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Section 1: 10-Q (10-Q 03312018)

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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 MARCH 31, 2018
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO             .

Commission file number: 000-32897

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 o   

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Small reporting company o

Emerging growth company o

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

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 April 30, 2018: 16,898,615

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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.
 
 
 
 

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Table of Contents

PART I. Financial Information


United Security Bancshares and Subsidiaries
Consolidated Balance Sheets – (unaudited)
March 31, 2018 and December 31, 2017
(in thousands except shares)
March 31, 2018
 
December 31, 2017
Assets
 
 
 
Cash and non-interest bearing deposits in other banks
$
24,608

 
$
35,237

Cash and due from Federal Reserve Bank ("FRB")
140,739

 
72,697

Cash and cash equivalents
165,347

 
107,934

Investment securities (at fair value)
 
 
 
Available for sale ("AFS") securities
39,329

 
41,985

Marketable equity securities
3,677

 
3,737

Total investment securities
43,006

 
45,722

Loans
595,882

 
601,351

Unearned fees and unamortized loan origination costs, net
968

 
1,039

Allowance for credit losses
(9,116
)
 
(9,267
)
Net loans
587,734

 
593,123

Accrued interest receivable
7,413

 
6,526

Premises and equipment – net
10,123

 
10,165

Other real estate owned
5,745

 
5,745

Goodwill
4,488

 
4,488

Cash surrender value of life insurance
19,671

 
19,752

Investment in limited partnerships
1,596

 
1,601

Deferred tax assets - net
2,432

 
2,389

Other assets
7,249

 
8,391

Total assets
$
854,804

 
$
805,836

 
 
 
 
Liabilities & Shareholders' Equity
 

 
 

Liabilities
 

 
 

Deposits
 

 
 

Noninterest bearing
$
319,438

 
$
307,299

Interest bearing
415,178

 
380,394

Total deposits
734,616

 
687,693

 
 
 
 
Accrued interest payable
47

 
44

Accounts payable and other liabilities
6,991

 
7,017

Junior subordinated debentures (at fair value)
9,641

 
9,730

Total liabilities
751,295

 
704,484

 
 
 
 
Shareholders' Equity
 

 
 

Common stock, no par value 20,000,000 shares authorized, 16,898,615 issued and outstanding at March 31, 2018, and 16,885,615 at December 31, 2017
58,171

 
57,880

Retained earnings
44,152

 
44,182

Accumulated other comprehensive income (loss)
1,186

 
(710
)
Total shareholders' equity
103,509

 
101,352

Total liabilities and shareholders' equity
$
854,804

 
$
805,836


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United Security Bancshares and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 
 
Three Months Ended March 31,
(In thousands except shares and EPS)
2018
 
2017
Interest Income:
 
 
 
Loans, including fees
$
8,226

 
$
7,225

Investment securities – AFS – taxable
193

 
224

Interest on deposits in FRB
384

 
183

Interest on deposits in other banks

 
1

Total interest income
8,803

 
7,633

 
 
 
 
Interest Expense:
 

 
 

Interest on deposits
387

 
336

Interest on other borrowings
90

 
69

Total interest expense
477


405

 
 
 
 
Net Interest Income
8,326

 
7,228

(Recovery of Provision) Provision for Credit Losses
(189
)
 
21

Net Interest Income after (Recovery of Provision) Provision for Credit Losses
8,515

 
7,207

 
 
 
 
Noninterest Income:
 

 
 

Customer service fees
951

 
941

Increase in cash surrender value of bank-owned life insurance
125

 
132

Gain on death benefit proceeds of bank-owned life insurance
171

 

Loss on change in fair value of marketable equity securities
(60
)
 

Loss on fair value of financial liability
(470
)
 
(336
)
Other
205

 
172

Total noninterest income
922

 
909

 
 
 
 
Noninterest Expense:
 
 
 
Salaries and employee benefits
2,961

 
2,985

Occupancy expense
1,018

 
1,015

Data processing
52

 
27

Professional fees
335

 
255

Regulatory assessments
83

 
136

Director fees
80

 
68

Correspondent bank service charges
17

 
18

Loss on California tax credit partnership
5

 
108

Net cost on operation and sale of OREO
51

 
32

Other
398

 
546

Total noninterest expense
5,000

 
5,190

 
 
 
 
Income Before Provision for Taxes
4,437

 
2,926

Provision for Taxes on Income
1,280

 
1,155

Net Income
$
3,157

 
$
1,771


 
 
 
Net Income per common share
 
 
 
Basic
$
0.19

 
$
0.10

Diluted
$
0.19

 
$
0.10

Shares on which net income per common shares were based
 
 
 
Basic
16,898,615

 
16,874,778

Diluted
16,925,971

 
16,888,573


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

(In thousands)
Three Months Ended 
 March 31, 2018
 
Three Months Ended 
 March 31, 2017
Net Income
$
3,157

 
$
1,771

 
 
 
 
Unrealized holdings (loss) gain on securities
(254
)
 
87

Unrealized gains on unrecognized post-retirement costs
9

 
13

    Unrealized gains on TRUPs
567

 

Other comprehensive income (loss), before tax
322

 
100

Tax benefit (expense) related to securities
79

 
(35
)
Tax expense related to unrecognized post-retirement costs
(3
)
 
(5
)
Tax expense related to TRUPs
(168
)
 

Total other comprehensive income (loss)
230

 
60

Comprehensive Income
$
3,387

 
$
1,831



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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) Gain
 
 Total
 
 
 
 
Balance December 31, 2016 (1)
16,705,594

 
$
56,557

 
$
40,701

 
$
(604
)
 
$
96,654

(1) Excludes 12,015 unvested restricted shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Other comprehensive income
 

 
 

 
 

 
60

 
60

Common stock dividends
167,082

 
1,220

 
(1,220
)
 
 

 

Stock options exercised
2,514

 
6

 
 
 
 
 
6

Stock-based compensation expense
 

 
7

 
 

 
 

 
7

Net income
 

 
 

 
1,771

 
 

 
1,771

Balance March 31, 2017 (2)
16,875,190

 
$
57,790

 
$
41,252

 
$
(544
)
 
$
98,498

(2) Excludes 12,015 unvested restricted shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss
 

 
 

 
 

 
(53
)
 
(53
)
Reclassification of income tax effects from accumulated other comprehensive income
 
 
 
 
113

 
(113
)
 

Dividends on common stock ($0.17 per share)
 
 
 
 
(2,870
)
 
 
 
(2,870
)
Dividends payable
 
 
 
 
(1,182
)
 
 
 
(1,182
)
Restricted stock units released
10,425

 
 
 
 

 
 
 

  Stock-based compensation expense
 

 
90

 
 

 
 
 
90

Net income
 

 
 

 
6,869

 
 

 
6,869

Balance December 31, 2017 (3)
16,885,615

 
$
57,880

 
$
44,182

 
$
(710
)
 
$
101,352

(3) Excludes 46,511 unvested restricted shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Other comprehensive income
 

 
 

 
 

 
230

 
230

Adoption of ASU 2016-01: reclassification of TRUPS to accumulated other comprehensive income
 
 
 
 
(1,482
)
 
1,482

 

Adoption of ASU 2016-01: recognition of previously unrealized losses within marketable equity securities
 
 
 
 
(184
)
 
184

 

Dividends payable ($0.09 per share)
 
 
 
 
(1,521
)
 
 
 
(1,521
)
Restricted stock units released
13,000

 
 
 
 
 
 
 

Stock-based compensation expense
 

 
291

 
 

 
 

 
291

Net income
 

 
 

 
3,157

 
 

 
3,157

Balance March 31, 2018 (4)
16,898,615

 
$
58,171

 
$
44,152

 
$
1,186

 
$
103,509

(4) Excludes 46,511 unvested restricted shares
 
 
 
 
 
 
 
 
 


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United Security Bancshares and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
 
Three months ended March 31,
(In thousands)
2018
 
2017
Cash Flows From Operating Activities:
 
 
 
Net Income
$
3,157

 
$
1,771

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

 
 

(Recovery of provision) provision for credit losses
(189
)
 
21

Depreciation and amortization
334

 
324

Amortization of investment securities
137

 
143

Accretion of investment securities
(1
)
 
(2
)
Increase in accrued interest receivable
(887
)
 
(550
)
Increase (decrease) in accrued interest payable
3

 
(24
)
Decrease in accounts payable and accrued liabilities
(1,711
)
 
(718
)
Decrease in unearned fees and unamortized loan origination costs, net
71

 
168

Decrease in income taxes receivable
1,419

 
1,293

Unrealized loss on marketable equity securities
60

 

Stock-based compensation expense
291

 
7

(Provision) benefit for deferred income taxes
29

 
(138
)
Gain on bank owned life insurance
(171
)
 

Increase in cash surrender value of bank-owned life insurance
(125
)
 
(137
)
Loss on fair value option of financial liabilities
470

 
336

Loss on tax credit limited partnership interest
5

 
108

Net increase in other assets
(253
)
 
(172
)
Net cash provided by operating activities
2,639

 
2,430

 
 
 
 
Cash Flows From Investing Activities:
 

 
 

Net increase in interest-bearing deposits with banks

 
(1
)
Purchase of correspondent bank stock
(3
)
 
(1
)
Principal payments of available-for-sale securities
2,265

 
2,087

Net decrease in loans
5,508

 
22,943

Investment in limited partnership

 
(598
)
Proceeds from bank owned life insurance
376

 

Capital expenditures of premises and equipment
(295
)
 
(678
)
Net cash provided by investing activities
7,851

 
23,752

 
 
 
 
Cash Flows From Financing Activities:
 

 
 

Net increase in demand deposits and savings accounts
44,010

 
14,450

Net increase (decrease) in time deposits
2,913

 
(20,538
)
Proceeds from exercise of stock options

 
6

Net cash provided by (used in) financing activities
46,923

 
(6,082
)
 
 
 
 
Net increase in cash and cash equivalents
57,413

 
20,100

Cash and cash equivalents at beginning of period
107,934

 
113,032

Cash and cash equivalents at end of period
$
165,347

 
$
133,132


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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 accounting principles generally accepted in the United States (GAAP) for interim financial information on a basis consistent with the accounting policies reflected in the audited financial statements of the Company included in its 2017 Annual Report on Form 10-K. These interim financial statements do not include all of the information and footnotes required by GAAP 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.

Reclassifications:

During the three months ended March 31, 2018, in accordance with ASU 2016-01, the Company changed its classification of investment securities available for sale (at fair value) presented within the consolidated balance sheets to separately present available for sale securities and marketable equity securities. This change in the classification of investment securities was made to better represent the types of securities held by the Company. As a result of these reclassifications, investment securities available for sale (at fair value) as of December 31, 2017 of $45,722,000 has been broken out to present available for sale securities of $41,985,000, and marketable equity securities of $3,737,000 separately. These reclassifications did not affect previously reported net income or total assets.

Revenue from Contracts with Customers:

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
 
Recently Issued Accounting Standards:

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 gains/losses on the sale of OREO, 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

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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 No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 was effective for the Company on January 1, 2018 and resulted in separate classification of equity securities previously included in available for sale securities on the consolidated balance sheets with changes in the fair value of the equity securities captured in the consolidated statements of income. See Note 2 – Investment Securities for disclosures related to equity securities. Adoption of the standard also 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 11 – Fair Value Disclosures for further information regarding the valuation of these loans. Additionally, adoption of the standard resulted in separately recognizing the instrument-specific credit risk associated with the Company's Junior Subordinated Debt. See Note 10 - Junior Subordinated Debt / Trust Preferred Securities for additional information.

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The FASB is issuing this Update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification® and creating Topic 842, Leases. This Update, along with IFRS 16, Leases, are the results of the FASB’s and the International Accounting Standards Board’s (IASB’s) efforts to meet that objective and improve financial reporting. This ASU will be effective for public business entities for annual periods beginning after December 15, 2018 (i.e., calendar periods beginning on January 1, 2019), and interim periods therein. Although an estimate of the impact of the new leasing standard has not yet been determined, the Company expects a significant new lease asset and related lease liability on the consolidated balance sheet due to the number of leased branches and standalone ATM sites the Company currently has that are accounted for under current operating lease guidance.

In June 2016, FASB issued ASU 2016-13, Financial Instruments- Credit Losses (Topic 326). The FASB is issuing this Update to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The Update requires enhanced disclosures and judgments in estimating credit losses and also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. This amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has established a project team for the implementation of this new standard. The team has started by working with a vendor to put a new Allowance for Loan Loss software in place and is collecting additional historical data to estimate the impact of this standard. An estimate of the impact of this standard has not yet been determined, however, the impact on the Company's consolidated financial statements is expected to be significant.

In January 2017, FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). The FASB is issuing this Update to eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. This ASU will be effective for public business entities for annual periods beginning after December 15, 2019 (i.e. calendar periods beginning on January 1, 2020, and interim periods therein. The Company does not expect any impact on the Company's consolidated financial statements resulting from the adoption of this Update.

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


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2.
Investment Securities

Following is a comparison of the amortized cost and fair value of securities available-for-sale, as of March 31, 2018 and December 31, 2017:
(in 000's)
 Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value (Carrying Amount)
March 31, 2018
 
 
 
Securities available for sale:
 
 
 
U.S. Government agencies
$
18,548

 
$
272

 
$
(48
)
 
$
18,772

U.S. Government sponsored entities & agencies collateralized by mortgage obligations
21,125

 
45

 
(613
)
 
20,557

Total securities available for sale
$
39,673

 
$
317

 
$
(661
)
 
$
39,329

(in 000's)
 Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value (Carrying Amount)
December 31, 2017
 
 
 
Securities available for sale:
 
 
 
U.S. Government agencies
$
19,683

 
$
312

 
$
(41
)
 
$
19,954

U.S. Government sponsored entities & agencies collateralized by mortgage obligations
22,391

 
56

 
(416
)
 
22,031

Total securities available for sale
$
42,074

 
$
368

 
$
(457
)
 
$
41,985

 
The amortized cost and fair value of securities available for sale at March 31, 2018, 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.
 
March 31, 2018
 
Amortized Cost
 
Fair Value (Carrying Amount)
(in 000's)
 
Due in one year or less
$

 
$

Due after one year through five years

 

Due after five years through ten years
567

 
576

Due after ten years
17,981

 
18,196

Collateralized mortgage obligations
21,125

 
20,557

 
$
39,673

 
$
39,329


There were no realized gains or losses on sales of available-for-sale securities for the three month periods ended March 31, 2018 and March 31, 2017. There were no other-than-temporary impairment losses for the three month periods ended March 31, 2018 and March 31, 2017.

At March 31, 2018, available-for-sale securities with an amortized cost of approximately $32,695,073 (fair value of $32,225,704) were pledged as collateral for FHLB borrowings and public funds balances.

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.


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Table of Contents

The following summarizes temporarily impaired investment securities:
(in 000's)
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2018
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
$
1,620

 
$
(2
)
 
6,072

 
(46
)
 
$
7,692

 
$
(48
)
U.S. Government sponsored entities & agencies collateralized by mortgage obligations
6,958

 
(244
)
 
12,782

 
(369
)
 
19,740

 
(613
)
Total impaired securities
$
8,578

 
$
(246
)
 
$
18,854

 
$
(415
)
 
$
27,432

 
$
(661
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 

 
 

 
 

 
 

 
 

 
 

Securities available for sale:
 

 
 

 
 

 
 

 
 

 
 

U.S. Government agencies
$
1,728

 
$
(3
)
 
$
6,625

 
$
(38
)
 
$
8,353

 
$
(41
)
U.S. Government sponsored entities & agencies collateralized by mortgage obligations
7,483

 
(154
)
 
13,583

 
(262
)
 
21,066

 
(416
)
Total impaired securities
$
9,211

 
$
(157
)
 
$
20,208

 
$
(300
)
 
$
29,419

 
$
(457
)
 
Temporarily impaired securities at March 31, 2018, were comprised of three U.S. government agency securities, and eleven U.S. government sponsored entities and agencies collateralized by mortgage obligations securities.

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

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recovery of its amortized cost basis less any current-period loss, the other-than-temporary-impairment shall be separated into 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 March 31, 2018, the decline in fair value of the three U.S. government agency securities, and the eleven U.S. government sponsored entities and agencies collateralized by mortgage obligations securities 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 March 31, 2018.

As of December 31, 2017, marketable equity securities with a fair value of $3,737,000 were recorded within investment securities available for sale with unrealized losses recorded through comprehensive income and accumulated other comprehensive income. As of January 1, 2018, the Company adopted Accounting Standard Update (“ASU”) 2016-01 and reclassified its marketable equity securities from investments available for sale into a separate component of investment securities. The ASU requires marketable equity securities to be reported at fair value with changes recorded through earnings. As of January 1, 2018, unrealized losses of $184,000 were reclassified from accumulated other comprehensive income to retained earnings. During the three months ended March 31, 2018, the Company recognized $60,000 of unrealized losses related to equity securities held at March 31, 2018 in the consolidated statements of income.

The Company had no held-to-maturity or trading securities at March 31, 2018 or December 31, 2017.


3.
Loans

Loans are comprised of the following:
(in 000's)
March 31, 2018

 
December 31, 2017

Commercial and Business Loans
$
52,514

 
$
46,065

Government Program Loans
932

 
961

Total Commercial and Industrial
53,446

 
47,026

Real Estate – Mortgage:
 

 
 

Commercial Real Estate
210,111

 
221,032

Residential Mortgages
82,175

 
84,804

Home Improvement and Home Equity loans
445

 
457

Total Real Estate Mortgage
292,731

 
306,293

Real Estate Construction and Development
125,346

 
122,970

Agricultural
57,615

 
59,481

Installment and Student Loans
66,744

 
65,581

Total Loans
$
595,882

 
$
601,351

 
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 9.0% of total loans at March 31, 2018 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.


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Real estate mortgage loans, representing 49.1% of total loans at March 31, 2018, 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 and or guarantor(s).

Commercial real estate mortgage loans comprise the largest segment of this loan category and are available on all types of income producing and non-income producing 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. 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.

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.

Home Improvement and Home Equity loans comprise a relatively small portion of total real estate mortgage loans. 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 21.0% of total loans at March 31, 2018, 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 or from the sale of the constructed homes to individuals.

Agricultural loans represent 9.7% of total loans at March 31, 2018 and are generally secured by land, equipment, inventory and receivables. Repayment is from the cash flow of the borrower.

Installment loans represent 11.2% of total loans at March 31, 2018 and generally consist of student loans, loans to individuals for household, family and other personal expenditures, automobiles or other consumer items. Included in installment loans are $61,001,000 in student loans made to medical and pharmacy school students. Upon graduation the loan is automatically placed on deferment for 6 months. This may be extended up to 48 months for graduates enrolling in Internship, Medical Residency or Fellowship. As approved the student may receive additional deferment for hardship or administrative reasons in the form of forbearance for a maximum of 24 months throughout the life of the loan. These loans are typically insured through a Surety Bond issued by ReliaMax Surety Company and provide the Company reasonable expectation of collection. Accrued interest on loans that have not entered repayment status totaled $5,159,000 at March 31, 2018. At March 31, 2018 there were 300 loans within repayment, deferment, and forbearance which represented $6,143,000, $1,297,000, and $2,697,000 in outstanding balances respectively.

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 March 31, 2018 and December 31, 2017, these financial instruments include commitments to extend credit of $98,559,000 and $99,958,000, respectively, and standby letters of credit of $1,183,000 and $2,058,000, 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.

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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 March 31, 2018 (in 000's):
March 31, 2018
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
$
60

 
$

 
$

 
$
60

 
$
52,454

 
$
52,514

 
$

Government Program Loans

 

 

 

 
932

 
932

 

Total Commercial and Industrial
60

 

 

 
60

 
53,386

 
53,446

 

Commercial Real Estate Loans

 

 

 

 
210,111

 
210,111

 

Residential Mortgages
304

 

 
288

 
592

 
81,583

 
82,175

 

Home Improvement and Home Equity Loans
23

 

 

 
23

 
422

 
445

 

Total Real Estate Mortgage
327

 

 
288

 
615

 
292,116

 
292,731

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate Construction and Development Loans

 

 
310

 
310

 
125,036

 
125,346

 

Agricultural Loans

 

 

 

 
57,615

 
57,615

 

Consumer Loans
148

 
665

 

 
813

 
65,770

 
66,583

 
67

Overdraft Protection Lines

 

 

 

 
39

 
39

 

Overdrafts

 

 

 

 
122

 
122

 

Total Installment
148

 
665

 

 
813

 
65,931

 
66,744

 
67

Total Loans
$
535

 
$
665

 
$
598

 
$
1,798

 
$
594,084

 
$
595,882

 
$
67


The following is a summary of delinquent loans at December 31, 2017 (in 000's):
December 31, 2017
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
$

 
$

 
$
212

 
$
212

 
$
45,853

 
$
46,065

 
$

Government Program Loans

 

 

 

 
961

 
961

 

Total Commercial and Industrial

 

 
212

 
212

 
46,814

 
47,026

 

Commercial Real Estate Loans
779

 

 

 
779

 
220,253

 
221,032

 

Residential Mortgages

 

 
94

 
94

 
84,710

 
84,804

 

Home Improvement and Home Equity Loans

 

 

 

 
457

 
457

 

Total Real Estate Mortgage
779

 

 
94

 
873

 
305,420

 
306,293

 

Real Estate Construction and Development Loans

 

 
360

 
360

 
122,610

 
122,970

 
360

Agricultural Loans

 

 

 

 
59,481

 
59,481

 

Consumer Loans

 

 

 

 
65,446

 
65,446

 
125

Overdraft Protection Lines

 

 

 

 
38

 
38

 

Overdrafts

 

 

 

 
97

 
97

 

Total Installment

 

 

 

 
65,581

 
65,581

 
125

Total Loans
$
779

 
$

 
$
666

 
$
1,445

 
$
599,906

 
$
601,351

 
$
485


Nonaccrual Loans

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

- 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.

For student loans there is a reasonable expectation of collection, principal and accrued interest, as these loans are typically insured through a Surety Bond issued by ReliaMax Surety Company. If a loan were to be delinquent 180 - 210 days a claim would be filed through ReliaMax. At that point payment of accured interest and principal would be expected from ReliaMax, absent this expectation the loan would be placed on non-accrual and the accrual of interest for financial statement purposes would be discontinued. As of March 31, 2018, claims had been filed on six loans for a total of $125,000.

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 $5,342,000 and $5,296,000 at March 31, 2018 and December 31, 2017, respectively. There were no remaining undisbursed commitments to extend credit on nonaccrual loans at March 31, 2018 or December 31, 2017.

The following is a summary of nonaccrual loan balances at March 31, 2018 and December 31, 2017 (in 000's).

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March 31, 2018
 
December 31, 2017
Commercial and Business Loans
$

 
$
212

Government Program Loans

 

Total Commercial and Industrial

 
212

 
 
 
 
Commercial Real Estate Loans
448

 
454

Residential Mortgages
288

 
288

Home Improvement and Home Equity Loans

 

Total Real Estate Mortgage
736

 
742

 
 
 
 
Real Estate Construction and Development Loans
4,606

 
4,342

 Agricultural Loans

 

 
 
 
 
Consumer Loans

 

Overdraft Protection Lines

 

Overdrafts

 

Total Installment

 

Total Loans
$
5,342

 
$
5,296


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.


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Table of Contents

-
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.
 
The following is a summary of impaired loans at March 31, 2018 (in 000's).
March 31, 2018
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
$
3,282

 
$
105

 
$
3,193

 
$
3,298

 
$
996

 
$
3,282

 
$
41

Government Program Loans
316

 
318

 

 
318

 

 
184

 
1

Total Commercial and Industrial
3,598

 
423

 
3,193

 
3,616

 
996

 
3,466

 
42

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate Loans
1,609

 
297

 
1,318

 
1,615

 
464

 
1,430

 
16

Residential Mortgages
2,525

 
693

 
1,840

 
2,533

 
94

 
2,792

 
30

Home Improvement and Home Equity Loans

 

 

 

 

 

 

Total Real Estate Mortgage
4,134

 
990

 
3,158

 
4,148

 
558

 
4,222

 
46

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate Construction and Development Loans
4,606

 
4,606

 

 
4,606

 

 
5,289

 
60

Agricultural Loans
1,111

 
1

 
1,115

 
1,116

 
785

 
1,161

 
22

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer Loans
83

 
84

 

 
84

 

 
42

 

Overdraft Protection Lines

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

Total Installment
83

 
84

 

 
84

 

 
42

 

Total Impaired Loans
$
13,532

 
$
6,104

 
$
7,466

 
$
13,570

 
$
2,339

 
$
14,180

 
$
170


(1) The recorded investment in loans includes accrued interest receivable of $38.
(2) Information is based on the three month period ended March 31, 2018.    


17

Table of Contents

The following is a summary of impaired loans at December 31, 2017 (in 000's).

December 31, 2017
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
$
3,255

 
$
381

 
$
2,887

 
$
3,268

 
$
534

 
$
3,791

 
$
229

Government Program Loans
49

 
50

 

 
50

 

 
219

 
5

Total Commercial and Industrial
3,304

 
431

 
2,887

 
3,318

 
534

 
4,010

 
234

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate Loans
1,233

 

 
1,245

 
1,245

 
385

 
1,138

 
79

Residential Mortgages
3,040

 
1,199

 
1,852

 
3,051

 
103

 
2,745

 
142

Home Improvement and Home Equity Loans

 

 

 

 

 

 

Total Real Estate Mortgage
4,273

 
1,199

 
3,097

 
4,296

 
488

 
3,883

 
221

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate Construction and Development Loans
5,951

 
5,972

 

 
5,972

 

 
6,660

 
418

Agricultural Loans
1,200

 
1

 
1,203

 
1,204

 
866

 
1,179

 
48

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer Loans

 

 

 

 

 
241

 

Overdraft Protection Lines

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

Total Installment

 

 

 

 

 
241

 

Total Impaired Loans
$
14,728

 
$
7,603

 
$
7,187

 
$
14,790

 
$
1,888

 
$
15,973

 
$
921


(1) The recorded investment in loans includes accrued interest receivable of $62.
(2) Information is based on the twelve month period ended December 31, 2017.

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 three months ended March 31, 2018 and 2017 was $14,180,000 and $16,958,000, respectively. Interest income recognized on impaired loans for the three months ended March 31, 2018 and 2017 was approximately $170,000 and $223,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $63,000 and $79,000 for the three months ended March 31, 2018 and 2017, respectively.

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

18

Table of Contents

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 and continued satisfactory performance is expected. To this end, the Company typically 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 March 31, 2018
($ 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

 
$

 
$

 

 
$

Government Program Loans

 

 

 

 

Commercial Real Estate Term Loans

 

 

 

 

Single Family Residential Loans

 

 

 

 

Home Improvement and Home Equity Loans

 

 

 

 

Real Estate Construction and Development Loans

 

 

 
1

 
310

Agricultural Loans

 

 

 

 

Consumer Loans

 

 

 

 

Overdraft Protection Lines

 

 

 

 

Total Loans

 
$

 
$

 
1

 
$
310






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Table of Contents

 
Three Months Ended March 31, 2017
($ 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

 
$
69

 
$
69

 

 
$

Government Program Loans

 

 

 

 

Commercial Real Estate Term Loans

 

 

 

 

Single Family Residential Loans

 

 

 

 

Home Improvement and Home Equity Loans

 

 

 

 

Real Estate Construction and Development Loans
1

 
790

 
790

 

 

Agricultural Loans
1

 
850

 
850

 

 

Consumer Loans

 

 

 

 

Overdraft Protection Lines

 

 

 

 

Total Loans
3

 
$
1,709

 
$
1,709

 

 
$


The Company makes various types of concessions when structuring TDRs including rate discounts, payment extensions, and forbearance. At March 31, 2018, the Company had 20 restructured loans totaling $9,702,000 as compared to 25 restructured loans totaling $11,362,000 at December 31, 2017.

The following tables summarize TDR activity by loan category for the three months ended March 31, 2018 and March 31, 2017 (in 000's).
Three Months Ended March 31, 2018
Commercial and Industrial
 
Commercial Real Estate
 
Residential Mortgages
 
Home Improvement and Home Equity
 
Real Estate Construction Development
 
Agricultural
 
Installment
& Other
 
Total
Beginning balance
$
436

 
$
1,233

 
$
2,542

 
$

 
$
5,951

 
$
1,200

 
$

 
$
11,362

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Defaults

 

 

 

 
(310
)
 

 

 
(310
)
Additions

 

 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal reductions
(226
)
 
81

 
(17
)
 

 
(1,035
)
 
(90
)
 

 
(1,287
)
Charge-offs
(63
)
 

 

 

 

 

 

 
(63
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
147

 
$
1,314

 
$
2,525

 
$

 
$
4,606

 
$
1,110

 
$

 
$
9,702

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan loss
$

 
$
464

 
$
109

 
$

 
$