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Section 1: 10-Q (10-Q UBFO 09302018)

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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 SEPTEMBER 30, 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 October 31, 2018: 16,903,290

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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)
September 30, 2018 and December 31, 2017
(in thousands except shares)
September 30, 2018
 
December 31, 2017
Assets
 
 
 
Cash and non-interest bearing deposits in other banks
$
28,952

 
$
35,237

Due from Federal Reserve Bank ("FRB")
178,348

 
72,697

Cash and cash equivalents
207,300

 
107,934

Investment securities (at fair value)
 
 
 
Available for sale ("AFS") securities
62,103

 
41,985

Marketable equity securities
3,624

 
3,737

Total investment securities
65,727

 
45,722

Loans
577,115

 
601,351

Unearned fees and unamortized loan origination costs, net
483

 
1,039

Allowance for credit losses
(8,798
)
 
(9,267
)
Net loans
568,800

 
593,123

Premises and equipment – net
9,875

 
10,165

Accrued interest receivable
9,412

 
6,526

Other real estate owned
5,745

 
5,745

Goodwill
4,488

 
4,488

Deferred tax assets - net
2,760

 
2,389

Cash surrender value of life insurance
19,935

 
19,752

Investment in limited partnerships
1,588

 
1,601

Other assets
8,398

 
8,391

Total assets
$
904,028

 
$
805,836

 
 
 
 
Liabilities & Shareholders' Equity
 

 
 

Liabilities
 

 
 

Deposits
 

 
 

Noninterest bearing
$
315,213

 
$
307,299

Interest bearing
463,670

 
380,394

Total deposits
778,883

 
687,693

 
 
 
 
Accrued interest payable
57

 
44

Other liabilities
7,639

 
7,017

Junior subordinated debentures (at fair value)
10,403

 
9,730

Total liabilities
796,982

 
704,484

 
 
 
 
Shareholders' Equity
 

 
 

Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 16,903,290 at September 30, 2018 and 16,885,615 at December 31, 2017
58,472

 
57,880

Retained earnings
47,852

 
44,182

Accumulated other comprehensive income (loss)
722

 
(710
)
Total shareholders' equity
107,046

 
101,352

Total liabilities and shareholders' equity
$
904,028

 
$
805,836


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Table of Contents

United Security Bancshares and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended September 30,
(In thousands except shares and EPS)
2018
 
2017
 
2018
 
2017
Interest Income:
 
 
 
 
 
 
 
Interest and fees on loans
$
8,397

 
$
7,978

 
$
24,114

 
$
22,782

Interest on investment securities
351

 
238

 
809

 
691

Interest on deposits in FRB
806

 
375

 
1,870

 
858

Interest on deposits in other banks

 
1

 

 
4

Total interest income
9,554

 
8,592

 
26,793

 
24,335

 
 
 
 
 
 
 
 
Interest Expense:
 
 
 
 
 

 
 

Interest on deposits
579

 
355

 
1,517

 
1,055

Interest on other borrowed funds
112

 
80

 
311

 
223

Total interest expense
691

 
435

 
1,828


1,278

 
 
 
 
 
 
 
 
Net Interest Income
8,863

 
8,157

 
24,965

 
23,057

(Recovery of Provision) Provision for Credit Losses
(373
)
 
7

 
(1,699
)
 
(24
)
Net Interest Income after (Recovery of Provision) Provision for Credit Losses
9,236

 
8,150

 
26,664

 
23,081

 
 
 
 
 
 
 
 
Noninterest Income:
 
 
 
 
 

 
 

Customer service fees
815

 
959

 
2,787

 
2,897

Increase in cash surrender value of bank-owned life insurance
132

 
134

 
389

 
400

Loss on marketable equity securities
(35
)
 

 
(114
)
 

Gain on proceeds from bank-owned life insurance

 

 
171

 

Loss on fair value of junior subordinated debentures
(262
)
 
(88
)
 
(923
)
 
(688
)
Gain on sale of investment in limited partnership

 
3

 

 
3

Gain on sale of assets

 

 
29

 

Other
199

 
168

 
601

 
539

Total noninterest income
849

 
1,176

 
2,940

 
3,151

 
 
 
 
 
 
 
 
Noninterest Expense:
 
 
 
 
 
 
 
Salaries and employee benefits
2,826

 
2,578

 
8,798

 
8,149

Occupancy expense
1,121

 
1,087

 
3,256

 
3,144

Data processing
13

 
29

 
104

 
81

Professional fees
408

 
312

 
1,134

 
912

Regulatory assessments
87

 
43

 
248

 
313

Director fees
78

 
72

 
239

 
215

Correspondent bank service charges
15

 
18

 
48

 
55

Loss (gain) on California tax credit partnership
5

 
(1
)
 
14

 
118

Net cost (gain) on operation and sale of OREO
30

 
21

 
129

 
(257
)
Other
560

 
587

 
1,489

 
1,813

Total noninterest expense
5,143

 
4,746

 
15,459

 
14,543

 
 
 
 
 
 
 
 
Income Before Provision for Taxes
4,942

 
4,580

 
14,145

 
11,689

Provision for Taxes on Income
1,424

 
1,840

 
4,077

 
4,685

Net Income
$
3,518

 
$
2,740

 
$
10,068

 
$
7,004


 
 
 
 
 
 
 
Net Income per common share
 
 
 
 
 
 
 
Basic
$
0.21

 
$
0.16

 
$
0.60

 
$
0.41

Diluted
$
0.21

 
$
0.16

 
$
0.59

 
$
0.41

Shares on which net income per common shares were based
 
 
 
 
 
 
 
Basic
16,902,218

 
16,885,615

 
16,897,524

 
16,885,578

Diluted
16,954,053

 
16,907,267

 
16,933,477

 
16,904,063


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

(In thousands)
Three Months Ended  
 September 30, 2018
 
Three Months Ended  
 September 30, 2017
 
Nine Months Ended 
 September 30, 2018
 
Nine Months Ended 
 September 30, 2017
Net Income
$
3,518

 
$
2,740

 
$
10,068

 
$
7,004

 
 
 
 
 
 
 
 
Unrealized holdings (loss) gain on securities
(226
)
 

 
(655
)
 
355

Unrealized gains on unrecognized post-retirement costs
14

 
13

 
41

 
39

    Unrealized (loss) gain on junior subordinated debentures
(14
)
 

 
280

 

Other comprehensive (loss) income, before tax
(226
)
 
13

 
(334
)
 
394

Tax benefit (expense) related to securities
67

 

 
195

 
(142
)
Tax expense related to unrecognized post-retirement costs
(4
)
 
(5
)
 
(12
)
 
(16
)
Tax benefit (expense) related to junior subordinated debentures
4

 

 
(83
)
 

Total other comprehensive (loss) income
(159
)
 
8

 
(234
)
 
236

Comprehensive Income
$
3,359

 
$
2,748

 
$
9,834

 
$
7,240



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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
 

 
 

 
 

 
236

 
236

Common stock dividends
167,082

 
1,220

 
(1,220
)
 
 

 

Dividends on common stock ($0.17 per share)
 
 
 
 
(1,688
)
 
 
 
(1,688
)
Dividends payable ($0.07 per share)
 
 
 
 
(1,182
)
 
 
 
(1,182
)
Stock options exercised
2,514

 
6

 
 
 
 
 
6

Restricted stock units released
10,425

 
 
 
 
 
 
 

Stock-based compensation expense
 

 
78

 
 

 
 

 
78

Net income
 

 
 

 
7,004

 
 

 
7,004

Balance September 30, 2017 (2)
16,885,615

 
$
57,861

 
$
43,615

 
$
(368
)
 
$
101,108

(2) Excludes 9,011 unvested restricted shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss
 

 
 

 
 

 
(229
)
 
(229
)
Reclassification of income tax effects from accumulated other comprehensive income
 
 
 
 
113

 
(113
)
 

Dividends payable ($0.07 per share)
 
 
 
 
(1,182
)
 
 
 
(1,182
)
  Stock-based compensation expense
 

 
19

 
 

 
 
 
19

Net income
 

 
 

 
1,636

 
 

 
1,636

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

 
$
57,880

 
$
44,182

 
$
(710
)
 
$
101,352

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

 
 

 
 

 
(234
)
 
(234
)
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 on common stock ($0.18 per share)
 
 
 
 
(3,042
)
 
 
 
(3,042
)
Dividends payable ($0.10 per share)
 
 
 
 
(1,690
)
 
 
 
(1,690
)
Restricted stock units released
17,675

 
 
 
 
 
 
 

Stock-based compensation expense
 

 
592

 
 

 
 

 
592

Net income
 

 
 

 
10,068

 
 

 
10,068

Balance September 30, 2018 (4)
16,903,290

 
$
58,472

 
$
47,852

 
$
722

 
$
107,046

(4) Excludes 78,508 unvested restricted shares
 
 
 
 
 
 
 
 
 


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United Security Bancshares and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)

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Table of Contents

 
Nine months ended September 30,
(In thousands)
2018
 
2017
Cash Flows From Operating Activities:
 
 
 
Net Income
$
10,068

 
$
7,004

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

 
 

Recovery of provision for credit losses
(1,699
)
 
(24
)
Depreciation and amortization
1,005

 
996

Amortization of investment securities
409

 
406

Accretion of investment securities
(3
)
 
(6
)
Increase in accrued interest receivable
(2,886
)
 
(1,951
)
Increase (decrease) in accrued interest payable
13

 
(35
)
(Decrease) increase in accounts payable and accrued liabilities
(1,052
)
 
282

Decrease (increase) in unearned fees and unamortized loan origination costs, net
556

 
(142
)
Increase in income taxes receivable
(493
)
 
(734
)
Unrealized loss on marketable equity securities
114

 

Stock-based compensation expense
592

 
78

Provision for deferred income taxes
(190
)
 
(283
)
Gain on sale of other real estate owned

 
(336
)
Gain on bank owned life insurance
(171
)
 

Increase in cash surrender value of bank-owned life insurance
(389
)
 
(400
)
Loss on fair value option of junior subordinated debentures
923

 
688

Loss on tax credit limited partnership interest
14

 
118

Gain on sale of premises and equipment
(29
)
 

Net decrease (increase) in other assets
330

 
(1,001
)
Net cash provided by operating activities
7,112

 
4,660

Cash Flows From Investing Activities:
 

 
 

Net increase in interest-bearing deposits with banks

 
(4
)
Purchase of correspondent bank stock
(23
)
 
(495
)
Purchases of available-for-sale securities
(28,072
)
 

Maturities of available-for-sale securities

 
3,000

Principal payments of available-for-sale securities
7,157

 
6,091

Net decrease (increase) in loans
25,385

 
(12,346
)
Cash proceeds from sales of other real estate owned

 
1,062

Investment in limited partnership

 
(1,075
)
Proceeds from bank owned life insurance
376

 

Capital expenditures of premises and equipment
(715
)
 
(1,020
)
Net cash provided by (used in) investing activities
4,108

 
(4,787
)
Cash Flows From Financing Activities:
 

 
 

Net increase in demand deposits and savings accounts
83,102

 
85,653

Net increase (decrease) in time deposits
8,086

 
(36,984
)
Proceeds from exercise of stock options

 
6

Dividends on common stock
(3,042
)
 
(1,688
)
Net cash provided by financing activities
88,146

 
46,987

Net increase in cash and cash equivalents
99,366

 
46,860

Cash and cash equivalents at beginning of period
107,934

 
113,032

Cash and cash equivalents at end of period
$
207,300

 
$
159,892


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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 one bank subsidiary, USB Investment Trust (the “REIT”) (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.

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.

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. The Company adopted Topic 606 using the modified retrospective method on all contracts not completed as of January 1, 2018. The adoption of Topic 606 did not result in a material change to the accounting for any of the in-scope revenue streams. As such, no cumulative effect adjustment was recorded.
 
Recently Issued Accounting Standards:

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. In July 2018, FASB issued ASU 2018-11, Lease (Topic 842) Targeted Improvements. One of the purposes of this Update was to provide entities with an additional (and optional) transition method to adopt Topic 842. Under this transition method, an entity initially applies the transition requirements in Topic 842 at

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the effective date with the effects of initially applying Topic 842 recognized as a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. At this time the Company is considering the impact of the transition methods. Additionally, while a complete 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. The Company has selected a vendor to assist in the calculation and implementation of this standard and is in the beginning stages of calculating and assessing the impact of this Update.

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.

In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts within FASB's Concepts Statement, including the consideration of costs and benefits. The amendment calls for the removal, modification, and addition of certain disclosure aspects to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures. The amendments of the update will become effective in fiscal years beginning after December 15, 2019. 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.


2.
Investment Securities

Following is a comparison of the amortized cost and fair value of securities available-for-sale, as of September 30, 2018 and December 31, 2017:
(in 000's)
 Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value (Carrying Amount)
September 30, 2018
 
 
 
Securities available for sale:
 
 
 
U.S. Government agencies
$
34,198

 
$
124

 
$
(191
)
 
$
34,131

U.S. Government sponsored entities & agencies collateralized by mortgage obligations
28,649

 
30

 
(707
)
 
27,972

Total securities available for sale
$
62,847

 
$
154

 
$
(898
)
 
$
62,103


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(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 September 30, 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.
 
September 30, 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
5,860

 
5,843

Due after ten years
28,338

 
28,288

Collateralized mortgage obligations
28,649

 
27,972

 
$
62,847

 
$
62,103


There were no realized gains or losses on sales of available-for-sale securities for the three and nine month periods ended September 30, 2018 and September 30, 2017. There were no other-than-temporary impairment losses for the three and nine month periods ended September 30, 2018 and September 30, 2017.

At September 30, 2018, available-for-sale securities with an amortized cost of approximately $48,538,528 (fair value of $47,814,781) were pledged as collateral for FHLB borrowings, securitized deposits, 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.


11

Table of Contents

The following summarizes temporarily impaired investment securities:
(in 000's)
Less than 12 Months
 
12 Months or More
 
Total
September 30, 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
$
17,755

 
$
(79
)
 
7,030

 
(112
)
 
$
24,785

 
$
(191
)
U.S. Government sponsored entities & agencies collateralized by mortgage obligations
6,730

 
(52
)
 
17,519

 
(655
)
 
24,249

 
(707
)
Total impaired securities
$
24,485

 
$
(131
)
 
$
24,549

 
$
(767
)
 
$
49,034

 
$
(898
)
 
 
 
 
 
 
 
 
 
 
 
 
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 September 30, 2018, were comprised of ten U.S. government agency securities, and thirteen 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

12

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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 September 30, 2018, the decline in fair value of the ten U.S. government agency securities, and the thirteen 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 September 30, 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 nine months ended September 30, 2018, the Company recognized $114,000 of unrealized losses related to equity securities held at September 30, 2018 in the consolidated statements of income. For the quarter ended September 30, 2018, the Company recognized $35,000 of unrealized losses related to equity securities held at September 30, 2018 in the consolidated statements of income. The resulting impact on basic and diluted earnings per share for the quarter and nine months ended September 30, 2018 is immaterial.

The Company had no held-to-maturity or trading securities at September 30, 2018 or December 31, 2017.


3.
Loans

Loans are comprised of the following:
(in 000's)
September 30, 2018

 
December 31, 2017

Commercial and business loans
$
54,639

 
$
46,065

Government program loans
884

 
961

Total commercial and industrial
55,523

 
47,026

Real estate – mortgage:
 

 
 

Commercial real estate
212,639

 
221,032

Residential mortgages
68,263

 
84,804

Home improvement and home equity loans
333

 
457

Total real estate mortgage
281,235

 
306,293

Real estate construction and development
109,154

 
122,970

Agricultural
59,655

 
59,481

Installment and student loans
71,548

 
65,581

Total loans
$
577,115

 
$
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 9.6% of total loans at September 30, 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

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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 48.7% of total loans at September 30, 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 18.9% of total loans at September 30, 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 10.3% of total loans at September 30, 2018 and are generally secured by land, equipment, inventory and receivables. Repayment is from the cash flow of the borrower.

Installment loans, including student loans, represent 12.4% of total loans at September 30, 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 $65,659,000 in unsecured student loans made to medical and pharmacy school students. The medical student loans are made to US citizens attending medical schools in the US and Antigua, while the pharmacy student loans are made to pharmacy students attending pharmacy school in the US. 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. Accrued interest on loans that have not entered repayment status totaled $7,183,000 at September 30, 2018. At September 30, 2018 there were 332 loans within repayment, deferment, and forbearance which represented $6,896,000, $1,005,000, and $2,680,000 in outstanding balances, respectively. Prior to June 2018, student loans were insured through a Surety Bond issued by ReliaMax Surety Company and provided the Company reasonable expectation of collection. In June 2018, ReliaMax Surety Company was declared insolvent by the South Dakota Division of Insurance and is now in liquidation. As a result of the insolvency, the Company's student loan portfolio is no longer insured.

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, 2018 and December 31, 2017, these financial instruments include commitments to extend credit of $116,096,000 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.


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Table of Contents

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.

During the second quarter of 2018, the Bank entered into a Small Business Administration (SBA) 504 Loan Forward Purchase Commitment to buy a one hundred percent (100%) interest in up to $30 million, first mortgage, California SBA 504 loans on a flow basis with servicing released by the Seller.

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, 2018 (in 000's):
September 30, 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
$

 
$

 
$

 
$

 
$
54,639

 
$
54,639

 
$

Government program loans

 

 

 

 
884

 
884

 

Total commercial and industrial

 

 

 

 
55,523

 
55,523

 

Commercial real estate loans

 
393

 

 
393

 
212,246

 
212,639

 

Residential mortgages
946

 

 

 
946

 
67,317

 
68,263

 

Home improvement and home equity loans

 

 

 

 
333

 
333

 

Total real estate mortgage
946

 
393

 

 
1,339

 
279,896

 
281,235

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate construction and development loans

 

 
8,825

 
8,825

 
100,329

 
109,154

 

Agricultural loans

 
45

 

 
45

 
59,610

 
59,655

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Installment and student loans
673

 
496

 

 
1,169

 
70,186

 
71,355

 
417

Overdraft protection lines

 

 

 

 
36

 
36

 

Overdrafts

 

 

 

 
157

 
157

 

Total installment and student loans
673

 
496

 

 
1,169

 
70,379

 
71,548

 
417

Total loans
$
1,619

 
$
934

 
$
8,825

 
$
11,378

 
$
565,737

 
$
577,115

 
$
417



15

Table of Contents

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

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Installment and student loans

 

 

 

 
65,446

 
65,446

 
125

Overdraft protection lines

 

 

 

 
38

 
38

 

Overdrafts

 

 

 

 
97

 
97

 

Total installment and student loans

 

 

 

 
65,581

 
65,581

 
125

Total loans
$
779

 
$

 
$
666

 
$
1,445

 
$
599,906

 
$
601,351

 
$
485


Nonaccrual Loans

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.

All loans, outside of student 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. Student loans are generally charged off at the end of the month during which an account becomes 120 days contractually past due. Accrued but unpaid interest related to charged off student loans 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.

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Table of Contents


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 $12,106,000 and $5,296,000 at September 30, 2018 and December 31, 2017, respectively. Two loans were added to nonaccrual during the quarter ended June 30, 2018. Those loans, totaling $8,825,000, were made to the same borrower and are well-secured by real estate collateral. There were no remaining undisbursed commitments to extend credit on nonaccrual loans at September 30, 2018 or December 31, 2017.

The following is a summary of nonaccrual loan balances at September 30, 2018 and December 31, 2017 (in 000's).
 
September 30, 2018
 
December 31, 2017
Commercial and business loans
$

 
$
212

Government program loans

 

Total commercial and industrial

 
212

 
 
 
 
Commercial real estate loans
393

 
454

Residential mortgages

 
288

Home improvement and home equity loans

 

Total real estate mortgage
393

 
742

 
 
 
 
Real estate construction and development loans
11,713

 
4,342

 Agricultural loans

 

 
 
 
 
Installment and student loans

 

Overdraft protection lines

 

Overdrafts

 

Total installment and student loans

 

Total loans
$
12,106

 
$
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,

17

Table of Contents

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.
 

18

Table of Contents

The following is a summary of impaired loans at September 30, 2018 (in 000's).
September 30, 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
$
2,726

 
$
503

 
$
2,235

 
$
2,738

 
$
633

 
$
3,063

 
$
139

Government program loans
300

 
301

 

 
301

 

 
245

 
15

Total commercial and industrial
3,026

 
804

 
2,235

 
3,039

 
633

 
3,308

 
154

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate loans
1,310

 
393

 
921

 
1,314

 
396

 
1,385

 
47

Residential mortgages
2,202

 
394

 
1,816

 
2,210

 
68

 
2,505

 
89

Home improvement and home equity loans

 

 

 

 

 

 

Total real estate mortgage
3,512

 
787

 
2,737

 
3,524

 
464

 
3,890

 
136

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate construction and development loans
11,713

 
11,713

 

 
11,713

 

 
8,514

 
268

Agricultural loans
909

 

 
914

 
914

 
620

 
1,063

 
63

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Installment and student loans
52

 
52

 

 
52

 

 
50

 
4

Overdraft protection lines

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

Total installment and student loans
52

 
52

 

 
52

 

 
50

 
4

Total impaired loans
$
19,212

 
$
13,356

 
$
5,886

 
$
19,242

 
$
1,717

 
$
16,825

 
$
625


(1) The recorded investment in loans includes accrued interest receivable of $30.
(2) Information is based on the nine month period ended September 30, 2018.    


19

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Installment and student loans

 

 

 

 

 
241

 

Overdraft protection lines

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

Total installment and student loans

 

 

 

 

 
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 quarters ended September 30, 2018 and 2017 was $19,469,000 and $15,681,000, respectively. Interest income recognized on impaired loans for the quarters ended September 30, 2018 and 2017 was approximately $173,000 and $192,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $64,000 and $70,000 for the quarters ended September 30, 2018 and 2017, respectively.

The average recorded investment in impaired loans for the nine months ended September 30, 2018 and 2017 was $16,825,000 and $16,366,000, respectively. Interest income recognized on impaired loans for the nine months ended September 30, 2018 and 2017 was approximately $625,000 and $738,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $277,000 and $260,000 for the nine months ended September 30, 2018 and 2017, respectively.


20

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 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 additions for the periods indicated:
 
Three Months Ended September 30, 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

 

 

 
1

 
393

Single family residential loans

 

 

 

 

Home improvement and home equity loans

 

 

 

 

Real estate construction and development loans

 

 

 

 

Agricultural loans

 

 

 

 

Installment and student loans

 

 

 

 

Overdraft protection lines

 

 

 

 

Total loans

 
$

 
$

 
1