively. These instruments involve elements of credit risk in excess of the amount recognized on the consolidated balance sheet. The contract amounts of these instruments reflect the extent of the involvement the Company has in off-balance sheet financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies as it does for on-balance sheet 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. A majority of these commitments are at floating interest rates based on the Prime rate. Commitments generally have fixed expiration dates. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation. Collateral held varies but includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate and income-producing properties.

Standby letters of credit are generally unsecured and are issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.


13

Table of Contents

Past Due Loans

The Company monitors delinquency and potential problem loans on an ongoing basis through weekly reports to the Loan Committee and monthly reports to the Board of Directors. The following is a summary of delinquent loans at September 30, 2015 (in 000's):
September 30, 2015
Loans
30-60 Days Past Due
 
Loans
61-89 Days Past Due
 
Loans
90 or More
Days Past Due
 
Total Past Due Loans
 
Current Loans
 
Total Loans
 
Accruing
Loans 90 or
More Days Past Due
Commercial and Business Loans
$

 
$

 
$
962

 
$
962

 
$
61,686

 
$
62,648

 
$

Government Program Loans

 

 
19

 
19

 
1,597

 
1,616

 
19

Total Commercial and Industrial

 

 
981

 
981

 
63,283

 
64,264

 
19

Commercial Real Estate Loans

 
747

 

 
747

 
164,318

 
165,065

 

Residential Mortgages

 
63

 
267

 
330

 
72,122

 
72,452

 

Home Improvement and Home Equity Loans

 

 

 

 
960

 
960



Total Real Estate Mortgage

 
810

 
267

 
1,077

 
237,400

 
238,477

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate Construction and Development Loans

 

 

 

 
150,888

 
150,888

 

Agricultural Loans

 

 

 

 
43,025

 
43,025

 

Consumer Loans

 

 
450

 
450

 
18,382

 
18,832

 

Overdraft Protection Lines

 

 

 

 
78

 
78

 

Overdrafts

 

 

 

 
137

 
137

 

Total Installment

 

 
450

 
450

 
18,597

 
19,047

 

Total Loans
$

 
$
810

 
$
1,698

 
$
2,508

 
$
513,193

 
$
515,701

 
$
19


The following is a summary of delinquent loans at December 31, 2014 (in 000's):
December 31, 2014
Loans
30-60 Days Past Due
 
Loans
61-89 Days Past Due
 
Loans
90 or More
Days Past Due
 
Total Past Due Loans
 
Current Loans
 
Total Loans
 
Accruing
Loans 90 or
More Days Past Due
Commercial and Business Loans
$
962

 
$

 
$

 
$
962

 
$
59,460

 
$
60,422

 
$

Government Program Loans
445

 

 

 
445

 
1,502

 
1,947

 

Total Commercial and Industrial
1,407

 

 

 
1,407

 
60,962

 
62,369

 

Commercial Real Estate Loans
463

 

 

 
463

 
154,209

 
154,672

 

Residential Mortgages

 
90

 
162

 
252

 
58,843

 
59,095

 

Home Improvement and Home Equity Loans
43

 

 
42

 
85

 
1,025

 
1,110

 

Total Real Estate Mortgage
506

 
90

 
204

 
800

 
214,077

 
214,877

 

Real Estate Construction and Development Loans

 

 

 

 
137,158

 
137,158

 

Agricultural Loans

 

 

 

 
31,713

 
31,713

 

Consumer Loans
67

 

 

 
67

 
11,428

 
11,495

 

Overdraft Protection Lines

 

 

 

 
92

 
92

 

Overdrafts

 

 

 

 
215

 
215

 

Total Installment
67

 

 

 
67

 
11,735

 
11,802

 

Total Loans
$
1,980

 
$
90

 
$
204

 
$
2,274

 
$
455,645

 
$
457,919

 
$


Nonaccrual Loans

Commercial, construction and commercial real estate loans are placed on nonaccrual status under the following circumstances:

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Table of Contents


- When there is doubt regarding the full repayment of interest and principal.

- When principal and/or interest on the loan has been in default for a period of 90-days or more, unless the asset is both well secured and in the process of collection that will result in repayment in the near future.

- When the loan is identified as having loss elements and/or is risk rated "8" Doubtful.

Other circumstances which jeopardize the ultimate collectability of the loan including certain troubled debt restructurings, identified loan impairment, and certain loans to facilitate the sale of OREO.
 
Loans meeting any of the preceding criteria are placed on nonaccrual status and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income.

All other loans where principal or interest is due and unpaid for 90 days or more are placed on nonaccrual and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income.

When a loan is placed on nonaccrual status and subsequent payments of interest (and principal) are received, the interest received may be accounted for in two separate ways.

Cost recovery method: If the loan is in doubt as to full collection, the interest received in subsequent payments is diverted from interest income to a valuation reserve and treated as a reduction of principal for financial reporting purposes.

Cash basis: This method is only used if the recorded investment or total contractual amount is expected to be fully collectible, under which circumstances the subsequent payments of interest are credited to interest income as received.

Loans on non-accrual status are usually not returned to accrual status unless all delinquent principal and/or interest has been brought current, there is no identified element of loss, and current and continued satisfactory performance is expected (loss of the contractual amount not the carrying amount of the loan). Return to accrual is generally demonstrated through the timely receipt of at least six monthly payments on a loan with monthly amortization.

Nonaccrual loans totaled $8,248,000 and $9,935,000 at September 30, 2015 and December 31, 2014, respectively. There were no remaining undisbursed commitments to extend credit on nonaccrual loans at September 30, 2015 or December 31, 2014.

The following is a summary of nonaccrual loan balances at September 30, 2015 and December 31, 2014 (in 000's).
 
September 30, 2015
 
December 31, 2014
Commercial and Business Loans
$
962

 
$
12

Government Program Loans
348

 
421

Total Commercial and Industrial
1,310

 
433

 
 
 
 
Commercial Real Estate Loans
1,280

 
3,145

Residential Mortgages
267

 
1,174

Home Improvement and Home Equity Loans

 
42

Total Real Estate Mortgage
1,547

 
4,361

 
 
 
 
Real Estate Construction and Development Loans
4,941

 
5,141

 Agricultural Loans

 

 
 
 
 
Consumer Loans
450

 

Overdraft Protection Lines

 

Overdrafts

 

Total Installment
450

 

Total Loans
$
8,248

 
$
9,935



15

Table of Contents

Impaired Loans

A loan 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 loan agreement.

The Company applies its normal loan review procedures in making judgments regarding probable losses and loan impairment. The Company evaluates for impairment those loans on nonaccrual status, graded doubtful, graded substandard or those that are troubled debt restructures. The primary basis for inclusion in impaired status under generally accepted accounting pronouncements is that it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.

A loan is not considered impaired if there is merely an insignificant delay or shortfall in the amounts of payments and the Company expects to collect all amounts due, including interest accrued, at the contractual interest rate for the period of the delay.

Review for impairment does not include large groups of smaller balance homogeneous loans that are collectively evaluated to estimate the allowance for loan losses. The Company’s present allowance for loan losses methodology, including migration analysis, captures required reserves for these loans in the formula allowance.

For loans determined to be impaired, the Company evaluates impairment based upon either the fair value of underlying collateral, discounted cash flows of expected payments, or observable market price.

-
For loans secured by collateral including real estate and equipment, the fair value of the collateral less selling costs will determine the carrying value of the loan. The difference between the recorded investment in the loan and the fair value, less selling costs, determines the amount of impairment. The Company uses the measurement method based on fair value of collateral when the loan is collateral dependent and foreclosure is probable. For loans that are not considered collateral dependent, a discounted cash flow methodology is used.

-
The discounted cash flow method of measuring the impairment of a loan is used for impaired loans that are not considered to be collateral dependent. Under this method, the Company assesses both the amount and timing of cash flows expected from impaired loans. The estimated cash flows are discounted using the loan's effective interest rate. The difference between the amount of the loan on the Bank's books and the discounted cash flow amounts determines the amount of impairment to be provided. This method is used for most of the Company’s troubled debt restructurings or other impaired loans where some payment stream is being collected.

-
The observable market price method of measuring the impairment of a loan is only used by the Company when the sale of loans or a loan is in process.
 
The method for recognizing interest income on impaired loans is dependent on whether the loan is on nonaccrual status or is a troubled debt restructure. For income recognition, the existing nonaccrual and troubled debt restructuring policies are applied to impaired loans. Generally, except for certain troubled debt restructurings which are performing under the restructure agreement, the Company does not recognize interest income received on impaired loans, but reduces the carrying amount of the loan for financial reporting purposes.

Loans other than certain homogeneous loan portfolios are reviewed on a quarterly basis for impairment. Impaired loans are written down to estimated realizable values by the establishment of specific reserves for loan utilizing the discounted cash flow method, or charge-offs for collateral-based impaired loans, or those using observable market pricing.
 

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Table of Contents

The following is a summary of impaired loans at September 30, 2015 (in 000's).
September 30, 2015
Unpaid
Contractual
Principal Balance
 
Recorded
Investment
With No Allowance (1)
 
Recorded
Investment
With Allowance (1)
 
Total
Recorded Investment
 
Related Allowance
 
Average
Recorded Investment (2)
 
Interest Recognized (2)
Commercial and Business Loans
$
1,723

 
$
530

 
$
1,195

 
$
1,725

 
$
1,019

 
$
1,568

 
$
28

Government Program Loans
348

 
348

 

 
348

 

 
381

 
22

Total Commercial and Industrial
2,071

 
878

 
1,195

 
2,073

 
1,019

 
1,949

 
50

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate Loans
1,279

 

 
1,279

 
1,279

 
512

 
2,093

 
51

Residential Mortgages
3,827

 
1,222

 
2,613

 
3,835

 
160

 
4,161

 
153

Home Improvement and Home Equity Loans

 

 

 

 

 
21

 

Total Real Estate Mortgage
5,106

 
1,222

 
3,892

 
5,114

 
672

 
6,275

 
204

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate Construction and Development Loans
6,114

 
5,411

 
708

 
6,119

 
143

 
6,244

 
303

Agricultural Loans
20

 
20

 

 
20

 

 
27

 
7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer Loans
1,100

 

 
1,105

 
1,105

 
585

 
1,055

 
26

Overdraft Protection Lines

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

Total Installment
1,100

 

 
1,105

 
1,105

 
585

 
1,055

 
26

Total Impaired Loans
$
14,411

 
$
7,531

 
$
6,900

 
$
14,431

 
$
2,419

 
$
15,550

 
$
590


(1) The recorded investment in loans includes accrued interest receivable of $20,000.
(2) Information is based on the nine month period ended September 30, 2015.    


17

Table of Contents

The following is a summary of impaired loans at December 31, 2014 (in 000's).

December 31, 2014
Unpaid
Contractual
Principal Balance
 
Recorded
Investment
With No Allowance (1)
 
Recorded
Investment
With Allowance (1)
 
Total
Recorded Investment
 
Related Allowance
 
Average
Recorded Investment (2)
 
Interest Recognized (2)
Commercial and Business Loans
$
996

 
$
770

 
$
230

 
$
1,000

 
$
64

 
$
847

 
$
76

Government Program Loans
421

 
421

 

 
421

 

 
250

 
28

Total Commercial and Industrial
1,417

 
1,191

 
230

 
1,421

 
64

 
1,097

 
104

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate Loans
3,145

 
1,794

 
1,351

 
3,145

 
478

 
5,765

 
244

Residential Mortgages
4,315

 
1,474

 
2,852

 
4,326

 
170

 
4,564

 
188

Home Improvement and Home Equity Loans
42

 
42

 

 
42

 

 
11

 
3

Total Real Estate Mortgage
7,502

 
3,310

 
4,203

 
7,513

 
648

 
10,340

 
435

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate Construction and Development Loans
6,367

 
6,371

 

 
6,371

 

 
3,362

 
209

Agricultural Loans
32

 
32

 

 
32

 

 
37

 
9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer Loans
695

 
655

 
45

 
700

 
3

 
209

 
37

Overdraft Protection Lines

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

Total Installment
695

 
655

 
45

 
700

 
3

 
209

 
37

Total Impaired Loans
$
16,013

 
$
11,559

 
$
4,478

 
$
16,037

 
$
715

 
$
15,045

 
$
794


(1) The recorded investment in loans includes accrued interest receivable of $24,000.
(2) Information is based on the twelve month period ended December 31, 2014.

In most cases, the Company uses the cash basis method of income recognition for impaired loans. In the case of certain troubled debt restructurings for which the loan is performing under the current contractual terms for a reasonable period of time, income is recognized under the accrual method.

The average recorded investment in impaired loans for the quarters ended September 30, 2015 and 2014 was $14,506,000 and $14,436,000, respectively. Interest income recognized on impaired loans for the quarters ended September 30, 2015 and 2014 was approximately $199,000 and $176,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $126,000 and $117,000 for the quarters ended September 30, 2015 and 2014, respectively.

The average recorded investment in impaired loans for the nine months ended September 30, 2015 and 2014 was $15,550,000 and $14,714,000, respectively. Interest income recognized on impaired loans for the nine months ended September 30, 2015 and 2014 was approximately $590,000 and $463,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $326,000 and $264,000 for the nine months ended September 30, 2015 and 2014, respectively.


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Table of Contents

Troubled Debt Restructurings

In certain circumstances, when the Company grants a concession to a borrower as part of a loan restructuring, the restructuring is accounted for as a troubled debt restructuring (TDR). TDRs are reported as a component of impaired loans.

A TDR is a type of restructuring in which the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower and the Bank) to the borrower that it would not otherwise consider. Although the restructuring may take different forms, the Company's objective is to maximize recovery of its investment by granting relief to the borrower.

A TDR may include, but is not limited to, one or more of the following:

- A transfer from the borrower to the Company of receivables from third parties, real estate, other assets, or an equity interest in the borrower is granted to fully or partially satisfy the loan.

- A modification of terms of a debt such as one or a combination of:

The reduction (absolute or contingent) of the stated interest rate.
The extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.
The reduction (absolute or contingent) of the face amount or maturity amount of debt as stated in the instrument or agreement.
The reduction (absolute or contingent) of accrued interest.
For a restructured loan to return to accrual status there needs to be, among other factors, at least 6 months successful payment history. In addition, the Company performs a financial analysis of the credit to determine whether the borrower has the ability to continue to meet payments over the remaining life of the loan. This includes, but is not limited to, a review of financial statements and cash flow analysis of the borrower. Only after determination that the borrower has the ability to perform under the terms of the loans, will the restructured credit be considered for accrual status. Although the Company does not have a policy which specifically addresses when a loan may be removed from TDR classification, as a matter of practice, loans classified as TDRs generally remain classified as such until the loan either reaches maturity or its outstanding balance is paid off.

The following tables illustrates TDR activity for the periods indicated:
 
Three Months Ended September 30, 2015
($ in 000's)
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
Number of Contracts which Defaulted During Period
 
Recorded Investment on Defaulted TDRs
Troubled Debt Restructurings
 
 
 
 
 
 
 
 
 
Commercial and Business Loans
1

 
$
81

 
$
81

 

 
$

Government Program Loans

 

 

 

 

Commercial Real Estate Term Loans

 

 

 

 

Single Family Residential Loans

 

 

 

 

Home Improvement and Home Equity Loans

 

 

 

 

Real Estate Construction and Development Loans

 

 

 

 

Agricultural Loans

 

 

 

 

Consumer Loans

 

 

 

 

Overdraft Protection Lines

 

 

 

 

Total Loans
1

 
$
81

 
$
81

 

 
$



19

Table of Contents


 
Nine Months Ended September 30, 2015
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
Number of Contracts which Defaulted During Period
 
Recorded Investment on Defaulted TDRs
Troubled Debt Restructurings
 
 
 
 
 
 
 
 
 
Commercial and Business Loans
2

 
$
339

 
$
335

 

 
$

Government Program Loans

 

 

 

 

Commercial Real Estate Term Loans

 

 

 

 

Single Family Residential Loans

 

 

 

 

Home Improvement and Home Equity Loans

 

 

 

 

Real Estate Construction and Development Loans

 

 

 

 

Agricultural Loans

 

 

 

 

Consumer Loans

 

 

 

 

Overdraft Protection Lines

 

 

 

 

Total Loans
2

 
$
339

 
$
335

 

 
$


 
Three Months Ended  
 September 30, 2014
($ in 000's)
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
Number of Contracts which Defaulted During Period
 
Recorded Investment on Defaulted TDRs
Troubled Debt Restructurings
 
 
 
 
 
 
 
 
 
Commercial and Business Loans
2

 
$
300

 
$
286

 

 
$

Government Program Loans

 

 

 

 

Commercial Real Estate Term Loans