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, ~~2017~~2020



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 o ☒	Non-accelerated filer o ☐
Small reporting company x ☒		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, 2017~~: ~~16,885,615~~September 30, 2020: 16,977,239

Table of Contents

TABLE OF CONTENTS

Facing Page

Table of Contents



PART I. Financial Information

			Item 1. Financial Statements

				Consolidated Balance Sheets	3
				Consolidated Statements of Income	4
				Consolidated Statements of Comprehensive Income	5
				Consolidated Statements of Changes in Shareholders' Equity	6
				Consolidated Statements of Cash Flows	78
				Notes to Consolidated Financial Statements	910

			Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		3942

				Overview	3942
				Results of Operations	4044
				Financial Condition	4751
				Asset/Liability Management – Liquidity and Cash Flow	5763
				Regulatory Matters	5864

			Item 3. Quantitative and Qualitative Disclosures about Market Risk		66

			Item 4. Controls and Procedures		6066

PART II. Other Information
			Item 1.	Legal Proceedings	6268
			Item ~~1A.~~2.	~~Risk Factors~~	62
	~~Item 2.~~	Unregistered Sales of Equity Securities and Use of Proceeds	6268
			Item 3.	Defaults Upon Senior Securities	6268
			Item 4.	Mine Safety Disclosures	6268
			Item 5.	Other Information	6268
			Item 6.	Exhibits	6268

Signatures					6369

Table of Contents

PART I. Financial Information

United Security Bancshares and Subsidiaries

Consolidated Balance Sheets – (unaudited)

September 30, ~~2017~~2020 and December 31, ~~2016~~2019


(in thousands except shares)	September 30, 2020		December 31, 2019
Assets
Cash and non-interest-bearing deposits in other banks	$	29,197	$	27,291
Due from Federal Reserve Bank ("FRB")	294,135		191,704
Cash and cash equivalents	323,332		218,995

Investment securities (at fair value)
Available-for-sale ("AFS") securities	87,917		76,312
Marketable equity securities	3,865		3,776
Total investment securities	91,782		80,088
Loans	661,482		597,374
Unearned fees and unamortized loan origination costs - net	(1,038)		(820)
Allowance for credit losses	(8,708)		(7,908)
Net loans	651,736		588,646
Premises and equipment - net	9,379		9,380
Accrued interest receivable	10,099		8,208
Other real estate owned	5,018		6,753
Goodwill	4,488		4,488
Deferred tax assets - net	2,631		3,191
Cash surrender value of life insurance	20,403		20,955

Operating lease right-of-use assets	2,914		3,360
Other assets	12,165		12,855
Total assets	$	1,133,947	$	956,919

Liabilities & Shareholders' Equity
Liabilities
Deposits
Non-interest-bearing	$	430,028	$	311,950
Interest-bearing	564,755		506,412
Total deposits	994,783		818,362

Accrued interest payable	36		59
Operating lease liabilities	3,017		3,463
Other liabilities	7,977		8,239
Junior subordinated debentures (at fair value)	10,081		10,808
Total liabilities	1,015,894		840,931
Shareholders' Equity
Common stock, 0 par value; 20,000,000 shares authorized; issued and outstanding: 16,977,239 at September 30, 2020 and 16,973,885 at December 31, 2019	59,289		58,973
Retained earnings	59,084		57,647
Accumulated other comprehensive loss	(320)		(632)
Total shareholders' equity	118,053		115,988
Total liabilities and shareholders' equity	$	1,133,947	$	956,919

(in thousands except shares) September 30, 2017 December 31, 2016
Assets
Cash and non-interest bearing deposits in other banks $ 22,688
$ 25,781
Cash and due from Federal Reserve Bank 137,204
87,251
Cash and cash equivalents 159,892
113,032
Interest-bearing deposits in other banks 654
650
Investment securities available for sale (at fair value) 48,356
57,491
Loans 582,384
569,759
Unearned fees and unamortized loan origination costs, net 1,217
1,075
Allowance for credit losses (9,158 ) (8,902 )
Net loans 574,443
561,932
Accrued interest receivable 5,846
3,895
Premises and equipment – net 10,469
10,445
Other real estate owned 5,745
6,471
Goodwill 4,488
4,488
Cash surrender value of life insurance 19,447
19,047
Investment in limited partnerships 1,715
757
Deferred tax assets - net 3,423
3,298
Other assets 9,029
6,466
Total assets $ 843,507
$ 787,972

Liabilities & Shareholders' Equity

Liabilities

Deposits

Noninterest bearing $ 315,877
$ 262,697
Interest bearing 409,421
413,932
Total deposits 725,298
676,629

Accrued interest payable 41
76
Accounts payable and other liabilities 7,526
5,781
Junior subordinated debentures (at fair value) 9,534
8,832
Total liabilities 742,399
691,318

Shareholders' Equity

Common stock, no par value 20,000,000 shares authorized, 16,885,615 issued and outstanding at September 30, 2017, and 16,705,594 at December 31, 2016 57,861
56,557
Retained earnings 43,615
40,701
Accumulated other comprehensive loss (368 ) (604 )
Total shareholders' equity 101,108
96,654
Total liabilities and shareholders' equity $ 843,507
$ 787,972

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)	2020		2019		2020		2019
Interest Income:
Interest and fees on loans	$	7,563	$	8,648	$	23,622	$	25,733
Interest on investment securities	343		439		1,127		1,360
Interest on deposits in FRB	62		1,330		667		4,052

Total interest income	7,968		10,417		25,416		31,145

Interest Expense:
Interest on deposits	451		950		1,562		2,675
Interest on other borrowed funds	49		111		229		352
Total interest expense	500		1,061		1,791		3,027

Net Interest Income	7,468		9,356		23,625		28,118
Provision for Credit Losses	4		5		2,138		15
Net Interest Income after Provision for Credit Losses	7,464		9,351		21,487		28,103

Noninterest Income:
Customer service fees	668		839		2,014		2,479
Increase in cash surrender value of bank-owned life insurance	124		147		382		438
Unrealized gain on fair value of marketable equity securities	4		18		89		128
Gain on proceeds from bank-owned life insurance	0		0		310		0

(Loss) gain on fair value of junior subordinated debentures	(18)		660		1,451		1,571
Loss on dissolution of real estate investment trust	0		(1)		0		(115)
(Loss) gain on sale of assets	0		(5)		0		1
Other	133		195		460		603
Total noninterest income	911		1,853		4,706		5,105

Noninterest Expense:
Salaries and employee benefits	2,722		2,775		8,131		8,307
Occupancy expense	887		829		2,609		2,450
Data processing	139		151		386		402
Professional fees	724		864		1,981		2,423
Regulatory assessments	121		(37)		283		138
Director fees	94		95		282		281
Correspondent bank service charges	19		14		52		42

Net cost on operation and sale of OREO	35		71		968		223
Other	469		573		1,663		1,677
Total noninterest expense	5,210		5,335		16,355		15,943

Income Before Provision for Taxes	3,165		5,869		9,838		17,265
Provision for Taxes on Income	894		1,696		2,800		4,989
Net Income	$	2,271	$	4,173	$	7,038	$	12,276

Net Income per common share
Basic	$	0.13	$	0.25	$	0.41	$	0.72
Diluted	$	0.13	$	0.25	$	0.41	$	0.72
Shares on which net income per common shares were based
Basic	16,977,239		16,953,744		16,975,648		16,950,474
Diluted	17,000,501		16,990,162		16,993,180		16,981,619

Quarter Ended September 30, Nine Months Ended September 30,
(In thousands except shares and EPS) 2017 2016 2017 2016
Interest Income:
Loans, including fees $ 7,978
$ 7,435
$ 22,782
$ 20,722
Investment securities – AFS – taxable 238
244
691
618
Interest on deposits in FRB 375
72
858
348
Interest on deposits in other banks 1
2
4
6
Total interest income 8,592
7,753
24,335
21,694
Interest Expense:

Interest on deposits 355
289
1,055
837
Interest on other borrowings 80
60
223
176
Total interest expense 435
349
1,278

1,013
Net Interest Income 8,157
7,404
23,057
20,681
Provision (Recovery of Provision) for Credit Losses 7
4
(24 ) (7 )
Net Interest Income after Provision (Recovery of Provision) for Credit Losses 8,150
7,400
23,081
20,688
Noninterest Income:

Customer service fees 959
924
2,897
2,867
Increase in cash surrender value of bank-owned life insurance 134
131
400
394
(Loss) gain on fair value of financial liability (88 ) (423 ) (688 ) 48
Gain on sale of investment in limited partnership 3
—
3
—
Other 168
154
539
464
Total noninterest income 1,176
786
3,151
3,773
Noninterest Expense:
Salaries and employee benefits 2,578
2,533
8,149
7,592
Occupancy expense 1,087
1,097
3,144
3,212
Data processing 29
23
81
108
Professional fees 312
327
912
1,116
Regulatory assessments 43
131
313
632
Director fees 72
75
215
218
(Gain) loss on California tax credit partnership (1 ) 49
118
122
Net cost (gain) on operation and sale of OREO 21
39
(257 ) 216
Other 605
590
1,868
1,772
Total noninterest expense 4,746
4,864
14,543
14,988
Income Before Provision for Taxes 4,580
3,322
11,689
9,473
Provision for Taxes on Income 1,840
1,282
4,685
3,643
Net Income $ 2,740
$ 2,040
$ 7,004
$ 5,830

Net Income per common share
Basic $ 0.16
$ 0.12
$ 0.41
$ 0.35
Diluted $ 0.16
$ 0.12
$ 0.41
$ 0.35
Shares on which net income per common shares were based
Basic 16,885,615
16,881,422
16,885,578
16,880,835
Diluted 16,907,267
16,891,066
16,904,063
16,887,078

Table of Contents

United Security Bancshares and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)


(In thousands)	Three Months Ended September 30, 2020		Three Months Ended September 30, 2019		Nine Months Ended September 30, 2020		Nine Months Ended September 30, 2019
Net Income	$	2,271	$	4,173	$	7,038	$	12,276

Unrealized holdings gain (loss) on debt securities	334		(246)		1,161		317
Unrealized gains on unrecognized post-retirement costs	20		14		60		42
Unrealized loss on junior subordinated debentures	(326)		(501)		(779)		(1,748)
Other comprehensive gain (loss), before tax	28		(733)		442		(1,389)
Tax (expense) benefit related to debt securities	(38)		76		(343)		(94)
Tax expense related to unrecognized post-retirement costs	(6)		(4)		(17)		(12)
Tax benefit related to junior subordinated debentures	97		148		230		516
Total other comprehensive gain (loss)	81		(513)		312		(979)
Comprehensive Income	$	2,352	$	3,660	$	7,350	$	11,297

(In thousands) Three Months Ended
September 30, 2017 Three Months Ended
September 30, 2016 Nine Months Ended
September 30, 2017 Nine Months Ended
September 30, 2016
Net Income $ 2,740
$ 2,040
$ 7,004
$ 5,830

Unrealized holdings (loss) gain on securities —
(190 ) 355
118
Unrealized gains on unrecognized post-retirement costs 13
13
39
37
Other comprehensive income (loss), before tax 13
(177 ) 394
155
Tax benefit (expense) related to securities —
76
(142 ) (47 )
Tax expense related to unrecognized post-retirement costs (5 ) (6 ) (16 ) (16 )
Total other comprehensive income (loss) 8
(107 ) 236
92
Comprehensive Income $ 2,748
$ 1,933
$ 7,240
$ 5,922

Table of Contents

United Security Bancshares and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

(unaudited)


	Common Stock
(In thousands except shares)	Number of Shares	Amount		Retained Earnings		Accumulated Other Comprehensive (Loss) Gain		Total

Balance December 31, 2018 (1)	16,946,622	$	58,624	$	49,942	$	674	$	109,240
(1) Excludes 59,217 unvested restricted shares

Other comprehensive loss						(284)		(284)
Dividends payable ($0.11 per share)				(1,869)				(1,869)

Restricted stock units released	2,500							0
Stock-based compensation expense		99						99
Net income				4,007				4,007
Balance March 31, 2019 (2)	16,949,122	$	58,723	$	52,080	$	390	$	111,193
(2) Excludes 58,717 unvested restricted shares

Other comprehensive loss						(182)		(182)
Dividends payable ($0.11 per share)				(1,865)				(1,865)


Restricted stock units released	4,622							0
Stock-based compensation expense		95						95
Net income				4,097				4,097
Balance June 30, 2019 (3)	16,953,744	$	58,818	$	54,312	$	208	$	113,338
(3) Excludes 55,713 unvested restricted shares

Other comprehensive loss						(513)		(513)
Dividends payable ($0.11 per share)				(1,865)				(1,865)



Stock-based compensation expense		78						78
Net income				4,173				4,173
Balance September 30, 2019 (4)	16,953,744	$	58,896	$	56,620	$	(305)	$	115,211
(4) Excludes 55,713 unvested restricted shares

Other comprehensive loss						(327)		(327)
Dividends payable ($0.11 per share)				(1,868)				(1,868)


Restricted stock units released	20,141							0
Stock-based compensation expense		77						77
Net income				2,895				2,895
Balance December 31, 2019 (5)	16,973,885	$	58,973	$	57,647	$	(632)	$	115,988
(5) Excludes 35,572 unvested restricted shares

Other comprehensive income						458		458
Dividends payable ($0.11 per share)				(1,867)				(1,867)


Restricted stock units released	350							0
Tax benefit from restricted stock units released		(1)						(1)
Stock-based compensation expense		78						78
Net income				2,754				2,754
Balance March 31, 2020 (6)	16,974,235	$	59,050	$	58,534	$	(174)	$	117,410
(6) Excludes 47,572 unvested restricted shares

Table of Contents

Common stock
(In thousands except shares) Number of Shares Amount Retained Earnings Accumulated Other Comprehensive Loss Total

Balance December 31, 2015* 16,051,406
$ 52,572
$ 37,265
$ (202 ) $ 89,635
*Excludes 15,019 unvested restricted shares

   Other comprehensive income

92
92
Common stock dividends 486,316
2,705
(2,705 )
—
Stock options exercised 2,463
6
6
Stock-based compensation expense
22

22
Net income

5,830

5,830
Balance September 30, 2016* 16,540,185
$ 55,305
$ 40,390
$ (110 ) $ 95,585
*Excludes 12,015 unvested restricted shares

Other comprehensive loss

(494 ) (494 )
Common stock dividends 165,409
1,244
(1,244 )
—
   Stock-based compensation expense
8

8
Net income

1,555

1,555
Balance December 31, 2016* 16,705,594
$ 56,557
$ 40,701
$ (604 ) $ 96,654
*Excludes 12,015 unvested restricted shares

  Other comprehensive income

236
236
Cash dividends on common stock ($0.17 per share) (2,870 ) (2,870 )
Common stock dividends 167,082
1,220
(1,220 )
—
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* 16,885,615
$ 57,861
$ 43,615
$ (368 ) $ 101,108
*Excludes 9,011 unvested restricted shares



Other comprehensive loss						(227)		(227)
Dividends payable ($0.11 per share)				(1,866)				(1,866)


Restricted stock units released	3,004							0

Stock-based compensation expense		131						131
Net income				2,012				2,012
Balance June 30, 2020 (7)	16,977,239	$	59,181	$	58,680	$	(401)	$	117,460
(7) Excludes 44,568 unvested restricted shares

Other comprehensive loss						81		81
Dividends payable ($0.11 per share)				(1,867)				(1,867)




Stock-based compensation expense		108						108
Net income				2,271				2,271
Balance September 30, 2020 (8)	16,977,239	$	59,289	$	59,084	$	(320)	$	118,053
(8) Excludes 44,568 unvested restricted shares

Table of Contents

United Security Bancshares and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)


	Nine months ended September 30,
(In thousands)	2020		2019
Cash Flows From Operating Activities:
Net Income	$	7,038	$	12,276
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses	2,138		15
Depreciation and amortization	1,044		1,055
Amortization of operating lease right-of-use assets	(446)		(575)
Amortization of premium/discount on investment securities, net	806		489
Increase in accrued interest receivable	(1,891)		(2,181)
(Decrease) increase in accrued interest payable	(23)		15
Decrease in accounts payable and accrued liabilities	(261)		(1,996)
Decrease in unearned fees and unamortized loan origination costs, net	218		508
Decrease (increase) in income taxes receivable	(9)		(359)
Unrealized gain on marketable equity securities	(89)		(128)
Stock-based compensation expense	316		272
Benefit (provision) for deferred income taxes	199		(52)
Loss on sale of other real estate owned	113		0
Write down on other real estate owned	727		0


Gain on bank owned life insurance	(310)		0
Increase in cash surrender value of bank-owned life insurance	(382)		(438)
Gain on fair value option of junior subordinated debentures	(1,451)		(1,571)




Loss on dissolution of real estate investment trust	0		115
Gain on sale of premises and equipment	0		(1)
Net decrease in other assets	1,629		2,321
Net cash provided by operating activities	9,366		9,765


Cash Flows From Investing Activities:


Purchase of correspondent bank stock	(45)		(52)
Purchases of available-for-sale securities	(29,016)		(23,017)

Principal payments of available-for-sale securities	17,766		11,407


Net (increase) decrease in loans	(65,446)		17,626
Cash proceeds from sales of other real estate owned	895		0

Investment in limited partnership	(201)		(300)

Cash proceeds from sale of premises and equipment	0		12
Proceeds from bank owned life insurance	1,243		0
Capital expenditures of premises and equipment	(1,043)		(684)
Net cash (used in) provided by investing activities	(75,847)		4,992


Cash Flows From Financing Activities:
Net increase in demand deposits and savings accounts	178,239		28,859
Net decrease in time deposits	(1,819)		(14,280)


Dividends on common stock	(5,602)		(3,730)
Net cash provided by financing activities	170,818		10,849

Table of Contents

Nine months ended September 30,
(In thousands) 2017 2016
Cash Flows From Operating Activities:
Net Income $ 7,004
$ 5,830
Adjustments to reconcile net income:to cash provided by operating activities:

Recovery of provision for credit losses (24 ) (7 )
Depreciation and amortization 996
1,091
Amortization of investment securities 406
335
Accretion of investment securities (6 ) (25 )
Increase in accrued interest receivable (1,951 ) (1,361 )
(Decrease) increase in accrued interest payable (35 ) 10
Increase (decrease) in accounts payable and accrued liabilities 282
(487 )
Increase in unearned fees and unamortized loan origination costs, net (142 ) (994 )
(Increase) decrease in income taxes receivable (734 ) 2,512
Stock-based compensation expense 78
22
(Benefit) provision for deferred income taxes (283 ) 20
Gain on sale of other real estate owned (336 ) (53 )
Increase in cash surrender value of bank-owned life insurance (400 ) (394 )
Loss (gain) on fair value option of financial liabilities 688
(48 )
Loss on tax credit limited partnership interest 118
122
Net increase in other assets (1,001 ) (548 )
Net cash provided by operating activities 4,660
6,025

Cash Flows From Investing Activities:

Net increase in interest-bearing deposits with banks (4 ) (6 )
Purchase of correspondent bank stock (495 ) (101 )
Purchases of available-for-sale securities —
(34,987 )
Maturities of available-for-sale securities 3,000
2,600
Principal payments of available-for-sale securities 6,091
2,700
Net increase in loans (12,346 ) (41,303 )
Cash proceeds from sales of other real estate owned 1,062
2,800
Payoff of senior liens on other real estate owned —
(705 )
(Investment in) distribution from limited partnership (1,075 ) 2
Capital expenditures of premises and equipment (1,020 ) (516 )
Net cash used in investing activities (4,787 ) (69,516 )

Cash Flows From Financing Activities:

Net increase in demand deposits and savings accounts 85,653
38,068
Net (decrease) increase in time deposits (36,984 ) 11,413
Proceeds from exercise of stock options 6
6
Dividends on common stock (1,688 ) —
Net cash provided by financing activities 46,987
49,487

Net increase (decrease) in cash and cash equivalents 46,860
(14,004 )
Cash and cash equivalents at beginning of period 113,032
125,751
Cash and cash equivalents at end of period $ 159,892
$ 111,747


Net increase in cash and cash equivalents	104,337		25,606
Cash and cash equivalents at beginning of period	218,995		220,337
Cash and cash equivalents at end of period	$	323,332	$	245,943

Table of Contents

United Security Bancshares and Subsidiaries - Notes to Consolidated Financial Statements - (Unaudited)


1.	~~Organization and Summary of Significant Accounting and Reporting Policies~~

1.Organization and Summary of Significant Accounting and Reporting Policies

The consolidated financial statements include the accounts of United Security Bancshares (Company or USB) 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”)~~(Bank). Intercompany accounts and transactions have been eliminated in consolidation.

These unaudited financial statements have been prepared in accordance with accounting principles generally accepted ~~accounting principles~~in the United States (GAAP) for interim financial information on a basis consistent with the accounting policies reflected in the audited consolidated financial statements of the Company included in its ~~2016~~2019 Annual Report on Form 10-K. These interim consolidated financial statements do not include all of the information and footnotes required by ~~generally accepted accounting principles~~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.

~~Recently Issued Accounting Standards~~:

~~In May 2014, the~~Impact of New Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which creates Topic 606 and supersedes Topic 605, Revenue Recognition. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), which postponed the effective date of 2014-09. Multiple ASUs and interpretative guidance have been issued in connection with ASU 2014-09. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard is effective for public entities for interim and annual periods beginning after December 15, 2017; early adoption is not permitted. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company has begun their process to implement this new standard by reviewing all revenue sources to determine the sources that are in scope for this guidance. As a bank, key revenue sources, such as interest income have been identified as out of scope of this new guidance. The Company does not expect the application of this ASU to have a material impact on the consolidated financial statements.:

~~In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01~~ ~~Financial Instruments-Overall: Recognition and Measurements of Financial Assets and Financial Liabilities.~~ This ASU requires equity investments to be measured at fair value, with changes in fair value recognized in net income. The amendment also simplifies the impairment assessment of equity investments for which fair value is not readily determinable by requiring an entity to perform a qualitative assessment to identify impairment. The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods therein. The Company expects this ASU to impact its consolidated income and other comprehensive income disclosures for the fair value of its mutual fund investment and junior subordinated debenture.

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 balance sheet due to the number of leased branches and standalone ATM sites the Bank 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 original amendment iswas effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In October 2019 FASB unanimously approved a vote to delay the effective date of this Standard to be effective for fiscal years beginning after December 15, 2022. The Company has ~~established~~formed a project team that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard. An external provider specializing in community bank loss driver and CECL reserving model design as well as other related consulting services has been retained, and the Company continues to evaluate potential CECL modeling alternatives. As part of this ~~new standard.~~process, the Company has determined potential loan pool segmentation and sub-segmentation under CECL, as well as evaluated the key economic loss drivers for each segment. The ~~team~~Company has ~~started by working~~begun to generate and evaluate model scenarios under CECL in tandem with ~~a vendor~~its current reserving processes for interim and annual reporting beginning in March 2020. While the Company is currently unable to ~~put a new Allowance for Loan Loss software in place and is collecting additional historical data to~~reasonably estimate the impact of adopting this ~~standard. An estimate of~~new guidance, management expects the impact of ~~this standard has not yet been determined, however,~~adoption will be significantly influenced by the composition and quality of the Company’s loan portfolio as well as the economic conditions as of the date of adoption. The Company also anticipates significant changes to the processes and procedures for calculating the reserve for credit losses and continues to evaluate the potential impact on the Company's consolidated financial ~~statements is expected~~statements. Additionally, in regard to ~~be significant.~~

~~As of January 1, 2017,~~the recently approved delay in implementation, the Company ~~adopted~~continues to evaluate its expected implementation date.

On March 22, 2020, a statement was issued by various regulatory agencies titled the “Interagency Statement on Loan Modifications and Reporting for Financial ~~Accounting Standards Board's (FASB) Accounting Standard Update ("ASU"~~Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) ~~No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements~~that encourages financial institutions to ~~Employee Share-Based Payment Accounting. ASU 2016-09, seeks~~work prudently with borrowers who are or may be unable to ~~simplify several aspects~~meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the ~~accounting for employee share-based payment transactions, including income tax consequences,~~CARES Act, that passed on March 27, 2020, further provides that a qualified loan modification is exempt by law from classification as a troubled debt restructuring (“TDR”) as defined by GAAP, from the period beginning March 1, 2020 until the earlier of ~~awards as either equity~~December 31, 2020 or ~~liabilities, and classification~~the date that is 60 days after the date on which the ~~statement of cash flows. As required~~national emergency concerning the COVID-19 outbreak declared by ~~ASU 2016-09, all adjustments are reflected as~~the President of the ~~beginning~~United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the ~~fiscal year, January 1, 2016. By applying this ASU,~~original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. In accordance with such guidance, the Company ~~no longer adjusts common stock for the tax impact of shares released, instead the tax impact is recognized as tax expense~~offered short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the ~~period the shares are released. This simplifies the tracking~~form of ~~the excess tax benefits and deficiencies, but could cause volatility~~payment deferrals, fee waivers, extensions of repayment terms, or other delays in tax expense for the periods presented. The statement of cash flows has been adjusted to reflect the provisions of this ASU. The application of this ASU did not have a material impact on the consolidated financial statements.

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 entitiespayment that are ~~SEC filers the amendments~~insignificant.

Table 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.Contents

2.Investment Securities


2.	~~Investment Securities~~

Following is a comparison of the amortized cost and fair value of securities available-for-sale, as of September 30, ~~2017~~2020 and December 31, ~~2016~~:2019:


(in 000's)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value (Carrying Amount)
September 30, 2020
Securities available-for-sale:
U.S. Government agencies	$	35,039	$	155	$	(252)	$	34,942
U.S. Government sponsored entities & agencies collateralized by mortgage obligations	42,054		857		(14)		42,897
Asset-backed securities	3,866		0		(38)		3,828
Municipal bonds	1,045		13		0		1,058
Corporate bonds	5,000		192		0		5,192
Total securities available for sale	$	87,004	$	1,217	$	(304)	$	87,917

(in 000's) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (Carrying Amount)
September 30, 2017
Securities available for sale:
U.S. Government agencies $ 20,676
$ 338
$ (44 ) $ 20,970
U.S. Government sponsored entities & agencies collateralized by mortgage obligations 23,693
70
(160 ) 23,603
Mutual Funds 4,000
—
(217 ) 3,783
Total securities available for sale $ 48,369
$ 408
$ (421 ) $ 48,356


(in 000's)												(in 000's)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value (Carrying Amount)
December 31, 2019												December 31, 2019
Securities available-for-sale:												Securities available-for-sale:
U.S. Government agencies												U.S. Government agencies		$	28,737					$	152			$	(190)			$	28,699
U.S. Government sponsored entities & agencies collateralized by mortgage obligations												U.S. Government sponsored entities & agencies collateralized by mortgage obligations		47,824						120				(331)				47,613

(in 000's)	Amortized Cost		Gross Unrealized Gains				Gross Unrealized Losses			Fair Value (Carrying Amount)
December 31, 2016
Securities available for sale:
U.S. Government agencies	$	22,992			$	280							$	(69	)	$	23,203
U.S. Government sponsored entities & agencies collateralized by mortgage obligations	30,867				107								(402		)	30,572
Mutual Funds	4,000		—				(284		)	3,716
Total securities available for sale	$	57,859	$	387			$	(755	)	$	57,491	Total securities available for sale		$	76,561			$	272			$	(521)			$	76,312

The amortized cost and fair value of securities available for sale at September 30, ~~2017~~,2020, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties. Contractual maturities on collateralized mortgage obligations cannot be anticipated due to allowed paydowns. ~~Mutual funds are included in the "due in one year or less" category below.~~


	September 30, 2020
	Amortized Cost		Fair Value (Carrying Amount)
(in 000's)
Due in one year or less	$	0	$	0
Due after one year through five years	300		300
Due after five years through ten years	18,224		18,332
Due after ten years	26,426		26,388
Collateralized mortgage obligations	42,054		42,897
	$	87,004	$	87,917

September 30, 2017
Amortized Cost Fair Value (Carrying Amount)
(in 000's)
Due in one year or less $ 4,000
$ 3,783
Due after one year through five years —
—
Due after five years through ten years 716
728
Due after ten years 19,960
20,242
Collateralized mortgage obligations 23,693
23,603
$ 48,369
$ 48,356

There were no0 realized gains or losses on sales of available-for-sale securities for the three and nine month periods ended September 30, ~~2017~~2020 and September 30, ~~2016~~.2019. There were no0 other-than-temporary impairment losses for the three and nine month periods ended September 30, ~~2017~~2020 and September 30, ~~2016~~.2019.

At September 30, ~~2017~~,2020, available-for-sale securities with an amortized cost of approximately ~~$36,896,960~~$79,013,000 (fair value of ~~$36,955,121~~)$79,942,000) were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances.

~~The Company had no held-to-maturity or trading securities at~~ ~~September 30, 2017~~ or ~~December 31, 2016~~.

~~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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The following summarizes temporarily impaired investment securities:


(in 000's)	Less than 12 Months						12 Months or More								Total						(in 000's)		Less than 12 Months											12 Months or More							Total
September 30, 2017	Fair Value (Carrying Amount)		Unrealized Losses				Fair Value (Carrying Amount)				Unrealized Losses				Fair Value (Carrying Amount)			Unrealized Losses
September 30, 2020										September 30, 2020				Fair Value (Carrying Amount)							Unrealized Losses						Fair Value (Carrying Amount)					Unrealized Losses				Fair Value (Carrying Amount)				Unrealized Losses
Securities available for sale:	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									U.S. Government agencies				$	9,540					$	(83)							17,897						(169)					$	27,437					$	(252)
U.S. Government sponsored entities & agencies collateralized by mortgage obligations	9,363		(25		)			12,245					(135		)			21,608				(160			)	U.S. Government sponsored entities & agencies collateralized by mortgage obligations		317							(2)				2,068				(12)					2,385	(14)
Mutual Funds	—		—				3,783				(217		)		3,783			(217		)
Corporate bonds																					Corporate bonds		0						0					0			0				0					0
Municipal bonds																					Municipal bonds		300						0					0			0				300					0
Asset-backed securities																					Asset-backed securities		3,828						(38)					0			0				3,828					(38)
Total impaired securities	$	11,131	$	(29	)		$	23,160			$	(392	)		$	34,291		$	(421	)	Total impaired securities		$	13,985					$	(123)				$	19,965		$	(181)			$	33,950				$	(304)

December 31, 2016
December 31, 2019																					December 31, 2019
Securities available for sale:																					Securities available for sale:
U.S. Government agencies	$	12,281	$	(69	)		$	—			$	—			$	12,281		$	(69	)	U.S. Government agencies		$	3,961					$	(12)				$	15,989		$	(178)			$	19,950				$	(190)
U.S. Government sponsored entities & agencies collateralized by mortgage obligations	25,904		(402		)		—				—				25,904			(402		)	U.S. Government sponsored entities & agencies collateralized by mortgage obligations		25,400						(187)					11,244			(144)				36,644					(331)
Mutual Funds	—		—				3,716				(284		)		3,716			(284		)

Total impaired securities	$	38,185	$	(471	)		$	3,716			$	(284	)		$	41,901		$	(755	)	Total impaired securities		$	29,361					$	(199)				$	27,233		$	(322)			$	56,594				$	(521)

Temporarily impaired securities at September 30, ~~2017,~~2020, were comprised of ~~one mutual fund, three~~1 asset-backed security, 3 municipal bonds, 12 U.S. government agency securities, and ~~ten~~4 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~~2 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~~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~~Additionally, OTTI guidance that is specific to purchased beneficial interests including private label mortgage-backed securities. Under this model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

~~Additionally, other-than-temporary-impairment~~ occurs when the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If the Company intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary-impairment shall be recognized in earnings equal to the entire

difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the other-than-temporary-impairment shall be separated into 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

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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.

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.

At September 30, ~~2017~~,2020, the decline in fair value of the ~~impaired mutual fund, the three~~1 asset-backed security, 3 municipal bonds, 12 U.S. government agency securities, and the ~~ten~~4 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~~intend to sell these impaired securities, and it is ~~not~~ more likely than not that it will not 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, ~~2017~~.2020.

During the nine months ended September 30, 2020 and 2019, the Company recognized $89,000 and $128,000 of unrealized holding gains related to equity securities in the consolidated statements of income, respectively. For the quarters ended September 30, 2020 and September 30, 2019, the Company recognized unrealized holding gains of $4,000 and $18,000, respectively.


3.	~~Loans~~

The Company had 0 held-to-maturity or trading securities at September 30, 2020 or December 31, 2019.

3.Loans

Loans are comprised of the following:

(in 000's) September 30, 2017
December 31, 2016
Commercial and Business Loans $ 45,937
$ 47,464
Government Program Loans 1,014
1,541
Total Commercial and Industrial 46,951
49,005
Real Estate – Mortgage:

Commercial Real Estate 199,668
200,213
Residential Mortgages 90,284
87,388
Home Improvement and Home Equity loans 510
599
Total Real Estate Mortgage 290,462
288,200
Real Estate Construction and Development 128,883
130,687
Agricultural 58,505
56,918
Installment and Student Loans 57,583
44,949
Total Loans $ 582,384
$ 569,759


(in 000's)	September 30, 2020		December 31, 2019
Commercial and industrial:
Commercial and business loans	$	39,218	$	44,534
Government program loans	26,524		744
Total commercial and industrial	65,742		45,278
Real estate mortgage:
Commercial real estate	264,013		245,183
Residential mortgages	45,722		45,881
Home improvement and home equity loans	114		173
Total real estate mortgage	309,849		291,237
Real estate construction and development	171,889		138,784
Agricultural	51,587		52,197
Installment and student loans	62,415		69,878
Total loans	$	661,482	$	597,374

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 ~~8.1%~~10.0% of total loans at September 30, ~~2017~~2020 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. Included within the balance of Commercial and industrial loans is $25,889,000 in Paycheck Protection Program ("PPP") loans administrated by the SBA. PPP loans have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.

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Real estate mortgage loans, representing ~~49.9%~~46.8% of total loans at September 30, ~~2017~~,2020, 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.~~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. ~~Although real estate associated with the business is the primary collateral for commercial real estate mortgage loans, the underlying real estate is not the source of repayment.~~

Commercial real estate loans are made under the premise that the loan will be repaid from the borrower's business operations, rental income associated with the real property, or personal assets.

•Residential mortgage loans are provided to individuals to finance or refinance single-family residences. Residential mortgages are not a primary business line offered by the Company, and a majority are conventional mortgages that were purchased as a pool. ~~Most residential mortgages originated~~

•Home Improvement and Home Equity loans comprise a relatively small portion of total real estate mortgage loans. Home equity loans are generally secured by ~~the Company are of a shorter term than conventional mortgages, with maturities ranging from 3 to 15 years on average.~~junior trust deeds, but may be secured by 1st trust deeds.


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

Real estate construction and development loans, representing ~~22.1%~~26.0% of total loans at September 30, ~~2017~~,2020, 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.~~project or from the sale of the constructed homes to individuals.

Agricultural loans represent ~~10.0%~~7.8% of total loans at September 30, ~~2017~~2020 and are generally secured by land, equipment, inventory and receivables. Repayment is from the cash flow of the borrower.

Installment ~~and~~loans, including student loans, represent ~~9.9%~~9.4% of total loans at September 30, ~~2017~~2020 and generally consist of student loans, loans to individuals for household, family and other personal expenditures, ~~such as credit cards,~~ automobiles or other consumer items. ~~Included in installment loans are $51,185,000 in~~See "Note 4 - Student Loans" for specific information on the student loans made to medical and pharmacy school students. Repayment on student loans is deferred until 6 months after graduation. Accrued interest on loans that have not entered repayment status totaled $3,769,000 at September 30, 2017.loan portfolio.

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, ~~2017~~2020 and December 31, ~~2016~~,2019, these financial instruments include commitments to extend credit of ~~$107,580,000~~$204,522,000 and ~~$120,485,000~~,$197,559,000, respectively, and standby letters of credit of ~~$2,058,000~~$3,662,000 and ~~$1,201,000~~,$1,662,000, 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.

The Bank has 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.

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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 September 30, ~~2017~~2020 (in 000's):


September 30, 2020	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	$	0	$	0	$	0	$	0	$	39,218	$	39,218	$	0
Government program loans	0		0		0		0		26,524		26,524		0
Total commercial and industrial	0		0		0		0		65,742		65,742		0
Commercial real estate loans	0		0		0		0		264,013		264,013		0
Residential mortgages	266		0		0		266		45,456		45,722		0
Home improvement and home equity loans	0		0		0		0		114		114		0
Total real estate mortgage	266		0		0		266		309,583		309,849		0

Real estate construction and development loans	0		0		8,573		8,573		163,316		171,889		0
Agricultural loans	0		0		477		477		51,110		51,587		0

Installment and student loans	2,253		429		53		2,735		59,580		62,315		53
Overdraft protection lines	0		0		0		0		30		30		0
Overdrafts	0		0		0		0		70		70		0
Total installment and student loans	2,253		429		53		2,735		59,680		62,415		53
Total loans	$	2,519	$	429	$	9,103	$	12,051	$	649,431	$	661,482	$	53

September 30, 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 $ 249
$ —
$ 22
$ 271
$ 45,666
$ 45,937
$ —
Government Program Loans —
—
—
—
1,014
1,014
—
Total Commercial and Industrial 249
—
22
271
46,680
46,951
—
Commercial Real Estate Loans —
—
—
—
199,668
199,668
—
Residential Mortgages —
—
—
—
90,284
90,284
—
Home Improvement and Home Equity Loans —
14
—
14
496
510
—
Total Real Estate Mortgage —
14
—
14
290,448
290,462
—

Real Estate Construction and Development Loans —
360
—
360
128,523
128,883
—
Agricultural Loans —
—
—
—
58,505
58,505
—
Consumer Loans —
—
—
—
57,313
57,313
—
Overdraft Protection Lines —
—
—
—
40
40
—
Overdrafts —
—
—
—
230
230
—
Total Installment —
—
—
—
57,583
57,583
—
Total Loans $ 249
$ 374
$ 22
$ 645
$ 581,739
$ 582,384
$ —

The following is a summary of delinquent loans at December 31, ~~2016~~2019 (in 000's):


December 31, 2019	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	$	568	$	0	$	75	$	643	$	43,891	$	44,534	$	0
Government program loans	0		0		0		0		744		744		0
Total commercial and industrial	568		0		75		643		44,635		45,278		0
Commercial real estate loans	0		0		0		0		245,183		245,183		0
Residential mortgages	28		0		0		28		45,853		45,881		0
Home improvement and home equity loans	0		0		0		0		173		173		0
Total real estate mortgage	28		0		0		28		291,209		291,237		0
Real estate construction and development loans	0		0		8,825		8,825		129,959		138,784		0
Agricultural loans	957		423		144		1,524		50,673		52,197		0

Installment and student loans	292		657		386		1,335		68,280		69,615		386
Overdraft protection lines	0		0		0		0		33		33		0
Overdrafts	0		0		0		0		230		230		0
Total installment and student loans	292		657		386		1,335		68,543		69,878		386
Total loans	$	1,845	$	1,080	$	9,430	$	12,355	$	585,019	$	597,374	$	386

Table of Contents

December 31, 2016
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 $ —
$ 432
$ —
$ 432
$ 48,009
$ 48,441
$ —
Government Program Loans —
—
290
290
1,251
1,541
—
Total Commercial and Industrial —
432
290
722
49,260
49,982
—
Commercial Real Estate Loans —
—
—
—
199,810
199,810
—
Residential Mortgages —
—
—
—
87,388
87,388
—
Home Improvement and Home Equity Loans —
—
—
—
599
599
—
Total Real Estate Mortgage —
—
—
—
287,797
287,797
—
Real Estate Construction and Development Loans 166
—
1,250
1,416
128,697
130,113
1,250
Agricultural Loans —
—
—
—
56,918
56,918
—
Consumer Loans —
—
965
965
43,785
44,750
—
Overdraft Protection Lines —
—
—
—
48
48
—
Overdrafts —
—
—
—
151
151
—
Total Installment —
—
965
965
43,984
44,949
—
Total Loans $ 166
$ 432
$ 2,505
$ 3,103
$ 566,656
$ 569,759
$ 1,250

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~~90-days or more, unless the asset is both well secured and in the process of collection that will result in repayment in the near future.

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

Other circumstances which jeopardize the ultimate collectability of the loan including certain troubled debt restructurings, identified loan impairment, and certain loans to facilitate the sale of OREO.

Loans meeting any of the preceding criteria are placed on nonaccrual status and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income.

All ~~other~~loans, 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. See Note 4 - Student Loans for specific information on the student loan portfolio.

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~~6 monthly payments on a loan with monthly amortization.

~~Nonaccrual loans totaled~~ ~~$5,145,000~~ ~~and~~ ~~$7,264,000~~ at ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016, respectively.~~ There were no0 remaining undisbursed commitments to extend credit on nonaccrual loans at September 30, ~~2017~~2020 or December 31, ~~2016~~.2019.

The following is a summary of nonaccrual loan balances at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 (in 000's).


	September 30, 2020		December 31, 2019
Commercial and business loans	$	0	$	75
Government program loans	0		0
Total commercial and industrial	0		75

Commercial real estate loans	0		0
Residential mortgages	0		0
Home improvement and home equity loans	0		0
Total real estate mortgage	0		0

Real estate construction and development loans	11,058		11,478
Agricultural loans	477		144
Installment and student loans	0		0

Total nonaccrual loans	$	11,535	$	11,697

September 30, 2017 December 31, 2016
Commercial and Business Loans $ 271
$ 275
Government Program Loans —
290
Total Commercial and Industrial 271
565

Commercial Real Estate Loans 466
1,126
Residential Mortgages —
—
Home Improvement and Home Equity Loans —
—
Total Real Estate Mortgage 466
1,126

Real Estate Construction and Development Loans 4,408
4,608
Agricultural Loans —
—

Consumer Loans —
965
Overdraft Protection Lines —
—
Overdrafts —
—
Total Installment —
965
Total Loans $ 5,145
$ 7,264

Table of Contents

Impaired Loans

A loan is considered impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement.

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

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

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

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

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

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

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


-	~~The observable market price method of measuring the impairment of a loan is only used by the Company when the sale of loans or a loan is in process.~~

- The 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.

Table of Contents

The following is a summary of impaired loans at September 30, ~~2017~~2020 (in 000's).


September 30, 2020	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	$	273	$	274	$	0	$	274	$	0	$	627	$	18
Government program loans	219		220		0		220		0		241		11
Total commercial and industrial	492		494		0		494		0		868		29

Commercial real estate loans	2,027		1,148		888		2,036		171		2,058		90
Residential mortgages	812		446		369		815		16		993		32
Home improvement and home equity loans	0		0		0		0		0		0		0
Total real estate mortgage	2,839		1,594		1,257		2,851		187		3,051		122

Real estate construction and development loans	11,058		11,058		0		11,058		0		11,264		210
Agricultural loans	655		313		343		656		215		692		23
Installment and student loans	0		0		0		0		0		0		0

Total impaired loans	$	15,044	$	13,459	$	1,600	$	15,059	$	402	$	15,875	$	384

September 30, 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 $ 3,590
$ 543
$ 3,061
$ 3,604
$ 567
$ 3,965
$ 63
Government Program Loans 83
54
29
83
4
275
36
Total Commercial and Industrial 3,673
597
3,090
3,687
571
4,240
99

Commercial Real Estate Loans 1,147
—
1,151
1,151
221
1,102
10
Residential Mortgages 2,783
512
2,281
2,793
206
2,643
150
Home Improvement and Home Equity Loans —
—
—
—
—
—
—
Total Real Estate Mortgage 3,930
512
3,432
3,944
427
3,745
160

Real Estate Construction and Development Loans 6,797
6,816
—
6,816
—
6,889
415
Agricultural Loans 887
1
890
891
743
1,170
64

Consumer Loans —
—
—
—
—
322
—
Overdraft Protection Lines —
—
—
—
—
—
—
Overdrafts —
—
—
—
—
—
—
Total Installment —
—
—
—
—
322
—
Total Impaired Loans $ 15,287
$ 7,926
$ 7,412
$ 15,338
$ 1,741
$ 16,366
$ 738

(1) The recorded investment in loans includes accrued interest receivable of ~~$51,000.~~$15.

(2) Information is based on ~~the~~ nine ~~month period~~months ended September 30, ~~2017.~~ 2020.

Table of Contents

The following is a summary of impaired loans at December 31, ~~2016~~2019 (in 000's).


December 31, 2019	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance (1)		Recorded Investment With Allowance (1)		Total Recorded Investment		Related Allowance		Average Recorded Investment (2)		Interest Recognized (2)
Commercial and business loans	$	1,484	$	368	$	1,128	$	1,496	$	606	$	1,930	$	116
Government program loans	257		258		0		258		0		275		18
Total commercial and industrial	1,741		626		1,128		1,754		606		2,205		134

Commercial real estate loans	2,073		1,181		902		2,083		263		2,031		123
Residential mortgages	1,060		517		546		1,063		20		1,577		56
Home improvement and home equity loans	0		0		0		0		0		0		0
Total real estate mortgage	3,133		1,698		1,448		3,146		283		3,608		179

Real estate construction and development loans	11,478		11,478		0		11,478		0		11,572		231
Agricultural loans	684		262		432		694		256		726		57

Installment and student loans	0		0		0		0		0		14		0

Total impaired loans	$	17,036	$	14,064	$	3,008	$	17,072	$	1,145	$	18,125	$	601

December 31, 2016
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 $ 4,635
$ 495
$ 4,158
$ 4,653
$ 757
$ 5,050
$ 302
Government Program Loans 356
356
—
356
—
372
20
Total Commercial and Industrial 4,991
851
4,158
5,009
757
5,422
322

Commercial Real Estate Loans 1,454
—
1,456
1,456
450
1,503
89
Residential Mortgages 2,467
526
1,949
2,475
153
2,874
138
Home Improvement and Home Equity Loans —
—
—
—
—
—
—
Total Real Estate Mortgage 3,921
526
3,405
3,931
603
4,377
227

Real Estate Construction and Development Loans 6,267
6,274
—
6,274
—
8,794
361
Agricultural Loans —
—
—
—
—
5
8

Consumer Loans 965
965
—
965
—
968
35
Overdraft Protection Lines —
—
—
—
—
—
—
Overdrafts —
—
—
—
—
—
—
Total Installment 965
965
—
965
—
968
35
Total Impaired Loans $ 16,144
$ 8,616
$ 7,563
$ 16,179
$ 1,360
$ 19,566
$ 953

(1) The recorded investment in loans includes accrued interest receivable of ~~$35,000.~~$36.

(2) Information is based on the ~~twelve month period~~year ended December 31, ~~2016~~.2019.

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, ~~2017~~2020 and ~~2016~~2019 was ~~$15,681,000~~$15,256,000 and ~~$19,397,000,~~$18,208,000, respectively. Interest income recognized on impaired loans for the quarters ended September 30, ~~2017~~2020 and ~~2016~~2019 was approximately ~~$192,000~~$121,000 and ~~$34,000,~~$120,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately ~~$70,000~~$77,000 and ~~$126,000~~$44,000 for the quarters ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

The average recorded investment in impaired loans for the nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 was ~~$16,366,000~~$15,875,000 and ~~$21,440,000,~~$18,390,000, respectively. Interest income recognized on impaired loans for the nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 was approximately ~~$738,000~~$384,000 and ~~$741,000,~~$454,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately ~~$260,000~~$225,000 and ~~$362,000~~$173,000 for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, 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

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.~~

◦The reduction (absolute or contingent) of the stated interest rate.

◦The extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.

◦The reduction (absolute or contingent) of the face amount or maturity amount of debt as stated in the instrument or agreement.

◦The reduction (absolute or contingent) of accrued interest.

For a restructured loan to return to accrual status there needs to be, among other factors, at least 6 months successful payment ~~history. In addition,~~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, a confirming loan is renewed at market terms, or its outstanding balance is paid off.

There were no TDR additions or defaults for the quarters ended September 30, 2020 or September 30, 2019. There was one addition during the nine months ended September 30, 2020 and none during the nine months ended September 30, 2019

The following tables illustrates TDR ~~activity~~additions and defaults for the periods indicated:


	Nine Months Ended September 30, 2020
($ 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	0	0		0			$	0
Government program loans	0	0		0		0	0
Commercial real estate term loans	0	0		0		0	0
Single family residential loans	0	0		0		0	0
Home improvement and home equity loans	0	0		0		0	0
Real estate construction and development loans	0	0		0		0	0
Agricultural loans	1	179		179		0	0
Installment and student loans	0	0		0		0	0
Overdraft protection lines	0	0		0		0	0
Total loans	1	$	179	$	179	0	$	0

Three Months Ended September 30, 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 —
$ —
$ —
—
$ —
Government Program Loans —
—
—
—
—
Commercial Real Estate Term Loans —
—
—
—
—
Single Family Residential Loans 1
167
167
—
—
Home Improvement and Home Equity Loans —
—
—
—
—
Real Estate Construction and Development Loans —
—
—
—
—
Agricultural Loans 1
587
587
—
—
Consumer Loans —
—
—
—
—
Overdraft Protection Lines —
—
—
—
—
Total Loans 2
$ 754
$ 754
—
$ —

Nine Months Ended September 30, 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 1
178
178
—
—
Commercial Real Estate Term Loans —
—
—
—
—
Single Family Residential Loans 2
404
404
—
—
Home Improvement and Home Equity Loans —
—
—
—
—
Real Estate Construction and Development Loans 1
790
790
—
—
Agricultural Loans 2
1,437
1,437
—
—
Consumer Loans —
—
—
—
—
Overdraft Protection Lines —
—
—
—
—
Total Loans 7
$ 2,878
$ 2,878
—
$ —

~~Three Months Ended September 30, 2016~~

~~($ 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~~

—

~~Agricultural Loans~~

—

~~Consumer Loans~~

—

~~Overdraft Protection Lines~~

—

~~Total Loans~~

—

Nine Months Ended September 30, 2016
($ 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 4
$ 1,021
$ 749
—
$ —
Government Program Loans 1
100
100
—
—
Commercial Real Estate Term Loans —
—
—
—
—
Single Family Residential Loans —
—
—
—
—
Home Improvement and Home Equity Loans —
—
—
—
—
Real Estate Construction and Development Loans —
—
—
—
—
Agricultural Loans —
—
—
—
—
Consumer Loans —
—
—
—
—
Overdraft Protection Lines —
—
—
—
—
Total Loans 5
$ 1,121
$ 849
—
$ —

The Company makes various types of concessions when structuring TDRs including rate ~~reductions,~~discounts, payment extensions, and other-than-temporary forbearance. At September 30, ~~2017~~,2020, the Company had 299 restructured loans totaling ~~$12,150,000~~$4,571,000 as compared to 2813 restructured loans totaling ~~$12,410,000~~$5,187,000 at December 31, ~~2016~~.2019.

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The following tables summarize TDR activity by loan category for the quarters ended September 30, ~~2017~~2020 and September 30, ~~2016.~~2019 (in 000's).


Three Months Ended September 30, 2020	Commercial and Industrial		Commercial Real Estate		Residential Mortgages		Home Improvement and Home Equity		Real Estate Construction Development		Agricultural		Installment and Student Loans		Total
Beginning balance	$	0	$	889	$	1,037	$	0	$	2,536	$	693	$	0	$	5,155

Additions	0		0		0		0		0		0		0		0

Principal (reductions) additions	0		(5)		(491)		0		(50)		(38)		0		(584)
Charge-offs	0		0		0		0		0		0		0		0

Ending balance	$	0	$	884	$	546	$	0	$	2,486	$	655	$	0	$	4,571

Allowance for loan loss	$	0	$	171	$	16	$	0	$	0	$	215	$	0	$	402
Defaults	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0


Three Months Ended September 30, 2017	Commercial and Industrial			Commercial Real Estate		Residential Mortgages			Home Improvement and Home Equity		Real Estate Construction Development			Agricultural			Installment & Other		Total
Three Months Ended September 30, 2019																						Three Months Ended September 30, 2019	Commercial and Industrial		Commercial Real Estate		Residential Mortgages		Home Improvement and Home Equity		Real Estate Construction Development		Agricultural		Installment and Student Loans		Total
Beginning balance	$	1,055		$	1,062	$	2,573		$	—	$	6,868		$	400		$	—	$	11,958		Beginning balance	$	38	$	907	$	1,842	$	0	$	2,738	$	658	$	0	$	6,183

Defaults	—			—		—			—		—			—			—		—
Additions	—			—		167			—		—			587			—		754			Additions	0		0		0		0		0		0		0		0
											—
Principal (reductions) additions	(425		)	85		(52		)	—		(70		)	(100		)	—		(562		)	Principal (reductions) additions	(18)		(5)		(771)		0		(33)		(30)		0		(857)
Charge-offs																						Charge-offs	0		0		0		0		0		(30)		0		(30)

Ending balance	$	630		$	1,147	$	2,688		$	—	$	6,798		$	887		$	—	$	12,150		Ending balance	$	20	$	902	$	1,071	$	0	$	2,705	$	598	$	0	$	5,296

Allowance for loan loss	$	15		$	221	$	206		$	—	$	—		$	743		$	—	$	1,185		Allowance for loan loss	$	0	$	346	$	15	$	0	$	0	$	256	$	0	$	617
Defaults																						Defaults	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

Three Months Ended September 30, 2016 Commercial and Industrial Commercial Real Estate Residential Mortgages Home Improvement and Home Equity Real Estate Construction Development Agricultural Installment
& Other Total
Beginning balance $ 1,236
$ 1,510
$ 2,400
$ —
$ 12,100
$ 6
$ 965
$ 18,217

Defaults —
—
—
—
—
—
—
—
Additions —
—
—
—
—
—
—
—

—

Principal reductions 10
(25 ) (15 ) —
(6,991 ) (5 ) —
(7,026 )

Ending balance $ 1,246
$ 1,485
$ 2,385
$ —
$ 5,109
$ 1
$ 965
$ 11,191

Allowance for loan loss $ 38
$ 472
$ 163
$ —
$ —
$ —
$ —
$ 673

The following tables summarize TDR activity by loan category for the nine months endedSeptember 30, ~~2017~~2020 and September 30, ~~2016~~2019 (in 000's).

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Nine Months Ended September 30, 2017	Commercial and Industrial			Commercial Real Estate			Residential Mortgages			Home Improvement and Home Equity		Real Estate Construction Development			Agricultural			Installment & Other			Total
Nine Months Ended September 30, 2020																								Nine Months Ended September 30, 2020	Commercial and Industrial		Commercial Real Estate		Residential Mortgages		Home Improvement and Home Equity		Real Estate Construction Development		Agricultural		Installment and Student Loans		Total
Beginning balance	$	1,356		$	1,454		$	2,368		$	—	$	6,267		$	—		$	965		$	12,410		Beginning balance	$	9	$	898	$	1,060	$	0	$	2,654	$	566	$	0	$	5,187

Defaults	—			—			—			—		—			—			—			—
Additions	247			—			404			—		790			1,437			—			2,878			Additions	0		0		0		0		0		179		0		179

Principal reductions	(973		)	(307		)	(84		)	—		(259		)	(550		)	(965		)	(3,138		)
Principal (reductions) additions																								Principal (reductions) additions	(9)		(14)		(514)		0		(168)		(90)		0		(795)
Charge-offs																								Charge-offs	0		0		0		0		0		0		0		0

Ending balance	$	630		$	1,147		$	2,688		$	—	$	6,798		$	887		$	—		$	12,150		Ending balance	$	0	$	884	$	546	$	0	$	2,486	$	655	$	0	$	4,571

Allowance for loan loss	$	15		$	221		$	206		$	—	$	—		$	743		$	—		$	1,185		Allowance for loan loss	$	0	$	171	$	16	$	0	$	0	$	215	$	0	$	402
Defaults																								Defaults	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0


Nine Months Ended September 30, 2019	Commercial and Industrial		Commercial Real Estate		Residential Mortgages		Home Improvement and Home Equity		Real Estate Construction Development		Agricultural		Installment and Student Loans		Total
Beginning balance	$	75	$	1,305	$	2,029	$	0	$	2,838	$	812	$	0	$	7,059

Additions	0		0		0		0		0		0		0		0

Principal (reductions) additions	(55)		(403)		(958)		0		(133)		(184)		0		(1,733)
Charge-offs	0		0				0		0		(30)		0		(30)

Ending balance	$	20	$	902	$	1,071	$	0	$	2,705	$	598	$	0	$	5,296

Allowance for loan loss	$	0	$	346	$	15	$	0	$	0	$	256	$	0	$	617
Defaults	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

The Company is working with customers directly affected by COVID-19. The Company has offered and continues to be prepared to offer short-term assistance. As of September 30, 2020, the Company had executed 23 payment deferrals or modifications on outstanding loan balances of $69,814,000 in connection with the COVID-19 relief provided by the CARES Act. These deferrals were generally no more than six months in duration and were not considered troubled debt restructurings in accordance with the CARES Act.

The following tables summarize modification under the CARES Act by loan category as of September 30, 2020 (in 000's).

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Nine Months Ended September 30, 2016 Commercial and Industrial Commercial Real Estate Residential Mortgages Home Improvement and Home Equity Real Estate Construction Development Agricultural
Installment
& Other
Total
Beginning balance $ 898
$ 1,243
$ 3,533
$ —
$ 12,168
$ 16
$ 650
$ 18,508

Defaults —
—
—
—
—
—
—
—
Additions 849
—
—
—
—
—
—
849

Principal additions (reductions) (501 ) 242
(1,148 ) —
(7,059 ) (15 ) 315
(8,166 )

Ending balance $ 1,246
$ 1,485
$ 2,385
$ —
$ 5,109
$ 1
$ 965
$ 11,191

Allowance for loan loss $ 38
$ 472
$ 163
$ —
$ —
$ —
$ —
$ 673


Loan Category	COVID-19 Modified Loan Balance		Total Portfolio Balance

Commercial and Industrial:	$	667	$	65,742

Commercial Real Estate:
Hospitality	39,757		53,711
Health Club	14,775		14,775
Construction and land development	10,836		130,202
Commercial/Office/Retail	2,687		101,195
Residential Mortgages	0		45,722
Home improvement and home equity loans	0		114
All other CRE	1,058		136,019

Agricultural:	0		51,587

Installment and student loans:	34		62,415
Total:	$	69,814	$	661,482

Credit Quality Indicators

As part of its credit monitoring program, the Company utilizes a risk rating system which quantifies the risk the Company estimates it has assumed during the life of a loan. The system rates the strength of the borrower and the facility or transaction, and is designed to provide a program for risk management and early detection of problems.

For each new credit approval, credit extension, renewal, or modification of existing credit facilities, the Company assigns risk ratings utilizing the rating scale identified in this policy. In addition, on an on-going basis, loans and credit facilities are reviewed for internal and external influences impacting the credit facility that would warrant a change in the risk rating. Each ~~loan~~ credit facility is to be given a risk rating that takes into account factors that materially affect credit quality.

When assigning risk ratings, the Company evaluates ~~two~~2 risk rating approaches, a facility rating and a borrower rating as follows:

Facility Rating:

The facility rating is determined by the analysis of positive and negative factors that may indicate that the quality of a particular loan or credit arrangement requires that it be rated differently from the risk rating assigned to the borrower. The Company assesses the risk impact of these factors:

Collateral - The rating may be affected by the type and quality of the collateral, the degree of coverage, the economic life of the collateral, liquidation value and the Company's ability to dispose of the collateral.

Guarantees - The value of third party support arrangements varies widely. Unconditional guaranties from persons with demonstrable ability to perform are more substantial than that of closely related persons to the borrower who offer only modest support.

Unusual Terms - Credit may be extended on terms that subject the Company to a higher level of risk than indicated in the rating of the borrower.

Borrower Rating:

The borrower rating is a measure of loss possibility based on the historical, current and anticipated financial characteristics of the borrower in the current risk environment. To determine the rating, the Company considers at least the following factors:

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- Quality of management

- Liquidity

- Leverage/capitalization

- Profit margins/earnings trend

- Adequacy of financial records

- Alternative funding sources

- Geographic risk

- Industry risk

- Cash flow risk

- Accounting practices

- Asset protection

- Extraordinary risks

The Company assigns risk ratings to loans other than consumer loans and other homogeneous loan pools based on the following scale. The risk ratings are used when determining borrower ratings as well as facility ratings. When the borrower rating and the facility ratings differ, the lowest rating applied is:


-	~~Grades 1 and 2~~ – These grades include loans which are given to high quality borrowers with high credit quality and sound financial strength. Key financial ratios are generally above industry averages and the borrower’s strong earnings history or net worth. These may be secured by deposit accounts or high-grade investment securities.

~~Grade 3~~ – This grade includes loans to borrowers with solid credit quality with minimal risk. The borrower’s balance sheet and financial ratios are generally in line with industry averages, and the borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans assigned this risk rating must have characteristics, which place them well above the minimum underwriting requirements for those departments. Asset-based borrowers assigned this rating must exhibit extremely favorable leverage and cash flow characteristics, and consistently demonstrate a high level of unused borrowing capacity.

Grades 4 and 5 – These include “pass” grade loans to borrowers of acceptable credit quality and risk. The borrower’s balance sheet and financial ratios may be below industry averages, but above the lowest industry quartile. Leverage is above and liquidity is below industry averages. Inadequacies evident in financial performance and/or management sufficiency are offset by readily available features of support, such as adequate collateral, or good guarantors having the liquid assets and/or cash flow capacity to repay the debt. The borrower may have recognized a loss over ~~three~~ or ~~four~~ years, however recent earnings trends, while perhaps somewhat cyclical, are improving and cash flows are adequate to cover debt service and fixed obligations. Real estate and asset-borrowers fully comply with all underwriting standards and are performing according to projections would be assigned this rating. These also include grade 5 loans which are “leveraged” or on management’s “watch list.” While still considered pass loans (loans given a grade 5), the borrower’s financial condition, cash flow or operations evidence more than average risk and short term weaknesses, these loans warrant a higher than average level of monitoring, supervision and attention from the Company, but do not reflect credit weakness trends that weaken or inadequately protect the Company’s credit position. Loans with a grade rating of 5 are not normally acceptable as new credits unless they are adequately secured or carry substantial endorser/guarantors.

~~Grade 6~~ – This grade includes “special mention” loans which are loans that are currently protected but are potentially weak. This generally is an interim grade classification and should usually be upgraded to an Acceptable rating or downgraded to Substandard within a reasonable time period. Weaknesses in special mention loans may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. Special mention loans are often loans with weaknesses inherent from the loan origination, loan servicing, and perhaps some technical deficiencies. The main theme in special mention credits is the distinct probability that the classification will deteriorate to a more adverse class if the noted deficiencies are not addressed by the loan officer or loan management.

~~Grade 7~~ – This grade includes “substandard” loans which are inadequately supported by the current sound net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that may impair the regular liquidation of the debt. Substandard loans exhibit a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Substandard loans also include impaired loans.

~~Grade 8~~ – This grade includes “doubtful” loans which exhibit the same characteristics as the Substandard loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include a proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.

- Grades 1 and 2 – These grades include loans which are given to high quality borrowers with high credit quality and sound financial strength. Key financial ratios are generally above industry averages and the borrower’s strong earnings history or net worth. These may be secured by deposit accounts or high-grade investment securities.

~~Grade 9~~ – This grade includes loans classified “loss” which are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off the asset even though partial recovery may be achieved in the future.

- Grade 3 – This grade includes loans to borrowers with solid credit quality with minimal risk. The borrower’s balance sheet and financial ratios are generally in line with industry averages, and the borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans assigned this risk rating must have characteristics, which place them well above the minimum underwriting requirements for those departments. Asset-based borrowers assigned this rating must exhibit extremely favorable leverage and cash flow characteristics, and consistently demonstrate a high level of unused borrowing capacity.

- Grades 4 and 5 – These include “pass” grade loans to borrowers of acceptable credit quality and risk. The borrower’s balance sheet and financial ratios may be below industry averages, but above the lowest industry quartile. Leverage is above and liquidity is below industry averages. Inadequacies evident in financial performance and/or management sufficiency are offset by readily available features of support, such as adequate collateral, or good guarantors having the liquid assets and/or cash flow capacity to repay the debt. The borrower may have recognized a loss over three or four years, however recent earnings trends, while perhaps somewhat cyclical, are improving and cash flows are adequate to cover debt service and fixed obligations. Real estate and asset-borrowers fully comply with all underwriting standards and are performing according to projections would be assigned this rating. These also include grade 5 loans which are “leveraged” or on management’s “watch list.” While still considered pass loans (loans given a grade 5), the borrower’s financial condition, cash flow or operations evidence more than average risk and short term weaknesses, these loans warrant a higher than average level of monitoring, supervision and attention from the Company, but do not reflect credit weakness trends that weaken or inadequately protect the Company’s credit position. Loans with a grade rating of 5 are not normally acceptable as new credits unless they are adequately secured or carry substantial endorser/guarantors.

- Grade 6 – This grade includes “special mention” loans which are loans that are currently protected but are potentially weak. This generally is an interim grade classification and should usually be upgraded to an Acceptable rating or downgraded to Substandard within a reasonable time period. Weaknesses in special mention loans may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. Special mention loans are often loans with weaknesses inherent from the loan origination, loan servicing, and perhaps some technical deficiencies. The main theme in special mention credits is the distinct probability that the classification will deteriorate to a more adverse class if the noted deficiencies are not addressed by the loan officer or loan management.

- Grade 7 – This grade includes “substandard” loans which are inadequately supported by the current sound net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that may impair the regular liquidation of the debt. Substandard loans exhibit a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Substandard loans also include impaired loans.

- Grade 8 – This grade includes “doubtful” loans which exhibit the same characteristics as the Substandard loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing

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facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include a proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.

- Grade 9 – This grade includes loans classified “loss” which are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off the asset even though partial recovery may be achieved in the future.

The Company did not carry any loans graded as loss at September 30, ~~2017~~2020 or December 31, ~~2016~~.2019.

The following tables summarize the credit risk ratings for commercial, construction, and other non-consumer related loans for September 30, ~~2017~~2020 and December 31, ~~2016~~:2019:


September 30, 2020	Commercial and Industrial		Commercial Real Estate		Real Estate Construction and Development		Agricultural		Total
(in 000's)
Grades 1 and 2	$	26,154	$	2,754	$	0	$	30	$	28,938
Grade 3	0		735		0		0		735
Grades 4 and 5 – pass	37,135		251,963		159,833		49,461		498,392
Grade 6 – special mention	1,945		7,418		998		1,441		11,802
Grade 7 – substandard	524		1,143		11,058		655		13,380
Grade 8 – doubtful	0		0		0		—		0
Total	$	65,758	$	264,013	$	171,889	$	51,587	$	553,247

Commercial and Industrial Commercial Real Estate Real Estate Construction and Development Agricultural Total
September 30, 2017
(in 000's)
Grades 1 and 2 $ 381
$ 2,972
$ —
$ 70
$ 3,423
Grade 3 268
5,600
—
—
5,868
Grades 4 and 5 – pass 40,155
182,089
108,506
55,488
386,238
Grade 6 – special mention 2,635
8,541
2,609
985
14,770
Grade 7 – substandard 3,512
466
17,768
1,962
23,708
Grade 8 – doubtful —
—
—
—
—
Total $ 46,951
$ 199,668
$ 128,883
$ 58,505
$ 434,007


	Commercial and Industrial		Commercial Real Estate			Real Estate Construction and Development				Agricultural			Total
December 31, 2016
December 31, 2019					December 31, 2019				Commercial and Industrial							Commercial Real Estate					Real Estate Construction and Development					Agricultural					Total
(in 000's)	Commercial and Industrial				Commercial Real Estate														Real Estate Construction and Development						Agricultural					Total			(in 000's)
Grades 1 and 2								Grades 1 and 2		$	278				$	2,806					$	0					$	0						$	3,084
Grade 3								Grade 3		0					981						0						0							981
Grades 4 and 5 – pass	34,921				192,699				110,992			56,843					395,455				Grades 4 and 5 – pass		41,757							238,612				126,308					50,234		456,911
Grade 6 – special mention	4,416		621			928				—				5,965			Grade 6 – special mention			919						1,608					998					1,279				4,804
Grade 7 – substandard	4,505		1,126			18,767				—			24,398			Grade 7 – substandard		2,324					1,176						11,478				684					15,662
Grade 8 – doubtful	—		—			—				—			—			Grade 8 – doubtful		0					0					0				0					0
Total	$	49,005	$	200,213		$	130,687			$	56,918		$	436,823		Total		$	45,278				$	245,183				$	138,784			$	52,197				$	481,442

The Company follows consistent underwriting standards outlined in its loan policy for consumer and other homogeneous loans but, does not specifically assign a risk rating when these loans are originated. Consumer loans are monitored for credit risk and are considered “pass” loans until some issue or event requires that the credit be downgraded to special mention or worse. Within the student loan portfolio, the Company does not grade these loan individually, but monitors credit quality indicators such as delinquency and program defined status codes such as forbearance.

The following tables summarize the credit risk ratings for consumer related loans and other homogeneous loans for September 30, ~~2017~~2020 and December 31, ~~2016~~:2019:

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	September 30, 2017													December 31, 2016										September 30, 2020																December 31, 2019
	Residential Mortgages		Home Improvement and Home Equity			Installment and Other				Total				Residential Mortgages		Home Improvement and Home Equity		Installment and Other			Total			Residential Mortgages				Home Improvement and Home Equity				Installment and Student Loans				Total				Residential Mortgages				Home Improvement and Home Equity				Installment and Student Loans				Total
(in 000's)									(in 000's)
Not graded	$	74,355			$			486				$	54,750							$			129,591			$	69,955			$	573	$	41,855	$	112,383		Not graded	$	32,738			$	98			$	61,974			$	94,810			$	33,059	$	155	$	68,752	$	101,966
Pass	14,659		24			2,827				17,510				15,669		26		2,120			17,815		Pass	12,453				16				388				12,857				12,542				18				740				13,300
Special Mention	647		—			—				647				—		—		—			—
Special mention																							Special mention	354				0				0				354				88				0				386				474
Substandard	623		—			6				629				1,764		—		9			1,773		Substandard	177				0				53				230				192				0				0				192
Doubtful	—		—			—				—				—		—		965			965		Doubtful	0				0				0				0				0				0				0				0
Total	$	90,284	$	510		$	57,583			$	148,377			$	87,388	$	599	$	44,949		$	132,936	Total	$	45,722			$	114			$	62,415			$	108,251			$	45,881			$	173			$	69,878			$	115,932

Allowance for Loan Losses

The Company analyzes risk characteristics inherent in each loan portfolio segment as part of the quarterly review of the adequacy of the allowance for loan losses. The following summarizes some of the key risk characteristics for the ~~ten~~10 segments of the loan portfolio (Consumer loans include ~~three~~3 segments):

Commercial and industrial loans – Commercial loans are subject to the effects of economic cycles and tend to exhibit increased risk as economic conditions deteriorate, or if the economic downturn is prolonged. The Company considers this segment to be one of higher risk given the size of individual loans and the balances in the overall portfolio.

Government program loans – This is a relatively a small part of the Company’s loan portfolio, but has historically had a high percentage of loans that have migrated from pass to substandard given their vulnerability to economic cycles.

Commercial real estate loans – This segment is considered to have more risk in part because of the vulnerability of commercial businesses to economic cycles as well as the exposure to fluctuations in real estate prices because most of these loans are secured by real estate. Losses in this segment have however been historically low because most of the loans are real estate secured, and the bank maintains appropriate loan-to-value ratios.

Residential mortgages – This segment is considered to have low risk factors both from the Company and peer statistics. These loans are secured by first deeds of trust. The losses experienced over the past sixteen quarters are isolated to approximately ~~nine~~3 loans and are generally the result of short sales.

Home improvement and home equity loans – Because of their junior lien position, these loans have an inherently higher risk level. Because residential real estate has been severely distressed in the recent past, the anticipated risk for this loan segment has increased.

Real estate construction and development loans –This segment of loans is considered to have a higher risk profile due to construction and market value issues in conjunction with normal credit risks.

Agricultural loans – This segment is considered to have risks associated with weather, insects, and marketing issues. In addition, concentrations in certain crops or certain agricultural areas can increase risk.

Installment and ~~other~~student loans (Includes consumer loans, student loans, overdrafts, and overdraft protection lines) – This segment is higher risk because many of the loans are unsecured. Additionally, in the case of student loans, there are increased risks associated with liquidity as there is a significant time lag between funding of a student loan and eventual repayment.

COVID-19 – As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. While the Company has not yet experienced any charge-offs related to COVID-19, the allowance for credit loss calculation and resulting provision for credit losses are significantly impacted by changes in economic conditions resulting from significant increase in unemployment. Given that economic scenarios have darkened significantly since the pandemic was declared in early March 2020, the credit risk in the loan portfolio has increased resulting in the need for an additional reserve for credit loss.

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The following summarizes the activity in the allowance for credit losses by loan category for the quarters ended September 30, ~~2017~~2020 and ~~2016~~2019 (in 000's).


Three Months Ended	Commercial and Industrial		Real Estate Mortgage		Real Estate Construction Development		Agricultural		Installment and Student Loans		Unallocated		Total
September 30, 2020
Beginning balance	$	756	$	812	$	3,572	$	836	$	2,746	$	140	$	8,862
Provision (reversal of provision) for credit losses	(46)		(147)		439		(68)		(749)		575		4

Charge-offs	0		0		(106)		0		(178)		0		(284)
Recoveries	9		79		37		0		1		0		126
Net recoveries (charge-offs)	9		79		(69)		0		(177)		0		(158)

Ending balance	$	719	$	744	$	3,942	$	768	$	1,820	$	715	$	8,708
Period-end amount allocated to:
Loans individually evaluated for impairment	0		187		0		215		0		0		402
Loans collectively evaluated for impairment	719		557		3,942		553		1,820		715		8,306
Ending balance	$	719	$	744	$	3,942	$	768	$	1,820	$	715	$	8,708

Three Months Ended Commercial and Industrial Real Estate Mortgage Real Estate Construction Development Agricultural Installment & Other Unallocated Total
September 30, 2017
Beginning balance $ 1,764
$ 1,174
$ 2,887
$ 1,589
$ 814
$ 777
$ 9,005
Provision (recovery of provision) for credit losses (271 ) (91 ) 112
81
(69 ) 245
7

Charge-offs (1 ) —
—
—
—
—
(1 )
Recoveries 11
59
—
—
77
—
147
Net charge-offs 10
59
—
—
77
—
146

Ending balance $ 1,503
$ 1,142
$ 2,999
$ 1,670
$ 822
$ 1,022
$ 9,158
Period-end amount allocated to:

Loans individually evaluated for impairment 571
427
—
743
—
—
1,741
Loans collectively evaluated for impairment 932
715
2,999
927
822
1,022
7,417
Ending balance $ 1,503
$ 1,142
$ 2,999
$ 1,670
$ 822
$ 1,022
$ 9,158


Three Months Ended	Commercial and Industrial			Real Estate Mortgage				Real Estate Construction Development		Agricultural			Installment & Other				Unallocated			Total			Three Months Ended		Commercial and Industrial			Real Estate Mortgage			Real Estate Construction Development				Agricultural				Installment and Student Loans				Unallocated			Total
September 30, 2016
September 30, 2019																							September 30, 2019				Commercial and Industrial			Real Estate Mortgage			Real Estate Construction Development				Agricultural				Installment and Student Loans				Unallocated			Total
Beginning balance	$	1,685					$		1,665			$				3,455								$	554			$	1,219			$		331				$	8,909			Beginning balance
Provision (recovery of provision) for credit losses	(15		)	(131		)		271		74			(438		)		243			4			Provision (recovery of provision) for credit losses		(168)			(109)			(3)				(227)				388				124						5

Charge-offs	(4		)	(7		)		—		—			—				(4		)	(15		)	Charge-offs		0			0			0				(36)				(263)				0			(299)
Recoveries	13			6				—		—			1				—			20			Recoveries		7			52			0				0				13				0			72
Net charge-offs	9			(1		)		0		0			1				(4		)	5
Net recoveries (charge-offs)																							Net recoveries (charge-offs)		7			52			0				(36)				(250)				0			(227)

Ending balance	$	1,679		$	1,533			$	3,726	$	628		$	782			$	570		$	8,918		Ending balance		$	1,296		$	807		$	2,327			$	869			$	2,129			$	802		$	8,230
Period-end amount allocated to:																							Period-end amount allocated to:
Loans individually evaluated for impairment	735			635				—					—				—			1,370			Loans individually evaluated for impairment		525			361			0				256				0				0			1,142
Loans collectively evaluated for impairment	944			898				3,726		628			782				570			7,548			Loans collectively evaluated for impairment		771			446			2,327				613				2,129				802			7,088
Ending balance	$	1,679		$	1,533			$	3,726	$	628		$	782			$	570		$	8,918		Ending balance		$	1,296		$	807		$	2,327			$	869			$	2,129			$	802		$	8,230

The following summarizes the activity in the allowance for credit losses by loan category for the nine months endedSeptember 30, ~~2017~~2020 and ~~2016~~2019 (in 000's).

Table of Contents


Nine Months Ended	Commercial and Industrial			Real Estate Mortgage				Real Estate Construction Development			Agricultural			Installment & Other				Unallocated			Total			Nine Months Ended		Commercial and Industrial			Real Estate Mortgage			Real Estate Construction Development				Agricultural				Installment and Student Loans				Unallocated			Total
September 30, 2017
September 30, 2020																								September 30, 2020				Commercial and Industrial			Real Estate Mortgage			Real Estate Construction Development				Agricultural				Installment and Student Loans				Unallocated			Total
Beginning balance	$	1,843					$		1,430				$				3,378								$	666			$	888			$		697				$	8,902			Beginning balance
Provision (recovery of provision) for credit losses	(408		)	(359		)		(379		)	983			(198		)		337			(24		)	Provision (recovery of provision) for credit losses		(625)			(56)			1,455				7				815				542						2,138

Charge-offs	(106		)	(2		)		—			—			—				(12		)	(120		)	Charge-offs		0			0			(358)				0				(1,134)				0			(1,492)
Recoveries	174			73				—			21			132				—			400			Recoveries		22			88			37				0				7				0			154
Net recoveries	68			71				—			21			132				(12		)	280
Net recoveries (charge-offs)																								Net recoveries (charge-offs)		22			88			(321)				0				(1,127)				0			(1,338)

Ending balance	$	1,503		$	1,142			$	2,999		$	1,670		$	822			$	1,022		$	9,158		Ending balance		$	719		$	744		$	3,942			$	768			$	1,820			$	715		$	8,708
Period-end amount allocated to:																								Period-end amount allocated to:
Loans individually evaluated for impairment	571			427				—			743			—				—			1,741			Loans individually evaluated for impairment		0			187			0				215				0				0			402
Loans collectively evaluated for impairment	932			715				2,999			927			822				1,022			7,417			Loans collectively evaluated for impairment		719			557			3,942				553				1,820				715			8,306
Ending balance	$	1,503		$	1,142			$	2,999		$	1,670		$	822			$	1,022		$	9,158		Ending balance		$	719		$	744		$	3,942			$	768			$	1,820			$	715		$	8,708


Nine Months Ended	Commercial and Industrial		Real Estate Mortgage		Real Estate Construction Development		Agricultural		Installment and Student Loans		Unallocated		Total
September 30, 2019
Beginning balance	$	1,673	$	1,015	$	2,424	$	1,131	$	1,559	$	593	$	8,395
Provision (recovery of provision) for credit losses	(441)		(263)		(97)		(226)		833		209		15

Charge-offs	0		(5)		0		(36)		(377)		0		(418)
Recoveries	64		60		0		0		114		0		238
Net (charge-offs) recoveries	64		55		0		(36)		(263)		0		(180)

Ending balance	$	1,296	$	807	$	2,327	$	869	$	2,129	$	802	$	8,230
Period-end amount allocated to:
Loans individually evaluated for impairment	525		361		0		256		0		0		1,142
Loans collectively evaluated for impairment	771		446		2,327		613		2,129		802		7,088
Ending balance	$	1,296	$	807	$	2,327	$	869	$	2,129	$	802	$	8,230

Table of Contents

Nine Months Ended Commercial and Industrial Real Estate Mortgage Real Estate Construction Development Agricultural Installment & Other Unallocated Total
September 30, 2016
Beginning balance $ 1,652
$ 1,449
$ 4,629
$ 655
$ 1,258
$ 70
$ 9,713
Provision (recovery of provision) for credit losses 822
93
(933 ) (27 ) (482 ) 520
(7 )

Charge-offs (846 ) (29 ) —
—
—
(20 ) (895 )
Recoveries 51
20
30
—
6
—
107
Net charge-offs (795 ) (9 ) 30
—
6
(20 ) (788 )

Ending balance $ 1,679
$ 1,533
$ 3,726
$ 628
$ 782
$ 570
$ 8,918
Period-end amount allocated to:

Loans individually evaluated for impairment 735
635
—

—
—
1,370
Loans collectively evaluated for impairment 944
898
3,726
628
782
570
7,548
Ending balance $ 1,679
$ 1,533
$ 3,726
$ 628
$ 782
$ 570
$ 8,918

The following summarizes information with respect to the loan balances at September 30, ~~2017~~2020 and ~~2016.~~2019.


	September 30, 2020						September 30, 2019
	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans		Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans
(in 000's)
Commercial and business loans	$	274	$	38,944	$	39,218	$	1,652	$	45,703	$	47,355
Government program loans	220		26,304		26,524		266		516		782
Total commercial and industrial	494		65,248		65,742		1,918		46,219		48,137

Commercial real estate loans	2,036		261,977		264,013		3,105		221,608		224,713
Residential mortgage loans	815		44,907		45,722		1,074		49,988		51,062
Home improvement and home equity loans	0		114		114		0		184		184
Total real estate mortgage	2,851		306,998		309,849		4,179		271,780		275,959

Real estate construction and development loans	11,058		160,831		171,889		11,529		104,914		116,443

Agricultural loans	656		50,931		51,587		736		59,364		60,100

Installment and student loans	0		62,415		62,415		0		69,489		69,489

Total loans	$	15,059	$	646,423	$	661,482	$	18,362	$	551,766	$	570,128

4.Student Loans

Included in installment loans are $58,677,000 and $65,800,000 in student loans at September 30, 2020 and December 31, 2019, respectively, 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. Accrued interest on loans that had not entered repayment status totaled $2,940,000 at September 30, 2020 and $4,689,000 at December 31, 2019. At September 30, 2020 there were 818 loans within repayment, deferment, and forbearance which represented $24,322,000, $7,044,000, and $5,174,000, respectively. At December 31, 2019, there were 855 loans within repayment, deferment, and forbearance which represented $24,986,000, $4,392,000 and $10,626,000, respectively. As of September 30, 2020 and December 31, 2019, the reserve against the student loan portfolio was $1,761,000 and $2,091,000, respectively. There were 0 TDRs within the portfolio as of September 30, 2020 or December 31, 2019. At September 30, 2020 and December 31, 2019, student loans totaling $53,000 were included in the substandard category and $386,000 in the special mention category, respectively.

ZuntaFi (previously known as Reunion Student Loan Finance Corporation (RSLFC)) is the third-party servicer for the student loan portfolio. ZuntaFi's services include application administration, processing, approval, documenting, funding, and collection. They also provide borrower file custodial responsibilities. Except in cases where applicants/loans do not meet program requirements, or extreme delinquency, ZuntaFi is responsible for complete program management. ZuntaFi is paid a monthly servicing fee based on the outstanding principal balance.

Table of Contents

September 30, 2017 September 30, 2016

Loans
Individually
Evaluated for Impairment

Loans
Collectively
Evaluated for Impairment
Total Loans
Loans
Individually
Evaluated for Impairment

Loans
Collectively
Evaluated for Impairment
Total Loans
(in 000's)
Commercial and Business Loans $ 3,604
$ 42,333
$ 45,937
$ 5,101
$ 52,404
$ 57,505
Government Program Loans 83
931
1,014
365
1,612
1,977
Total Commercial and Industrial 3,687
43,264
46,951
5,466
54,016
59,482

Commercial Real Estate Loans 1,151
198,517
199,668
1,511
179,983
181,494
Residential Mortgage Loans 2,793
87,491
90,284
2,961
98,339
101,300
Home Improvement and Home Equity Loans —
510
510
—
760
760
Total Real Estate Mortgage 3,944
286,518
290,462
4,472
279,082
283,554

Real Estate Construction and Development Loans 6,816
122,067
128,883
12,131
126,043
138,174

Agricultural Loans 891
57,614
58,505
6
46,757
46,763

Installment and Other Loans —
57,583
57,583
965
28,271
29,236

Total Loans $ 15,338
$ 567,046
$ 582,384
$ 23,040
$ 534,169
$ 557,209
The following tables summarize the credit quality indicators for outstanding student loans as of September 30, 2020 and December 31, 2019 (in 000's, except for number of borrowers):


	September 30, 2020					December 31, 2019
	Number of Loans	Amount		Accrued Interest		Number of Loans	Amount		Accrued Interest
School	320	$	12,758	$	2,940	601	$	24,198	$	4,689
Grace	212	9,379		2,434		49	1,598		394
Repayment	547	24,322		577		507	24,986		203
Deferment	162	7,044		445		124	4,392		204
Forbearance	109	5,174		153		224	10,626		188
Total	1,350	$	58,677	$	6,549	1,505	$	65,800	$	5,678


4.	~~Deposits~~

School - The time in which the borrower is still actively in school at least half time. No payments are expected during this stage, though the borrower may begin immediate payments.

Grace - A six month period of time granted to the borrower immediately upon graduation, or if deemed no longer an active student. Interest continues to accrue. Upon completion of the six month grace period the loan is transferred to repayment status. Additionally, if applicable, this status may represent a borrower activated to military duty while in their in-school period, they will be allowed to return to that status once their active duty has expired. The borrower must return to an at least half time status within six months of the active duty end date in order to return to an in-school status.

Repayment - The time in which the borrower is no longer actively in school at least half time, and has not received an approved grace, deferment, or forbearance. Regular payment is expected from these borrowers under an allotted payment plan.

Deferment - May be granted up to 48 months for borrowers who have begun the repayment period on their loans but are (1) actively enrolled in an eligible school at least half time, or (2) are actively enrolled in an approved and verifiable medical residency, internship, or fellowship program.

Forbearance - The period of time during which the borrower may postpone making principal and interest payments, which may be granted for either hardship or administrative reasons. Interest will continue to accrue on loans during periods of authorized forbearance. If the borrower is delinquent at the time the forbearance is granted, the delinquency will be covered by the forbearance and all accrued and unpaid interest from the date of delinquency or if none, from the date of beginning of the forbearance period, will be capitalized at the end of each forbearance period. The term of the loan will not change and payments may be increased to allow the loan to pay off in the required time frame. A forbearance that results in only an insignificant delay in payment, is not considered a concessionary change in terms, provided the borrower affirms the obligation. Forbearance is not an uncommon status designation, this designation is standard industry practice, and is consistent with the succession of students migrating to employed medical professionals.

Student Loan Aging

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. For the three and nine months ended September 30, 2020, $9,000 and $59,000 in accrued interest receivable was reversed, due to charge-offs of $174,000 and $1,121,000, respectively, within the student loan portfolio. For the three and nine months ended September 30, 2019, $13,000 and $20,000 in accrued interest receivable was reversed, due to charge-offs of $235,000 and $338,000, respectively, within the student loan portfolio.

Table of Contents

The following tables summarize the student loan aging for loans in repayment and forbearance as of September 30, 2020 and December 31, 2019 (in 000's, except for number of borrowers):


	September 30, 2020			December 31, 2019
	Number of Borrowers	Amount		Number of Borrowers	Amount
Current or less than 31 days	254	$	26,755	295	$	34,277
31 - 60 days	21	2,259		4	292
61 - 90 days	5	429		7	657
91 - 120 days	1	53		6	386

Total	281	$	29,496	312	$	35,612

5.Deposits

Deposits include the following:


(in 000's)	September 30, 2017		December 31, 2016		(in 000's)	September 30, 2020		December 31, 2019
Noninterest-bearing deposits	$	315,877	$	262,697	Noninterest-bearing deposits	$	430,028	$	311,950
Interest-bearing deposits:					Interest-bearing deposits:
NOW and money market accounts	262,037		235,873		NOW and money market accounts	406,706		360,934
Savings accounts	81,378		75,068		Savings accounts	94,467		80,078
Time deposits:					Time deposits:
Under $250,000	53,702		87,419		Under $250,000	41,379		44,926
$250,000 and over	12,304		15,572		$250,000 and over	22,203		20,474
Total interest-bearing deposits	409,421		413,932		Total interest-bearing deposits	564,755		506,412
Total deposits	$	725,298	$	676,629	Total deposits	$	994,783	$	818,362

Total brokered deposits included in time deposits above	$	9,755	$	28,132


5.	~~Short-term Borrowings/Other Borrowings~~

6.Short-term Borrowings/Other Borrowings

At September 30, ~~2017~~,2020, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling ~~$283,948,000~~,$341,410,000, as well as Federal Home Loan Bank (FHLB) lines of credit totaling ~~$14,400,000~~.$5,111,000. At September 30, ~~2017,~~2020, the Company had an uncollateralized line of credit with Pacific Coast Bankers Bank ~~("PCBB")~~(PCBB) totaling $10,000,000, a Fed Funds line of $10,000,000 with Union Bank, and a Fed Funds line of $20,000,000 with Zions First National Bank. All lines of credit are on an “as available” basis and can be revoked by the grantor at any time. These lines of credit have interest rates that are generally tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or LIBOR. FHLB advances are collateralized by the Company’s stock in the FHLB, investment securities, and certain qualifying mortgage loans.

As of September 30, ~~2017~~, ~~$15,327,000~~2020, $5,582,000 in investment securities at FHLB were pledged as collateral for FHLB advances. Additionally, ~~$410,463,000~~$519,013,000 in secured and unsecured loans were pledged at September 30, ~~2017~~,2020, as collateral for borrowing lines with the Federal Reserve ~~Bank totaling~~ ~~$283,948,000~~.Bank. At September 30, ~~2017~~,2020, the Company had no0 outstanding borrowings.

At December 31, ~~2016~~,2019, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling ~~$323,162,000~~,$313,445,000, as well as Federal Home Loan Bank (“FHLB”) lines of credit totaling ~~$2,037,000~~.$5,815,000. At December 31, ~~2016~~,2019, the Company had an uncollateralized line of credit with Pacific Coast Bankers Bank ("PCBB") and Union Bank totaling $10,000,000 ~~and~~each, with a Fed Funds line of $20,000,000 ~~with~~at Zions First National Bank. All lines of credit are on an “as available” basis and can be revoked by the grantor at any time. These lines of credit generally have interest rates tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or LIBOR. FHLB advances are collateralized by the Company’s stock in the FHLB, investment securities, and certain qualifying mortgage loans.

As of December 31, ~~2016~~, ~~$2,152,000~~2019, $6,201,000 in investment securities at FHLB were pledged as collateral for FHLB advances. Additionally, ~~$471,737,000~~$462,937,000 in secured and unsecured loans were pledged at December 31, ~~2016~~,2019, as collateral for used and unused borrowing lines with the Federal Reserve ~~Bank totaling $323,162,000.~~Bank. At December 31, ~~2016~~,2019, the Company had no0 outstanding borrowings.

~~All lines~~

Table of ~~credit are on an “as available” basis~~Contents

7.Leases

The Company leases land and ~~can be revoked~~premises for its branch banking offices, administration facilities, and ATMs. The initial terms of these leases expire at various dates through 2025. Under the provisions of most of these leases, the Company has the option to extend the leases beyond their original terms at rental rates adjusted for changes reported in certain economic indices or as reflected by market conditions. Lease terms may include options to extend or terminate the ~~grantor at any time.~~lease when it is reasonably certain the Company will exercise that option. As of September 30, 2020, the Company had 12 operating leases and 0 financing leases.

The components of lease expense were as follows:


	Three Months Ended				Nine Months Ended
(in 000's)	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019



Operating lease expense	$	191	$	197	$	570	$	575

Variable lease expense	51		7		169		115

Total	$	242	$	204	$	739	$	690

Supplemental balance sheet information related to leases was as follows:


(in 000's)			September 30, 2020

6.			~~Supplemental Cash Flow Disclosures~~

Nine months ended September 30,
(in 000's) 2017 2016
Cash paid during the period for:
Interest $ 1,313
$ 1,003
Income taxes $ 5,700
$ 1,110
Noncash investing activities:

OREO financed $ —
$ 3,766
Unrealized gain on securities $ 355
$ 118
Stock dividends issued $ 1,220
$ 1,673
Cash dividend declared $ 1,182
$ —


7.	~~Dividends on Common Stock~~
Operating cash flows from operating leases	$	571

ROU assets obtained in exchange for new operating lease liabilities	0

Weighted-average remaining lease term in years for operating leases	5.86

Weighted-average discount rate for operating leases	5.15		%

On ~~March 28, 2017, the Company’s Board~~Maturities of ~~Directors declared a one-percent (1%) stock dividend~~lease liabilities were as follows:


(in 000's)	September 30, 2020
2021	$	682
2022	661
2023	666
2024	562
2025	371
Thereafter	556
Total undiscounted cash flows	3,498
Less: present value discount	(481)
Present value of net future minimum lease payments	$	3,017

8 Supplemental Cash Flow Disclosures


	Nine months ended September 30,
(in 000's)	2020		2019
Cash paid during the period for:
Interest	$	1,814	$	3,012
Income taxes	2,380		4,890
Noncash investing activities:


Unrealized gain on unrecognized post retirement costs	60		42
Unrealized gain on available for sale securities	1,161		317
Unrealized loss on junior subordinated debentures	(779)		(1,748)

Cash dividend declared	1,867		1,865
Adoption of ASU 2016-02: recognition of lease right-of-use (ROU) asset	—		3,395
Adoption of ASU 2016-02: recognition of lease liability	—		3,486

Table of Contents

9.Dividends on the Company’s outstanding common stock. Based upon the number of outstanding common shares on the record date of April 7, 2017, 167,082 additional shares were issued to shareholders on April 17, 2017. Because the stock dividend was considered a “small stock dividend,” approximately $1,219,759 was transferred from retained earnings to common stock based upon the ~~$7.38~~ ~~closing price of the Company’s common stock on the declaration date of~~ ~~March 28, 2017~~. There were no fractional shares paid. Except for earnings-per-share calculations, shares issued for the stock dividend have been treated prospectively for financial reporting purposes. For purposes of earnings per share calculations, the Company’s weighted average shares outstanding and potentially dilutive shares used in the computation of earnings per share have been restated after giving retroactive effect to a 1% ~~stock dividend to shareholders for all periods presented.~~Common Stock

On ~~April 25, 2017,~~September 22, 2020, the Company’s Board of Directors declared a cash dividend of ~~$0.05~~$0.11 per share on the Company's common stock. The dividend was payable on ~~May 17, 2017,~~October 16, 2020, to shareholders of record as of ~~May 8, 2017.~~October 6, 2020. Approximately ~~$846,000~~$1,867,000 was ~~transfered~~transferred from retained earnings to ~~cash~~dividends payable to allow for distribution of the dividend to shareholders. ~~The~~

On June 23, 2020, the Company’s Board of Directors ~~also~~declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on July 15, 2020, to shareholders of record as of July 6, 2020. Approximately $1,866,000 was transferred from retained earnings to dividends payable to allow for distribution of the dividend to shareholders.

On March 24, 2020, the Company’s Board of Directors declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on April 15, 2020, to shareholders of record as of April 6, 2020. Approximately $1,867,000 was transferred from retained earnings to dividends payable to allow for distribution of the dividend to shareholders.

During 2017, the Board of Directors authorized the repurchase of up to $3 million of the outstanding common stock of the Company. The timing of the purchases will depend on certain factors, including but not limited to, market conditions and prices, available funds, and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, or negotiated private transactions. At this time, no shares have been repurchased.

~~On June 27, 2017, the Company’s Board of Directors declared a cash dividend of $0.05~~

10.Net Income per share on the Company's common stock. The dividend was payable on July 21, 2017, to shareholders of record as of July 7, 2017. Approximately $844,000 were transfered from retained earnings to cash to allow for distribution of the dividend to shareholders.Common Share

On September 26, 2017, the Company’s Board of Directors declared a cash dividend of $0.07 per share on the Company's common stock. The dividend is payable on October 19, 2017, to shareholders of record as of October 10, 2017. Approximately $1,182,000 were transfered from retained earnings to other liabilities to allow for distribution of the dividend to shareholders.


8.	~~Net Income per Common Share~~

The following table provides a reconciliation of the numerator and the denominator of the basic EPS computation with the numerator and the denominator of the diluted EPS computation:


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Net income (000's, except per share amounts)	$	2,271	$	4,173	$	7,038	$	12,276

Weighted average shares issued	16,977,239		16,953,744		16,975,648		16,950,474
Add: dilutive effect of stock options	23,262		36,418		17,532		31,145
Weighted average shares outstanding adjusted for potential dilution	17,000,501		16,990,162		16,993,180		16,981,619

Basic earnings per share	$	0.13	$	0.25	$	0.41	$	0.72
Diluted earnings per share	$	0.13	$	0.25	$	0.41	$	0.72
Anti-dilutive stock options excluded from earnings per share calculation	75,000		60,000		88,000		60,000

11.Taxes on Income

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Net income (000's, except per share amounts) $ 2,740
$ 2,040
$ 7,004
$ 5,830

Weighted average shares issued 16,885,615
16,881,422
16,885,578
16,880,835
Add: dilutive effect of stock options 21,652
9,644
18,485
6,243
Weighted average shares outstanding adjusted for potential dilution 16,907,267
16,891,066
16,904,063
16,887,078

Basic earnings per share $ 0.16
$ 0.12
$ 0.41
$ 0.35
Diluted earnings per share $ 0.16
$ 0.12
$ 0.41
$ 0.35
Anti-dilutive stock options excluded from earnings per share calculation 30,000
21,000
30,000
21,000

~~Prior year anti-dilutive stock options excluded from earnings per share calculation have been restated to reflect the impact of stock dividends.~~


9.	~~Taxes on Income~~

The Company periodically reviews its tax positions under the accounting standards related to uncertainty in income taxes, which defines the criteria that an individual tax position would have to meet for some or all of the income tax benefit to be recognized in a taxable entity’s financial statements. Under the guidelines, an entity should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that the position will be sustained on examination. The term “more likely than not” means a likelihood of more than 50 percent. In assessing whether the more-likely-than-not criterion is met, the entity should assume that the tax position will be reviewed by the applicable taxing authority and all available information is known to the taxing authority.

The Company periodically evaluates its deferred tax assets to determine whether a valuation allowance is required based upon a determination that some or all of the deferred assets may not be ultimately realized. At September 30, ~~2017~~2020 and December 31, ~~2016~~,2019, the Company had no0 recorded valuation allowance.

The Company ~~and its subsidiary file income tax returns in the U.S federal jurisdiction, and several states within the U.S. There are~~is no ~~filings in foreign jurisdictions. During 2014, the Company began the process~~longer subject to ~~amend its California state tax returns~~IRS examination for ~~the~~ years 2009 through 2012 to file a combined report on a unitary basis with the Company and USB Investment Trust. The amended returns for 2009, 2010, and 2011 were filed in 2014, 2015, and 2016 respectively. The amended return for 2012 was filed during 2016. During the third quarterbefore 2015.

Table of 2016, the IRS notified the Company it would be conducting an examination of the Company's 2014 federal return. As of September 30, 2017, the Company is unaware of any change in tax positions as a result of the IRS examination.Contents

The Company's policy is to recognize any interest or penalties related to uncertain tax positions in income tax expense. Interest and penalties recognized during the periods ended September 30, ~~2017~~2020 and ~~2016~~2019 were insignificant.

The Company reported a provision for income taxes of $2,800,000 for the nine months ended September 30, 2020 as compared to the $4,989,000 provision reported in the comparable period of 2019. The effective tax rate was 28.46% for the nine months ended September 30, 2020 as compared to 28.90% for the comparable period of 2019.


~~10.~~	~~Junior Subordinated Debt/Trust Preferred Securities~~

12.Junior Subordinated Debt/Trust Preferred Securities

Effective September 30, 2009 and beginning with the ~~quarterly~~ interest payment due October 1, 2009, the Company elected to defer interest payments on the Company's ~~$15.0~~$15.0 million of junior subordinated debentures relating to its trust preferred ~~securities. The terms~~securities for the allowable five-year period. Interest payments were subsequently resumed at the end of the ~~debentures and trust indentures allow for the Company to defer interest payments for up to~~ 20 consecutive quarters without default or penalty. During the period that the interest deferrals were elected, the Company continued to record interest expense associated with the debentures. As of June 30, 2014, the Company ended the extension period, paid all accrued and unpaid interest, and is currently making quarterly interest payments. The Company may redeem the junior subordinated debentures at any time at par.

During August 2015, the Bank purchased $3.0 million of the Company's junior subordinated debentures related to the Company's trust preferred securities at a fair value discount of 40%. Subsequently, inallowable deferment. In September 2015, the Company ~~purchased those shares from the Bank and canceled~~redeemed $3.0 million inat par ~~value of the junior subordinated debentures, realizing a $78,000 gain on redemption.~~value. The contractual principal balance of the Company's debentures relating to its trust preferred securities is $12.0 million as of September 30, ~~2017.~~2020. The Company may redeem the junior subordinated debentures at any time at par.

The ~~fair value guidance generally permits the measurement of selected eligible financial instruments at fair value at specified election dates. Effective January 1, 2008, the~~ Company ~~elected the fair value option~~accounts for its junior subordinated debt issued under USB Capital Trust ~~II.~~II at fair value. The Company believes the election of fair value accounting for the junior subordinated debentures better reflects the true economic value of the debt instrument on the balance sheet. ~~The~~As of September 30, 2020, the rate paid on the junior subordinated debt issued under USB Capital Trust II is 3-month LIBOR plus 129 basis points, and is adjusted quarterly.

At September 30, ~~2017~~2020, the Company performed a fair value measurement analysis on its junior subordinated debt using a cash flow model approach to determine the present value of those cash flows. The cash flow model utilizes the forward 3-month LIBOR curve to estimate future quarterly interest payments due over the ~~thirty-year~~ life of the debt instrument. These cash flows were discounted at a rate which incorporates a current market rate for similar-term debt instruments, adjusted for additional credit and liquidity risks associated with the junior subordinated debt. We believe the ~~5.89%~~3.83% discount rate used represents what a market participant would consider under the circumstances based on current market assumptions. At September 30, ~~2017,~~2020, the total cumulative gain recorded on the debt is ~~$3,008,000.~~$2,432,000.

The net fair value calculation performed at as of September 30, ~~2017~~2020 resulted in a net pretax ~~loss~~gain adjustment of ~~$688,000~~ (~~$405,000~~,$672,000 ($473,000, net of tax) for the nine months endedSeptember 30, ~~2017~~,2020 compared to a net pretax ~~gain~~loss adjustment of ~~$48,000~~ (~~$28,000~~,$177,000 ($126,000, net of tax) for the nine months endedSeptember 30, ~~2016. Fair~~2019.

For the nine months ended September 30, 2020, the net $672,000 ($473,000, net of tax) fair value ~~gains and losses are reflected~~gain adjustment was separately presented as a ~~component~~$1,451,000 gain ($1,022,000, net of ~~noninterest income~~tax) recognized on the consolidated statements of income, and a $779,000 loss ($549,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. For the nine months ended September 30, 2019, the net $177,000 ($126,000, net of tax) fair value loss adjustment was separately presented as a $1,571,000 gain ($1,107,000, net of tax) recognized on the consolidated statements of income, and a $1,748,000 loss ($1,233,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. The Company calculated the change in the discounted cash flows based on updated market credit spreads for the periods ended.

The net fair value calculation performed atas of September 30, ~~2017~~2020 resulted in a net pretax loss adjustment of ~~$88,000~~$344,000 ($~~52,000,~~243,000, net of tax) for the ~~three months~~quarter ended September 30, ~~2017,~~2020 compared to a net pretax gain adjustment of ~~$423,000~~$159,000 ($~~249,000,~~112,000, net of tax) for the ~~three months~~quarter ended September 30, ~~2016. Fair~~2019.

For the quarter ended September 30, 2020, the net $344,000 ($243,000, net of tax) fair value ~~gains and losses are reflected~~loss adjustment was separately presented as a ~~component~~$18,000 loss ($13,000, net of ~~noninterest income~~tax) recognized on the consolidated statements of income, and a $326,000 loss ($230,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. For the quarter ended September 30, 2019, the net $159,000 ($112,000, net of tax) fair value gain adjustment was separately presented as a $660,000 gain ($465,000, net of tax) recognized on the consolidated statements of income, and a $501,000 loss ($353,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. The Company calculated the change in the discounted cash flows based on updated market credit spreads for the periods ended.


~~11.~~	~~Fair Value Measurements and Disclosure~~

13.Fair Value Measurements and Disclosure

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The following summary disclosures are made in accordance with the guidance provided by ASC Topic 825, Fair Value Measurements and Disclosures ~~(formerly Statement of Financial Accounting Standards No. 107,~~ ~~Disclosures about Fair Value of Financial Instruments~~), which requires the disclosure of fair value information about both on- and off-balance sheet financial instruments where it is practicable to estimate that value.

Generally accepted accounting guidance clarifies the definition of fair value, describes methods used to appropriately measure fair value in accordance with generally accepted accounting principles and expands fair value disclosure requirements. This guidance applies whenever other accounting pronouncements require or permit fair value measurements.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2, and Level 3). Level 1 inputs are unadjusted quoted prices in active markets (as defined) for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability, and reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).

The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized at the periods indicated:


September 30, 2020
(in 000's)	Carrying Amount	Estimated Fair Value	Quoted Prices In Active Markets for Identical Assets Level 1	Significant Other Observable Inputs Level 2	Significant Unobservable Inputs Level 3
Financial Assets:


Investment securities	91,782	91,782	3,865	87,917	0
Loans	651,736	645,098	0	0	645,098
Accrued interest receivable	10,099	10,099	0	10,099	0
Financial Liabilities:
Deposits:
Noninterest-bearing	430,028	430,210	430,210	0	0
NOW and money market	406,706	406,707	406,707	0	0
Savings	94,467	94,467	94,467	0	0
Time deposits	63,582	63,931	0	0	63,931
Total deposits	994,783	995,315	931,384	0	63,931
Junior subordinated debt	10,081	10,081	0	0	10,081
Accrued interest payable	36	36	0	36	0

Table of Contents

September 30, 2017
(in 000's) Carrying Amount Estimated Fair Value Quoted Prices In Active Markets for Identical Assets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3
Financial Assets:
Cash and cash equivalents $ 159,892
$ 159,892
$ 159,892
$ —
$ —
Interest-bearing deposits 654
654
—
654
—
Investment securities 48,356
48,356
3,783
44,573
—
Loans 574,443
569,970
—
—
569,970
Accrued interest receivable 5,846
5,846
—
5,846
—
Financial Liabilities:

Deposits:

Noninterest-bearing 315,877
315,877
315,877
—
—
NOW and money market 262,037
262,037
262,037
—
—
Savings 81,378
81,378
81,378
—
—
Time deposits 66,006
65,658
—
—
65,658
Total deposits 725,298
724,950
659,292

65,658
Junior subordinated debt 9,534
9,534
—
—
9,534
Accrued interest payable 41
41
—
41
—


December 31, 2019											December 31, 2019
(in 000's)											(in 000's)	Carrying Amount	Estimated Fair Value	Quoted Prices In Active Markets for Identical Assets Level 1	Significant Other Observable Inputs Level 2	Significant Unobservable Inputs Level 3
Financial Assets:											Financial Assets:

December 31, 2016
(in 000's)	Carrying Amount		Estimated Fair Value		Quoted Prices In Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Financial Assets:
Cash and cash equivalents	$	113,032	$	113,032	$	113,032	$	—	$	—
Interest-bearing deposits	650		650		—		650		—
Investment securities	57,491		57,491		3,716		53,775		—		Investment securities	80,088	80,088	3,776	76,312	0
Loans	561,932		557,914		—		—		557,914		Loans	588,646	581,695	0	0	581,695
Accrued interest receivable	3,895		3,895		—		3,895		—		Accrued interest receivable	8,208	8,208	0	8,208	0
Financial Liabilities:											Financial Liabilities:
Deposits:											Deposits:
Noninterest-bearing	262,697		262,697		262,697		—		—		Noninterest-bearing	311,950	311,950	311,950	0	0
NOW and money market	235,873		235,873		235,873		—		—		NOW and money market	360,934	360,934	360,934	0	0
Savings	75,068		75,068		75,068		—		—		Savings	80,078	80,078	80,078	0	0
Time deposits	102,991		102,743		—		—		102,743		Time deposits	65,400	65,236	0	0	65,236
Total deposits	676,629		676,381		573,638		—		102,743		Total deposits	818,362	818,198	752,962	0	65,236
Junior subordinated debt	8,832		8,832		—		—		8,832		Junior subordinated debt	10,808	10,808	0	0	10,808
Accrued interest payable	76		76		—		76		—		Accrued interest payable	59	59	0	59	0

The Company performs fair value measurements on certain assets and liabilities as the result of the application of current accounting guidelines. Some fair value measurements, such as ~~available-for-sale~~investment securities ~~(AFS)~~ and junior subordinated debt are performed on a recurring basis, while others, such as impairment of loans, other real estate owned, goodwill and other intangibles, are performed on a nonrecurring basis.

The Company’s Level 1 financial assets consist of money market funds and highly liquid mutual funds for which fair values are based on quoted market prices. The Company’s Level 2 financial assets include highly liquid debt instruments of U.S. government agencies, collateralized mortgage obligations, and debt obligations of states and political subdivisions, whose fair

values are obtained from readily-available pricing sources for the identical or similar underlying security that may, or may not, be actively traded. The Company’s Level 3 financial assets include certain instruments where the assumptions may be made by us or third parties about assumptions that market participants would use in pricing the asset or liability. From time to time, the Company recognizes transfers between Level 1, 2, and 3 when a change in circumstances warrants a transfer. There were no transfers in or out of Level 1 and Level 2 fair value measurements during the ~~three or~~ nine ~~month periods~~months ended September 30, ~~2017~~.2020.

The following methods and assumptions were used in estimating the fair values of financial ~~instruments:~~

~~Cash and Cash Equivalents~~ ~~- The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate their estimated fair values.~~

~~Interest-bearing Deposits –~~ ~~Interest bearing deposits in other banks consist of fixed-rate certificates of deposits. Accordingly,~~instruments measured at fair value ~~has been estimated based upon interest rates currently being offered~~ on ~~deposits with similar characteristics~~a recurring and ~~maturities.~~non-recurring basis:

Investment Securities – Available for sale and marketable equity securities are valued based upon open-market price quotes obtained from reputable third-party brokers that actively make a market in those securities. Market pricing is based upon specific CUSIP identification for each individual security. To the extent there are observable prices in the market, the mid-point of the bid/ask price is used to determine fair value of individual securities. If that data is not available for the last 30 days, a Level 2-type matrix pricing approach based on comparable securities in the market is utilized. Level 2 pricing may include using a forward spread from the last observable trade or may use a proxy bond like a TBA mortgage to come up with a price for the security being valued. Changes in fair market value are recorded through other comprehensive loss as the securities are available for sale.

~~Loans~~ - Fair values of variable rate loans, which reprice frequently and with no significant change in credit risk, are based on carrying values adjusted for credit risk. Fair values for all other loans, except impaired loans, are estimated using discounted cash flows over their remaining maturities, using interest rates at which similar loans would currently be offered to borrowers with similar credit ratings and for the same remaining maturities. The allowance for loan loss is considered to be a reasonable estimate of loan discount for credit quality concerns.

Impaired Loans - Fair value measurements for collateral dependent impaired loans are performed pursuant to authoritative accounting guidance and are based upon either collateral values supported by third party appraisals and observed market prices. Collateral dependent loans are measured for impairment using the fair value of the collateral. Changes are recorded directly as an adjustment to current earnings.

Other Real Estate Owned - Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

~~Deposits~~ ~~– Fair values for transaction and savings accounts are equal to the respective amounts payable on demand (i.e., carrying amounts). Fair values~~

Table of ~~fixed-maturity certificates of deposit were estimated using the rates currently offered for deposits with similar remaining maturities.~~Contents

Junior Subordinated Debt – The fair value of the junior subordinated debt was determined based upon a discounted cash flows model utilizing observable market rates and credit characteristics for similar debt instruments. In its analysis, the Company used characteristics that market participants generally use, and considered factors specific to (a) the liability, (b) the principal (or most advantageous) market for the liability, and (c) market participants with whom the reporting entity would transact in that market. Cash flows are discounted at a rate which incorporates a current market rate for similar-term debt instruments, adjusted for credit and liquidity risks associated with similar junior subordinated debt and circumstances unique to the Company. The Company believes that the subjective nature of ~~theses~~these inputs, ~~due primarily to~~and credit concerns in the ~~current economic environment,~~capital markets and inactivity in the trust preferred markets that have limited the observability of the market spreads, require the junior subordinated debt to be classified as a Level 3 fair value.

~~Accrued Interest Receivable and Payable- The carrying value of these instruments is a reasonable estimate of fair value.~~

~~Off-Balance Sheet Instruments~~ - Off-balance sheet instruments consist of commitments to extend credit, standby letters of credit and derivative contracts. Fair values of commitments to extend credit are estimated using the interest rate currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present

~~counterparties’ credit standing. There was no material difference between the contractual amount and the estimated fair value of commitments to extend credit at~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~.

Fair values of standby letters of credit are based on fees currently charged for similar agreements. The fair value of commitments generally approximates the fees received from the customer for issuing such commitments. These fees are not material to the Company’s consolidated balance sheets and results of operations.

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at September 30, ~~2017~~2020 and December 31, ~~2016:~~2019:

September 30, 2017

December 31, 2016

September 30, 2020

December 31, 2019

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average

Junior Subordinated Debt

Discounted cash flow

Discount Rate

5.89%

Junior Subordinated Debt

Discounted cash flow

Discount Rate

6.46%

Junior Subordinated Debt

Discounted cash flow

Market credit risk adjusted spreads

3.83%

Junior Subordinated Debt

Discounted cash flow

Market credit risk adjusted spreads

4.46%

Management believes that the credit risk adjusted spread utilized in the fair value measurement of the junior subordinated debentures carried at fair value is indicative of the nonperformance risk premium a willing market participant would require under current market conditions, that is, the inactive market. Management attributes the change in fair value of the junior subordinated debentures during the period to market changes in the nonperformance expectations and pricing of this type of debt, and not as a result of changes to our entity-specific credit risk. The narrowing of the credit risk adjusted spread above the Company’s contractual spreads has primarily contributed to the negative fair value adjustments.debt. Generally, an increase in the credit risk adjusted spread and/or a decrease in the three month LIBOR swap curve will result in positive fair value adjustments (and decrease the fair value measurement). Conversely, a decrease in the credit risk adjusted spread and/or an increase in the three month LIBOR swap curve will result in negative fair value adjustments (and increase the fair value measurement). The decrease in discount rate between the periods ended September 30, ~~2017~~2020 and December 31, ~~2016~~2019 is primarily due to decreases in rates for similar debt instruments.

Table of Contents

The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of September 30, ~~2017~~2020 (in 000’s):


Description of Assets	September 30, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
AFS Securities (2):
U.S. Government agencies	$	34,942	$	0	$	34,942	$	0
U.S. Government collateralized mortgage obligations	42,897		0		42,897		0
Asset-backed securities	3,828		0		3,828		0
Municipal bonds	1,058		0		1,058		0
Corporate bond	5,192		0		5,192		0
Total AFS securities	87,917		0		87,917		0

Marketable equity securities (2)	3,865		3,865		0		0

Impaired loans (1):


RE construction & development	3,332		0		0		3,332


Total impaired loans	3,332		0		0		3,332

Other real estate owned (1)	5,018		0		0		5,018

Total	$	95,114	$	3,865	$	87,917	$	3,332

Description of Assets September 30, 2017
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
AFS Securities (2):
U.S. Government agencies $ 20,970
$ —
$ 20,970
$ —
U.S. Government collateralized mortgage obligations 23,603
—
23,603
—
Mutual Funds 3,783
3,783
—
—
Total AFS securities $ 48,356
$ 3,783
$ 44,573
$ —

Total $ 48,356
$ 3,783
$ 44,573
$ —


Description of Liabilities	September 30, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Junior subordinated debt (2)	$	10,081	0	0	$	10,081
Total	$	10,081	0	0	$	10,081

(1)Nonrecurring

(2)Recurring

Description of Liabilities September 30, 2017
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Junior subordinated debt (2) $ 9,534
—
—
$ 9,534
Total $ 9,534
—
—
$ 9,534

~~(1)Nonrecurring~~

~~(2)Recurring~~

~~The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of~~ ~~December 31, 2016~~ ~~(in 000’s):~~

Description of Assets December 31, 2016
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
AFS Securities (2):
U.S. Government agencies $ 23,203
$ —
$ 23,203
$ —
U.S. Government collateralized mortgage obligations 30,572
—
30,572
—
Mutual Funds 3,716
3,716
—
—
Total AFS securities 57,491
3,716
53,775
$ —
Impaired Loans (1):

Commercial and industrial 301
—
—
301
Total impaired loans $ 301
$ —
$ —
$ 301

Total $ 57,792
$ 3,716
$ 53,775
$ 301

Description of Liabilities December 31, 2016
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Junior subordinated debt (2) $ 8,832
$ —
$ —
$ 8,832
Total $ 8,832
$ —
$ —
$ 8,832

~~(1)Nonrecurring~~

~~(2)Recurring~~

~~The Company did not record a write-down on other real estate owned during the~~ ~~nine months endedSeptember 30, 2017~~ ~~or the year ended December 31, 2016.~~

The following table presents quantitative information about Level 3 fair value measurements for the Company's assets measured at fair value on a non-recurring basis at September 30, 2020 (in 000's).

September 30, 2020

Financial Instrument

Fair Value

Valuation Technique

Unobservable Input

Adjustment Percentage

Impaired Loans:

RE construction & development

$3,332

Fair Value of Collateral Method for Collateral Dependent Loans

Adjustment for difference between appraised value and net realizable value

7.02%

Other Real Estate Owned:

$5,018

Fair Value of Collateral Method for Collateral Dependent Loans

Adjustment for difference between appraised value and net realizable value

13.69%

The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of December 31, ~~2016~~2019 (in ~~000's). There were no~~000’s):

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Description of Assets	December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
AFS Securities (2):
U.S. Government agencies	$	28,699	$	0	$	28,699	$	0
U.S. Government collateralized mortgage obligations	47,613		0		47,613		0
Total AFS securities	76,312		0		76,312		$	0

Marketable equity securities (2)	3,776		3,776		0		0
Impaired Loans (1):

Real estate mortgage	144		0		0		144



Total impaired loans	144		0		0		144


Total	$	80,232	$	3,776	$	76,312	$	144


Description of Liabilities	December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Junior subordinated debt (2)	$	10,808	$	0	$	0	$	10,808
Total	$	10,808	$	0	$	0	$	10,808

(1)Nonrecurring

(2)Recurring

The following table presents quantitative information about Level 3 fair value measurements for the Company's assets measured at fair value on a non-recurring basis ~~as of September 30, 2017.~~at December 31, 2019 (in 000's).

December 31, 2019

Financial Instrument

Fair Value

Valuation Technique

Unobservable Input

Adjustment Percentage

Impaired Loans:

Real estate mortgage

$144

Fair Value of Collateral Method for Collateral Dependent Loans

Adjustment for difference between appraised value and net realizable value

6.00%

December 31, 2016
Financial Instrument Fair Value Valuation Technique Unobservable Input Range, Weighted Average
Impaired Loans:
Commercial and industrial $ 301
Sales Comparison Approach Adjustment for difference between comparable sales 7% - 29%, 19.1%

The following tables provide a reconciliation of assets and liabilities at fair value using significant unobservable inputs (Level 3) on a recurring basis during the ~~three and~~ ~~nine months~~quarters endedSeptember 30, ~~2017~~2020 and ~~2016~~2019 (in 000’s):

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	Three Months Ended September 30, 2017		Three Months Ended September 30, 2016		Nine Months Ended September 30, 2017		Nine Months Ended September 30, 2016				Three Months Ended September 30, 2020		Three Months Ended September 30, 2019		Nine Months Ended September 30, 2020		Nine Months Ended September 30, 2019
Reconciliation of Liabilities:	Junior Subordinated Debt		Junior Subordinated Debt		Junior Subordinated Debt		Junior Subordinated Debt			Reconciliation of Liabilities:	Junior Subordinated Debt		Junior Subordinated Debt		Junior Subordinated Debt		Junior Subordinated Debt
Beginning balance	$	9,441	$	7,837	$	8,832	$	8,300		Beginning balance	$	9,771	$	10,496	$	10,808	$	10,155
Total loss (gain) included in earnings	88		423		688		(48		)
Other accrued interest	5		2		14		10
Gross loss (gain) included in earnings										Gross loss (gain) included in earnings	18		(660)		(1,451)		(1,571)
Gross loss related to changes in instrument specific credit risk										Gross loss related to changes in instrument specific credit risk	326		502		779		1,748
Change in accrued interest										Change in accrued interest	(34)		(8)		(55)		(2)
Ending balance	$	9,534	$	8,262	$	9,534	$	8,262		Ending balance	$	10,081	$	10,330	$	10,081	$	10,330
The amount of total loss (gains) for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date	$	88	$	423	$	688	$	(48	)
The amount of total loss (gain) for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date										The amount of total loss (gain) for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date	$	18	$	(660)	$	(1,451)	$	(1,571)


~~12.~~	~~Goodwill and Intangible Assets~~

14.Goodwill and Intangible Assets

At September 30, ~~2017~~,2020, the Company had goodwill in the amount of $4,488,000 in connection with various business combinations and purchases. This amount was unchanged from the balance of $4,488,000 at December 31, ~~2016~~.2019. While goodwill is not amortized, the Company does conduct periodic impairment analysis on goodwill at least annually or more often as conditions require. The Company performed ~~its~~an interim analysis of goodwill impairment, due to the triggering event of the current stock price falling below the Company's calculated book value. During the three and nine months ended September 30, 2020, the Company determined that COVID-19 was a triggering event based on adverse impact on our business and results of operations. At September 30, 2020, the Company completed its qualitative assessment of goodwill and concluded that it is more likely than not that the fair value of the reporting units exceeds the carrying value. However, it is reasonably possible if adverse economic conditions or recent decrease in our stock price and market capitalization as a results of the COVID-19 pandemic were to be deemed sustained in the future rather than temporary, it may significantly affect the fair value of our goodwill ~~was not impaired at~~and result in impairment charges.

15.Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, included in shareholders’ equity, are as follows:


	September 30, 2020						December 31, 2019
(in 000's)	Net unrealized loss on available for sale securities		Unfunded status of the supplemental retirement plans		Net unrealized gain on junior subordinated debentures		Net unrealized loss on available for sale securities		Unfunded status of the supplemental retirement plans		Net unrealized gain on junior subordinated debentures
Beginning balance	$	(175)	$	(675)	$	218	$	(372)	$	(459)	$	1,505
Current period comprehensive income (loss)	818		43		(549)		197		(216)		(1,287)
Ending balance	$	643	$	(632)	$	(331)	$	(175)	$	(675)	$	218
Accumulated other comprehensive loss					$	(320)					$	(632)

16.Investment in York Monterey Properties

In the nine months ended September 30, ~~2017.~~2020, the Bank wholly-owns an interest in subsidiary York Monterey Properties Inc., organized as a California corporation. The Bank capitalized the subsidiary through a transfer of 8 unimproved lots at a historical cost of $5.3 million comprised of approximately 186.97 acres in the York Highlands subdivision of the Monterra Ranch residential development in Monterey County, California ("Properties") together with $250,000 in cash. The Bank transferred the Properties to York Monterey Properties Inc, in order to maintain ownership beyond the ten year regulatory holding period applicable to a national bank. The Bank acquired 5 of the lots through a non-judicial foreclosure on or about

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May 29, 2009. In addition, the Bank purchased 3 of the lots from another bank. The Bank had continuously held the Properties since the date of foreclosure and acquisition. At the time of transfer, the Properties had reached the end of the ten year regulatory holding period limit.


~~13.~~	~~Subsequent Events~~

As of September 30, 2020, the Bank's investment in York Monterey Properties Inc. totaled $4,759,000. York Monterey Properties Inc. is included within the consolidated financial statements of the Company, with $4,582,000 of the total investment recognized within the balance of other real estate owned on the consolidated balance sheets.

17.Subsequent Events

Subsequent eventsare events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the consolidated financial statements were issued and have identified no subsequent events requiring disclosure.

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

Overview

Certain matters discussed or incorporated by reference in this Quarterly Report of Form 10-Q are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, but are not limited to, those described in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Such risks and uncertainties include, but are not limited to, the following factors: i) the effects of the COVID-19 pandemic, including the effects of the steps being taken to address the pandemic and their impact on the Company’s market and employees; ii) Severe weather or natural disasters, such as wildfires, earthquakes, drought, or flood; iii) competitive pressures in the banking industry and changes in the regulatory environment; ~~ii)~~iv) exposure to changes in the interest rate environment and the resulting impact on the Company’s interest rate sensitive assets and liabilities; ~~iii)~~v) decline in the health of the economy nationally or regionally which could reduce the demand for loans or reduce the value of real estate collateral securing most of the Company’s loans; ~~iv)~~vi) credit quality deterioration that could cause an increase in the provision for loan losses; v)vii) Asset/Liability matching risks and liquidity risks; viii) volatility and devaluation in the securities markets, ~~vi)~~ix) expected cost savings from recent acquisitions are not realized, ~~vii)~~x) potential impairment of goodwill and other intangible assets, and ~~viii)~~xi) technology implementation problems and information security breaches. Therefore, the information set forth therein should be carefully considered when evaluating the business prospects of the Company. For additional information concerning risks and uncertainties related to the Company and its operations, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~.2019.

United Security Bancshares (the “Company” or “Holding Company") is a California corporation incorporated during March of 2001 and is registered with the Board of Governors of the Federal Reserve System as a bank holding company under the Bank Holding Company Act of 1956, as amended. United Security Bank (the “Bank”) is a wholly-owned bank subsidiary of the Company and was formed in 1987. References to the Company are references to United Security Bancshares (including the Bank). References to the Bank are to United Security Bank, while references to the Holding Company are to the parent only, United Security Bancshares. The Company currently has eleven banking branches, which provide financial services in Fresno, Madera, Kern, and Santa Clara counties in the state of California.

Trends Affecting Results of Operations and Financial Position

The Company’s overall operations are impacted by a number of factors, including not only interest rates and margin spreads, which impact the results of operations, but also the composition of the Company’s balance sheet. One of the primary strategic goals of the Company is to maintain a mix of assets that will generate a reasonable rate of return without undue risk, and to finance those assets with a low-cost and stable source of funds. Liquidity and capital resources must also be considered in the planning process to mitigate risk and allow for growth.

Since the Bank primarily conducts banking operations in California’s Central Valley, its operations and cash flows are subject to changes in the economic condition of the Central Valley. Our business results are dependent in large part upon the business activity, population, income levels, deposits and real estate activity in the Central Valley, and declines in economic conditions can have adverse material effects upon the Bank. In addition, the Central Valley remains largely dependent on agriculture. A downturn in agriculture and agricultural related business could indirectly and adversely affect the Company as many borrowers and customers are involved in, or are impacted to some extent, by the agricultural industry. While a great number of our borrowers are not directly involved in agriculture, they would likely be impacted by difficulties in the agricultural industry since many jobs in our market areas are ancillary to the regular production, processing, marketing and sale of agricultural commodities. ~~While the prolonged drought has been alleviated during the past year due to significant amounts of precipitation,~~Beginning in 2011, the state of California recently experienced one of the worst ~~drought~~droughts in recorded history. ItWhile the drought has subsequently been declared over, it is not possible to quantify the drought's impact on businesses and consumers located in the Company's market areas or to predict adverse economic impacts related to future droughts. In response to the prolonged drought, the California state legislature passed the Sustainable Groundwater Management Act with the purpose to ensure better local and regional management of groundwater use and sustainable groundwater management in California by 2042. The local districts will develop, prepare, and begin implementation of the Groundwater Sustainability Plans as early as 2020. The effect of such plans to Central Valley agriculture, if any, is still unknown.

COVID-19

The ~~residential real estate~~COVID-19 pandemic has already impacted the local economy in the Central Valley. Federal, State and local shelter-in-place recommendations were enacted in our markets in March 2020 causing many businesses to close and workers to be furloughed or lose jobs. Essential purpose entities such as medical professionals, food and agricultural businesses, and transportation and logistical businesses were exempted from the ~~five county region from Merced~~closures; however, unemployment rates are increasing in our

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local market area. As of September 2020, the unemployment rate in Fresno County was 10.4%. Congress, the President, and the Federal Reserve have taken several actions designed to ~~Kern has strengthened since 2013~~cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and ~~that trend has continued~~Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through ~~2017.~~various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The ~~severe declines in residential construction~~package also includes extensive emergency funding for hospitals and home prices that began in 2008 have ended and home prices are now rising on a year-over-year basis. The sustained period of double-digit price declines from 2008–2011 adversely impacted the Company’s operations and increased the levels of nonperforming assets, increased expenses related to foreclosed properties, and decreased profit margins. As the Company continues its business development and expansion efforts throughout its market areas, it will also maintain its commitmentproviders. In addition to the ~~reduction~~general impact of ~~nonperforming assets and provision~~COVID-19, certain provisions of ~~options for borrowers experiencing difficulties. Those options include combinations of rate and term concessions,~~the CARES Act as well as ~~forbearance agreements~~other recent legislative and regulatory relief efforts may have a material impact on our operations. While it is not possible to know the full universe or extent of these impacts as of the date this filing, we are disclosing potentially material items of which we are aware.

Financial position and results of operations

Pertaining to the Company's September 30, 2020 financial condition and results of operations, COVID-19 has had an impact on the allowance for credit losses. While the Company has not yet experienced any charge-offs related to COVID-19, its allowance for credit loss calculation and resulting provision for credit losses are significantly impacted by changes in economic conditions resulting from significant increase in unemployment. Given that economic scenarios have darkened significantly since the pandemic was declared in early March, the credit risk in the loan portfolio has increased resulting in the need for an additional reserve for credit loss. Refer to the discussion of the allowance for credit loss in Note 3 of the unaudited financial statements as well as further discussion later on in MD&A. Should economic conditions worsen, the Company could experience further increases in its required allowance for credit loss and record additional provision expense.

The Company's interest income could be reduced due to COVID-19. In keeping with ~~borrowers.~~guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. Interest and fees will still accrue to income pursuant to normal GAAP accounting policies. Should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Capital and liquidity

As of September 30, 2020, the Company and Bank's capital ratios were in excess of all regulatory requirements. The Company's management team believes that while the Company and Bank have sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses. The Company relies on cash on hand as well as dividends from the Bank to service its debt. If the Bank is unable to pay dividends for an extended period of time, the Company may not be able to service its debt.

The Company maintains access to multiple sources of liquidity. If an extended recession caused large numbers of its deposit customers to withdraw their funds, it might become more reliant on volatile or more expensive sources of funding. Wholesale funding markets are available to the Company, but rates for short-term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on net interest margin.

Asset valuation

Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on the balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

The Company's stock closed below book value at the end of the first three quarters of 2020. Management deemed this to be a triggering event to perform a goodwill impairment test. As of September 30, 2020, goodwill was not impaired. COVID-19 could cause a further and sustained decline in the Company's stock price which could cause the Company to re-perform a goodwill impairment test and that could result in an impairment charge being recorded for that period. In the event that all or a portion of goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At September 30, 2020, the Company had goodwill of $4,488,000, representing approximately 3.8% of equity.

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Processes, controls and business continuity plan

The Company maintains a Business Continuity Plan to prepare, and respond to unforeseen circumstances, such as, natural disasters and pandemics. Upon the COVID-19 pandemic declaration, the Company invoked its Business Continuity Plan. Shortly after invoking the plan, the Company implemented protocols for team member safety, provided timely communication to team members and customers, established remote work capabilities to isolate certain personnel essential to critical business continuity operations, and initiated strategies for monitoring and responding to local COVID-19 impacts. Due to the nature of their functions, many team members continue to operate from physical Company locations, while effectively employing social distancing standards. The Company's Management Team continues to ~~emphasize relationship banking~~meet regularly to anticipate and ~~core deposit growth,~~respond to any future COVID-19 interruptions or developments. As of September 30, 2020, the Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures it has ~~focused greater attention on~~taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of its ~~market area of Fresno, Madera,~~business continuity plans.

Lending operations and ~~Kern Counties, as well as Campbell, in Santa Clara County. The San Joaquin Valley and~~accommodations to borrowers

~~other California markets are exhibiting stronger demand~~In keeping with regulatory guidance to work with borrowers during this unprecedented situation, the Company is executing a payment deferral program for ~~construction lending and~~our commercial lending ~~from small~~clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for up to six months. As of September 30, 2020, the Company had executed 23 payment deferrals or modifications on outstanding loan balances of $$69,814,000. In accordance with the CARES Act, these short term deferrals are not considered troubled debt restructurings. Loan segment breakout information related to the loan modifications is reported in Note 3- Loans.

With the passage of the Paycheck Protection Program (“PPP”), administered by the SBA, the Company participated in assisting our customers with applications for resources through the program. The PPP program ended on August 8, 2020. PPP loans have a two-year term and ~~medium size businesses,~~earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of September 30, 2020, there were over 200 approved SBA PPP loans representing $25,889,000 in funding and $1,028,000 in unearned fees.

The Company is working with customers directly affected by COVID-19. The Company is prepared to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as ~~commercial~~needs and ~~residential real estate markets have shown improvements.~~issues arise. The Company is engaging in more frequent communication with the servicer and individual schools participating in the student loan portfolio to better understand the effects of COVID-19 on students in school or in clinical programs. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

The Company continually evaluates its strategic business plan as economic and market factors change in its market area. The Company may see a short-term slowdown in new loan originations due to COVID-19. Balance sheet management, enhancing revenue sources, and maintaining market share will continue to be of primary importance during ~~2017~~2020 and beyond. The previous pressure on net margins as interest rates hit historical lows may now be ending as interest rates are anticipated to rise slowly. As a result, market rates of interest and asset quality will continue to be important factors in the Company’s ongoing strategic planning process.

Results of Operations

On a year-to-date basis, the Company reported net income of ~~$7,004,000~~$7,038,000 or ~~$0.41~~$0.41 per share ($($0.41 diluted), for the nine months ended September 30, ~~2017~~,2020, as compared to ~~$5,830,000~~$12,276,000, or ~~$0.35~~$0.72 per share ($~~0.35~~0.72 diluted), for the same period in ~~2016~~.2019. The Company’s return on average assets was ~~1.17%~~0.93% for the nine months ended September 30, ~~2017~~,2020, as compared to ~~1.04%~~1.70% for the nine months ended September 30, ~~2016~~.2019. The Company’s return on average equity was ~~9.42%~~7.93% for the nine months ended September 30, ~~2017~~,2020, as compared to ~~8.38%~~14.50% for the nine months ended September 30, ~~2016~~.2019. The decrease in net income is due to the decrease in net interest income, resulting from lower interest rates, and the $2,138,000 provision for the credit losses recognized during the period ended September 30, 2020.

Net Interest Income

The following tables present condensed average balance sheet information, together with interest income and yields earned on average interest earning assets, and interest expense and rates paid on average interest-bearing liabilities for the three and nine month periods ended September 30, ~~2017~~2020 and ~~2016.~~2019.

Table 1. Distribution of Average Assets, Liabilities and Shareholders’ Equity:

Interest rates and Interest Differentials

Three Months Ended September 30, ~~2017~~2020 and ~~2016~~

2019

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2017 2016
(dollars in thousands) Average Balance Interest Yield/Rate (2) Average Balance Interest Yield/Rate (2)

Assets:
Interest-earning assets:
Loans and leases (1) $ 574,484
$ 7,978
5.51 % $ 574,885
$ 7,435
5.15 %
Investment Securities – taxable (3) 51,811
238
1.82 % 56,887
244
1.71 %
Interest-bearing  deposits in other banks 654
1
0.61 % 1,533
2
0.52 %
Interest-bearing  deposits in FRB 117,803
375
1.26 % 56,264
72
0.51 %
Total interest-earning assets 744,752
$ 8,592
4.58 % 689,569
$ 7,753
4.47 %
Allowance for credit losses (9,104 )

(8,913 )

Noninterest-earning assets:

Cash and due from banks 22,375

21,857

Premises and equipment, net 10,623

10,321

Accrued interest receivable 4,878

2,791

Other real estate owned 5,745

7,407

Other assets 37,355

36,734

Total average assets $ 816,624

$ 759,766

Liabilities and Shareholders' Equity:

Interest-bearing liabilities:

NOW accounts $ 87,435
$ 30
0.14 % $ 86,074
$ 30
0.14 %
Money market accounts 156,050
187
0.48 % 148,411
142
0.38 %
Savings accounts 81,027
47
0.23 % 67,652
34
0.20 %
Time deposits 66,841
91
0.54 % 70,772
83
0.47 %
Junior subordinated debentures 9,399
80
3.38 % 7,805
60
3.06 %
Total interest-bearing liabilities 400,752
$ 435
0.43 % 380,714
$ 349
0.36 %
Noninterest-bearing liabilities:

Noninterest-bearing checking 308,480

275,878

Accrued interest payable 92

73

Other liabilities 6,298

8,194

Total Liabilities 715,622

664,859

Total shareholders' equity 101,002

94,907

Total average liabilities and shareholders' equity $ 816,624

$ 759,766

Interest income as a percentage  of average earning assets

4.58 %

4.47 %
Interest expense as a percentage of average earning assets

0.23 %

0.20 %
Net interest margin

4.35 %

4.27 %


~~(1)~~	Loan amounts include nonaccrual loans, but the related interest income has been included only if collected for the period prior to the loan being placed on a nonaccrual basis. Loan interest income includes loan costs of approximately $68,000 for the quarter ended September 30, 2017 and loan costs of $133,000 for the quarter ended September 30, 2016.


~~(2)~~	~~Interest income/expense is divided by actual number of days in the period times 365 days in the yield calculation~~


~~(3)~~	~~Yields on investments securities are calculated based on average amortized cost balances rather than fair value, as changes in fair value are reflected as a component of shareholders' equity.~~


			2020						2019
(dollars in thousands)	Average Balance		Interest		Yield/Rate (2)		Average Balance		Interest		Yield/Rate (2)

Assets:
Interest-earning assets:
Loans (1)	$	656,501	$	7,563	4.58	%	$	579,035	$	8,648	5.93	%
Investment securities (3)	94,076		342		1.45	%	71,168		439		2.45	%
Interest-bearing deposits in FRB	248,722		62		0.10	%	240,605		1,330		2.19	%
Total interest-earning assets	999,299		$	7,967	3.17	%	890,808		$	10,417	4.64	%
Allowance for credit losses	(8,917)						(8,448)
Noninterest-earning assets:
Cash and due from banks	32,106						29,105
Premises and equipment, net	9,399						9,546
Accrued interest receivable	8,952						9,716
Other real estate owned	5,204						5,745
Other assets	42,128						43,490
Total average assets	$	1,088,171					$	979,962
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts	$	131,465	$	44	0.13	%	$	105,873	$	39	0.15	%
Money market accounts	265,421		237		0.36	%	268,456		660		0.98	%
Savings accounts	91,164		26		0.11	%	81,363		42		0.20	%
Time deposits	63,747		144		0.90	%	68,745		209		1.21	%

Junior subordinated debentures	9,710		49		2.01	%	10,416		111		4.23	%
Total interest-bearing liabilities	561,507		$	500	0.35	%	534,853		$	1,061	0.79	%
Noninterest-bearing liabilities:
Noninterest-bearing checking	398,282						319,547
Accrued interest payable	94						203
Other liabilities	9,595						10,116
Total liabilities	969,478						864,719

Total shareholders' equity	118,693						115,243
Total average liabilities and shareholders' equity	$	1,088,171					$	979,962
Interest income as a percentage of average earning assets					3.17	%					4.64	%
Interest expense as a percentage of average earning assets					0.20	%			��		0.47	%
Net interest margin					2.97	%					4.17	%

~~For~~(1)Loan amounts include nonaccrual loans, but the ~~quarter~~related interest income has been included only if collected for the period prior to the loan being placed on a nonaccrual basis. Loan interest costs includes loan fee income of approximately $45,000 for the three months ended September 30, ~~2017, total interest~~2020 and loan fee income ~~increased $839,000 or 10.82%, as compared to~~of $114,000 for the ~~quarter~~three months ended September 30, ~~2016. Comparing those two periods,~~2019.

(2)Interest income/expense is divided by actual number of days in the period times 366 days (365 days for 2019) in the yield calculation.

(3)Yields on investments securities, aside from marketable equity securities, are calculated based on average ~~interest earning assets increased $55,183,000, with a $61,539,000 increase on~~amortized cost balances ~~held at the Federal Reserve Bank, partially offset by a $5,076,000 decrease~~rather than fair value, as changes in ~~investment securities, and a $401,000 decrease in loans and leases. The average yield on total interest-earning assets increased 11 basis points. Loan yields increased 36 basis points primarily~~fair value are reflected as a ~~result~~component of loan growth in the higher-yielding student loan portfolio, and increases on rates throughout the loan portfolio reflecting the increase in the prime rate. Yields on interest bearing deposits at the Federal Reserve Bank and other banks increased for the quarter ended September 30, 2017 as a resultshareholders' equity.

Table of the two 0.25% interest rate increases during 2017. For the quarter ended September 30, 2017, total interest expense increased $86,000 or 24.64% as compared to the quarter ended September 30, 2016, as a result of a $20,038,000 increase in interest-bearing liabilities. The average rate paid on interest-bearing liabilities was 0.43% for the quarter ended September 30, 2017 and 0.36% for the quarter ended September 30, 2016.Contents

Interest rates and Interest Differentials

Nine Months Ended September 30, 2020 and 2019


			2020						2019
(dollars in thousands)	Average Balance		Interest		Yield/Rate (2)		Average Balance		Interest		Yield/Rate (2)

Assets:
Interest-earning assets:
Loans (1)	632,221		$	23,622	4.99	%	$	575,323	$	25,733	5.98	%
Investment securities (3)	91,140		1,126		1.65	%	68,254		1,360		2.66	%
Interest-bearing deposits in FRB	203,574		667		0.44	%	231,807		4,052		2.34	%
Total interest-earning assets	926,935		$	25,415	3.66	%	875,384		$	31,145	4.76	%
Allowance for credit losses	(8,650)						(8,449)
Noninterest-earning assets:
Cash and due from banks	29,948						28,898
Premises and equipment, net	9,434						9,627
Accrued interest receivable	8,193						9,060
Other real estate owned	6,033						5,745
Other assets	44,245						42,425
Total average assets	$	1,016,138					$	962,690
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts	$	120,040	$	119	0.13	%	$	107,590	$	115	0.14	%
Money market accounts	253,844		903		0.48	%	254,081		1,731		0.91	%
Savings accounts	86,225		82		0.13	%	88,417		202		0.31	%
Time deposits	63,027		458		0.97	%	73,016		627		1.15	%

Junior subordinated debentures	9,640		229		3.17	%	10,296		352		4.57	%
Total interest-bearing liabilities	532,776		$	1,791	0.45	%	533,400		$	3,027	0.76	%
Noninterest-bearing liabilities:
Noninterest-bearing checking	355,114						306,590
Accrued interest payable	115						197
Other liabilities	9,560						9,309
Total liabilities	897,565						849,496

Total shareholders' equity	118,573						113,194
Total average liabilities and shareholders' equity	$	1,016,138					$	962,690
Interest income as a percentage of average earning assets					3.66	%					4.76	%
Interest expense as a percentage of average earning assets					0.26	%					0.46	%
Net interest margin					3.40	%					4.30	%

(1)Loan amounts include nonaccrual loans, but the related interest income has been included only if collected for the period prior to the loan being placed on a nonaccrual basis. Loan interest income includes loan fee income of approximately $134,000 for the nine months ended September 30, ~~2017~~2020 and ~~2016~~loan income of $79,000 for the nine months ended September 30, 2019.

Table of Contents

2017 2016
(dollars in 000's) Average Balance Interest Yield/Rate (2) Average Balance Interest Yield/Rate (2)

Assets:
Interest-earning assets:
Loans and leases (1) $ 565,068
$ 22,782
5.39 % $ 532,133
$ 20,722
5.20 %
Investment Securities – taxable (3) 54,284
691
1.70 % 46,384
618
1.78 %
Interest-bearing deposits in other banks 652
4
0.82 % 1,531
6
0.52 %
Interest-bearing deposits in FRB 107,921
858
1.06 % 93,305
348
0.50 %
Total interest-earning assets 727,925
$ 24,335
4.47 % 673,353

$ 21,694
4.30 %
Allowance for credit losses (9,017 )

(9,439 )

Noninterest-earning assets:

Cash and due from banks 21,393

22,126

Premises and equipment, net 10,708

10,550

Accrued interest receivable 4,248

2,350

Other real estate owned 6,083

9,797

Other assets 36,731

36,552

Total average assets $ 798,071

$ 745,289

Liabilities and Shareholders' Equity:

Interest-bearing liabilities:

NOW accounts $ 87,598
$ 87
0.13 % $ 84,610
$ 81
0.13 %
Money market accounts 152,257
506
0.44 % 146,801
419
0.38 %
Savings accounts 78,247
136
0.23 % 66,117
103
0.21 %
Time deposits 80,861
326
0.54 % 70,936
234
0.44 %
Junior subordinated debentures 9,114
223
3.27 % 7,995
176
2.94 %
Total interest-bearing liabilities 408,077

$ 1,278
0.42 % 376,459

$ 1,013
0.36 %
Noninterest-bearing liabilities:

Noninterest-bearing checking 283,783

268,820

Accrued interest payable 104

73

Other liabilities 6,714

7,218

Total Liabilities 698,678

652,570

Total shareholders' equity 99,393

92,719

Total average liabilities and shareholders' equity $ 798,071

$ 745,289

Interest income as a percentage of average earning assets

4.47 %

4.30 %
Interest expense as a percentage of average earning assets

0.23 %

0.20 %
Net interest margin

4.24 %

4.10 %
(2)Interest income/expense is divided by actual number of days in the period times 366 days (365 days for 2019) in the yield calculation.

(3)Yields on investments securities, aside from marketable equity securities, are calculated based on average amortized cost balances rather than fair value, as changes in fair value are reflected as a component of shareholders' equity.


~~(1)~~	Loan amounts include nonaccrual loans, but the related interest income has been included only if collected for the period prior to the loan being placed on a nonaccrual basis. Loan interest income includes loan costs of approximately $336,000 and $169,000 for the nine months ended September 30, 2017 and 2016, respectively.


~~(2)~~	~~Interest income/expense is divided by actual number of days in the period times 365 days in the yield calculation~~


~~(3)~~	~~Yields on investments securities are calculated based on average amortized cost balances rather than fair value, as changes in fair value are reflected as a component of shareholders' equity.~~

The prime rate ~~was raised~~decreased from 4.75% at December 31, 2019 to ~~4.00% in March 2017,~~3.25% during the first quarter of 2020, and ~~raised to 4.25% in June 2017. These~~remained unchanged through September 30, 2020. Future increases or decreases will affect ~~rates for loans~~both interest income and ~~customer deposits, both of which have increased~~expense and ~~are likely to increase further as~~ the ~~prime rate continues to rise.~~resultant net interest margin.

Both the Company's net interest income and net interest margin are affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as "volume change." Both are also affected by changes in yields on interest-earning assets and rates paid on interest-bearing liabilities, referred to as "rate change." The following table sets forth the changes in interest income and interest expense for each major category of interest-earning asset and interest-bearing liability, and the amount of change attributable to volume and rate changes for the periods indicated.

Table 2. Rate and Volume Analysis


	Increase (decrease) for the three months ended September 30, 2020 compared to September 30, 2019
(in 000's)	Total		Rate		Volume
Increase (decrease) in interest income:
Loans	$	(1,085)	$	(2,137)	$	1,052
Investment securities available for sale	(96)		(211)		115
Interest-bearing deposits in other banks	—		—		—
Interest-bearing deposits in FRB	(1,268)		(1,269)		1
Total interest income	(2,449)		(3,617)		1,168
Increase (decrease) in interest expense:
Interest-bearing demand accounts	(418)		(458)		40
Savings and money market accounts	(16)		(21)		5
Time deposits	(65)		(51)		(14)
Other borrowings	—		—		—
Subordinated debentures	(62)		(55)		(7)
Total interest expense	(561)		(585)		24
Increase (decrease) in net interest income	$	(1,888)	$	(3,032)	$	1,144

For the three months ended September 30, 2020, total interest income decreased $2,449,000, or 23.51%, as compared to the three months ended September 30, 2019. In comparing the two periods, average interest earning assets increased $108,491,000, with an increase of $77,466,000 in loan balances, an increase of $22,908,000 in investment securities, and an increase of $8,117,000 in balances held at the Federal Reserve Bank. Investment securities yields decreased 100 basis points and loan yields decreased 134 basis points. The average yield on total interest-earning assets decreased 147 basis points. The decrease in yields are a result of repricing of variable rate loans, floating rate investment securities, and interest-bearing deposits in FRB at lower rates. Interest-bearing deposits in FRB are the Company's lowest-yielding interest-earning asset.

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	Increase (decrease) in the nine months ended September 30, 2017 compared to September 30, 2016										Increase (decrease) for the nine months ended September 30, 2020 compared to September 30, 2019
(in 000's)	Total			Rate			Volume			(in 000's)	Total		Rate		Volume
Increase (decrease) in interest income:										Increase (decrease) in interest income:
Loans and leases	$	2,060		$	832		$	1,228
Loans										Loans	$	(2,111)	$	(4,507)	$	2,396
Investment securities available for sale	73			(25		)	98			Investment securities available for sale	(233)		(608)		375
Interest-bearing deposits in other banks	(2		)	4			(6		)	Interest-bearing deposits in other banks	—		—		—
Interest-bearing deposits in FRB	510			386			124			Interest-bearing deposits in FRB	(3,385)		(3,345)		(40)
Total interest income	2,641			1,197			1,444			Total interest income	(5,729)		(8,460)		2,731
Increase (decrease) in interest expense:										Increase (decrease) in interest expense:
Interest-bearing demand accounts	93			75			18			Interest-bearing demand accounts	(824)		(884)		60
Savings and money market accounts	33			13			20			Savings and money market accounts	(120)		(115)		(5)
Time deposits	92			57			35			Time deposits	(169)		(90)		(79)
Other borrowings										Other borrowings	—		—		—
Subordinated debentures	47			22			25			Subordinated debentures	(123)		(102)		(21)
Total interest expense	265			167			98			Total interest expense	(1,236)		(1,191)		(45)
Increase in net interest income	$	2,376		$	1,030		$	1,346
Increase (decrease) in net interest income										Increase (decrease) in net interest income	$	(4,493)	$	(7,269)	$	2,776

For the nine months ended September 30, ~~2017,~~2020, total interest income ~~increased approximately $2,641,000,~~decreased $5,729,000, or ~~12.17%~~18.39%, as compared to the nine months ended September 30, ~~2016. Earning asset volumes for loans~~2019. In comparing the two periods, average interest earning assets increased $51,551,000, with an increase of $56,898,000 in loan balances and ~~leases increased $32,935,000 on average. Overnight investments with the FRB increased $14,616,000 and available for sale~~an increase of $22,886,000 in investment securities, ~~increased $7,900,000 between~~offset by a $28,233,000 decrease in balances held at the ~~two periods.~~Federal Reserve Bank. Investment securities yields decreased 101 basis points and loan yields decreased 99 basis points. The average yield on total interest-earning assets decreased 110 basis points. The decreases in yields are a result of repricing of variable rate loans, ~~increased 19 basis points between the two periods, and the average yield on~~floating rate investment securities, ~~decreased approximately 8 basis points during~~and interest-bearing deposits in FRB to lower rates. Interest-bearing deposits in FRB are the ~~nine months ended September 30, 2017 as compared to the same period of 2016.~~ Company's lowest-yielding interest-earning asset.

The overall average yield on the loan portfolio ~~increased~~decreased to ~~5.39%~~4.99% for the nine months ended September 30, ~~2017,~~2020, as compared to ~~5.20%~~5.98% for the nine months ended September 30, ~~2016.~~2019. The Company has ~~successfully~~ sought to mitigate the low-interest rate environment with loan floors included in new and renewed loans when practical. At September 30, ~~2017, 53.0%~~2020, 58.5% of the Company's loan portfolio consisted of floating rate instruments, as compared to ~~52.1%~~54.2% of the portfolio at December 31, ~~2016,~~2019, with the majority of those tied to the prime rate. Approximately ~~25.3%~~28.7%, or ~~$78,201,000,~~$110,871,000, of the floating rate loans had rate floors at September 30, ~~2017,~~2020, making them effectively fixed-rate loans for certain ~~increases in interest rates, and fixed-rate loans for all~~ decreases in interest rates. ~~None of the loans with floors~~Loan balances totaling $24,510,000 have floor spreads of 100 basis points or more.

~~Although market rates~~The Company’s net interest margin decreased to 3.40% for the nine months ended September 30, 2020, when compared to 4.30% for the nine months ended September 30, 2019. The net interest margin decreased primarily as a result of ~~interest are at historically low levels,~~decreases in the yields on average earnings assets.

The Company’s disciplined deposit pricing efforts have helped keep the Company's cost of funds low. The ~~Company’s net interest margin increased~~rates paid on interest-bearing liabilities decreased to ~~4.24%~~0.45% for the nine months ended September 30, ~~2017, when~~2020, as compared to ~~4.10%~~0.76% for the nine months ended September 30, 2016. The net interest margin increased due to increases in the loan portfolio yield and increases in the yield on overnight investments held at correspondent banks. As interest rates paid on deposits have also increased, the Company’s average cost of funds rose to 0.42% for the nine months ended September 30, 2017, as compared to 0.36% for the nine months ended September 30, 2016. The Company utilizes brokered deposits as an additional source of funding. Currently, the Company holds CDARs reciprocal deposits, which are preferred by some depositors. These comprise $9,755,000 of the balance of certificates of deposits at September 30, 2017.2019. For the nine months ended September 30, ~~2017,~~2020, total interest expense ~~increased~~decreased approximately ~~$265,000,~~$1,236,000, or ~~26.16%~~40.83%, as compared to the nine months ended September 30, ~~2016.~~2019. Between those two periods, average interest-bearing liabilities ~~increased~~decreased by ~~$31,618,000~~$624,000 due to decreases in savings accounts and time deposits, partially offset by increases ~~across all categories~~in NOW accounts. While the Company may utilize brokered deposits as an additional source of ~~customer deposits.~~

~~Net interest income has increased between~~funding, the ~~nine months ended~~Company held no brokered deposits at September 30, ~~2017~~2020.

Table 3. Interest-Earning Assets and 2016, totaling $23,057,000 for the nine months ended September 30, 2017 as compared to $20,681,000 for the nine months ended September 30, 2016. The increase in net interest income between 2016 and 2017 was primarily the result of reinvestment of low yielding overnight investments into the loan and investment portfolios and growth in total interest-earning assets.Liabilities

The following table summarizes the year-to-date averages of the components of interest-earning assets as a percentage of total interest-earning assets and the components of interest-bearing liabilities as a percentage of total interest-bearing liabilities:

Table of Contents


	YTD Average 9/30/2017	YTD Average 12/31/16	YTD Average 9/30/2016		YTD Average 9/30/2020	YTD Average 12/31/19	YTD Average 9/30/2019
Loans	77.63%	79.26%	79.02%	Loans	68.22%	66.14%	65.73%
Investment securities available for sale	7.46%	7.27%	6.89%	Investment securities available for sale	9.83%	8.20%	7.80%
Interest-bearing deposits in other banks	0.09%	0.22%	0.23%
Interest-bearing deposits in FRB	14.82%	13.25%	13.86%	Interest-bearing deposits in FRB	21.95%	25.66%	26.47%
Total interest-earning assets	100.00%	100.00%	100.00%	Total interest-earning assets	100.00%	100.00%	100.00%

NOW accounts	21.47%	22.25%	22.48%	NOW accounts	22.53%	20.50%	20.17%
Money market accounts	37.31%	38.82%	39.00%	Money market accounts	47.65%	47.69%	47.63%
Savings accounts	19.17%	17.62%	17.56%	Savings accounts	16.18%	16.31%	16.58%
Time deposits	19.82%	19.21%	18.84%	Time deposits	11.83%	13.55%	13.69%

Subordinated debentures	2.23%	2.10%	2.12%	Subordinated debentures	1.81%	1.95%	1.93%
Total interest-bearing liabilities	100.00%	100.00%	100.00%	Total interest-bearing liabilities	100.00%	100.00%	100.00%

Noninterest Income

Table 3.4. Changes in Noninterest Income

The following tables sets forth the amount and percentage changes in the categories presented for the three and nine month periods ended September 30, ~~2017~~2020 and ~~2016~~:2019:


(in 000's)	Three Months Ended September 30, 2020		Three Months Ended September 30, 2019		Amount of Change		Percent Change
Customer service fees	$	668	839		$	(171)	(20.38)	%
Increase in cash surrender value of bank-owned life insurance	124		147		(23)		(15.65)	%
Unrealized gain on fair value of marketable equity securities	4		18		(14)		(77.78)	%

(Loss) gain on fair value of junior subordinated debentures	(18)		660		(678)		(102.73)	%

Loss on dissolution of real estate investment trust	—		(1)		1		(100.00)	%
Loss on sale of assets	—		(5)		5		(100.00)	%
Other	133		195		(62)		(31.79)	%
Total noninterest income	$	911	$	1,853	$	(942)	(50.84)	%

(in 000's)
Three Months Ended September 30, 2017 Three Months Ended September 30, 2016 Amount of
Change Percent
Change
Customer service fees $ 959
$ 924
$ 35
3.79 %
Increase in cash surrender value of BOLI/COLI 134
131
3
2.29 %
(Loss) gain on fair value of financial liability (88 ) (423 ) 335
(79.20 )%
Gain on sale of other investment 3
—
3
100.00 %
Other 168
154
14
9.09 %
Total noninterest income $ 1,176
$ 786
$ 390
49.62 %

Noninterest income for the quarter ended September 30, ~~2017 increased $390,000~~2020 decreased $942,000 to ~~$1,176,000,~~$911,000, compared to the quarter ended September 30, ~~2016.~~2019. The ~~increase~~decrease is mostly attributed to a decrease in the ~~loss on the~~recorded fair value of ~~financial liability~~junior subordinated debentures of ~~$335,000~~$678,000 for the quarter ended September 30, ~~2017.~~2020. The ~~fluctuation~~change in fair value of ~~financial liability~~junior subordinated debentures recorded in non-interest income was caused by ~~changes~~fluctuations in the LIBOR yield curve.

Table of Contents


(in 000's)	Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016		Amount of Change			Percent Change		(in 000's)	Nine Months Ended September 30, 2020		Nine Months Ended September 30, 2019		Amount of Change		Percent Change
Customer service fees	$	2,897		$	2,867	$	30		1.05	%	Customer service fees	$	2,014	2,479		$	(465)	(18.76)	%
Increase in cash surrender value of BOLI/COLI	400			394		6			1.52	%
(Loss) gain on fair value of financial liability	(688		)	48		(736		)	(1,533.33	)%
Gain on sale of other investment	3			—		3			100.00	%
Increase in cash surrender value of bank-owned life insurance											Increase in cash surrender value of bank-owned life insurance	382		438		(56)		(12.79)	%
Unrealized gain on fair value of marketable equity securities											Unrealized gain on fair value of marketable equity securities	89		128		(39)		(30.47)	%
Gain on death benefit proceeds from bank-owned life insurance											Gain on death benefit proceeds from bank-owned life insurance	310		—		310		100.00	%
Gain on fair value of junior subordinated debentures											Gain on fair value of junior subordinated debentures	1,451		1,571		(120)		(7.64)	%
Loss on dissolution of real estate investment trust											Loss on dissolution of real estate investment trust	—		(115)		115		(100.00)	%
Gain on sale of assets											Gain on sale of assets	—		1		(1)		(100.00)	%
Other	539			464		75			16.16	%	Other	460		603		(143)		(23.71)	%
Total noninterest income	$	3,151		$	3,773	$	(622	)	(16.49	)%	Total noninterest income	$	4,706	$	5,105	$	(399)	(7.82)	%

Noninterest income ~~for the~~ ~~nine months endedSeptember 30, 2017decrease~~d ~~$622,000, or~~ ~~16.49%, when compared to the same period of~~ ~~2016. Customer service fees, the primary component of noninterest income,~~ ~~increase~~d ~~$30,000, or~~ ~~1.05%, between the two periods presented. The~~ ~~decrease~~ ~~in noninterest income of~~ ~~$622,000~~ ~~between the two periods is primarily the result of a $688,000 loss recorded on the fair value of a financial liability~~ for the nine months ended September 30, ~~2017 as~~2020 decreased $399,000 to $4,706,000, compared to the nine months ended September 30, 2019. The decrease is mostly attributed to a ~~$48,000 gain on~~decrease of $465,000 in customer service fees and a decrease of $120,000 in the recorded fair value of ~~a financial liability recorded~~junior subordinated debentures for the ~~same period in 2016.~~nine months ended September 30, 2020. The change in ~~the~~ fair value of ~~financial liability~~junior subordinated debentures recorded in non-interest income was ~~primarily~~ caused by fluctuations in the LIBOR yield curve. The decrease in customer service fees is the result of lower fees and surcharges related to insufficient funds and electronic transfers.

The cost of the Company’s subordinated debentures issued by USB Capital Trust II has remained low as market rates have remained low during the first nine months of 2017. With pricing at 3-month-LIBOR plus 129 basis points, the effective cost of the subordinated debt was 2.85% at September 30, 2017, as compared to 2.15% at September 30, 2016. Pursuant to fair value accounting guidance, the Company has recorded $688,000 in pretax fair value loss on its junior subordinated debt during the nine months ended September 30, 2017, bringing the total cumulative gain recorded on the debt to $3,008,000 at September 30, 2017.

Noninterest Expense

Table 5. Changes in Noninterest Expense

The following ~~table~~tables sets forth the amount and percentage changes in the categories presented for the three and nine month periods ended September 30, ~~2017~~2020 and ~~2016:~~2019:


(in 000's)	Three Months Ended September 30, 2020		Three Months Ended September 30, 2019		Amount of Change		Percent Change
Salaries and employee benefits	$	2,722	$	2,775	$	(53)	(1.91)	%
Occupancy expense	887		829		58		7.00	%
Data processing	139		151		(12)		(7.95)	%
Professional fees	724		864		(140)		(16.20)	%
Regulatory assessments	121		(37)		158		(427.03)	%
Director fees	94		95		(1)		(1.05)	%
Correspondent bank service charges	19		14		5		35.71	%
Net cost on operation of OREO	35		71		(36)		(50.70)	%
Other	469		573		(104)		(18.15)	%
Total expense	$	5,210	$	5,335	$	(125)	(2.34)	%

~~Table 4. Changes in Noninterest Expense~~

(in 000's)
Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
Amount of
Change

Percent
Change
Salaries and employee benefits $ 2,578
$ 2,533
$ 45
1.78 %
Occupancy expense 1,087
1,097
(10 ) (0.91 )%
Data processing 29
23
6
26.09 %
Professional fees 312
327
(15 ) (4.59 )%
FDIC/DFI insurance assessments 43
131
(88 ) (67.18 )%
Director fees 72
75
(3 ) (4.00 )%
Loss on California tax credit partnership (1 ) 49
(50 ) (102.04 )%
Net cost on operation of OREO 21
39
(18 ) (46.15 )%
Other 605
590
15
2.54 %
Total expense $ 4,746
$ 4,864
$ (118 ) (2.43 )%

Noninterest expense for the quarter ended September 30, ~~2017~~2020 decreased ~~$118,000~~$125,000 to ~~$4,746,000,~~$5,210,000, compared to the quarter ended September 30, ~~2016.~~2019. The decrease was attributed to ~~lower OREO expenses, a~~decreases in professional fees and salaries and employee benefits, partially offset by an increase in occupancy expense. The decrease in salary and employee benefits expense is the ~~loss~~result of ~~a tax credit partnership, and a reduction in regulatory assessment expense. The FDIC assessment rate~~reduced hours for various employees throughout the Company ~~was~~as a result of reduced ~~effective third quarter 2017. OREO expenses decreased $18,000 during~~branch hours. Branch hours were reduced in response to the COVID-19 pandemic. The decrease in professional fees for the quarter ended September 30, ~~2017 as a result~~2020 was related to decreases in legal fees compared to the quarter ended September 30, 2019.

Table of ~~partial sales on OREO properties in 2016 and 2017.~~

Contents


(in 000's)	Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016		Amount of Change			Percent Change		(in 000's)	Nine Months Ended September 30, 2020		Nine Months Ended September 30, 2019		Amount of Change		Percent Change
Salaries and employee benefits	$	8,149		$	7,592	$	557		7.34	%	Salaries and employee benefits	$	8,131	$	8,307	$	(176)	(2.12)	%
Occupancy expense	3,144			3,212		(68		)	(2.12	)%	Occupancy expense	2,609		2,450		159		6.49	%
Data processing	81			108		(27		)	(25.00	)%	Data processing	386		402		(16)		(3.98)	%
Professional fees	912			1,116		(204		)	(18.28	)%	Professional fees	1,981		2,423		(442)		(18.24)	%
FDIC/DFI insurance assessments	313			632		(319		)	(50.47	)%
Regulatory assessments											Regulatory assessments	283		138		145		105.07	%
Director fees	215			218		(3		)	(1.38	)%	Director fees	282		281		1		0.36	%
Loss on California tax credit partnership	118			122		(4		)	(3.28	)%
Net (gain) cost on operation of OREO	(257		)	216		(473		)	(218.98	)%
Correspondent bank service charges											Correspondent bank service charges	52		42		10		23.81	%
Net cost on operation of OREO											Net cost on operation of OREO	968		223		745		334.08	%
Other	1,868			1,772		96			5.42	%	Other	1,663		1,677		(14)		(0.83)	%
Total expense	$	14,543		$	14,988	$	(445	)	(2.97	)%	Total expense	$	16,355	$	15,943	$	412	2.58	%

Noninterest expense ~~decreased approximately $445,000 or 2.97% between~~for the nine months ended September 30, 2016 and September 30, 2017. The decrease experienced during the nine months ended September 30, 2017, was primarily the result of decreases of $473,000 in net cost of OREO, $319,000 in regulatory assessments, $204,000 in professional fees, and $68,000 in occupancy expense, partially offset by an increase of $557,000 in employee salary and benefit expenses. The increase in employee salary and benefit expenses is driven by increases in group insurance and higher employee incentives,2020 increased $412,000 to $16,355,000, compared to the nine months ended September 30, ~~2016.~~2019. The increase was attributed to increases in net OREO costs and occupancy expense, partially offset by decreases in salaries and employee benefits and professional fees. The decrease in professional fees for the nine months ended September 30, 2020 was related to decreases in legal fees and consulting expense. Net cost on operation of OREO for the nine months ended September 30, 2020 includes a $727,000 write-down on OREO.

Income Taxes

The Company’s income tax expense is impacted to some degree by permanent taxable differences between income reported for book purposes and income reported for tax purposes, as well as certain tax credits which are not reflected in the Company’s pretax income or loss shown in the statements of operations and comprehensive income. As pretax income or loss amounts become smaller, the impact of these differences become more significant and are reflected as variances in the Company’s effective tax rate for the periods presented. In general, the permanent differences and tax credits affecting tax expense have a positive impact and tend to reduce the effective tax rates shown in the Company’s statements of income and comprehensive income.

The Company reviews its current tax positions at least quarterly based on the accounting standards related to uncertainty in income taxes which includes the criteria that an individual tax position would have to meet for some or all of the income tax benefit to be recognized in a taxable entity’s financial statements. Under the income tax guidelines, an entity should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that the position will be sustained on examination. The term “more likely than not” means a likelihood of more than 50 percent. In assessing whether the more-likely-than-not criterion is met, the entity should assume that the tax position will be reviewed by the applicable taxing authority.

The Company has reviewed all of its tax positions as of September 30, ~~2017,~~2020, and has determined that, there are no material amounts to be recorded under the current income tax accounting guidelines.

The Company's effective tax rate for the nine months ended September 30, 2020 was 28.46% compared to 28.90% for the nine months ended September 30, 2019.

Financial Condition

Total assets ~~increase~~d ~~$55,535,000~~,increased $177,028,000, or ~~7.05%~~18.50%, to a balance of ~~$843,507,000~~$1,133,947,000 at September 30, ~~2017~~2020, from the balance of $956,919,000 at December 31, 2019, and increased $176,549,000, or 18.44%, from the balance of ~~$787,972,000~~$957,398,000 at ~~December 31, 2016, and~~ ~~increase~~d ~~$61,915,000, or~~ ~~7.92%, from the balance of $781,592,000 at~~ September 30, ~~2016~~.2019. Total deposits of ~~$725,298,000~~$994,783,000 at September 30, ~~2017~~, ~~increase~~d ~~$48,669,000~~,2020, increased $176,421,000, or ~~7.19%~~21.56%, from the balance reported at December 31, ~~2016~~,2019, and ~~increase~~d ~~$54,012,000~~,increased $174,560,000, or ~~8.05%~~21.28%, from the balance of ~~$671,286,000~~$820,223,000 reported at September 30, ~~2016~~.2019. Cash and cash equivalents ~~increase~~d ~~$46,860,000~~,increased $104,337,000, or ~~41.46%~~47.64%, between December 31, ~~2016~~2019 and September 30, ~~2017; net~~2020. Net loans ~~increase~~d ~~$12,511,000~~,increased $63,090,000, or ~~2.23%~~10.72%, to a balance of ~~$574,443,000~~;$651,736,000, and investment securities ~~decrease~~d ~~$9,135,000~~,increased $11,694,000, or ~~15.89%~~14.60%, during the first nine months of ~~2017~~.2020.

Earning assets averaged approximately ~~$727,925,000~~$926,935,000 during the nine months endedSeptember 30, ~~2017~~,2020, as compared to ~~$673,353,000~~$875,384,000 for the same period in ~~2016~~.2019. Average interest-bearing liabilities ~~increased~~decreased to ~~$408,077,000~~$532,776,000 for the nine months endedSeptember 30, ~~2017~~,2020, from ~~$376,459,000~~$533,400,000 reported for the comparative period of ~~2016~~.2019.

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Loans ~~and Leases~~

The Company's primary business is that of acquiring deposits and making loans, with the loan portfolio representing the largest and most important component of earning assets. Loans totaled ~~$582,384,000~~$661,482,000 at September 30, ~~2017~~,2020, an increase of ~~$12,625,000~~,$64,108,000, or ~~2.22%~~10.73%, when compared to the balance of ~~$569,759,000~~$597,374,000 at December 31, ~~2016~~,2019, and an increase of ~~$22,785,000~~,$91,354,000, or ~~4.07%~~13.81%, when compared to the balance of ~~$559,599,000~~$570,128,000 reported at September 30, ~~2016~~.2019. Loans on average ~~increase~~d ~~$32,935,000~~,increased $56,898,000, or ~~6.19%~~9.89%, between the nine months endedSeptember 30, ~~2016~~2019 and September 30, ~~2017~~,2020, with loans averaging ~~$565,068,000~~$632,221,000 for the nine months endedSeptember 30, ~~2017~~,2020, as compared to ~~$532,133,000~~$575,323,000 for the same period of ~~2016~~.2019.

~~Total~~Table 6. Loans

The following table sets forth the amounts of loans ~~increased $12,625,000 between~~outstanding by category at September 30, 2020 and December 31, ~~2016~~2019, the category percentages as of those dates, and ~~September 30, 2017, and increased $22,785,000~~the net change between ~~September 30, 2016 and September 30, 2017.~~ the two periods presented.


	September 30, 2020				December 31, 2019
(in 000's)	Dollar Amount		% of Loans		Dollar Amount		% of Loans		Net Change		% Change
Commercial and industrial	$	65,742	10.0	%	$	45,278	7.6	%	$	20,464	45.20	%
Real estate – mortgage	309,849		46.8	%	291,237		48.8	%	18,612		6.39	%
RE construction & development	171,889		26.0	%	138,784		23.2	%	33,105		23.85	%
Agricultural	51,587		7.8	%	52,197		8.7	%	(610)		(1.17)	%
Installment and student loans	62,415		9.4	%	69,878		11.7	%	(7,463)		(10.68)	%
Total gross loans	$	661,482	100.00	%	$	597,374	100.00	%	$	64,108	10.73	%

During the nine months ended September 30, ~~2017,~~2020, the Company experienced increases in commercial and industrial loans, real estate ~~agriculture,~~mortgage loans, and ~~consumer~~real estate construction and development loans compared to the same period ended September 30, ~~2016.~~2019. Commercial and industrial loans ~~decreased $2,054,000~~increased $20,464,000 between December 31, ~~2016~~2019 and September 30, ~~2017~~2020 and ~~decreased $762,000~~increased $17,605,000 between September 30, ~~2016~~2019 and September 30, ~~2017.~~2020. Included in commercial and industrial loans as of September 30, 2020 are $25,889,000 in SBA PPP loans. Real estate mortgage loans increased $18,612,000 between December 31, 2019 and September 30, 2020 and increased $33,890,000 between September 30, 2019 and September 30, 2020. The real estate mortgage loan balance as of September 30, 2020 includes $22,143,000 in multifamily and $7,613,000 in residential adjustable rate mortgages purchased during 2020. Agricultural loans decreased $610,000 between December 31, 2019 and September 30, 2020 and decreased $8,513,000 between September 30, 2019 and September 30, 2020. Installment and ~~other~~student loans ~~increased $12,634,000~~decreased $7,463,000 between December 31, 2019 and September 30, 2020 and decreased $7,074,000 between September 30, 2019 and September 30, 2020, primarily due to decreases in student loan balances.

Installment and student loans decreased $7,074,000 during the nine months ended September 30, 2020 as compared to the same period ended September 30, 2019, due to ~~growth~~decreases in the student loan portfolio. Included in installment loans are ~~$51,185,000~~$58,677,000 in student loans made to medical and pharmacy school students. ~~Repayment on~~The student loan portfolio consists of unsecured loans to medical and pharmacy students enrolled in medical and pharmacy schools in the US and the Caribbean. 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 ~~deferred until 6~~automatically placed on deferment for six months. This may be extended up to 48 months ~~after graduation. Accrued interest on loans that have not entered repayment status totaled $3,769,000 at September 30, 2017.~~for graduates enrolling in internship, medical residency or fellowship. If approved, the student may receive additional deferment for hardship or administrative reasons in the form of a forbearance for a maximum of 24 months throughout the life of the loan. The outstanding balance of student loans that have not entered repayment status totaled ~~$47,759,000~~$22,137,000 at September 30, ~~2017. Real estate mortgage~~2020. Accrued interest on loans ~~increased $2,262,000, or 0.78%, between~~that have not entered repayment status totaled $5,972,000 at September 30, 2020. At September 30, 2020 there were 818 loans within repayment, deferment, and forbearance which represented $24,322,000, $7,044,000, and $5,174,000 in outstanding balances, respectively. Underwriting is premised on qualifying credit scores. The weighted average credit score for the portfolio is in the mid-700s. In addition, there are non-student co-borrowers for roughly one-third of the portfolio that provide additional repayment capacity. Graduation and employment placement rates are high for both medical and pharmacy students. The average student loan balance per borrower as of September 30, 2020 is approximately $96,000. Loan interest rates range from 2.875 to 7.875.

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The Company classifies student loans delinquent more than 90 days as substandard. As of September 30, 2020 and December 31, ~~2016~~2019 reserves against the student loan portfolio totaled $1,761,000 and $2,091,000, respectively. There were no TDRs within the portfolio as of September 30, ~~2017, and increased $450,000 between~~2020 or December 31, 2019. During the nine months ended September 30, ~~2016~~2020, $59,000 in accrued interest receivable was reversed, due to charge-offs of $1,121,000 within the student loan portfolio.

ZuntaFi (previously known as Reunion Student Loan Finance Corporation (RSLFC)) is the third-party servicer for the student loan portfolio. ZuntaFi's services include application administration, processing, approval, documenting, funding, and ~~September 30, 2017. Agricultural~~ collection. They also provide borrower file custodial responsibilities. Except in cases where applicants/loans ~~increased $1,587,000,~~do not meet program requirements, or ~~2.79%, between December 31, 2016~~extreme delinquency, ZuntaFi is responsible for complete program management. ZuntaFi is paid a monthly servicing fee based on the outstanding principal balance.

~~and September 30, 2017 and increased $5,236,000 between September 30, 2016 and September 30, 2017.~~ Commercial real estate loans (a component of real estate mortgage loans) continue to represent a significant portion of the total loan portfolio. Commercial real estate loans amounted to ~~34.28%~~39.91%, ~~35.14%~~41.04%, and ~~35.30%~~39.41%, of the total loan portfolio at September 30, ~~2017,~~2020, December 31, ~~2016,~~2019, and September 30, ~~2016,~~2019, respectively. Real estate mortgage loans increased $18,612,000, or 6.39%, between December 31, 2019 and September 30, 2020, and increased $33,890,000 between September 30, 2019 and September 30, 2020. Residential mortgage loans are not generally originated by the Company, but some residential mortgage loans have been made over the past several years to facilitate take-out loans for construction borrowers ~~when they~~who were ~~not able~~unable to obtain permanent financing elsewhere. These loans are generally 30-year amortizing loans with maturities of between three and five years. Residential mortgages totaled ~~$90,284,000,~~$45,722,000, or ~~15.50%~~6.91%, of the portfolio at September 30, ~~2017, $87,388,000,~~2020, $45,881,000, or ~~15.34%~~7.68% of the portfolio at December 31, ~~2016,~~2019, and ~~$91,852,000~~$51,062,000 or ~~16.41%~~8.96% of the portfolio at September 30, ~~2016.~~2019. Loan participations purchased decreased to $5,936,000, or 0.90% of the portfolio, at September 30, 2020. The Company held no loan participation purchases at September 30, ~~2016, December 31, 2016 or September 30, 2017.~~2019. Loan participations sold decreased from ~~$7,632,000,~~$7,140,000, or ~~1.36%~~1.3%, of the portfolio at September 30, ~~2016,~~2019, to ~~$7,548,000,~~$4,866,000, or ~~1.3%~~0.8%, of the portfolio, at December 31, ~~2016,~~2019, and ~~increased to $9,069,000,~~remained the same at $4,866,000, or ~~1.6%~~0.7%, of the portfolio, at September 30, ~~2017.~~2020.

~~The following table sets forth the amounts of loans outstanding by category at~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016, the category percentages as of those dates, and the net change between the two periods presented.~~

~~Table 5. Loans~~

September 30, 2017 December 31, 2016
(in 000's) Dollar Amount % of Loans Dollar Amount % of Loans Net Change % Change
Commercial and industrial $ 46,951
8.1 % $ 49,005
8.6 % $ (2,054 ) (4.19 )%
Real estate – mortgage 290,462
49.9 % 288,200
50.6 % 2,262
0.78 %
RE construction & development 128,883
22.1 % 130,687
22.9 % (1,804 ) -1.38 %
Agricultural 58,505
10.0 % 56,918
10.0 % 1,587
2.79 %
Installment/other 57,583
9.9 % 44,949
7.9 % 12,634
28.11 %
Total Gross Loans $ 582,384
100.0 % $ 569,759
100.0 % $ 12,625
2.22 %

Deposits

~~Total deposits~~Deposit balances totaled ~~$725,298,000~~$994,783,000 at September 30, ~~2017~~,2020, representing an increase of ~~$48,669,000~~,$176,421,000, or ~~7.19%~~21.56%, from the balance of ~~$676,629,000~~$818,362,000 reported at December 31, ~~2016~~,2019, and an increase of ~~$54,012,000~~,$174,560,000, or ~~8.05%~~21.28%, from the balance of ~~$671,286,000~~$820,223,000 reported at September 30, ~~2016~~.2019.

Table 7. Deposits

The following table sets forth the amounts of deposits outstanding by category at September 30, ~~2017~~2020 and December 31, ~~2016~~,2019, and the net change between the two periods presented.


(in 000's)	September 30, 2020		December 31, 2019		Net Change		Percentage Change
Noninterest-bearing deposits	$	430,028	$	311,950	$	118,078	37.85	%
Interest-bearing deposits:
NOW and money market accounts	406,706		360,934		45,772		12.68	%
Savings accounts	94,467		80,078		14,389		17.97	%
Time deposits:
Under $250,000	41,379		44,926		(3,547)		(7.90)	%
$250,000 and over	22,203		20,474		1,729		8.44	%
Total interest-bearing deposits	564,755		506,412		58,343		11.52	%
Total deposits	$	994,783	$	818,362	$	176,421	21.56	%

~~Table 6. Deposits~~

(in 000's) September 30, 2017 December 31, 2016
Net
Change

Percentage
Change
Noninterest bearing deposits $ 315,877
$ 262,697
$ 53,180
20.24 %
Interest bearing deposits:

NOW and money market accounts 262,037
235,873
26,164
11.09 %
Savings accounts 81,378
75,068
6,310
8.41 %
Time deposits:

Under $250,000 53,702
87,419
(33,717 ) -38.57 %
$250,000 and over 12,304
15,572
(3,268 ) -20.99 %
Total interest bearing deposits 409,421
413,932
(4,511 ) -1.09 %
Total deposits $ 725,298
$ 676,629
$ 48,669
7.19 %

The Company's deposit base consists of two major components represented by ~~noninterest bearing~~noninterest-bearing (demand) deposits and ~~interest bearing~~interest-bearing deposits, totaling ~~$315,877,000~~$430,028,000 and ~~$409,421,000~~$564,755,000 at September 30, ~~2017~~,2020, respectively. ~~Interest bearing~~

Interest-bearing deposits consist of time certificates, NOW and money market accounts, and savings deposits. Total ~~interest bearing~~interest-bearing deposits ~~decrease~~d ~~$4,511,000~~,increased $58,343,000, or ~~1.09%~~11.52%, between December 31, ~~2016~~2019 and September 30, ~~2017~~,2020, and ~~noninterest bearing~~noninterest-bearing deposits ~~increase~~d ~~$53,180,000~~,increased $118,078,000, or ~~20.24%~~37.85%, between the same two periods presented. Included in the ~~decrease~~increase of ~~$4,511,000~~$58,343,000 in ~~interest bearing~~interest-bearing deposits during the nine months endedSeptember 30, ~~2017~~,2020, are ~~decreases~~increases of ~~$36,985,000~~$14,389,000 in ~~time deposits~~savings accounts and ~~$26,164,000~~$45,772,000 in NOW and money market accounts, partially offset by ~~increases~~decreases of ~~$6,310,000 in savings accounts and $26,164,000 in NOW and money market accounts. The decrease~~$1,818,000 in time deposits, ~~is attributed to the maturities of $17,285,000 in brokered deposits and $18,413,000 in out-of-market time deposits.~~

Core deposits, as defined by the Company as consisting of all deposits other than time deposits of more than $250,000 and brokered deposits, continue to provide the foundation for the Company's principal sources of funding and liquidity. These core

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deposits amounted to ~~96.96%~~97.77% and ~~90.82%~~ ~~of the total deposit portfolio at~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016, respectively. Brokered deposits totaled~~ ~~$9,755,000~~ at ~~September 30, 2017, as compared to~~ ~~$28,132,000~~ at ~~December 31, 2016, and $12,146,000 at~~ ~~September 30, 2016. Brokered deposits were~~ ~~1.34%~~ ~~and~~ ~~4.16%~~97.50% of total deposits at September 30, ~~2017~~2020 and December 31, ~~2016~~,2019, respectively. The Company held no brokered deposits at September 30, 2020 and December 31, 2019.

On a year-to-date average, the Company experienced an increase of ~~$45,462,000~~,$48,556,000, or ~~7.13%~~5.85%, in total deposits between the nine months endedSeptember 30, ~~2017~~2020 and the nine months ended September 30, ~~2016~~.2019. Between these two periods, ~~average interest bearing~~interest-bearing deposits ~~increase~~d ~~$30,499,000~~,increased $32,000, or ~~8.28%~~0.01%, and ~~total~~ noninterest-bearing deposits ~~increase~~d ~~$14,963,000~~,increased $48,524,000, or ~~5.57%~~15.83%, on a year-to-date average basis.

Short-Term Borrowings

At September 30, ~~2017~~,2020, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling ~~$283,948,000~~,$341,410,000, as well as Federal Home Loan Bank (FHLB) lines of credit totaling ~~$14,400,000~~.$5,111,000. At September 30, ~~2017,~~2020, the Company had uncollateralized lines of credit with both Pacific Coast Bankers Bank ~~("PCBB")~~(PCBB), Union Bank, and Zion's Bank, totaling $10,000,000, $10,000,000, and $20,000,000, respectively. These lines of credit generally have interest rates tied to either the Federal Funds rate, short-term U.S. Treasury rates, or LIBOR. All lines of credit are on an “as available” basis and can be revoked by the grantor at any time. At September 30, ~~2017~~2020 and September 30, ~~2016~~,2019, the Company had no outstanding borrowings. The Company had collateralized FRB lines of credit of ~~$323,162,000~~,$313,445,000, collateralized FHLB lines of credit totaling ~~$2,037,000~~,$5,815,000, and uncollateralized lines of credit of $10,000,000 with PCBB, $10,000,000 with Union Bank, and $20,000,000 with Zions Bank at December 31, ~~2016~~.2019.

Asset Quality and Allowance for Credit Losses

Lending money is the Company's principal business activity, and ensuring appropriate evaluation, diversification, and control of credit risks is a primary management responsibility. Losses are implicit in lending activities and the amount of such losses will vary, depending on the risk characteristics of the loan portfolio as affected by local economic conditions and the financial experience of borrowers.

The allowance for credit losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in existing loans and commitments to extend credit. The adequacy of the allowance for credit losses is based upon management's continuing assessment of various factors affecting the collectability of loans and commitments to extend credit; including current economic conditions, past credit experience, collateral, and concentrations of credit. There is no precise method of predicting specific losses or amounts which may ultimately be charged off on particular segments of the loan portfolio. The conclusion that a loan may become uncollectible, either in part or in whole is subjective and contingent upon economic, environmental, and other conditions which cannot be predicted with certainty. When determining the adequacy of the allowance for credit losses, the Company follows, in accordance with GAAP, the guidelines set forth in the Revised Interagency Policy Statement on the Allowance for Loan and Lease Losses ~~(“Statement”)~~(Statement) issued by banking regulators in December 2006. The Statement is a revision of the previous guidance released in July 2001, and outlines characteristics that should be used in segmentation of the loan portfolio for purposes of the analysis including risk classification, past due status, type of loan, industry or collateral. It also outlines factors to consider when adjusting the loss factors for various segments of the loan portfolio, and updates previous guidance that describes the responsibilities of the board of directors, management, and bank examiners regarding the allowance for credit losses. Securities and Exchange Commission Staff Accounting Bulletin No. 102 was released during July 2001, and represents the SEC staff’s view relating to the incurred loss methodologies and supporting documentation for the Allowance for Loan and Lease Losses that should be observed by all public companies in complying with the federal securities laws and the Commission’s interpretations. It is also generally consistent with the guidance published by the banking regulators.

The allowance for loan losses includes an asset-specific component, as well as a general or formula-based component. The Company segments the loan and lease portfolio into eleven (11) segments, primarily by loan class and type, that have homogeneity and commonality of purpose and terms for analysis under the formula-based component of the allowance. Those loans which are determined to be impaired under current accounting guidelines are not subject to the formula-based reserve analysis, and evaluated individually for specific impairment under the asset-specific component of the allowance.

The Company’s methodology for assessing the adequacy of the allowance for credit losses consists of several key elements, which include:

~~- the~~•The formula allowance

~~- specific~~•Specific allowances for problem graded loans identified as ~~impaired~~impaired; and

~~- and the~~•The unallocated allowance

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The formula allowance is calculated by applying loss factors to outstanding loans and certain unfunded loan commitments. Loss factors are based on the Company’s historical loss experience and on the internal risk grade of those loans, and may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. Factors that may affect collectability of the loan portfolio include:

•Levels of, and trends in delinquencies and nonaccrual loans;

•Trends in volumes and term of loans;

•Effects of any changes in lending policies and procedures including those for underwriting, collection, charge-off, and recovery;

•Experience, ability, and depth of lending management and staff;

•National and local economic trends and conditions and;

•Concentrations of credit that might affect loss experience across one or more components of the portfolio, including high-balance loan concentrations and participations.

Management determines the loss factors for problem graded loans (substandard, doubtful, and loss), special mention loans, and pass graded loans, based on a loss migration model. The migration analysis incorporates loan losses over the previous quarters as determined by management (time horizons adjusted as business cycles or environment changes) and loss factors are adjusted to recognize and quantify the loss exposure from changes in market conditions and trends in the Company’s loan portfolio. For purposes of this analysis, loans are grouped by internal risk classifications and categorized as pass, special mention, substandard, doubtful, or loss. Certain loans are homogeneous in nature and are therefore pooled by risk grade. These homogeneous loans include consumer installment and home equity loans. Special mention loans are currently performing but are potentially weak, as the borrower has begun to exhibit deteriorating trends which, if not corrected, could jeopardize repayment of the loan and result in further downgrades. Substandard loans have well-defined weaknesses which, if not corrected, could jeopardize the full satisfaction of the debt. A loan classified as doubtful has critical weaknesses that make full collection of the obligation improbable. Classified loans, as defined by the Company, include impaired loans and loans categorized as substandard, doubtful, and loss which are not considered impaired. At September 30, ~~2017~~,2020, impaired and classified loans totaled ~~$28,214,000,~~$15,076,000, or ~~5.2%~~2.3%, of gross loans as compared to ~~$29,838,000~~,$17,664,000, or ~~5.2%~~3.2%, of gross loans at December 31, ~~2016~~.2019.

The student loan portfolio is reviewed for allowance adequacy under the same guidelines as other loans in the Company's portfolio, with additional emphasis for specific risks associated with the portfolio. In general, the Company provides an additional reserve for a percentage of loans in forbearance and loans rated special mention.

Loan participations are reviewed for allowance adequacy under the same guidelines as other loans in the Company’s portfolio, with an additional participation factor added, if required, for specific risks associated with participations. In general, participations are subject to certain thresholds set by the Company, and are reviewed for geographic location as well as the well-being of the underlying agent bank.

Specific allowances are established based on management’s periodic evaluation of loss exposure inherent in impaired loans. For impaired loans, specific allowances are determined based on the net realizable value of the underlying collateral, the net present value of the anticipated cash flows, or the market value of the underlying assets. Formula allowances for classified loans, excluding impaired loans, are determined on the basis of additional risks involved with individual loans that may be in excess of risk factors associated with the loan portfolio as a whole. The specific allowance is different from the formula allowance in that the specific allowance is determined on a loan-by-loan basis based on risk factors directly related to a particular loan, as opposed to the formula allowance which is determined for a pool of loans with similar risk characteristics, based on past historical trends and other risk factors which may be relevant on an ongoing basis.

The unallocated portion of the allowance is based upon management’s evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to,

general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions.

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Table 8. Allowance for Loan Losses

The following table summarizes the specific allowance, formula allowance, and unallocated allowance at September 30, ~~2017~~2020 and December 31, ~~2016~~,2019, as well as classified loans at those period-ends.


(in 000's)	September 30, 2020		December 31, 2019
Specific allowance – impaired loans	$	402	$	1,145
Formula allowance – classified loans not impaired	7		59
Formula allowance – special mention loans	318		355
Total allowance for special mention and classified loans	727		1,559

Formula allowance for pass loans	7,266		6,176
Unallocated allowance	715		173
Total allowance for loan losses	$	8,708	$	7,908

Impaired loans	15,059		17,072
Classified loans not considered impaired	17		592
Total classified loans / impaired loans	$	15,076	$	17,664
Special mention loans not considered impaired	$	11,890	$	5,846

(in 000's) September 30, 2017 December 31, 2016
Specific allowance – impaired loans $ 1,741
$ 1,360
Formula allowance – classified loans not impaired 1,286
1,226
Formula allowance – special mention loans 385
248
Total allowance for special mention and classified loans 3,412
2,834

Formula allowance for pass loans 4,724
5,371
Unallocated allowance 1,022
697
Total allowance for loan losses $ 9,158
$ 8,902

Impaired loans 15,338
16,179
Classified loans not considered impaired 12,876
13,659
Total classified loans / impaired loans $ 28,214
$ 29,838
Special mention loans not considered impaired $ 13,990
$ 5,515

~~While impaired~~Impaired loans decreased ~~$841,000~~$2,013,000 between December 31, ~~2016~~2019 and September 30, ~~2017~~,2020, and the specific allowance related to impaired loans ~~increase~~d ~~$381,000~~decreased $743,000 between December 31, ~~2016~~2019 and September 30, ~~2017~~ ~~due to the addition of a new highly reserved impaired Ag loan in the period.~~2020. The decrease in impaired loans is primarily due to a decrease in ~~troubled debt restructures.~~non-performing loans. The formula allowance related to classified and special mention unimpaired loans ~~increase~~ddecreased by ~~$197,000~~$89,000 between December 31, ~~2016~~2019 and September 30, ~~2017~~.2020. The unallocated allowance increased from ~~$697,000~~$173,000 at December 31, ~~2016~~2019 to ~~$1,022,000~~$715,000 at September 30, ~~2017. The~~2020. There has been an increase in ~~unallocated allowance is~~ the ~~result of declining historical loss factors. Although there has been a reduction in~~ required loss reserves as economic conditions have ~~improved, the~~destabilized due to COVID-19. The Company has a concentration in loans to finance CRE, construction and land development activities not secured by real estate. These loans have inherently higher risk characteristics and management believes maintaining additional, unallocated reserves to address the losses inherent ~~losses~~ in these loans is reasonable and appropriate. The level of “pass” loans increased approximately ~~$5,972,000~~$59,490,000 between December 31, ~~2016~~2019 and September 30, ~~2017.~~2020. The related formula allowance ~~decrease~~d ~~$647,000~~increased $1,090,000 during the same period. The formula allowance for “pass loans” is derived from the loan loss factors under migration analysis.

The Company’s methodology includes features that are intended to reduce the difference between estimated and actual losses. The specific allowance portion of the analysis is designed to be self-correcting by taking into account the current loan loss experience based on that portion of the portfolio. By analyzing the estimated losses inherent in the loan portfolio on a quarterly basis, management is able to adjust specific and inherent loss estimates using the most recent information available. In performing the periodic migration analysis, management believes that historical loss factors used in the computation of the formula allowance need to be adjusted to reflect current changes in market conditions and trends in the Company’s loan portfolio. There are a number of other factors which are reviewed when determining adjustments in the historical loss factors. Those factors ~~include~~include: 1) trends in delinquent and nonaccrual loans, 2) trends in loan volume and terms, 3) effects of changes in lending policies, 4) concentrations of credit, 5) competition, 6) national and local economic trends and conditions, 7) experience of lending staff, 8) loan review and Board of Directors oversight, 9) high balance loan concentrations, and 10) other business conditions.

The general reserve requirements (ASC 450-70) decreased with the continued strengthening of local, state, and national economies and their impact on our local lending base, which has resulted in a lower qualitative component for the general reserve calculation. These positive factors were partially offset by the Company including OREO financial results in loss history and extending the look back period used to capture the loss history for the quantitative portion of the ALLL. In the third quarter of 2013, the look back period was changed from 4 years toOur stake-in-the-ground (December 31, 2005), in an effort to include higher losses experienced during the credit crisis. Changes in the mix of historical losses in the look back period resulted in a reallocation of the general reserve component of the allowance amount within the various loan segments as compared to September 30, 2017, as loss experience by segment has fluctuated over time. The stake-in-the-ground

methodology requires the Company to use December 31, 2005 as the starting point of the look back period to capture loss ~~history.~~history and better capture an entire economic cycle. Time horizons are subject to Management's assessment of the current period, taking into consideration changes in business cycles and environment changes.

Management and the Company’s lending officers evaluate the loss exposure of classified and impaired loans on a weekly/monthly basis. The Company’s Loan Committee meets weekly and serves as a forum to discuss specific problem assets that pose significant concerns to the Company, and to keep the Board of Directors informed through committee minutes. All special mention and classified loans are reported quarterly on Problem Asset Reports and Impaired Loan Reports and are reviewed by

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senior management. Migration analysis and impaired loan analysis are performed on a quarterly basis and adjustments are made to the allowance as deemed necessary. The Board of Directors is kept abreast of any changes or trends in problem assets on a monthly basis, or more often if required.

The specific allowance for impaired loans is measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. The amount of impaired loans is not directly comparable to the amount of nonperforming loans disclosed later in this section. The primary differences between impaired loans and nonperforming loans are: i) all loan categories are considered in determining nonperforming loans while impaired loan recognition is limited to commercial and industrial loans, commercial and residential real estate loans, construction loans, and agricultural loans, and ii) impaired loan recognition considers not only loans 90 days or more past due, restructured loans and nonaccrual loans but may also include problem loans other than delinquent loans.

The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include nonaccrual loans, troubled debt restructures, and performing loans in which full payment of principal or interest is not expected. Management bases the measurement of these impaired loans either on the fair value of the loan's collateral or the expected cash flows on the ~~loans~~loan discounted at the loan's stated interest rates. Cash receipts on impaired loans not performing to contractual terms and that are on nonaccrual status are used to reduce principal balances. Impairment losses are included in the allowance for credit losses through a charge to the provision, if applicable.

In most cases, the Company uses the cash basis method of income recognition for impaired loans. In the case of certain troubled debt restructuring, for which the loan has been performing for a prescribed period of time under the current contractual terms, income is recognized under the accrual method. At September 30, ~~2017~~,2020, included in impaired loans, were troubled debt restructures totaling ~~$12,150,000. Nonaccrual loans, totaling $5,124,000,~~$4,571,000, of which $2,962,000 were ~~included in that balance.~~on nonaccrual. The remaining $1,609,000 in troubled debt restructures ~~totaling~~ ~~$7,026,000~~, were considered current with regards to payments, and were performing according to their modified contractual terms.

The following tables summarize modification under the CARES Act by loan category as of September 30, 2020 (in 000's).


Loan Category	COVID-19 Modified Loan Balance		Total Portfolio Balance

Commercial and Industrial:	$	667	$	65,742

Commercial Real Estate:
Hospitality	39,757		53,711
Health Club	14,775		14,775
Construction and land development	10,836		130,202
Commercial/Office/Retail	2,687		101,195
Residential Mortgages	—		45,722
Home improvement and home equity loans	—		114
All other CRE	1,058		136,019

Agricultural:	—		51,587

Installment and student loans:	34		62,415
Total:	$	69,814	$	661,482

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Commercial and industrial loans and real estate mortgage loans, respectively, comprised approximately ~~24.04%~~3.28% and ~~25.71%~~18.93% of total impaired loan balances at September 30, ~~2017.~~2020. Of the ~~$3,687,000~~$494,000 in commercial and industrial impaired loans reported at September 30, ~~2017,~~2020, two loans, with a total recorded investment of ~~$286,000,~~$494,000, were secured by real estate. Specific collateral related to impaired loans is reviewed for current appraisal information, economic trends within geographic markets, loan-to-value ratios, and other factors that may impact the value of the loan collateral. Adjustments are made to collateral values as needed for these factors. Of total impaired loans at September 30, ~~2017,~~2020, approximately ~~$11,046,000,~~$14,403,000, or ~~72.0%~~95.6%, are secured by real estate. The majority of impaired real estate construction and development loans are for the purpose of residential construction, residential and commercial acquisition and development, and land development. Residential construction loans are made for the purpose of building residential 1-4 single family homes. Residential and commercial acquisition and development loans are made for the purpose of purchasing land, developing that land if required, and developing real estate or commercial construction projects on those properties. Land development loans are made for the purpose of converting raw land into construction-ready building sites.

Table 9. Impaired Loans and Specific Reserves

The following table summarizes the components of impaired loans and their related specific reserves at September 30, ~~2017~~2020 and December 31, ~~2016.~~2019.


	Impaired Loan Balance		Reserve		Impaired Loan Balance		Reserve
(in 000’s)	September 30, 2020		September 30, 2020		December 31, 2019		December 31, 2019
Commercial and industrial	$	494	$	—	$	1,754	$	606
Real estate – mortgage	2,851		187		3,146		283
RE construction & development	11,058		—		11,478		—
Agricultural	656		215		694		256
Installment and student loans	—		—		—		—
Total impaired loans	$	15,059	$	402	$	17,072	$	1,145

Impaired Loan Balance Reserve Impaired Loan Balance Reserve
(in 000’s) September 30, 2017 September 30, 2017 December 31, 2016 December 31, 2016
Commercial and industrial $ 3,687
$ 571
$ 5,009
$ 757
Real estate – mortgage 3,944
427
3,931
603
RE construction & development 6,816
—
6,274
—
Agricultural 891
743
—
—
Installment/other —
—
965
—
Total Impaired Loans $ 15,338
$ 1,741
$ 16,179
$ 1,360

Included in impaired loans are loans modified in troubled debt restructurings (TDRs), where concessions have been granted to borrowers experiencing financial difficulties in an attempt to maximize collection. The Company makes various types of concessions when structuring TDRs including rate reductions, payment extensions, and forbearance. At September 30, ~~2017~~,2020, approximately ~~$3,835,000~~$1,430,000 of the total ~~$12,150,000~~$4,571,000 in TDRs was comprised of real estate mortgages. An additional ~~$6,798,000~~$2,486,000 was related to real estate construction and development loans. There were no reserve amounts for real estate construction and development impaired loans ~~and impaired installment loans~~ at December 31, ~~2016~~2019 and September 30, ~~2017,~~2020, due to the ~~Company~~value of the collateral securing ~~collateral on~~ those loans.

As of September 30, 2020, the Company had executed 23 payment deferrals or modifications on outstanding loan balances of $69,814,000 in connection with the COVID-19 relief provided by the CARES Act. These deferrals were generally no more than six months in duration and were not considered troubled debt restructurings based on interagency guidance issued in March 2020.

Total troubled debt restructurings ~~decrease~~d ~~2.10%~~decreased 11.88% between September 30, ~~2017~~2020 and December 31, ~~2016~~.2019. Nonaccrual TDRs ~~decrease~~dincreased by ~~29.46%~~ ~~while~~5.90% and accruing TDRs ~~increase~~ddecreased by ~~36.53%~~32.65% over the same period. Total residential mortgages and real estate construction TDRs ~~increased slightly to~~ ~~5.39%~~. Many of these credits are related to real estate projects that slowed significantly or stalled during the recession, leading the Company to pursue restructuring of the qualified credits allowing the real estate market time to recover and developers opportunity to finish projects at a slower pace. Concessions granted in these circumstances include lengthened maturities and/or rate reductions that enabled the borrower to finish the projects and may be entirely successful. In large part, current successes are relateddecreased $696,000 to a ~~recovering real estate market.~~percentage total of 15.09%.

Table 10. TDRs

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The following ~~table summarizes~~tables summarize TDRs by type, classified separately as nonaccrual or accrual, which are included in impaired loans at September 30, ~~2017~~2020 and December 31, ~~2016.~~2019.


	Total TDRs		Nonaccrual TDRs		Accruing TDRs			Total TDRs		Nonaccrual TDRs		Accruing TDRs
(in 000's)	September 30, 2017		September 30, 2017		September 30, 2017		(in 000's)	September 30, 2020		September 30, 2020		September 30, 2020
Commercial and industrial	$	630	$	250	$	381	Commercial and industrial	$	—	$	—	$	—
Real estate - mortgage:
Real estate mortgage:							Real estate mortgage:
Commercial real estate	1,147		466		681		Commercial real estate	884		—		884
Residential mortgages	2,688		—		2,688		Residential mortgages	546		—		546

Total real estate mortgage	3,835		466		3,369		Total real estate mortgage	1,430		—		1,430
RE construction & development	6,798		4,408		2,389		RE construction & development	2,486		2,486		—
Agricultural	887		—		887		Agricultural	655		477		179
Total Troubled Debt Restructurings	$	12,150	$	5,124	$	7,026

Total troubled debt restructurings							Total troubled debt restructurings	$	4,571	$	2,963	$	1,609


	Total TDRs		Nonaccrual TDRs		Accruing TDRs
(in 000's)	December 31, 2019		December 31, 2019		December 31, 2019
Commercial and industrial	$	9	$	—	$	9
Real estate mortgage:
Commercial real estate	898		—		898
Residential mortgages	1,060		—		1,060

Total real estate mortgage	1,958		—		1,958
RE construction & development	2,654		2,654		—
Agricultural	566		144		422

Total troubled debt restructurings	$	5,187	$	2,798	$	2,389

Total TDRs Nonaccrual TDRs Accruing TDRs
(in 000's) December 31, 2016 December 31, 2016 December 31, 2016
Commercial and industrial $ 1,356
$ 565
$ 791
Real estate - mortgage:

Commercial real estate 1,454
1,126
328
Residential mortgages 2,368
—
2,368
Total real estate mortgage 3,822
1,126
2,696
RE construction & development 6,267
4,608
1,659
Installment/other 965
965
—
Total Troubled Debt Restructurings $ 12,410
$ 7,264
$ 5,146

Of the ~~$12,150,000~~$4,571,000 in total TDRs at September 30, ~~2017, $5,124,000~~2020, $2,963,000 were on nonaccrual status at period-end. Of the ~~$12,410,000~~$5,187,000 in total TDRs at December 31, ~~2016, $7,264,000~~2019, $2,798,000 were on nonaccrual status at period-end. As of September 30, ~~2017,~~2020, the Company ~~has~~had no commercial real estate (CRE) workouts whereby an existing loan was restructured into multiple new loans (i.e., A Note/B Note structure).

~~For a~~A restructured loan tomay return to accrual status ~~there needs to be at least~~after 6 months successful payment ~~history. In addition, the Company’s Credit Administration~~history if continued satisfactory performance is expected. The Company typically performs a financial analysis of the credit to determine whether the borrower has the ability to continue to ~~perform successfully~~meet payments over the remaining life of the loan. This includes, but is not limited to, a review of financial statements and a cash flow analysis of the borrower. Only after ~~determining~~determination that the borrower has the ability to perform under the terms of the loans will the restructured credit be considered for accrual status.

Table 7.11. Credit Quality Indicators for Outstanding Student Loans

The following table summarizes the credit quality indicators for outstanding student loans as of September 30, 2020 and December 31, 2019 (in 000's, except for number of borrowers):


	September 30, 2020					December 31, 2019
	Number of Loans	Amount		Accrued Interest		Number of Loans	Amount		Accrued Interest
School	320	$	12,758	$	2,940	601	$	24,198	$	4,689
Grace	212	9,379		2,434		49	1,598		394
Repayment	547	24,322		577		507	24,986		203
Deferment	162	7,044		445		124	4,392		204
Forbearance	109	5,174		153		224	10,626		188
Total	1,350	$	58,677	$	6,549	1,505	$	65,800	$	5,678

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Included in installment loans are $58,677,000 and $65,800,000 in student loans at September 30, 2020 and December 31, 2019, respectively, made to medical and pharmacy school students. Accrued interest on loans that had not entered repayment status totaled $5,972,000 at September 30, 2020 and $5,475,000 at December 31, 2019. At September 30, 2020 there were 818 loans within repayment, deferment, and forbearance which represented $24,322,000, $7,044,000, and $5,174,000, respectively. At December 31, 2019, there were 855 loans within repayment, deferment, and forbearance which represented $24,986,000, $4,392,000 and $10,626,000, respectively. As of September 30, 2020 and December 31, 2019 the reserve against the student loan portfolio was $1,761,000 and $2,091,000, respectively.

Loan interest rates on the student loan portfolio range from 2.875% to 7.875% and 4.75% to 9.75% at September 30, 2020 and December 31, 2019, respectively.

Table 12. Nonperforming Assets

(in 000's) September 30, 2017 December 31, 2016
Nonaccrual Loans (1) $ 5,145
$ 7,264
Restructured Loans 7,026
5,146
Loans past due 90 days or more, still accruing —
—
Total nonperforming loans 12,171
12,410
Other real estate owned 5,745
6,471
Total nonperforming assets $ 17,916
$ 18,881

Nonperforming loans to total gross loans 2.09 % 2.18 %
Nonperforming assets to total assets 2.12 % 2.40 %
Allowance for loan losses to nonperforming loans 75.24 % 71.73 %


~~(1)~~	~~Included in nonaccrual loans at September 30, 2017~~The following table summarizes the components of nonperforming assets as of September 30, 2020 and ~~December 31, 2016 are restructured loans totaling $5,124,000 and $7,264,000, respectively.~~

~~Non-performing loans decreased $239,000 between~~ December 31, ~~2016~~2019 (in 000's), and ~~September 30, 2017. Nonaccrual~~the percentage of nonperforming assets to total gross loans, ~~decreased $2,119,000 between December 31, 2016~~total assets, and ~~September 30, 2017, with real estate mortgage and real estate construction loans comprising approximately 94.73% of total~~the allowance for loan losses:


(in 000's)	September 30, 2020			December 31, 2019
Nonaccrual loans (1)	$	11,535		$	11,697
Restructured loans	1,609			2,389
Loans past due 90 days or more, still accruing	53			386
Total nonperforming loans	13,197			14,472
Other real estate owned	5,018			6,753
Total nonperforming assets	$	18,215		$	21,225

Nonperforming loans to total gross loans	2.00		%	2.42		%
Nonperforming assets to total assets	1.61		%	2.22		%
Allowance for loan losses to nonperforming loans	65.98		%	54.64		%

(1) Included in nonaccrual loans at September 30, ~~2017. The reduction in nonaccrual~~2020 and December 31, 2019 are restructured loans istotaling $2,962,000 and $2,797,000, respectively.

Nonperforming assets, which are primarily ~~attributed~~related to the real estate loan and other real estate owned portfolio, decreased $3,010,000 from a balance of $21,225,000 at December 31, 2019 to a ~~payoff~~balance of ~~a $965,000~~$18,215,000 at September 30, 2020, and remained relatively high compared to peers during the nine months ended September 30, 2020. The ratio of the allowance for loan ~~and the migration of a $589,000 loan~~losses to ~~accrual.~~ nonperforming loans increased from 54.64% at December 31, 2019 to 65.98% at September 30, 2020.

The following table summarizes the nonaccrual totals by loan category for the periods ~~shown. The ratio of the allowance for loan losses to nonperforming loans increased from 71.73% at December 31, 2016 to 75.24% at September 30, 2017.~~shown:


	Balance		Balance		Change from
(in 000's)	September 30, 2020		December 31, 2019		December 31, 2019
Nonaccrual Loans:
Commercial and industrial	$	—	$	75	$	(75)
Real estate - mortgage	—		—		—
RE construction & development	11,058		11,478		(420)
Agricultural	477		144		333
Installment and student loans	—		—		—
Total nonaccrual loans	$	11,535	$	11,697	$	(162)

(in 000's)

Balance Balance Change from
Nonaccrual Loans: September 30, 2017 December 31, 2016 December 31, 2016
Commercial and industrial $ 271
$ 565
$ (294 )
Real estate - mortgage 466
1,126
(660 )
RE construction & development 4,408
4,608
(200 )
Installment/other —
965
(965 )
Total Nonaccrual Loans $ 5,145
$ 7,264
$ (2,119 )

Loans past due more than 30 days receive increased management attention and are monitored for increased risk. The Company continues to move past due loans to nonaccrual status in an ongoing effort to recognize and address loan problems as early and most effectively as possible. As impaired loans, nonaccrual and restructured loans are reviewed for specific reserve allocations, the allowance for credit losses is adjusted accordingly.

Except for the nonaccrual loans included in the above table, or those included in the impaired loan totals, there were no loans at September 30, ~~2017~~2020 where the known credit problems of a borrower caused the Company to have serious doubts as to the

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ability of such borrower to comply with the present loan repayment terms and which would result in such loan being included as a nonaccrual, past due, or restructured loan at some future date.

Nonperforming assets, which are primarily related to the real estate loan and other real estate owned portfolio, decreased$965,000 from a balance of $18,881,000 at December 31, 2016 to a balance of $17,916,000Nonaccrual loans, totaling $11,535,000 at September 30, ~~2017, but remained relatively high compared to peers during the nine months ended September 30, 2017. Nonaccrual loans, totaling $5,145,000 at September 30, 2017,~~2020, decreased ~~$2,119,000~~$162,000 from the balance of ~~$7,264,000~~$11,697,000 reported at December 31, ~~2016.~~2019, with real estate mortgage and real estate construction loans comprising 95.86% of total nonaccrual loans at September 30, 2020. In determining the adequacy of the underlying collateral related to these loans, management monitors trends within specific geographical areas, loan-to-value ratios, appraisals, and other credit issues related to the specific loans. Impaired loans decreased ~~$841,000~~$2,013,000 during the nine months ended September 30, ~~2017~~2020 to a balance of ~~$15,338,000~~$15,059,000 at September 30, ~~2017.~~2020. Other real estate owned through foreclosure decreased to ~~$5,745,000~~$5,018,000 for the period ended September 30, ~~2017 from~~2020 as compared to the ~~$6,471,000~~ balance of $6,753,000 recorded at December 31, ~~2016.~~2019. Nonperforming assets as a percentage of total assets decreased from ~~2.40%~~2.22% at December 31, ~~2016~~2019 to ~~2.12%~~1.61% at September 30, ~~2017.~~2020.

The following table summarizes various nonperforming components of the loan portfolio, the related allowance for credit losses and provision for credit losses for the periods shown.


(in 000's)	September 30, 2020			December 31, 2019			September 30, 2019
Provision for credit losses year-to-date	$	2,138		$	20		$	15
Allowance as % of nonperforming loans	65.98		%	54.64		%	52.99		%

Nonperforming loans as % total loans	2.00		%	2.42		%	2.72		%
Restructured loans as % total loans	0.69		%	0.87		%	0.93		%

(in 000's) September 30, 2017 December 31, 2016 September 30, 2016
Recovery of provision for credit losses year-to-date $ (24 ) $ (21 ) $ (7 )
Allowance as % of nonperforming loans 75.24 % 71.73 % 77.06 %

Nonperforming loans as % total loans 2.09 % 2.18 % 2.07 %
Restructured loans as % total loans 2.09 % 2.18 % 2.00 %

Management continues to monitor economic conditions in the real estate market for signs of ~~further~~ deterioration or improvement which may impact the level of the allowance for loan losses required to cover identified losses in the loan portfolio. ~~Greater focus~~Focus has been placed on monitoring and reducing the level of problem assets, while working with borrowers to find more options, including loan ~~restructures, to work through these difficult economic times.~~restructures. Restructured loan balances are comprised of 299 loans totaling ~~$12,150,000~~$4,571,000 at September 30, ~~2017,~~2020, compared to 2813 loans totaling ~~$12,410,000~~$5,187,000 at December 31, ~~2016.~~

2019.

The following table summarizes special mention loans by type at September 30, ~~2017~~2020 and December 31, ~~2016~~.2019.


(in thousands)	September 30, 2017		December 31, 2016		(in thousands)	September 30, 2020		December 31, 2019
Commercial and industrial	$	2,635	$	4,416	Commercial and industrial	$	1,945	$	919
Real estate - mortgage:
Real estate mortgage:					Real estate mortgage:
Commercial real estate	8,541		621		Commercial real estate	7,418		1,608
Residential mortgages	647		—		Residential mortgages	354		88

Total real estate mortgage	9,188		621		Total real estate mortgage	7,772		1,696
RE construction & development	2,609		928		RE construction & development	998		998
Agricultural	985		—		Agricultural	1,441		1,279
Total Special Mention Loans	$	15,417	$	5,965
Installment and student loans					Installment and student loans	—		386
Total special mention loans					Total special mention loans	$	12,156	$	5,278

The Company focuses on competition and other economic conditions within its market area and other geographical areas in which it does business, which may ultimately affect the risk assessment of the portfolio. The Company continues to experience increased competition from major banks, local independents and non-bank institutions which creates pressure on loan pricing. ~~Low interest rates and a weak economy continue to dominate, even as real estate prices show signs of stabilization and interest rates have begun to rise.~~ The Company continues to place increased emphasis on reducing both the level of nonperforming assets and the level of losses on the disposition of these assets. It is in the best interest of both the Company and the borrowers to seek alternative options to foreclosure in an effort to reduce the impacts on the real estate market. As part of this strategy, the Company ~~has increased its level of~~enters into troubled debt restructurings, when it ~~makes economic sense.~~improves collection prospects. While business and consumer spending ~~show~~have shown improvement ~~in recent quarters, current GDP remains anemic. It~~over the last several years, it is difficult to forecast ~~what~~the impact ~~Federal Reserve actions to hold rates low~~COVID-19 will have on the economy. Local unemployment rates in the San Joaquin Valley have improved, but ~~remain elevated compared with other regions~~are expected to substantially increase due to closure of non-essential business and historically are higher as a result of the area's agricultural dynamics. The Company believes that the Central San Joaquin Valley will continue to grow and diversify as property and housing costs remain low relative to other areas of the state.shelter-in-place orders. Management recognizes the increased risk of loss due to the

Company's exposure to local and worldwide economic conditions, as well as potentially volatile real estate markets, and takes these factors into consideration when analyzing the adequacy of the allowance for credit losses.

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The following table provides a summary of the Company's allowance for possible credit losses, provisions made to that allowance, and charge-off and recovery activity affecting the allowance for the nine months ended September 30, ~~2017~~2020 and September 30, ~~2016.~~2019.

Table 8.13. Allowance for Credit Losses - Summary of Activity


(in 000's)	September 30, 2017			September 30, 2016			(in 000's)	September 30, 2020			September 30, 2019
Total loans outstanding at end of period before deducting allowances for credit losses	$	583,601		$	560,651		Total loans outstanding at end of period before deducting allowances for credit losses	$	660,444		$	569,500
Average loans outstanding during period	565,068			532,133			Average loans outstanding during period	632,221			575,323

Balance of allowance at beginning of period	8,902			9,713			Balance of allowance at beginning of period	7,908			8,395
Loans charged off:
Loans charged-off:							Loans charged-off:
Real estate	(2		)	(29		)	Real estate	(358)			(5)
Commercial and industrial	(106		)	(846		)	Commercial and industrial	—			—
Installment and other	(12		)	(20		)
Total loans charged off	(120		)	(895		)
Recoveries of loans previously charged off:
Agricultural							Agricultural	—			(36)
Installment and student loans							Installment and student loans	(1,134)			(377)
Total loans charged-off							Total loans charged-off	(1,492)			(418)
Recoveries of loans previously charged-off:							Recoveries of loans previously charged-off:
Real estate	73			50			Real estate	125			60
Commercial and industrial	195			51			Commercial and industrial	22			64
Installment and other	132			6
Installment and student loans							Installment and student loans	7			114
Total loan recoveries	400			107			Total loan recoveries	154			238
Net loans recovered (charged off)	280			(788		)
Net loans charged-off							Net loans charged-off	(1,338)			(180)

Recovery of provision charged to operating expense	(24		)	(7		)
Provision charged to operating expense							Provision charged to operating expense	2,138			15
Balance of allowance for credit losses at end of period	$	9,158		$	8,918		Balance of allowance for credit losses at end of period	$	8,708		$	8,230

Net loan (recoveries) charge offs to total average loans (annualized)	(0.07		)%	0.20		%
Net loan (recoveries) charge offs to loans at end of period (annualized)	(0.10		)%	0.19		%
Net loan charged-off to total average loans (annualized)							Net loan charged-off to total average loans (annualized)	0.28		%	0.04		%
Net loan charged-off to loans at end of period (annualized)							Net loan charged-off to loans at end of period (annualized)	0.05		%	0.06		%
Allowance for credit losses to total loans at end of period	1.57		%	1.59		%	Allowance for credit losses to total loans at end of period	1.32		%	1.45		%
Net loan (recoveries) charge offs to allowance for credit losses (annualized)	(6.11		)%	35.34		%
Provision for credit losses to net (charge offs) recoveries (annualized)	(11.43		)%	1.18		%
Net loan charged-off to allowance for credit losses (annualized)							Net loan charged-off to allowance for credit losses (annualized)	3.84		%	4.37		%
Provision for credit losses to net charged-off (annualized)							Provision for credit losses to net charged-off (annualized)	(319.58)		%	(11.11)		%

Provisions for credit losses are determined on the basis of management's periodic credit review of the loan portfolio, consideration of past loan loss experience, current and future economic conditions, and other pertinent factors. Management believes its estimate of the allowance for credit losses adequately covers estimated losses inherent in the loan portfolio and, based on the condition of the loan portfolio, management believes the allowance is sufficient to cover risk elements in the loan portfolio. For the nine months ended September 30, ~~2017, the recovery of~~2020, a $2,138,000 provision ~~for~~was recorded to the allowance for credit losses ~~was $24,000~~ as compared to a ~~recovery of~~$15,000 provision ~~of $7,000~~recorded for the nine months ended September 30, ~~2016.~~2019.

Net ~~recoveries~~charge-offs during the nine months ended September 30, ~~2017~~2020 totaled ~~$280,000~~$1,338,000 as compared to net charge-offs of ~~$788,000~~$180,000 for the nine months ended September 30, ~~2016.~~2019. The Company charged-off, or had partial charge-offs on 326 loans during the nine months ended September 30, ~~2017,~~2020, as compared to 11fourteen loans during the same period ended September 30, ~~2016,~~2019, and 1335 loans during the year ended December 31, ~~2016.~~2019. The annualized percentage of net ~~recoveries~~charge-offs to average loans ~~were 0.07%~~was 0.28% for the nine months ended September 30, ~~2017 and 0.15%~~2020. Annualized percentage net charge-offs were 0.09% for the year ended December 31, ~~2016, as compared to~~2019. Annualized percentage net ~~charge-offs of 0.20%~~recoveries were 0.04% for the nine months ended September 30, ~~2016.~~2019. The Company's loans net ~~loans~~of unearned fees increased from ~~$560,651,000~~$569,500,000 at September 30, ~~2016~~2019 to ~~$583,601,000~~$660,444,000 at September 30, ~~2017.~~2020.

The allowance at September 30, ~~2017~~2020 was ~~1.57%~~1.32% of outstanding loan balances at September 30, ~~2017,~~2020, as compared to ~~1.56%~~1.33% at December 31, ~~2016,~~2019, and ~~1.59%~~1.45% at September 30, ~~2016. The increase in the allowance as a percentage~~2019.

Table of ~~outstanding loan balances between December 31, 2016~~Contents

At September 30, 2020 and September 30, ~~2017 is primarily attributed to increases in specific reserves due to newly impaired loans.~~

~~At September 30, 2017 and September 30, 2016, $370,000 and $316,000, respectively, of the formula allowance is allocated to~~2019, unfunded loan ~~commitments~~commitment reserves of $572,000 and ~~is, therefore,~~$592,000, respectively, were reported ~~separately~~ in other ~~liabilities on the consolidated balance sheet.~~liabilities. Management believes that the ~~1.57%~~1.32% credit loss allowance at September 30, ~~2017~~2020 is adequate to absorb known and inherent risks in the loan portfolio. No assurance can be given, however, regarding economic conditions or other circumstances which may adversely affect the Company's service areas and result in future losses to the loan portfolio.

Asset/Liability Management – Liquidity and Cash Flow

The primary ~~function~~functions of asset/liability management isare to provide adequate liquidity and maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities. In a changing-rate environment, imbalances between interest-sensitive assets and interest-sensitive liabilities will impact earnings. For example, in an increasing-rate environment if interest-sensitive liabilities reprice sooner than interest sensitive assets, net interest income will be negatively impacted.

Liquidity

Liquidity management may be described as the ability to maintain sufficient cash flows to fulfill financial obligations, including loan funding commitments and customer deposit withdrawals, without straining the Company’s equity structure. To maintain an adequate liquidity position, the ~~Company~~Bank relies on, in addition to cash and cash equivalents, cash inflows from deposits and short-term borrowings, repayments of principal on loans and investments, and interest income received. The ~~Company's~~Bank's principal cash outflows are for loan origination, purchases of investment securities, depositor withdrawals and payment of operating expenses.

The ~~Company~~Bank continues to emphasize liability management as part of its overall asset/liability strategy. Through the discretionary acquisition of short term borrowings, the ~~Company~~Bank has, when needed, been able to provide liquidity to fund asset growth while, at the same time, better utilizing its capital resources, and better controlling interest rate risk. This does not preclude the ~~Company~~Bank from selling assets such as investment securities to fund liquidity needs but, with favorable borrowing rates, the ~~Company~~Bank has maintained a positive yield spread between borrowed liabilities and the assets which those liabilities fund. If, at some time, rate spreads become unfavorable, the ~~Company~~Bank has the ability to utilize an asset management approach and, either control asset growth or fund further growth with maturities or sales of investment securities. At September 30, ~~2017~~,2020, the ~~Company~~Bank had no borrowings, as its deposit base currently provides funding sufficient to support its asset values.

The ~~Company's~~Banks liquid asset base which generally consists of cash and due from banks, federal funds sold, securities purchased under agreements to resell ~~(“reverse repos”)~~(reverse repos) and investment securities, is maintained at a level deemed sufficient to provide the cash outlay necessary to fund loan growth ~~as well as~~and accommodate any customer deposit runoff that may occur. Additional liquidity requirements may be funded with overnight or term borrowing arrangements with various correspondent banks, FHLB and the Federal Reserve Bank. Within this framework is the objective of maximizing the yield on earning assets. This is generally achieved by maintaining a high percentage of earning assets in loans, which historically have represented the Company's highest yielding asset. At September 30, ~~2017~~,2020, the loan portfolio totaled ~~69.19%~~58.2% of total assets and the loan to deposit ratio was ~~79.20%~~65.5%, compared to ~~72.44%~~62.3% and ~~83.05%~~71.9%, respectively, at December 31, ~~2016~~.2019. Liquid assets at September 30, ~~2017~~,2020, included cash and cash equivalents totaling ~~$159,892,000~~$323,332,000 as compared to ~~$113,032,000~~$218,995,000 at December 31, ~~2016~~.2019. Other sources of liquidity include collateralized lines of credit from the Federal Home Loan Bank, and from the Federal Reserve Bank totaling ~~$298,348,000~~$346,521,000 and uncollateralized lines of credit from Pacific Coast Banker's Bank (PCBB) of $10,000,000, Union Bank of $10,000,000, and Zion's Bank of $20,000,000 at September 30, ~~2017~~.2020.

The liquidity of the ~~parent company,~~Holding Company, United Security Bancshares, is primarily dependent on the payment of cash dividends by its subsidiary, ~~United Security~~the Bank, subject to limitations imposed by the Financial Code of the State of California. During the nine months ended September 30, ~~2017,~~2020, the Holding Company has received ~~$3,109,000~~$6,027,000 in cash dividends from the Bank.

Cash Flow

The period-end balances of cash and cash equivalents for the periods shown are as follows (from Consolidated Statements of Cash Flows – in 000’s):

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(in 000's) Balance
December 31, 2015 $ 125,751
September 30, 2016 $ 111,747
December 31, 2016 $ 113,032
September 30, 2017 $ 159,892


(in 000's)	Balance
December 31, 2018	$	220,337
September 30, 2019	$	245,943
December 31, 2019	$	218,995
September 30, 2020	$	323,332

Cash and cash equivalents increased ~~$46,860,000~~$104,337,000 during the nine months ended September 30, ~~2017,~~2020, compared to ~~a decrease~~an increase of ~~$14,004,000~~$25,606,000 during the nine months ended September 30, ~~2016.~~2019.

The Company had a net cash inflow from operating activities of ~~$4,660,000~~$9,366,000 for the nine months ended September 30, ~~2017~~2020 and a cash inflow from operations totaling ~~$6,025,000~~$9,765,000 for the period ended September 30, ~~2016.~~2019. The Company experienced net cash outflows from investing activities of ~~$4,787,000~~$75,847,000 related to a ~~$12,346,000~~$65,446,000 increase in loan balances ~~partially offset by principal payments on~~and purchases of available-for-sale securities of ~~$6,091,000 and proceeds from the sale of OREO of $1,062,000 during the nine months ended September 30, 2017.~~$29,016,000. For the nine months ended September 30, ~~2016,~~2019, the Company experienced net cash ~~outflows~~inflows from investing activities of ~~$69,516,000 due an increase of $41,303,000~~$4,992,000 related to a $17,626,000 decrease in loan balances and ~~purchases~~principal payments on available-for-sale securities of ~~$34,987,000 in available-for-sale securities.~~$11,407,000.

During the nine months ended September 30, ~~2017,~~2020, the Company experienced net cash inflows from financing activities totaling ~~$46,987,000~~,$170,818,000, primarily as the result of increases of ~~$85,653,000~~$178,239,000 in demand deposits and savings accounts, partially offset by decreases of $1,819,000 in time deposits. For the nine months ended September 30, 2019, the Company experienced net cash inflows of $10,849,000 primarily as the result of increases of $28,859,000 in demand deposits and savings accounts, offset by decreases of ~~$36,984,000~~$14,280,000 in time ~~deposits and purchased brokered~~ deposits. ~~For the~~ ~~nine months endedSeptember 30, 2016, the Company experienced net cash~~ ~~inflows of~~ ~~$49,487,000~~ ~~from financing activities due to increases in demand deposit accounts, time deposits, and savings accounts.~~

The Company has the ability to increase or decrease loan growth, increase or decrease deposits and borrowings, or a combination of both to manage balance sheet liquidity.

Regulatory Matters

~~Termination of Regulatory Agreements~~

Effective April 12, 2017, the Federal Reserve Bank of San Francisco (the “Reserve Bank”) terminated the informal supervisory agreement with the Company (the “Agreement”) that required, among other things, that the Company obtain prior regulatory approval to accept dividends from the Bank, to pay dividends to its shareholders, or to pay interest on the Company’s junior subordinated debt. The Agreement had replaced a previous formal supervisory agreement with the Reserve Bank effective November 19, 2014.

Effective October 19, 2016, the California Department of Business Oversight (the “DBO”) terminated the informal memorandum of understanding (“MOU”) the Bank had entered into on September 24, 2013, replacing a previous formal order. The MOU required the Bank to maintain a ratio of tangible shareholder’s equity to total tangible assets equal to or greater than 9.0% and also required the DBO’s approval for the Bank to pay a dividend to the Company.

Capital Adequacy

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements adopted by the Board of Governors of the Federal Reserve System (the “Board of Governors”). Failure to meet minimum capital requirements can initiate certain mandates and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework, ~~for prompt corrective action,~~ the consolidated Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. ~~Prompt corrective action provisions are not applicable to bank holding companies.~~

Quantitative measures established by the capital adequacy guidelines require insured institutions to maintain a minimum leverage ratio of Tier 1 capital (the sum of common stockholders' equity, noncumulative perpetual preferred stock and minority interests in consolidated subsidiaries, minus intangible assets, identified losses and investments in certain subsidiaries, plus unrealized losses or minus unrealized gains on available for sale securities) to total assets. Institutions which have received the

highest composite regulatory rating and which are not experiencing or anticipating significant growth are required to maintain a minimum leverage capital ratio of 3% of Tier 1 capital to total assets. All other institutions are required to maintain a minimum leverage capital ratio of at least 100 to 200 basis points above the 3% minimum requirement.

The Company has adopted a capital plan that includes guidelines and trigger points to ensure sufficient capital is maintained at the Bank and the Company, and that capital ratios are maintained at a level deemed appropriate under regulatory guidelines given the level of classified assets, concentrations of credit, ALLL, current and projected growth, and projected retained earnings. The capital plan also contains contingency strategies to obtain additional capital as required to fulfill future capital requirements for both the Bank, as a separate legal entity, and the Company on a consolidated basis. The capital plan requires the Bank to maintain a ratio of tangible ~~shareholder’s~~shareholders' equity to total tangible assets equal to or greater than ~~9.0%~~9%. The Bank’s ratio of tangible shareholders’ equity to total tangible assets was ~~12.5%~~12.4% and ~~12.7%~~12.1% at September 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

The Company uses a variety of measures to evaluate its capital adequacy, including the leverage ratios which is calculated separately for the Company and the Bank. Management reviews these capital measurements on a quarterly basis and takes appropriate action to help ensure that they meet or surpass established internal and external guidelines. The following table sets forth the Company’s and the Bank's actual capital positions at September 30, ~~2017~~2020:

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Table 14. Capital Ratios


	Ratios at September 30, 2020	Ratios at December 31, 2019	Minimum Requirement to be Well Capitalized (3)	Minimum requirement for Community Bank Leverage Ratio (2) (4)
Total capital to risk weighted assets (1)
Company	N/A	17.98%	10.00%	N/A
Bank	N/A	17.78%	10.00%	N/A
Tier 1 capital to risk-weighted assets (1)
Company	N/A	16.81%	8.00%	N/A
Bank	N/A	16.61%	8.00%	N/A
Common equity tier 1 capital to risk-weighted assets (1)
Company	N/A	15.39%	6.50%	N/A
Bank	N/A	16.61%	6.50%	N/A
Tier 1 capital to adjusted average assets ("Leverage Ratio")
Company	11.38%	12.82%	5.00%	8.00%
Bank	11.24%	12.83%	5.00%	8.00%

(1) Current data is not applicable as the Bank and Company have adopted the Community Bank Leverage Ratio Framework as of the third quarter of 2020.

(2) The minimum required Community Bank Leverage Ratio is 9.00%, but the CARES Act temporarily lowers this to 8% as ~~well as~~described below.

(3) The Company was subject to these minimum requirements under the regulatory framework for Prompt Corrective Action at December 31, 2019.

(4) If the subsidiary bank’s Leverage Ratio exceeds the minimum ratio under the Community Bank Leverage Ratio Framework, it is deemed to be “well capitalized” under all other regulatory capital requirements. The Company may revert back to the regulatory framework for Prompt Corrective Action if the subsidiary bank’s Leverage Ratio falls below the minimum under the Community Bank Leverage Ratio Framework.

The federal banking agencies published a final rule on November 13, 2019, that provided a simplified measure of capital adequacy for qualifying community banking organizations. A qualifying community banking organization that opts into the community bank leverage ratio framework and maintains a leverage ratio greater than 9 percent will be considered to have met the minimum capital requirements, the capital ratio requirements for the well capitalized category under the Prompt Corrective Action framework, and any other capital or leverage requirements to which the qualifying banking organization is subject. A qualifying community banking organization with a leverage ratio of greater than 9 percent may opt into the community bank leverage ratio framework if it has average consolidated total assets of less than $10 billion, has off-balance-sheet exposures of 25% or less of total consolidated assets, and has total trading assets and trading liabilities of 5 percent or less of total consolidated assets. Further, the bank must not be ~~well capitalized under prompt corrective action provisions (Bank required only) under the regulatory guidelines discussed above:~~an advance approaches banking organization.

~~Table 9. Capital Ratios~~

Ratio at September 30, 2017 Ratio at December 31, 2016 Minimum for Capital Adequacy Minimum requirement for "Well Capitalized" Institution
Total capital to risk weighted assets
Company 17.97% 17.26% 8.00% N/A
Bank 17.85% 17.19% 8.00% 10.00%
Tier 1 capital to risk-weighted assets
Company 16.72% 16.01% 6.00% N/A
Bank 16.60% 15.94% 6.00% 8.00%
Common equity tier 1 capital to risk-weighted assets
Company 15.29% 14.68% 4.50% N/A
Bank 16.60% 15.94% 4.50% 6.50%
Tier 1 capital to adjusted average assets (leverage)
Company 12.96% 12.97% 4.00% N/A
Bank 12.95% 12.99% 4.00% 5.00%

The Federal Reserve and the Federal Deposit Insurance Corporation approved final capital rules in July 2013, that substantially amend the existing capital rules for banks. These new rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (commonly referred to as “Basel III”) as well as requirements encompassed by the Dodd-Frank Act.

The final ~~rules set a new common equity tier~~rule became effective January 1, ~~requirement~~2020 and ~~higher minimum tier 1 requirements for all banking organizations.~~banks that meet the qualifying criteria can elect to use the community bank leverage framework starting with the quarter ended March 31, 2020. The CARES Act reduced the required community bank leverage ratio to 8% until the earlier of December 31, 2020, or the national emergency is declared over. The federal bank regulatory agencies adopted an interim final ~~rules also require a Common Equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition~~rule to implement this change from the ~~other minimum risk-based capital standards~~CARES Act. The Company and the Bank meet the criteria outlined in the rule. The capital buffer requirement will be phased in over three years beginning in 2016, and will effectively raise the minimum required Common Equity Tier 1 RBC Ratio to 7.0%, the Tier 1 RBC Ratio to 8.5%,final rule and the ~~Total RBC Ratio to 10.5% on a fully phased-in basis. Institutions that do not maintain~~interim final rule and have adopted the ~~required capital buffer will become subject to progressively more stringent limitations on~~community bank leverage ratio framework in the percentage of earnings that can be paid out in dividends or used for stock repurchases, and on the payment of discretionary bonuses to executive management. The rules revise the prompt corrective action framework to incorporate the new regulatory capital minimums. They also enhance risk sensitivity and address weaknesses identified over recent years with the measure of risk-weighted assets.third quarter 2020.

As of September 30, ~~2017,~~2020, the Company and the Bank meet all capital adequacy requirements to which they are subject. Management believes that, under the current regulations, both will continue to meet their minimum capital requirements in the foreseeable future.

Dividends

Dividends paid to shareholders by the Holding Company are subject to restrictions set forth in the California General

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Corporation Law. As applicable to the Holding Company, the California General Corporation Law provides that the Holding Company may make a distribution to its shareholders if retainedearnings immediately prior to the dividend payout are at least equal to the amount of the proposed distribution or if immediately after the distribution, the value of the Holding Company’s assets would equal or exceed the sum of its total liabilities. The primary source of funds with which dividends will be paid to shareholders will come from cash dividends received by the Company from the Bank.

On April 25, 2017, the Board of Directors announced the authorization of the repurchase of up to $3,000,000 of the outstanding stock of the Holding Company. This amount represents 3%2.6% of total shareholders' equity of ~~$101,108,000~~$118,053,000 at September 30, ~~2017.~~2020. The timing of the purchases will depend on certain factors including, but not limited to, market conditions and prices, available funds, and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, or negotiated private transactions. During the ~~three~~nine months ended September 30, ~~2017,~~2020, the Company did not repurchase any of the shares available.

During the nine ~~month period~~months ended ended September 30, ~~2017~~,2020, the Bank paid ~~$3,109,000~~$6,027,000 in cash dividends to the Holding Company which funded the Holding Company’s operating costs and payments of interest on its junior subordinated ~~debt, all~~debt.

On September 22, 2020, the Company’s Board of ~~which were approved by~~Directors declared a cash dividend of $0.11 per share on the ~~Reserve Bank and~~Company's common stock. The dividend was payable on October 16, 2020, to shareholders of record as of October 6, 2020. Approximately $1,867,000 was transferred from retained earnings to dividends payable to allow for distribution of the ~~DBO,~~dividend to shareholders.

On June 23, 2020, the Company’s Board of Directors declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on July 15, 2020, to shareholders of record as ~~applicable.~~of July 6, 2020. Approximately $1,866,000 was transferred from retained earnings to dividends payable to allow for distribution of the dividend to shareholders.

The Bank, as a state-chartered bank, is subject to dividend restrictions set forth in the California Financial Code, as administered by the Commissioner of the ~~DBO (“Commissioner”)~~Department of Financial Protection and Innovation (Commissioner). As applicable to the Bank, the Financial Code provides that the Bank may not pay cash dividends in an amount which exceeds the lesser of the retained earnings of the Bank or the Bank’s net income for the last three fiscal years (less the amount of distributions to the Holding Company during that period of time). If the above test is not met, cash dividends may only be paid with the prior approval of the Commissioner, in an amount not exceeding the Bank’s net income for its last fiscal year or the amount of its net income for the current fiscal year. Such restrictions do not apply to stock dividends, which generally require neither the satisfaction of any tests nor the approval of the Commissioner. Notwithstanding the foregoing, if the Commissioner finds that the shareholder's equity of the Bank is not adequate or that the declaration of a dividend would be unsafe or unsound, the Commissioner may order the Bank not to pay any dividend. The Reserve Bank may also limit dividends paid by the Bank.

Reserve Balances

The Bank is required to maintain average reserve balances with the Federal Reserve Bank. During 2005, the Company implemented a deposit reclassification program which allows the Company to reclassify a portion of transaction accounts to non-transaction accounts for reserve purposes. The deposit reclassification program is provided by a third-party vendor and has been approved by the Federal Reserve Bank. At September 30, ~~2017~~,2020, the Bank was not subject to a reserve requirement.

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

The Company’s assessment of market risk as of September 30, 2020 indicates there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2019.

Item 4.Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

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The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of September 30, ~~2017~~,2020, the end of the period covered by this report, an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures was carried out. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company's internal control over financial reporting that occurred during the quarter ended September 30, ~~2017,~~2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

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PART II. Other Information

Item 1.Legal Proceedings

~~Not applicable~~The Company is involved in various legal proceedings in the normal course of business. In the opinion of Management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial condition or results of operations.

~~Item 1A.Risk Factors~~

~~There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.~~

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

None during the quarter ended September 30, ~~2017~~.2020.

Item 3.Defaults Upon Senior Securities

Not applicable

Item 4.Mine Safety Disclosures

Not applicable

Item 5.Other Information

Not applicable

Item 6.Exhibits:

(a)Exhibits:


~~(a)~~11			~~Exhibits:~~



11	Computation of Earnings per Share*
31.1		Certification of the Chief Executive Officer of United Security Bancshares pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of the Chief Financial Officer of United Security Bancshares pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the Chief Executive Officer of United Security Bancshares pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of the Chief Financial Officer of United Security Bancshares pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Data required by Accounting Standards Codification (ASC) 260, Earnings per Share, is provided in Note 810 to the consolidated financial statements in this report.

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Signatures

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



			United Security Bancshares

Date:		~~November 2, 2017~~October 30, 2020	/S/ Dennis R. Woods
			Dennis R. Woods
			President and
	Chief Executive Officer

			/S/ Bhavneet Gill
			Bhavneet Gill
			Senior Vice President and Chief Financial Officer

6369



	Quarter Ended September 30,						Nine Months Ended September 30,
(In thousands except shares and EPS)	2017			2016			2017			2016
Interest Income:
Loans, including fees	$	7,978		$	7,435		$	22,782		$	20,722
Investment securities – AFS – taxable	238			244			691			618
Interest on deposits in FRB	375			72			858			348
Interest on deposits in other banks	1			2			4			6
Total interest income	8,592			7,753			24,335			21,694
Interest Expense:
Interest on deposits	355			289			1,055			837
Interest on other borrowings	80			60			223			176
Total interest expense	435			349			1,278			1,013
Net Interest Income	8,157			7,404			23,057			20,681
Provision (Recovery of Provision) for Credit Losses	7			4			(24		)	(7		)
Net Interest Income after Provision (Recovery of Provision) for Credit Losses	8,150			7,400			23,081			20,688
Noninterest Income:
Customer service fees	959			924			2,897			2,867
Increase in cash surrender value of bank-owned life insurance	134			131			400			394
(Loss) gain on fair value of financial liability	(88		)	(423		)	(688		)	48
Gain on sale of investment in limited partnership	3			—			3			—
Other	168			154			539			464
Total noninterest income	1,176			786			3,151			3,773
Noninterest Expense:
Salaries and employee benefits	2,578			2,533			8,149			7,592
Occupancy expense	1,087			1,097			3,144			3,212
Data processing	29			23			81			108
Professional fees	312			327			912			1,116
Regulatory assessments	43			131			313			632
Director fees	72			75			215			218
(Gain) loss on California tax credit partnership	(1		)	49			118			122
Net cost (gain) on operation and sale of OREO	21			39			(257		)	216
Other	605			590			1,868			1,772
Total noninterest expense	4,746			4,864			14,543			14,988
Income Before Provision for Taxes	4,580			3,322			11,689			9,473
Provision for Taxes on Income	1,840			1,282			4,685			3,643
Net Income	$	2,740		$	2,040		$	7,004		$	5,830

Net Income per common share
Basic	$	0.16		$	0.12		$	0.41		$	0.35
Diluted	$	0.16		$	0.12		$	0.41		$	0.35
Shares on which net income per common shares were based
Basic	16,885,615			16,881,422			16,885,578			16,880,835
Diluted	16,907,267			16,891,066			16,904,063			16,887,078



(In thousands)	Three Months Ended September 30, 2017			Three Months Ended September 30, 2016			Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016
Net Income	$	2,740		$	2,040		$	7,004		$	5,830

Unrealized holdings (loss) gain on securities	—			(190		)	355			118
Unrealized gains on unrecognized post-retirement costs	13			13			39			37
Other comprehensive income (loss), before tax	13			(177		)	394			155
Tax benefit (expense) related to securities	—			76			(142		)	(47		)
Tax expense related to unrecognized post-retirement costs	(5		)	(6		)	(16		)	(16		)
Total other comprehensive income (loss)	8			(107		)	236			92
Comprehensive Income	$	2,748		$	1,933		$	7,240		$	5,922



				2017							2016
(dollars in 000's)	Average Balance			Interest		Yield/Rate (2)		Average Balance			Interest		Yield/Rate (2)
	Average Balance			Interest		Yield/Rate (2)		Average Balance			Interest		Yield/Rate (2)
Assets:
Interest-earning assets:
Loans and leases (1)	$	565,068		$	22,782	5.39	%	$	532,133		$	20,722	5.20	%
Investment Securities – taxable (3)	54,284			691		1.70	%	46,384			618		1.78	%
Interest-bearing deposits in other banks	652			4		0.82	%	1,531			6		0.52	%
Interest-bearing deposits in FRB	107,921			858		1.06	%	93,305			348		0.50	%
Total interest-earning assets	727,925			$	24,335	4.47	%	673,353			$	21,694	4.30	%
Allowance for credit losses	(9,017		)					(9,439		)
Noninterest-earning assets:
Cash and due from banks	21,393							22,126
Premises and equipment, net	10,708							10,550
Accrued interest receivable	4,248							2,350
Other real estate owned	6,083							9,797
Other assets	36,731							36,552
Total average assets	$	798,071						$	745,289
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts	$	87,598		$	87	0.13	%	$	84,610		$	81	0.13	%
Money market accounts	152,257			506		0.44	%	146,801			419		0.38	%
Savings accounts	78,247			136		0.23	%	66,117			103		0.21	%
Time deposits	80,861			326		0.54	%	70,936			234		0.44	%
Junior subordinated debentures	9,114			223		3.27	%	7,995			176		2.94	%
Total interest-bearing liabilities	408,077			$	1,278	0.42	%	376,459			$	1,013	0.36	%
Noninterest-bearing liabilities:
Noninterest-bearing checking	283,783							268,820
Accrued interest payable	104							73
Other liabilities	6,714							7,218
Total Liabilities	698,678							652,570

Total shareholders' equity	99,393							92,719
Total average liabilities and shareholders' equity	$	798,071						$	745,289
Interest income as a percentage of average earning assets						4.47	%						4.30	%
Interest expense as a percentage of average earning assets						0.23	%						0.20	%
Net interest margin						4.24	%						4.10	%



(in 000's)	Balance
December 31, 2015	$	125,751
September 30, 2016	$	111,747
December 31, 2016	$	113,032
September 30, 2017	$	159,892



	Ratio at September 30, 2017	Ratio at December 31, 2016	Minimum for Capital Adequacy	Minimum requirement for "Well Capitalized" Institution
Total capital to risk weighted assets
Company	17.97%	17.26%	8.00%	N/A
Bank	17.85%	17.19%	8.00%	10.00%
Tier 1 capital to risk-weighted assets
Company	16.72%	16.01%	6.00%	N/A
Bank	16.60%	15.94%	6.00%	8.00%
Common equity tier 1 capital to risk-weighted assets
Company	15.29%	14.68%	4.50%	N/A
Bank	16.60%	15.94%	4.50%	6.50%
Tier 1 capital to adjusted average assets (leverage)
Company	12.96%	12.97%	4.00%	N/A
Bank	12.95%	12.99%	4.00%	5.00%