SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



x☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2021

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



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)

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.

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.

PART I. Financial Information

United Security Bancshares and Subsidiaries

Consolidated Balance Sheets – (unaudited)

~~September~~June 30, ~~2017~~2021 and December 31, ~~2016~~2020

(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

United Security Bancshares and Subsidiaries

Consolidated Statements of Income

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

United Security Bancshares and Subsidiaries

Consolidated Statements of Comprehensive Income

(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 Content

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, 2019 (1)	16,973,885	$	58,973	$	57,647	$	(632)	$	115,988
(1) Excludes 35,572 unvested restricted shares

Other comprehensive loss						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 (2)	16,974,235	$	59,050	$	58,534	$	(174)	$	117,410
(2) Excludes 47,572 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 (3)	16,977,239	$	59,181	$	58,680	$	(401)	$	117,460
(3) 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 (4)	16,977,239	$	59,289	$	59,084	$	(320)	$	118,053
(4) Excludes 44,568 unvested restricted shares

Other comprehensive loss						(408)		(408)
Dividends payable ($0.11 per share)				(1,870)				(1,870)


Restricted stock units released	32,644							0
Stock-based compensation expense		108						108
Net income				1,924				1,924
Balance December 31, 2020 (5)	17,009,883	$	59,397	$	59,138	$	(728)	$	117,807
(5) Excludes 11,924 unvested restricted shares

Other comprehensive income						(55)		(55)
Dividends payable ($0.11 per share)				(1,876)				(1,876)


Restricted stock units released	405							0
Stock-based compensation expense		46						46
Net income				1,411				1,411
Balance March 31, 2021 (6)	17,010,288	$	59,443	$	58,673	$	(783)	$	117,333
(6) Excludes 41,424 unvested restricted shares

Table of Content

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 income						145		145
Dividends payable ($0.11 per share)				(1,871)				(1,871)



Stock-based compensation expense		53						53
Net income				2,705				2,705
Balance June 30, 2021 (7)	17,010,288	$	59,496	$	59,507	$	(638)	$	118,365
(7) Excludes 41,424 unvested restricted shares

Table of Content

United Security Bancshares and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

Table of Content


	Six months ended June 30,
(In thousands)	2021		2020
Cash Flows From Operating Activities:
Net Income	$	4,115	$	4,768
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses	1,201		2,134
Depreciation and amortization	702		698
Amortization of operating lease right-of-use assets	(260)		(295)
Amortization of premium/discount on investment securities, net	481		523
Increase in accrued interest receivable	(436)		(937)
Decrease in accrued interest payable	(3)		(23)
Increase (decrease) in accounts payable and accrued liabilities	34		(397)
(Increase) decrease in unearned fees and unamortized loan origination costs, net	(2,010)		184
(Increase) decrease in income taxes receivable	(253)		1,472
Unrealized loss (gain) on marketable equity securities	60		(85)
Stock-based compensation expense	98		209
(Provision) benefit for deferred income taxes	(98)		300
Loss on sale of other real estate owned	0		113
Write down on other real estate owned	0		727


Gain on bank owned life insurance	0		(310)
Increase in cash surrender value of bank-owned life insurance	(269)		(258)
Loss (gain) on fair value option of junior subordinated debentures	656		(1,469)






Net decrease in other assets	1,839		762
Net cash provided by operating activities	5,857		8,116

Cash Flows From Investing Activities:


Purchase of correspondent bank stock	(8)		(39)
Purchases of available-for-sale securities	(97,325)		(27,971)

Principal payments of available-for-sale securities	11,964		11,709


Net increase in loans	(186,215)		(53,461)
Cash proceeds from sales of other real estate owned	251		895

Investment in limited partnership	(340)		(201)

Proceeds from Bank Owned Life Insurance	0		1,243
Purchase of bank-owned life insurance	(920)		0
Capital expenditures of premises and equipment	(469)		(759)
Net cash used in investing activities	(273,062)		(68,584)

Cash Flows From Financing Activities:
Net increase in demand deposits and savings accounts	136,210		76,476
Net increase (decrease) in time deposits	1,581		(1,727)


Dividends on common stock	(3,747)		(3,735)
Net cash provided by financing activities	134,044		71,014

Net (decrease) increase in cash and cash equivalents	(133,161)		10,546
Cash and cash equivalents at beginning of period	294,069		218,995
Cash and cash equivalents at end of period	$	160,908	$	229,541

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

Table of Content

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~~2020 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~~statements. Additionally, in regard to the recently approved delay in implementation, the Company continues to evaluate its expected implementation date.

In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be ~~significant.~~

Asdiscontinued because of ~~January 1, 2017,~~reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the ~~Company adopted the Financial Accounting Standards Board's (FASB) Accounting Standard~~amendments in this Update ~~("ASU") No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements~~ to Employee Share-Based Payment Accounting. ASU 2016-09, seeks to simplify several aspects of the accounting for employee share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. As required by ASU 2016-09, all adjustments are reflectedeligible hedging relationships existing as of the beginning of the ~~fiscal year, January 1, 2016. By applying~~interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that included March 12, 2020. The amendments in this ~~ASU, the~~Update do not apply to contract modifications made after December 31, 2022. The one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity may be made at any time after March 12, 2020 but no later than December 31, 2022. The Company ~~no longer adjusts common stock for the tax impact of shares released, instead the tax impact~~ is ~~recognized as tax expense~~ in the ~~period the shares are released. This simplifies the tracking~~process of ~~the excess tax benefits and deficiencies, but could cause volatility in tax expense for the periods presented. The statement of cash flows has been adjusted to reflect~~evaluating the provisions of this ~~ASU. The application of this~~ ASU ~~did not have a material impact~~and its effects on ~~the~~our 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~~

Table 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.Content

2.Investment Securities

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


2.	~~Investment Securities~~

Following is a comparison of the amortized cost and fair value of securities available-for-sale, as of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016~~:2020:


(in 000's)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value (Carrying Amount)
June 30, 2021
Securities available-for-sale:
U.S. Government agencies	$	38,077	$	322	$	(81)	$	38,318
U.S. Government sponsored entities & agencies collateralized by mortgage obligations	69,488		520		(130)		69,878
Asset-backed securities	5,259		60		0		5,319
Municipal bonds	48,505		189		(655)		48,039
Corporate bonds	5,000		422		0		5,422
Total securities available-for-sale	$	166,329	$	1,513	$	(866)	$	166,976

(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) 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


(in 000's)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value (Carrying Amount)
December 31, 2020
Securities available-for-sale:
U.S. Government agencies	$	33,800	$	142	$	(232)	$	33,710
U.S. Government sponsored entities & agencies collateralized by mortgage obligations	37,732		722		(9)		38,445
Asset-backed securities	3,871		38		0		3,909
Municipal bonds	1,045		13		0		1,058
Corporate bonds	5,000		219		0		5,219
Total securities available-for-sale	$	81,448	$	1,134	$	(241)	$	82,341

The amortized cost and fair value of securities available for sale at ~~September~~June 30, ~~2017~~,2021, 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.~~pay downs.


	June 30, 2021
	Amortized Cost		Fair Value (Carrying Amount)
(in 000's)
Due in one year or less	$	1,479	$	1,483
Due after one year through five years	465		464
Due after five years through ten years	67,811		67,824
Due after ten years	27,086		27,327
Collateralized mortgage obligations	69,488		69,878
	$	166,329	$	166,976

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~~six month periods ended ~~September~~June 30, ~~2017~~2021 and ~~September~~June 30, ~~2016~~.2020. There were no0 other-than-temporary impairment losses for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2021 and ~~September~~June 30, ~~2016~~.2020.

At ~~September~~June 30, ~~2017~~,2021, available-for-sale securities with an amortized cost of approximately ~~$36,896,960~~$105,071,000 (fair value of ~~$36,955,121~~)$105,782,000) 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
June 30, 2021										June 30, 2021				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				$	0					$	0							$	12,307					$	(81)				$	12,307					$	(81)
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		26,168							(130)				26				0					26,194	(130)
Mutual Funds	—		—				3,783				(217		)		3,783			(217		)
Corporate bonds																					Corporate bonds		0						0					0			0				0					0
Municipal bonds																					Municipal bonds		29,225						(655)					0			0				29,225					(655)
Asset-backed securities																					Asset-backed securities		0						0					0			0				0					0
Total impaired securities	$	11,131	$	(29	)		$	23,160			$	(392	)		$	34,291		$	(421	)	Total impaired securities		$	55,393					$	(785)				$	12,333		$	(81)			$	67,726				$	(866)

December 31, 2016
December 31, 2020																					December 31, 2020
Securities available for sale:																					Securities available for sale:
U.S. Government agencies	$	12,281	$	(69	)		$	—			$	—			$	12,281		$	(69	)	U.S. Government agencies		$	9,013					$	(73)				$	16,963		$	(159)			$	25,976				$	(232)
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		30						(1)					1,684			(8)				1,714					(9)
Mutual Funds	—		—				3,716				(284		)		3,716			(284		)
Corporate bonds																					Corporate bonds		0						0					0			0				0					0
Municipal bonds																					Municipal bonds		0						0					0			0				0					0
Asset-backed securities																					Asset-backed securities		0						0					0			0				0					0
Total impaired securities	$	38,185	$	(471	)		$	3,716			$	(284	)		$	41,901		$	(755	)	Total impaired securities		$	9,043					$	(74)				$	18,647		$	(167)			$	27,690				$	(241)

Temporarily impaired securities at ~~September~~June 30, ~~2017,~~2021, were comprised of ~~one mutual fund, three~~NaN municipal bonds, 6 U.S. government agency securities, and ~~ten~~9 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

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

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~~June 30, ~~2017~~,2021, the decline in fair value of the ~~impaired mutual fund, the three~~NaN municipal bonds, 6 U.S. government agency securities, and the ~~ten~~9 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~~June 30, ~~2017~~.2021.

During the six months ended June 30, 2021 and 2020, the Company recognized $60,000 in unrealized holding losses and $85,000 of unrealized holding gains related to equity securities in the consolidated statements of income, respectively. For the quarters ended June 30, 2021 and 2020, the Company recognized unrealized holding gains of 0 and $71,000, respectively.


3.	~~Loans~~

The Company had 0 held-to-maturity or trading securities at June 30, 2021 or December 31, 2020.

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)	June 30, 2021		December 31, 2020
Commercial and industrial:
Commercial and business loans	$	43,676	$	37,349
Government program loans	12,408		10,165
Total commercial and industrial	56,084		47,514
Real estate mortgage:
Commercial real estate	333,288		282,951
Residential mortgages	176,501		37,236
Home improvement and home equity loans	96		107
Total real estate mortgage	509,885		320,294
Real estate construction and development	165,426		175,016
Agricultural	53,518		51,079
Installment and student loans	56,190		61,508
Total loans	$	841,103	$	655,411

~~The~~Outside of mortgage loan pools, which are occasionally purchased, 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%~~6.7% of total loans at ~~September~~June 30, ~~2017~~2021 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 $12,172,000 in Paycheck Protection Program ("PPP") loans administrated by the SBA. PPP loans have a two or five year term and earn interest at 1%. In addition to interest, the Company receives a processing fee ranging from 3%-5% of the loan balance for each PPP loan. The fees are recognized as income over the contractual life of the loan. At June 30, 2021, there were $553,000 outstanding in net unearned

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PPP fees. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.

Real estate mortgage loans, representing ~~49.9%~~60.6% of total loans at ~~September~~June 30, ~~2017~~,2021, 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%~~19.7% of total loans at ~~September~~June 30, ~~2017~~,2021, 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%~~6.4% of total loans at ~~September~~June 30, ~~2017~~2021 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%~~6.7% of total loans at ~~September~~June 30, ~~2017~~2021 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~~June 30, ~~2017~~2021 and December 31, ~~2016~~,2020, these financial instruments include commitments to extend credit of ~~$107,580,000~~$192,518,000 and ~~$120,485,000~~,$216,799,000, respectively, and standby letters of credit of ~~$2,058,000~~$465,000 and ~~$1,201,000~~,$3,668,000, 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.

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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~~June 30, ~~2017~~2021 (in 000's):


June 30, 2021	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	$	43,676	$	43,676	$	0
Government program loans	0		0		0		0		12,408		12,408		0
Total commercial and industrial	0		0		0		0		56,084		56,084		0

Commercial real estate loans	0		0		0		0		333,288		333,288		0
Residential mortgages	0		546		0		546		175,955		176,501		0
Home improvement and home equity loans	14		0		0		14		82		96		0
Total real estate mortgage	14		546		0		560		509,325		509,885		0

Real estate construction and development loans	0		0		8,605		8,605		156,821		165,426		0
Agricultural loans	0		0		262		262		53,256		53,518		0




Installment and student loans	1,029		86		156		1,271		54,919		56,190		156

Total loans	$	1,043	$	632	$	9,023	$	10,698	$	830,405	$	841,103	$	156

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~~2020 (in 000's):


December 31, 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	$	184	$	0	$	0	$	184	$	37,165	$	37,349	$	0
Government program loans	0		0		0		0		10,165		10,165		0
Total commercial and industrial	184		0		0		184		47,330		47,514		0

Commercial real estate loans	0		0		0		0		282,951		282,951		0
Residential mortgages	0		0		0		0		37,236		37,236		0
Home improvement and home equity loans	0		0		0		0		107		107		0
Total real estate mortgage	0		0		0		0		320,294		320,294		0

Real estate construction and development loans	0		0		8,605		8,605		166,411		175,016		0
Agricultural loans	0		0		439		439		50,640		51,079		0




Installment and student loans	510		875		513		1,898		59,610		61,508		513

Total loans	$	694	$	875	$	9,557	$	11,126	$	644,285	$	655,411	$	513

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.

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- 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~~June 30, ~~2017~~2021 or December 31, ~~2016~~.2020.

The following is a summary of nonaccrual loan balances at ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016~~2020 (in 000's).


	June 30, 2021		December 31, 2020
Commercial and business loans	$	0	$	0
Government program loans	0		0
Total commercial and industrial	0		0

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	10,940		11,057
Agricultural loans	325		439
Installment and student loans	0		0

Total nonaccrual loans	$	11,265	$	11,496

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

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

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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~~loans utilizing the discounted cash flow method, or charge-offs for collateral-based impaired loans, or those using observable market pricing.

Table of Content

The following is a summary of impaired loans at ~~September~~June 30, ~~2017~~2021 (in 000's).


June 30, 2021	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	$	0	$	0	$	0	$	0	$	0	$	260	$	0
Government program loans	154		155		0		155		0		184		5
Total commercial and industrial	154		155		0		155		0		444		5

Commercial real estate loans	0		0		0		0		0		896		0
Residential mortgages	359		0		360		360		12		530		8
Home improvement and home equity loans	0		0		0		0		0		0		0
Total real estate mortgage	359		0		360		360		12		1,426		8

Real estate construction and development loans	10,940		10,940		0		10,940		0		11,056		146
Agricultural loans	379		117		262		379		161		501		13
Installment and student loans	0		0		0		0		0		0		0

Total impaired loans	$	11,832	$	11,212	$	622	$	11,834	$	173	$	13,427	$	172

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.~~$2.

(2) Information is based on ~~the nine month period~~six months ended ~~September~~June 30, ~~2017.~~ 2021.

Table of Content

The following is a summary of impaired loans at December 31, ~~2016~~2020 (in 000's).


December 31, 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	$	250	$	251	$	0	$	251	$	0	$	551	$	23
Government program loans	214		215		0		215		0		236		14
Total commercial and industrial	464		466		0		466		0		787		37

Commercial real estate loans	874		878		0		878		0		1,822		54
Residential mortgages	365		0		366		366		13		867		17
Home improvement and home equity loans	0		0		0		0		0		0		0
Total real estate mortgage	1,239		878		366		1,244		13		2,689		71

Real estate construction and development loans	11,057		11,057		0		11,057		0		11,223		252
Agricultural loans	610		293		316		609		196		675		39

Installment and student loans	0		0		0		0		0		0		0

Total impaired loans	$	13,370	$	12,694	$	682	$	13,376	$	209	$	15,374	$	399

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.~~$6.

(2) Information is based on the ~~twelve month period~~year ended December 31, ~~2016~~.2020.

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~~June 30, ~~2017~~2021 and ~~2016~~2020 was ~~$15,681,000~~$12,452,000 and ~~$19,397,000,~~

$15,685,000, respectively. Interest income recognized on impaired loans for the quarters ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020 was

approximately ~~$192,000~~$78,000 and ~~$34,000,~~$124,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately ~~$70,000~~$87,000 and ~~$126,000~~$67,000 for the quarters ended ~~September~~June 30, ~~2017~~2021 and ~~2016,~~2020, respectively.

The average recorded investment in impaired loans for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020 was ~~$16,366,000~~$13,427,000 and ~~$21,440,000,~~

$16,148,000, respectively. Interest income recognized on impaired loans for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 was

approximately ~~$738,000~~$172,000 and ~~$741,000,~~$263,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately ~~$260,000~~$156,000 and ~~$362,000~~$148,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016,~~ 2020,

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 Content

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 June 30, 2021 or June 30, 2020. There were no additions during the six months ended June 30, 2021 and one during the six months ended June 30, 2020.

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


	Six Months Ended June 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	$	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~~June 30, ~~2017~~,2021, the Company had 296 restructured loans totaling ~~$12,150,000~~$3,073,000 as compared to 287 restructured loans totaling ~~$12,410,000~~$3,426,000 at December 31, ~~2016~~.2020.

Table of Content

The following tables summarize TDR activity by loan category for the quarters ended ~~September~~June 30, ~~2017~~2021 and ~~September~~June 30, ~~2016.~~2020 (in 000's).


Three Months Ended June 30, 2021	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	$	0	$	362	$	0	$	2,401	$	448	$	0	$	3,211

Additions	0		0		0		0		0		0		0		0

Principal (reductions) additions	0		0		(3)		0		(66)		(69)		0		(138)
Charge-offs	0		0		0		0		0		0		0		0

Ending balance	$	0	$	0	$	359	$	0	$	2,335	$	379	$	0	$	3,073

Allowance for loan loss	$	0	$	0	$	12	$	0	$	0	$	161	$	0	$	173
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 June 30, 2020																						Three Months Ended June 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	$	1,055		$	1,062	$	2,573		$	—	$	6,868		$	400		$	—	$	11,958		Beginning balance	$	4	$	893	$	1,048	$	0	$	2,587	$	721	$	0	$	5,253

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	(4)		(4)		(10)		0		(51)		(29)		0		(98)
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	$	889	$	1,038	$	0	$	2,536	$	692	$	0	$	5,155

Allowance for loan loss	$	15		$	221	$	206		$	—	$	—		$	743		$	—	$	1,185		Allowance for loan loss	$	0	$	175	$	31	$	0	$	0	$	243	$	0	$	449
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


Six Months Ended June 30, 2021	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	$	0	$	365	$	0	$	2,452	$	609	$	0	$	3,426

Additions	0		0		0		0		0		0		0		0

Principal (reductions) additions	0		0		(6)		0		(117)		(230)		0		(353)
Charge-offs	0		0		0		0		0		0		0		0

Ending balance	$	0	$	0	$	359	$	0	$	2,335	$	379	$	0	$	3,073

Allowance for loan loss	$	0	$	0	$	12	$	0	$	0	$	161	$	0	$	173
Defaults	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

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
Beginning balance $ 1,356
$ 1,454
$ 2,368
$ —
$ 6,267
$ —
$ 965
$ 12,410

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

Principal reductions (973 ) (307 ) (84 ) —
(259 ) (550 ) (965 ) (3,138 )

Ending balance $ 630
$ 1,147
$ 2,688
$ —
$ 6,798
$ 887
$ —
$ 12,150

Allowance for loan loss $ 15
$ 221
$ 206
$ —
$ —
$ 743
$ —
$ 1,185


Six Months Ended June 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	$	9	$	898	$	1,060	$	0	$	2,654	$	566	$	0	$	5,187

Additions	0		0		0		0		0		179		0		179

Principal (reductions) additions	(9)		(9)		(22)		0		(118)		(53)		0		(211)
Charge-offs	0		0		0		0		0		0		0		0

Ending balance	$	0	$	889	$	1,038	$	0	$	2,536	$	692	$	0	$	5,155

Allowance for loan loss	$	0	$	175	$	31	$	0	$	0	$	243	$	0	$	449
Defaults	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

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

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:

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.

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:

- Quality of management

- Leverage/capitalization

- Profit margins/earnings trend

- Adequacy of financial records

- Alternative funding sources

- Accounting practices

- 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:

~~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 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

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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 doubtful or loss at ~~September~~June 30, ~~2017~~2021 or December 31, ~~2016~~.2020.

The following tables summarize the credit risk ratings for commercial, construction, and other non-consumer related loans for ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016~~:2020:

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.~~originated or purchased. 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 loans 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~~June 30, ~~2017~~2021 and December 31, ~~2016~~:2020:

September 30, 2017 December 31, 2016
Residential Mortgages
Home
Improvement and Home Equity
Installment and Other Total Residential Mortgages
Home
Improvement and Home Equity
Installment and Other Total
(in 000's)
Not graded $ 74,355
$ 486
$ 54,750
$ 129,591
$ 69,955
$ 573
$ 41,855
$ 112,383
Pass 14,659
24
2,827
17,510
15,669
26
2,120
17,815
Special Mention 647
—
—
647
—
—
—
—
Substandard 623
—
6
629
1,764
—
9
1,773
Doubtful —
—
—
—
—
—
965
965
Total $ 90,284
$ 510
$ 57,583
$ 148,377
$ 87,388
$ 599
$ 44,949
$ 132,936

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~~ ~~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~~Additionally, residential real estate has been ~~severely distressed~~challenged in the recent past ~~the~~and therefore 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, water availability, regulatory, 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 – The Company is engaged in more frequent communication with borrowers to understand their situation and the challenges faced, as a result of the ongoing COVID-19 pandemic. 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 impacted by changes in economic conditions and an increase in unemployment. Although economic scenarios have improved since the pandemic was declared in March 2020, the credit risk in the loan portfolio remains heightened resulting in the need for an additional reserve for credit loss.

The following summarizes the activity in the allowance for credit losses by loan category for the quarters ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020 (in 000's).

The following summarizes the activity in the allowance for credit losses by loan category for the ~~nine~~six months ended~~September~~ June 30, ~~2017~~2021 and ~~2016~~2020 (in 000's).

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~~June 30, ~~2017~~2021 and ~~2016.~~2020.

Included in the installment and student loans segment of the loan portfolio are $52,660,000 and $57,385,000 in student loans at June 30, 2021 and December 31, 2020, 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 programs. 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 $2,236,000 at June 30, 2021 and $3,201,000 at December 31, 2020. At June 30, 2021 there were 896 loans within repayment, deferment, and forbearance which represented $21,670,000, $5,893,000, and $12,706,000, respectively. At December 31, 2020, there were 944 loans within repayment, deferment, and forbearance which represented $28,906,000, $7,407,000 and $7,179,000, respectively. As of June 30, 2021 and December 31, 2020, the reserve against the student loan portfolio was $2,709,000 and $2,546,000, respectively. There were 0 TDRs within the portfolio as of June 30, 2021 or December 31, 2020. At June 30, 2021 and December 31, 2020, student loans totaling $156,000 and $513,000 were included in the substandard category, respectively.

ZuntaFi 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.

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 June 30, 2021 and December 31, 2020 (in 000's, except for number of borrowers):


	June 30, 2021					December 31, 2020
	Number of Loans	Amount		Accrued Interest		Number of Loans	Amount		Accrued Interest
School	225	$	7,844	$	2,236	319	$	12,905	$	3,201
Grace	91	4,547		1,220		34	988		719
Repayment	475	21,670		544		623	28,906		292
Deferment	139	5,893		600		187	7,407		209
Forbearance	282	12,706		830		134	7,179		553
Total	1,212	$	52,660	$	5,430	1,297	$	57,385	$	4,974

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. However additional risk is associated with this designation.

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 six months ended June 30, 2021, $16,000 and $44,000 in accrued interest receivable was reversed, due to charge-offs

of $188,000 and $568,000, respectively, within the student loan portfolio. For three and six months ended June 30, 2020, $21,000 and $50,000 in accrued interest receivable was reversed, due to charge-offs of $446,000 and $947,000, respectively, within the student loan portfolio.

The following tables summarize the student loan aging for loans in repayment and forbearance as of June 30, 2021 and December 31, 2020 (in 000's, except for number of borrowers):


	June 30, 2021			December 31, 2020
	Number of Borrowers	Amount		Number of Borrowers	Amount
Current or less than 31 days	304	$	33,016	304	$	34,188
31 - 60 days	7	1,019		4	510
61 - 90 days	1	86		10	875
91 - 120 days	2	156		5	513

Total	314	$	34,277	323	$	36,086

Deposits include the following:

6.Short-term Borrowings/Other Borrowings

At ~~September~~June 30, ~~2017~~,2021, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling ~~$283,948,000~~,$334,648,000, as well as Federal Home Loan Bank (FHLB) lines of credit totaling ~~$14,400,000~~.$4,055,000. At ~~September~~June 30, ~~2017,~~2021, the Company had an uncollateralized line of credit with Pacific Coast Bankers Bank ~~("PCBB")~~(PCBB) totaling ~~$10,000,000,~~$50,000,000, 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~~June 30, ~~2017~~, ~~$15,327,000~~2021, $4,359,000 in investment securities at FHLB were pledged as collateral for FHLB advances. Additionally, ~~$410,463,000~~$530,442,000 in secured and unsecured loans were pledged at ~~September~~June 30, ~~2017~~,2021, as collateral for borrowing lines with the Federal Reserve ~~Bank totaling~~ ~~$283,948,000~~.Bank. At ~~September~~June 30, ~~2017~~,2021, the Company had no0 outstanding borrowings.

At December 31, ~~2016~~,2020, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling ~~$323,162,000~~,$336,788,000, as well as Federal Home Loan Bank (“FHLB”) lines of credit totaling ~~$2,037,000~~.$4,881,000. At December 31, ~~2016~~,2020, 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~~2020, $5,294,000 in investment securities at FHLB were pledged as collateral for FHLB advances. Additionally, ~~$471,737,000~~$517,516,000 in secured and unsecured loans were pledged at December 31, ~~2016~~,2020, as collateral for used and unused borrowing lines with the Federal Reserve ~~Bank totaling $323,162,000.~~Bank. At December 31, ~~2016~~,2020, the Company had no0 outstanding borrowings.

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 2032. 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 June 30, 2021, the Company had 12 operating leases and 0 financing leases.

The components of lease expense were as follows:

Supplemental balance sheet information related to leases was as follows:


(in 000's)			June 30, 2021

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	$	332

ROU assets obtained in exchange for new operating lease liabilities	0

Weighted-average remaining lease term in years for operating leases	5.47

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)	June 30, 2021
2021	$	672
2022	679
2023	636
2024	418
2025	199
Thereafter	506
Total undiscounted cash flows	3,110
Less: present value discount	(403)
Present value of net future minimum lease payments	$	2,707

8.Supplemental Cash Flow Disclosures


	Six months ended June 30,
(in 000's)	2021		2020
Cash paid during the period for:
Interest	$	990	$	1,314
Income taxes	2,060		0
Noncash investing activities:


Unrealized gain on unrecognized post retirement costs	50		40
Unrealized (loss) gain on available for sale securities	(247)		827
Unrealized gain (loss) on junior subordinated debentures	325		(453)

Cash dividend declared	1,871		1,868

Table of Content

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,~~June 22, 2021, 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,~~July 16, 2021, to shareholders of record as of ~~May 8, 2017.~~July 6, 2021. Approximately ~~$846,000~~$1,871,000 was ~~transfered~~transferred from retained earnings to ~~cash~~dividends payable to allow for distribution of the dividend to shareholders. ~~The~~

On March 26, 2021, the Company’s Board of Directors ~~also authorized~~declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on April 16, 2021, to shareholders of record as of April 6, 2021. Approximately $1,876,000 was transferred from retained earnings to dividends payable to allow for distribution of the dividend to shareholders.

The Company has a program to repurchase of up to $3 million of ~~the~~its outstanding common ~~stock of the Company.~~stock. 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 June 30,				Six months ended June 30,
	2021		2020		2021		2020
Net income (000's, except per share amounts)	$	2,705	$	2,012	$	4,115	$	4,768

Weighted average shares issued	17,010,288		16,975,588		17,010,210		16,974,845
Add: dilutive effect of stock options	22,590		13,190		17,267		17,378
Weighted average shares outstanding adjusted for potential dilution	17,032,878		16,988,778		17,027,477		16,992,223

Basic earnings per share	$	0.16	$	0.12	$	0.24	$	0.28
Diluted earnings per share	$	0.16	$	0.12	$	0.24	$	0.28
Anti-dilutive stock options excluded from earnings per share calculation	71,000		101,000		101,000		101,000

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~~June 30, ~~2017~~2021 and December 31, ~~2016~~,2020, 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 quarter 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.before 2015.

The Company's policy is to recognize any interest or penalties related to uncertain tax positions in income tax expense. Interest and penalties recognized or uncertain tax positions during the periods ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020 were insignificant.

The Company reported a provision for income taxes of $1,613,000 for the six months ended June 30, 2021 as compared to the $1,906,000 provision reported in the comparable period of 2020. The effective tax rate was 28.16% for the six months ended June 30, 2021 as compared to 28.56% for the comparable period of 2020.

Table of Content


~~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 million~~ ~~of junior subordinated debentures relating to its trust preferred securities. The terms 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, in September 2015, the Company purchased those shares from the Bank and canceled $3.0 million in par value of the junior subordinated debentures, realizing a $78,000 gain on redemption. The contractual principal balance of the Company's debentures relating to its trust preferred securities is $12.0 million as of ~~September~~June 30, ~~2017.~~2021. 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 June 30, 2021, 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~~June 30, ~~2017~~2021, 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%~~The 3.84% discount rate used represents what a market participant would consider under the circumstances based on current market assumptions. At ~~September~~June 30, ~~2017,~~2021, the total cumulative gain recorded on the debt is ~~$3,008,000.~~$1,256,000.

The net fair value calculation performed at ~~September~~as of June 30, ~~2017~~2021 resulted in a net pretax loss adjustment of ~~$688,000~~ (~~$405,000~~,$331,000 for the six months ended June 30, 2021 compared to a net pretax gain adjustment of $1,015,000 for the six months ended June 30, 2020.

For the six months ended June 30, 2021, the net $331,000 fair value loss adjustment was separately presented as a $656,000 loss ($462,000, net of tax) ~~for the~~ ~~nine months endedSeptember 30, 2017, compared to a pretax~~ ~~gain~~ ~~adjustment of~~ ~~$48,000~~ (~~$28,000, net of tax) for the~~ ~~nine months endedSeptember 30, 2016. Fair value gains and losses are reflected as a component of noninterest income~~recognized on the consolidated statements of ~~income.~~

~~The fair value calculation performed at September 30, 2017 resulted in~~income, and a ~~pretax loss adjustment of $88,000~~$325,000 gain ($~~52,000,~~229,000, net of tax) ~~for~~associated with the ~~three~~instrument-specific credit risk recognized in other comprehensive income. For the six months ended ~~September~~June 30, ~~2017, compared to a pretax~~2020, the net $1,015,000 fair value gain adjustment ~~of $423,000~~was separately presented as a $1,469,000 gain ($~~249,000,~~1,035,000, net of tax) ~~for the three months ended September 30, 2016. Fair value gains and losses are reflected as a component of noninterest income~~recognized on the consolidated statements of income, and a $453,000 loss ($319,000, 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 as of June 30, 2021 resulted in a net pretax loss adjustment of $270,000 for the quarter ended June 30, 2021 compared to a net pretax loss adjustment of $1,238,000 for the quarter ended June 30, 2020.


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

For the quarter ended June 30, 2021, the net $270,000 fair value loss adjustment was separately presented as a $377,000 gain ($265,000, net of tax) recognized on the consolidated statements of income, and a $647,000 loss ($456,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. For the quarter ended June 30, 2020, the net $1,238,000 fair value loss adjustment was separately presented as a $30,000 loss ($21,000, net of tax) recognized on the consolidated statements of income, and a $1,208,000 loss ($851,000, 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.

13.Fair Value Measurements and Disclosure

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:

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

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

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.

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

~~Accrued Interest Receivable~~The following tables summarize the Company’s assets and ~~Payable~~- liabilities that were measured at fair value on a recurring and non-recurring basis as of June 30, 2021 (in 000’s):

There were no non-recurring fair value adjustments at June 30, 2021.

The ~~carrying~~following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of ~~these instruments is a reasonable estimate of fair value.~~December 31, 2020 (in 000’s):

~~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(1)Nonrecurring

~~counterparties’ credit standing. There was no material difference between the contractual amount and the estimated~~

The following table presents quantitative information about Level 3 fair value ~~of commitments to extend credit~~measurements for the Company's assets measured at ~~September 30, 2017~~ ~~and~~ fair value on a non-recurring basis at December 31, ~~2016~~2020 (in 000's).

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.

December 31, 2020

Financial Instrument

Fair Value

Valuation Technique

Unobservable Input

Adjustment Percentage

Impaired Loans:

RE construction & development

$3,364

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

$5,004

Fair Value of Collateral Method for Collateral Dependent Loans

Adjustment for difference between appraised value and net realizable value

13.69%

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~~June 30, ~~2017~~2021 and December 31, ~~2016:~~2020:

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~~June 30, ~~2017~~2021 and December 31, ~~2016~~2020 is primarily due to decreases in rates for similar debt instruments.

~~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~~ ~~(in 000’s):~~

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, 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

~~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

14.Goodwill and Intangible Assets

Three Months Ended September 30, 2017 Three Months Ended September 30, 2016 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
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
Total loss (gain) included in earnings 88
423
688
(48 )
Other accrued interest 5
2
14
10
Ending balance $ 9,534
$ 8,262
$ 9,534
$ 8,262
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 )

15.Accumulated Other Comprehensive Income

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


	June 30, 2021						December 31, 2020
(in 000's)	Net unrealized gain (loss) on available for sale securities		Unfunded status of the supplemental retirement plans		Net unrealized (loss) gain on junior subordinated debentures		Net unrealized (loss) gain on available for sale securities		Unfunded status of the supplemental retirement plans		Net unrealized gain (loss) on junior subordinated debentures
Beginning balance	$	630	$	(770)	$	(588)	$	(175)	$	(675)	$	218
Current period comprehensive (loss) income	(174)		35		229		805		(95)		(806)
Ending balance	$	456	$	(735)	$	(359)	$	630	$	(770)	$	(588)
Accumulated other comprehensive loss					$	(638)					$	(728)

16.Investment in York Monterey Properties

As of June 30, 2021, the Bank's investment in York Monterey Properties Inc. totaled $4,699,000. 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.Commitments and Contingent Liabilities

Financial Instruments with Off-Balance Sheet Risk: The Company is party to financial instruments with off-balance sheet risk which arise in the normal course of business. These instruments may contain elements of credit risk, interest rate risk and liquidity risk, and include commitments to extend credit and standby letters of credit. The credit risk associated with these instruments is essentially the same as that involved in extending credit to customers and is represented by the contractual amount indicated in the table below:


	Contractual Amount
(In thousands)	June 30, 2021		December 31, 2020
Commitments to extend credit	$	192,518	$	216,799
Standby letters of credit	$	465	$	3,668

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. Substantially all of these commitments are at floating interest rates based on the Prime rate, and most have fixed expiration dates. The Company evaluates each customer's creditworthiness on a case-by-case basis, and 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. Many of the commitments are expected to expire without being drawn upon and, as a result, the total commitment amounts do not necessarily represent future cash requirements of the Company.

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 Company’s letters of credit are short-term guarantees and generally have terms from less than one month to approximately 3 years. At June 30, 2021, the maximum potential amount of future undiscounted payments the Company could be required to make under outstanding standby letters of credit totaled $465,000.

In the ordinary course of business, the Company becomes involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material to the financial position of the Company.

18.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.

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

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) expected cost savings from recent acquisitions are not realized, vii)~~ix) potential impairment of goodwill and other intangible assets, and ~~viii)~~x) 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~~.2020.

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~~York Monterey Properties ("YMP") is a wholly-owned subsidiary of the ~~Company are references to United Security Bancshares (including the Bank).~~Bank and was formed in 2020. 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~~twelve 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~~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~~the bank's 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, the~~The state of California ~~recently experienced~~is experiencing a severe drought and water allocations have been significantly reduced for farmers in the ~~worst drought in recorded history. It is not possible~~Central Valley. Due to ~~quantify~~these water issues the ~~drought's~~ impact on businesses and consumers located in the Company's market areas is not possible to quantify. In response 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 began to develop, prepare, and begin implementation of the Groundwater Sustainability Plans in 2020. The effect of such plans to Central Valley agriculture, if any, is still unknown.

The COVID-19 pandemic has 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 closures; however, unemployment rates have increased in our local market area. As of May 2021, the unemployment rate in Fresno County was 8.8%. Congress, the President, and the Federal Reserve have

taken several actions designed to ~~predict adverse~~cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package, the Consolidated Appropriations Act, 2021 was signed into law at the end of December 2020 as a $900 billion legislative package, and the American Rescue Plan was signed into law in March 2021 providing an additional $1.9 trillion of relief. In February 2021, the California Legislature passed a $7.6 billion stimulus package to provide relief to Californians and business impacted by the pandemic. The goal of the CARES Act, Consolidated Appropriations Act, and American Rescue Plan, were to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of 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 June 30, 2021 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 ~~future droughts.~~

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 June 30, 2021, 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 ongoing economic weakness 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 extended economic weakness 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.

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.

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. 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 where deemed necessary. 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 June 30, 2021, 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 has executed a payment deferral program for ~~construction lending and~~our commercial lending 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. During 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 and interagency guidance issued in March 2020. The Company has not recognized any losses on the loan modifications and as of June 30, 2021, there were no modifications outstanding.

The Company participated in the first and second draw of the Paycheck Protection Program ("PPP"), administered by the SBA. The first PPP draw ended on August 8, 2020, the second draw and PPP program ended May 31, 2021. PPP loans earn interest at 1% and have either a two or five year term. In addition to interest, the Company receives a processing fee ranging from ~~small~~3%-5% of the loan balance for each PPP loan. 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 June 30, 2021, there were 111 outstanding SBA PPP loans representing $12,172,000 in balances.

The Company is working with customers directly affected by COVID-19. The Company has provided and ~~medium size businesses,~~continues to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment, 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 school closures and 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~~2021 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~~$4,115,000 or ~~$0.41~~$0.24 per share (~~$0.41~~($0.24 diluted), for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~,2021, as compared to ~~$5,830,000~~$4,768,000, or ~~$0.35~~$0.28 per share ($~~0.35~~0.28 diluted), for the same period in ~~2016~~.2020. The Company’s return on average assets was ~~1.17%~~0.71% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~,2021, as compared to ~~1.04%~~0.98% for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~.2020. The Company’s return on average equity was ~~9.42%~~7.00% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~,2021, as compared to ~~8.38%~~8.09% for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~.2020. The decrease is primarily the result of the change in LIBOR rates between periods, causing a $656,000 loss for the six months ended June 30, 2021 on the fair value of junior subordinated debentures, compared to a $1,469,000 gain for the six months ended June 30, 2020.

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~~six month periods ended ~~September~~June 30, ~~2017~~2021 and ~~2016.~~2020.

Interest rates and Interest Differentials

Three Months Ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020

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 %

(2)Interest income/expense is divided by actual number of days in the period times 365 days (366 days for 2020) 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,~~shareholders' equity.

Shareholders’ Equity:

Interest rates and Interest Differentials

~~Nine~~Six Months Ended June 30, 2021 and 2020


			2021						2020
(dollars in thousands)	Average Balance		Interest		Yield/Rate (2)		Average Balance		Interest		Yield/Rate (2)

Assets:
Interest-earning assets:
Loans (1)	$	716,162	$	16,779	4.72	%	$	619,950	$	16,348	5.30	%
Investment securities (3)	134,243		1,041		1.56	%	89,655		784		1.76	%

Interest-bearing deposits in FRB	219,272		104		0.10	%	180,751		605		0.67	%
Total interest-earning assets	1,069,677		$	17,924	3.38	%	890,356		$	17,737	4.01	%
Allowance for credit losses	(8,535)						(7,905)
Noninterest-earning assets:
Cash and due from banks	45,051						28,857
Premises and equipment, net	8,995						9,452
Accrued interest receivable	7,814						7,808
Other real estate owned	5,019						6,452
Other assets	49,239						45,585
Total average assets	$	1,177,260					$	980,605
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts	$	155,077	$	115	0.15	%	$	114,264	$	75	0.13	%
Money market accounts	286,153		503		0.35	%	247,992		666		0.54	%
Savings accounts	104,090		57		0.11	%	83,729		56		0.13	%
Time deposits	62,821		220		0.71	%	62,663		314		1.01	%

Junior subordinated debentures	10,929		92		1.70	%	9,605		180		3.77	%
Total interest-bearing liabilities	619,070		$	987	0.32	%	518,253		$	1,291	0.50	%
Noninterest-bearing liabilities:
Noninterest-bearing checking	429,513						333,330
Accrued interest payable	100						126
Other liabilities	9,673						9,773
Total liabilities	1,058,356						861,482

Total shareholders' equity	118,904						118,513
Total average liabilities and shareholders' equity	$	1,177,260					$	979,995
Interest income as a percentage of average earning assets					3.38	%					4.01	%
Interest expense as a percentage of average earning assets					0.19	%					0.29	%
Net interest margin					3.19	%					3.72	%

(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 costs includes loan fee income of approximately $936 for the six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~loan fee income of $89 for thesix months ended June 30, 2020.

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 365 days (366 days for 2020) 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.

The prime rate ~~was raised to 4.00% in March 2017,~~remained unchanged at 3.25% between June 30, 2020 and ~~raised to 4.25% in~~ June ~~2017. These~~30, 2021. 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.

Increase (decrease) in the nine months ended September 30, 2017 compared to September 30, 2016
(in 000's) Total Rate Volume
Increase (decrease) in interest income:
Loans and leases $ 2,060
$ 832
$ 1,228
Investment securities available for sale 73
(25 ) 98
Interest-bearing deposits in other banks (2 ) 4
(6 )
Interest-bearing deposits in FRB 510
386
124
Total interest income 2,641
1,197
1,444
Increase (decrease) in interest expense:

Interest-bearing demand accounts 93
75
18
Savings and money market accounts 33
13
20
Time deposits 92
57
35
Subordinated debentures 47
22
25
Total interest expense 265
167
98
Increase in net interest income $ 2,376
$ 1,030
$ 1,346

For the ~~nine~~three months ended ~~September~~June 30, ~~2017,~~2021, total interest income increased ~~approximately $2,641,000,~~$1,161,000, or ~~12.17%~~14.08%, as compared to the ~~nine~~three months ended ~~September~~June 30, ~~2016. Earning asset volumes for loans and leases~~2020. In comparing the two periods, average interest earning assets increased ~~$32,935,000 on average. Overnight investments~~$190,255,000, with ~~the FRB increased $14,616,000 and available for sale~~an increase of $125,250,000 in loan balances, an increase of $67,699,000 in investment securities, and an decrease of $2,694,000 in balances held at the Federal Reserve Bank. The increase in average loan balances was driven by purchases of $145,717,000 in residential mortgage loans. Investment securities yields increased ~~$7,900,000 between the two periods.~~12 basis points and loan yields decreased 38 basis points. The average yield on total interest-earning assets decreased 21 basis points. The decrease in yields are a result of repricing of variable rate loans, ~~increased 19 basis points between the two periods,~~floating rate investment securities, and the low interest environment of interest-bearing deposits in FRB. Interest-bearing deposits in FRB are the Company's lowest-yielding interest-earning asset and comprises 16% of the average ~~yield on investment securities decreased approximately 8 basis points during the nine~~earning assets for three months ended ~~September~~June 30, ~~2017~~2021.


	Increase (decrease) for the six months ended
	June 30, 2021 compared to June 30, 2020
(in 000's)	Total		Rate		Volume
Increase (decrease) in interest income:
Loans	$	431	$	(1,916)	$	2,347
Investment securities available for sale	257		(92)		349

Interest-bearing deposits in FRB	(501)		(497)		(4)
Total interest income	187		(2,505)		2,692
Increase (decrease) in interest expense:
Interest-bearing demand accounts	(123)		(262)		139
Savings and money market accounts	1		(11)		12
Time deposits	(94)		(95)		1

Subordinated debentures	(88)		(110)		22
Total interest expense	(304)		(478)		174
Increase (decrease) in net interest income	$	491	$	(2,027)	$	2,518

For the six months ended June 30, 2021, total interest income increased $187,000, or 1.05%, as compared to the ~~same period~~six months ended June 30, 2020. In comparing the two periods, average interest earning assets increased $179,321,000, with an increase of ~~2016.~~ $96,212,000 in loan balances, an increase of $44,588,000 in investment securities, and an increase of $38,521,000 in balances held at the Federal Reserve Bank. Investment securities yields decreased 20 basis points and loan yields decreased 58 basis points. The average yield on total interest-earning assets decreased 63 basis points. The changes in yields are a result of the lower rate environment. Included in interest income for six months ended June 30, 2021 were $544,000 in fees related to SBA PPP loans. Interest-bearing deposits in FRB are the Company's lowest-yielding interest-earning asset and comprises 20% of the average earning assets for six months ended June 30, 2021.

The overall average yield on the loan portfolio ~~increased~~decreased to ~~5.39%~~4.72% for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, as compared to ~~5.20%~~5.30% for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020. 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~~June 30, ~~2017, 53.0%~~2021, 51.1% of the Company's loan portfolio consisted of floating rate instruments, as compared to ~~52.1%~~60.8% of the portfolio at December 31, ~~2016,~~2020, with the majority of those tied to the prime rate. Approximately ~~25.3%~~46.3%, or ~~$78,201,000,~~$199,052,000, of the floating rate loans had rate floors at ~~September~~June 30, ~~2017,~~2021, 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 $28,085,000 have floor spreads of 100 basis points or more.

~~Although market rates~~The Company’s net interest margin decreased to 3.19% for the six months ended June 30, 2021, when compared to 3.72% for the six months ended June 30, 2020. The net interest margin decreased primarily as a result of ~~interest are at historically low levels,~~decreases in the yield on the loan portfolio.

The Company’s disciplined deposit pricing efforts have helped keep the Company's cost of funds low. The Company’s net interest margin increased to 4.24% for the nine months ended September 30, 2017, when compared to 4.10% 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~~interest-bearing liabilities decreased to ~~0.42%~~0.32% for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, as compared to ~~0.36%~~0.50% for the ~~nine~~six months ended ~~September~~June 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, 2017.2020. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, total interest expense ~~increased~~decreased approximately ~~$265,000,~~$304,000, or ~~26.16%~~23.55%, as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020. Between those two periods, average interest-bearing liabilities increased by ~~$31,618,000~~$100,817,000 due to increases ~~across all categories~~in NOW, money market, and savings accounts. While the Company may utilize brokered deposits as an additional source of ~~customer deposits.~~funding, the Company held no brokered deposits at June 30, 2021.

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:

The following tables sets forth the amount and percentage changes in the categories presented for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~:2020:

(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~~June 30, ~~2017~~2021 increased ~~$390,000~~$108,000 to ~~$1,176,000,~~$1,322,000 when compared to the quarter ended ~~September~~June 30, ~~2016.~~2020. The increase is ~~mostly attributed to~~the result of the change in LIBOR rates between periods, causing a ~~decrease in~~$377,000 gain for the ~~loss~~quarter ended June 30, 2021 on the fair value of ~~financial liability of $335,000~~junior subordinated debentures, compared to a $30,000 loss for the quarter ended ~~September~~June 30, ~~2017. The fluctuation in fair value~~2020, partially offset by life insurance proceeds realized during the quarter ended June 30, 2020.

Table of ~~financial liability was caused by changes in the LIBOR yield curve.~~

Content


(in 000's)	Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016		Amount of Change			Percent Change		(in 000's)	Six Months Ended June 30, 2021		Six Months Ended June 30, 2020		Amount of Change		Percent Change
Customer service fees	$	2,897		$	2,867	$	30		1.05	%	Customer service fees	$	1,348	1,346		$	2	0.15	%
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	269		258		11		4.26	%
Unrealized (loss) gain on fair value of marketable equity securities											Unrealized (loss) gain on fair value of marketable equity securities	(60)		85		(145)		(170.59)	%
Gain on death benefit proceeds from bank-owned life insurance											Gain on death benefit proceeds from bank-owned life insurance	—		310		(310)		(100)	%
(Loss) gain on fair value of junior subordinated debentures											(Loss) gain on fair value of junior subordinated debentures	(656)		1,469		(2,125)		(144.66)	%

Gain on sale of assets											Gain on sale of assets	13		—		13		100.00	%
Other	539			464		75			16.16	%	Other	248		328		(80)		(24.39)	%
Total noninterest income	$	3,151		$	3,773	$	(622	)	(16.49	)%	Total noninterest income	$	1,162	$	3,796	$	(2,634)	(69.39)	%

The following ~~table~~tables sets forth the amount and percentage changes in the categories presented for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2021 and ~~2016:~~2020:

~~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~~June 30, ~~2017~~2021 decreased ~~$118,000~~$84,000 to ~~$4,746,000,~~$5,605,000, compared to the quarter ended ~~September~~June 30, ~~2016.~~2020. The decrease was attributed to ~~lower~~decreases in the cost on OREO ~~expenses, a~~and occupancy expense, offset by increases in salaries and employee benefits and professional fees. The decrease in the ~~loss~~cost on OREO was the result of a ~~tax credit partnership, and a reduction in regulatory assessment expense. The FDIC assessment rate for the Company was reduced effective third quarter 2017. OREO expenses decreased $18,000~~$727,000 write-down on one property recorded during the quarter ended ~~September~~June 30, ~~2017 as a result~~2020.

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

Content


(in 000's)	Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016		Amount of Change			Percent Change		(in 000's)	Six Months Ended June 30, 2021		Six Months Ended June 30, 2020		Amount of Change		Percent Change
Salaries and employee benefits	$	8,149		$	7,592	$	557		7.34	%	Salaries and employee benefits	$	5,917	$	5,409	$	508	9.39	%
Occupancy expense	3,144			3,212		(68		)	(2.12	)%	Occupancy expense	1,693		1,723		(30)		(1.74)	%
Data processing	81			108		(27		)	(25.00	)%	Data processing	235		247		(12)		(4.86)	%
Professional fees	912			1,116		(204		)	(18.28	)%	Professional fees	1,690		1,546		144		9.31	%
FDIC/DFI insurance assessments	313			632		(319		)	(50.47	)%
Regulatory assessments											Regulatory assessments	289		162		127		78.40	%
Director fees	215			218		(3		)	(1.38	)%	Director fees	184		188		(4)		(2.13)	%
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	42		33		9		27.27	%
Net cost on operation of OREO											Net cost on operation of OREO	43		933		(890)		(95.39)	%
Other	1,868			1,772		96			5.42	%	Other	1,077		1,193		(116)		(9.72)	%
Total expense	$	14,543		$	14,988	$	(445	)	(2.97	)%	Total expense	$	11,170	$	11,434	$	(264)	(2.31)	%

Noninterest expense ~~decreased approximately $445,000 or 2.97% between~~for the ~~nine~~six months ended ~~September~~June 30, ~~2016 and September~~2021 decreased $264,000 to $11,170,000, compared to the six months ended June 30, ~~2017.~~2020. The decrease ~~experienced during~~was attributed to decreases in the ~~nine months ended September 30, 2017,~~cost on OREO and other expense, offset by increases in salaries and employee benefits and professional fees. The decrease in the cost on OREO 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, compared toa $727,000 write-down on one property recorded during the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020.

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~~June 30, ~~2017,~~2021, 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 six months ended June 30, 2021 was 28.16% compared to 28.56% for the six months ended June 30, 2020.

Total assets ~~increase~~d ~~$55,535,000~~,increased $138,401,000, or ~~7.05%~~12.67%, to a balance of ~~$843,507,000~~$1,231,055,000 at ~~September~~June 30, ~~2017~~2021, from the balance of $1,092,654,000 at December 31, 2020, and increased $199,682,000, or 19.36%, from the balance of ~~$787,972,000~~$1,031,373,000 at ~~December 31, 2016, and~~ ~~increase~~d ~~$61,915,000, or~~ ~~7.92%, from the balance of $781,592,000 at~~ ~~September~~June 30, ~~2016~~.2020. Total deposits of ~~$725,298,000~~$1,090,442,000 at ~~September~~June 30, ~~2017~~, ~~increase~~d ~~$48,669,000~~,2021, increased $137,791,000, or ~~7.19%~~14.46%, from the balance reported at December 31, ~~2016~~,2020, and ~~increase~~d ~~$54,012,000~~,increased $197,330,000, or ~~8.05%~~22.09%, from the balance of ~~$671,286,000~~$893,112,000 reported at ~~September~~June 30, ~~2016~~.2020. Cash and cash equivalents ~~increase~~d ~~$46,860,000~~,decreased $133,161,000, or ~~41.46%~~45.28%, between December 31, ~~2016~~2020 and ~~September~~June 30, ~~2017; net~~2021. Net loans ~~increase~~d ~~$12,511,000~~,increased $187,024,000, or ~~2.23%~~28.96%, to a balance of ~~$574,443,000~~;$832,849,000, and investment securities ~~decrease~~d ~~$9,135,000~~,increased $84,575,000, or ~~15.89%~~98.12%, during the first ~~nine~~six months of ~~2017~~.2021.

Earning assets averaged ~~approximately~~ ~~$727,925,000~~$1,069,677,000 during the ~~nine~~six months ended~~September~~ June 30, ~~2017~~,2021, as compared to ~~$673,353,000~~$890,356,000 for the same period in ~~2016~~.2020. Average interest-bearing liabilities increased to ~~$408,077,000~~$619,070,000 for the ~~nine~~six months ended~~September~~ June 30, ~~2017~~,2021, from ~~$376,459,000~~$518,253,000 reported for the comparative period of ~~2016~~.2020.

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~~$841,103,000 at ~~September~~June 30, ~~2017~~,2021, an increase of ~~$12,625,000~~,$185,692,000, or ~~2.22%~~28.33%, when compared to the balance of ~~$569,759,000~~$655,411,000 at December 31, ~~2016~~,2020, and an increase of ~~$22,785,000~~,$191,449,000, or ~~4.07%~~22.76%, when compared to the balance of ~~$559,599,000~~$649,654,000 reported at ~~September~~June 30, ~~2016~~.2020. During the second quarter of 2021, the Company purchased $145,717,000 in residential mortgage loans. Loans on average ~~increase~~d ~~$32,935,000~~,increased $96,212,000, or ~~6.19%~~15.52%, between the ~~nine~~six months ended~~September~~ June 30, ~~2016~~2020 and ~~September~~June 30, ~~2017~~,2021, with loans averaging ~~$565,068,000~~$716,162,000 for the ~~nine~~six months ended~~September~~ June 30, ~~2017~~,2021, as compared to ~~$532,133,000~~$619,950,000 for the same period of ~~2016~~.2020.



Large accelerated filer o ☐	Accelerated filer o ☐	Non-accelerated filer o ☒
Small reporting company x ☒		Emerging growth company o ☐



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		3940

				Overview	3940
				Results of Operations	4042
				Financial Condition	4749
				Asset/Liability Management – Liquidity and Cash Flow	5761
				Regulatory Matters	5862

			Item 3. Quantitative and Qualitative Disclosures about Market Risk		64

			Item 4. Controls and Procedures		6064

PART II. Other Information
			Item 1.	Legal Proceedings	6265
			Item ~~1A.~~2.	~~Risk Factors~~	62
	~~Item 2.~~	Unregistered Sales of Equity Securities and Use of Proceeds	6265
			Item 3.	Defaults Upon Senior Securities	6265
			Item 4.	Mine Safety Disclosures	6265
			Item 5.	Other Information	6265
			Item 6.	Exhibits	6265

Signatures					6366



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


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands except shares and EPS)	2021		2020		2021		2020
Interest Income:
Interest and fees on loans	$	8,708	$	7,849	$	16,779	$	16,348
Interest on investment securities	654		356		1,041		784
Interest on deposits in FRB	42		38		104		605

Total interest income	9,404		8,243		17,924		17,737

Interest Expense:
Interest on deposits	468		447		895		1,111
Interest on other borrowed funds	45		83		92		180
Total interest expense	513		530		987		1,291

Net Interest Income	8,891		7,713		16,937		16,446
Provision for Credit Losses	826		428		1,201		2,134
Net Interest Income after Provision for Credit Losses	8,065		7,285		15,736		14,312

Noninterest Income:
Customer service fees	692		618		1,348		1,346
Increase in cash surrender value of bank-owned life insurance	138		127		269		258
Unrealized gain (loss) on fair value of marketable equity securities	—		71		(60)		85
Gain on proceeds from bank-owned life insurance	0		310		0		310

Gain (loss) on fair value of junior subordinated debentures	377		(30)		(656)		1,469

Gain on sale of assets	0		0		13		0
Other	115		118		248		328
Total noninterest income	1,322		1,214		1,162		3,796

Noninterest Expense:
Salaries and employee benefits	2,893		2,414		5,917		5,409
Occupancy expense	837		869		1,693		1,723
Data processing	148		135		235		247
Professional fees	865		691		1,690		1,546
Regulatory assessments	123		77		289		162
Director fees	92		94		184		188
Correspondent bank service charges	23		17		42		33

Net cost on operation and sale of OREO	18		780		43		933
Other	606		612		1,077		1,193
Total noninterest expense	5,605		5,689		11,170		11,434

Income Before Provision for Taxes	3,782		2,810		5,728		6,674
Provision for Taxes on Income	1,077		798		1,613		1,906
Net Income	$	2,705	$	2,012	$	4,115	$	4,768

Net Income per common share
Basic	$	0.16	$	0.12	$	0.24	$	0.28
Diluted	$	0.16	$	0.12	$	0.24	$	0.28
Shares on which net income per common shares were based
Basic	17,010,288		16,975,588		17,010,210		16,974,845
Diluted	17,032,878		16,988,778		17,027,477		16,992,223



	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



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


-	~~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.


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 & Student Loans				Unallocated			Total
September 30, 2017
June 30, 2021																						June 30, 2021				Commercial and Industrial			Real Estate Mortgage			Real Estate Construction Development				Agricultural				Installment & Student Loans				Unallocated			Total
Beginning balance	$	1,764					$		1,174			$				2,887							$	1,589			$	814			$		777				$	9,005			Beginning balance
Provision (recovery of provision) for credit losses	(271		)	(91		)		112		81			(69		)		245		7
Provision (recapture of provision) for credit losses																						Provision (recapture of provision) for credit losses		100			531			(617)				441				249				122						826

Charge-offs	(1		)	—				—		—			—				—		(1		)	Charge-offs		0			0			0				0				(188)				0			(188)
Recoveries	11			59				—		—			77				—		147			Recoveries		4			5			0				0				4				0			13
Net charge-offs	10			59				—		—			77				—		146			Net charge-offs		4			5			0				0				(184)				0			(175)

Ending balance	$	1,503		$	1,142			$	2,999	$	1,670		$	822			$	1,022	$	9,158		Ending balance		$	632		$	1,087		$	3,213			$	1,106			$	2,789			$	373		$	9,200
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			12			0				161				0				0			173
Loans collectively evaluated for impairment	932			715				2,999		927			822				1,022		7,417			Loans collectively evaluated for impairment		632			1,075			3,213				945				2,789				373			9,027
Ending balance	$	1,503		$	1,142			$	2,999	$	1,670		$	822			$	1,022	$	9,158		Ending balance		$	632		$	1,087		$	3,213			$	1,106			$	2,789			$	373		$	9,200


Nine Months Ended	Commercial and Industrial			Real Estate Mortgage				Real Estate Construction Development			Agricultural			Installment & Other				Unallocated			Total
September 30, 2017
Six Months Ended																								Six Months Ended		Commercial and Industrial				Real Estate Mortgage				Real Estate Construction Development			Agricultural				Installment and Student Loans			Unallocated			Total
June 30, 2021																								June 30, 2021
Beginning balance	$	1,843					$		1,430				$				3,378								$	666		$	888			$	697			$			8,902	Beginning balance		$	625		$	575		$	3,722	$	711	$	2,614	$	275	$	8,522
Provision (recovery of provision) for credit losses	(408		)	(359		)		(379		)	983			(198		)		337			(24		)
Provision (recapture of provision) for credit losses																								Provision (recapture of provision) for credit losses		(32)				501				(509)			395				748			98			1,201

Charge-offs	(106		)	(2		)		—			—			—				(12		)	(120		)	Charge-offs		0				0				0			0				(580)			0			(580)
Recoveries	174			73				—			21			132				—			400			Recoveries		39				11				0			0				7			0			57
Net recoveries	68			71				—			21			132				(12		)	280
Net recoveries (charge-offs)																								Net recoveries (charge-offs)		39				11				0			0				(573)			0			(523)

Ending balance	$	1,503		$	1,142			$	2,999		$	1,670		$	822			$	1,022		$	9,158		Ending balance		$	632			$	1,087			$	3,213		$	1,106			$	2,789		$	373		$	9,200
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				12				0			161				0			0			173
Loans collectively evaluated for impairment	932			715				2,999			927			822				1,022			7,417			Loans collectively evaluated for impairment		632				1,075				3,213			945				2,789			373			9,027
Ending balance	$	1,503		$	1,142			$	2,999		$	1,670		$	822			$	1,022		$	9,158		Ending balance		$	632			$	1,087			$	3,213		$	1,106			$	2,789		$	373		$	9,200


	June 30, 2021						June 30, 2020
	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	$	0	$	43,676	$	43,676	$	318	$	41,207	$	41,525
Government program loans	155		12,253		12,408		241		26,464		26,705
Total commercial and industrial	155		55,929		56,084		559		67,671		68,230

Commercial real estate loans	0		333,288		333,288		2,048		262,444		264,492
Residential mortgage loans	360		176,141		176,501		1,041		48,785		49,826
Home improvement and home equity loans	0		96		96		0		120		120
Total real estate mortgage	360		509,525		509,885		3,089		311,349		314,438

Real estate construction and development loans	10,940		154,486		165,426		11,109		142,546		153,655

Agricultural loans	379		53,139		53,518		696		48,283		48,979

Installment and student loans	0		56,190		56,190		0		64,352		64,352

Total loans	$	11,834	$	829,269	$	841,103	$	15,453	$	634,201	$	649,654



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



	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


Description of Assets	June 30, 2021		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	$	38,318	$	0	$	38,318	$	0
U.S. Government collateralized mortgage obligations	69,878		0		69,878		0
Asset-backed securities	5,319		0		5,319		0
Municipal bonds	48,039		0		48,039		0
Corporate bond	5,422		0		5,422		0
Total AFS securities	166,976		0		166,976		0

Marketable equity securities (2)	3,791		3,791		0		0











Total	$	170,767	$	3,791	$	166,976	$	0


Description of Liabilities	June 30, 2021		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)	$	11,253	0	0	$	11,253
Total	$	11,253	0	0	$	11,253


	Three Months Ended June 30, 2021		Three Months Ended June 30, 2020		Six Months Ended June 30, 2021		Six Months Ended June 30, 2020
Reconciliation of Liabilities:	Junior Subordinated Debt		Junior Subordinated Debt		Junior Subordinated Debt		Junior Subordinated Debt
Beginning balance	$	10,983	$	8,546	$	10,924	$	10,808
Gross (gain) loss included in earnings	(377)		30		656		(1,469)
Gross loss (gain) related to changes in instrument specific credit risk	647		1,208		(325)		453
Change in accrued interest	0		(13)		(2)		(21)
Ending balance	$	11,253	$	9,771	$	11,253	$	9,771
The amount of total (gain) loss for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date	$	(377)	$	30	$	656	$	(1,469)


~~(1)~~	(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.~~



				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	%


~~(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.


	Increase (decrease) for the three months ended
	June 30, 2021 compared to June 30, 2020
(in 000's)	Total		Rate		Volume
Increase (decrease) in interest income:
Loans	$	859	$	(618)	$	1,477
Investment securities available for sale	298		33		265

Interest-bearing deposits in FRB	4		5		(1)
Total interest income	1,161		(580)		1,741
Increase (decrease) in interest expense:
Interest-bearing demand accounts	60		(11)		71
Savings and money market accounts	5		(1)		6
Time deposits	(44)		(45)		1

Subordinated debentures	(38)		(57)		19
Total interest expense	(17)		(114)		97
Increase (decrease) in net interest income	$	1,178	$	(466)	$	1,644


	YTD Average 9/30/2017	YTD Average 12/31/16	YTD Average 9/30/2016		YTD Average 6/30/2021	YTD Average 12/31/20	YTD Average 6/30/2020
Loans	77.63%	79.26%	79.02%	Loans	66.96%	67.51%	69.64%
Investment securities available for sale	7.46%	7.27%	6.89%	Investment securities available for sale	12.55%	9.57%	10.07%
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	20.49%	22.92%	20.29%
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	25.05%	23.12%	22.05%
Money market accounts	37.31%	38.82%	39.00%	Money market accounts	46.22%	47.32%	47.85%
Savings accounts	19.17%	17.62%	17.56%	Savings accounts	16.81%	16.23%	16.16%
Time deposits	19.82%	19.21%	18.84%	Time deposits	10.15%	11.54%	12.09%

Subordinated debentures	2.23%	2.10%	2.12%	Subordinated debentures	1.77%	1.79%	1.85%
Total interest-bearing liabilities	100.00%	100.00%	100.00%	Total interest-bearing liabilities	100.00%	100.00%	100.00%


(In thousands)
Student Loan Portfolio Balance as of December 31, 2020	$	57,385
Disbursements	—
Capitalized Interest	663
Payments Received	(4,820)
Loans Charged-off	(568)
Student Loan Portfolio Balance as of June 30, 2021	$	52,660


	Impaired Loan Balance		Reserve		Impaired Loan Balance		Reserve			Impaired Loan Balance		Reserve		Impaired Loan Balance		Reserve
(in 000’s)	September 30, 2017		September 30, 2017		December 31, 2016		December 31, 2016		(in 000’s)	June 30, 2021		June 30, 2021		December 31, 2020		December 31, 2020
Commercial and industrial	$	3,687	$	571	$	5,009	$	757	Commercial and industrial	$	155	$	—	$	466	$	—
Real estate – mortgage	3,944		427		3,931		603		Real estate – mortgage	360		12		1,244		13
RE construction & development	6,816		—		6,274		—		RE construction & development	10,940		—		11,057		—
Agricultural	891		743		—		—		Agricultural	379		161		609		196
Installment/other	—		—		965		—
Total Impaired Loans	$	15,338	$	1,741	$	16,179	$	1,360
Installment and student loans									Installment and student loans	—		—		—		—
Total impaired loans									Total impaired loans	$	11,834	$	173	$	13,376	$	209


	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)	June 30, 2021		June 30, 2021		June 30, 2021
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	—		—		—
Residential mortgages	2,688		—		2,688		Residential mortgages	359		—		359

Total real estate mortgage	3,835		466		3,369		Total real estate mortgage	359		—		359
RE construction & development	6,798		4,408		2,389		RE construction & development	2,335		2,335		—
Agricultural	887		—		887		Agricultural	379		326		53
Total Troubled Debt Restructurings	$	12,150	$	5,124	$	7,026

Total troubled debt restructurings							Total troubled debt restructurings	$	3,073	$	2,661	$	412


~~(1)~~	~~Included in nonaccrual loans at September 30, 2017~~The following table summarizes the components of nonperforming assets as of June 30, 2021 and ~~December 31, 2016 are restructured loans totaling $5,124,000 and $7,264,000, respectively.~~


	Balance		Balance		Change from
(in 000's)	June 30, 2021		December 31, 2020		December 31, 2020
Nonaccrual Loans:
Commercial and industrial	$	—	$	—	$	—
Real estate - mortgage	—		—		—
RE construction & development	10,940		11,057		(117)
Agricultural	325		439		(114)
Installment and student loans	—		—		—
Total nonaccrual loans	$	11,265	$	11,496	$	(231)


(in 000's)	Balance
December 31, 2019	$	218,995
June 30, 2020	$	229,541
December 31, 2020	$	294,069
June 30, 2021	$	160,908



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


	Ratios at June 30, 2021	Ratios at December 31, 2020	Minimum Requirement to be Well Capitalized	Minimum requirement for Community Bank Leverage Ratio (1) (2)









Tier 1 capital to adjusted average assets ("Leverage Ratio")
Company	10.28%	11.37%	5.00%	8.50%
Bank	10.11%	11.17%	5.00%	8.50%



	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%