| Loans | 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 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% of total loans at September 30, 2017 and are generally made to support the ongoing operations of small-to-medium sized commercial businesses. Commercial and industrial loans have a high degree of industry diversification and provide working capital, financing for the purchase of manufacturing plants and equipment, or funding for growth and general expansion of businesses. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases, or other collateral including real estate. The remainder are unsecured; however, extensions of credit are predicated upon the financial capacity of the borrower. Repayment of commercial loans is generally from the cash flow of the borrower. Real estate mortgage loans, representing 49.9% of total loans at September 30, 2017 , are secured by trust deeds on primarily commercial property, but are also secured by trust deeds on single family residences. Repayment of real estate mortgage loans generally comes from the cash flow of the borrower. • Commercial real estate mortgage loans comprise the largest segment of this loan category and are available on all types of income producing and commercial properties, including: office buildings, shopping centers; apartments and motels; owner occupied buildings; manufacturing facilities and more. Commercial real estate mortgage loans can also be used to refinance existing debt. Although real estate associated with the business is the primary collateral for commercial real estate mortgage loans, the underlying real estate is not the source of repayment. Commercial real estate loans are made under the premise that the loan will be repaid from the borrower's business operations, rental income associated with the real property, or personal assets. • Residential mortgage loans are provided to individuals to finance or refinance single-family residences. Residential mortgages are not a primary business line offered by the Company, and a majority are conventional mortgages that were purchased as a pool. Most residential mortgages originated by the Company are of a shorter term than conventional mortgages, with maturities ranging from 3 to 15 years on average. • Home Improvement and Home Equity loans comprise a relatively small portion of total real estate mortgage loans, and are offered to borrowers for the purpose of home improvements, although the proceeds may be used for other purposes. Home equity loans are generally secured by junior trust deeds, but may be secured by 1 st trust deeds. Real estate construction and development loans, representing 22.1% of total loans at September 30, 2017 , consist of loans for residential and commercial construction projects, as well as land acquisition and development, or land held for future development. Loans in this category are secured by real estate including improved and unimproved land, as well as single-family residential, multi-family residential, and commercial properties in various stages of completion. All real estate loans have established equity requirements. Repayment on construction loans generally comes from long-term mortgages with other lending institutions obtained at completion of the project. Agricultural loans represent 10.0% of total loans at September 30, 2017 and are generally secured by land, equipment, inventory and receivables. Repayment is from the cash flow of the borrower. Installment and student loans represent 9.9% of total loans at September 30, 2017 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 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 . In the normal course of business, the Company is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. At September 30, 2017 and December 31, 2016 , these financial instruments include commitments to extend credit of $107,580,000 and $120,485,000 , respectively, and standby letters of credit of $2,058,000 and $1,201,000 , respectively. These instruments involve elements of credit risk in excess of the amount recognized on the consolidated balance sheet. The contract amounts of these instruments reflect the extent of the involvement the Company has in off-balance sheet financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. A majority of these commitments are at floating interest rates based on the Prime rate. Commitments generally have fixed expiration dates. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation. Collateral held varies but includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate and income-producing properties. Standby letters of credit are generally unsecured and are issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Past Due Loans The Company monitors delinquency and potential problem loans on an ongoing basis through weekly reports to the Loan Committee and monthly reports to the Board of Directors. The following is a summary of delinquent loans at September 30, 2017 (in 000's): 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 (in 000's): December 31, 2016 Loans 30-60 Days Past Due Loans 61-89 Days Past Due Loans 90 or More Days Past Due Total Past Due Loans Current Loans Total Loans Accruing Loans 90 or More Days Past Due Commercial and Business Loans $ — $ 432 $ — $ 432 $ 48,009 $ 48,441 $ — Government Program Loans — — 290 290 1,251 1,541 — Total Commercial and Industrial — 432 290 722 49,260 49,982 — Commercial Real Estate Loans — — — — 199,810 199,810 — Residential Mortgages — — — — 87,388 87,388 — Home Improvement and Home Equity Loans — — — — 599 599 — Total Real Estate Mortgage — — — — 287,797 287,797 — Real Estate Construction and Development Loans 166 — 1,250 1,416 128,697 130,113 1,250 Agricultural Loans — — — — 56,918 56,918 — Consumer Loans — — 965 965 43,785 44,750 — Overdraft Protection Lines — — — — 48 48 — Overdrafts — — — — 151 151 — Total Installment — — 965 965 43,984 44,949 — Total Loans $ 166 $ 432 $ 2,505 $ 3,103 $ 566,656 $ 569,759 $ 1,250 Nonaccrual Loans Commercial, construction and commercial real estate loans are placed on nonaccrual status under the following circumstances: - When there is doubt regarding the full repayment of interest and principal. - When principal and/or interest on the loan has been in default for a period of 90 -days or more, unless the asset is both well secured and in the process of collection that will result in repayment in the near future. - When the loan is identified as having loss elements and/or is risk rated "8" Doubtful. Other circumstances which jeopardize the ultimate collectability of the loan including certain troubled debt restructurings, identified loan impairment, and certain loans to facilitate the sale of OREO. Loans meeting any of the preceding criteria are placed on nonaccrual status and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income. All other loans where principal or interest is due and unpaid for 90 days or more are placed on nonaccrual and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income. When a loan is placed on nonaccrual status and subsequent payments of interest (and principal) are received, the interest received may be accounted for in two separate ways. Cost recovery method : If the loan is in doubt as to full collection, the interest received in subsequent payments is diverted from interest income to a valuation reserve and treated as a reduction of principal for financial reporting purposes. Cash basis : This method is only used if the recorded investment or total contractual amount is expected to be fully collectible, under which circumstances the subsequent payments of interest are credited to interest income as received. Loans on non-accrual status are usually not returned to accrual status unless all delinquent principal and/or interest has been brought current, there is no identified element of loss, and current and continued satisfactory performance is expected (loss of the contractual amount not the carrying amount of the loan). Return to accrual is generally demonstrated through the timely receipt of at least six monthly payments on a loan with monthly amortization. Nonaccrual loans totaled $5,145,000 and $7,264,000 at September 30, 2017 and December 31, 2016 , respectively. There were no remaining undisbursed commitments to extend credit on nonaccrual loans at September 30, 2017 or December 31, 2016 . The following is a summary of nonaccrual loan balances at September 30, 2017 and December 31, 2016 (in 000's). 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 pronouncements is that it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is not considered impaired if there is merely an insignificant delay or shortfall in the amounts of payments and the Company expects to collect all amounts due, including interest accrued, at the contractual interest rate for the period of the delay. Review for impairment does not include large groups of smaller balance homogeneous loans that are collectively evaluated to estimate the allowance for loan losses. The Company’s present allowance for loan losses methodology, including migration analysis, captures required reserves for these loans in the formula allowance. For loans determined to be impaired, the Company evaluates impairment based upon either the fair value of underlying collateral, discounted cash flows of expected payments, or observable market price. - For loans secured by collateral including real estate and equipment, the fair value of the collateral less selling costs will determine the carrying value of the loan. The difference between the recorded investment in the loan and the fair value, less selling costs, determines the amount of impairment. The Company uses the measurement method based on fair value of collateral when the loan is collateral dependent and foreclosure is probable. For loans that are not considered collateral dependent, a discounted cash flow methodology is used. - The discounted cash flow method of measuring the impairment of a loan is used for impaired loans that are not considered to be collateral dependent. Under this method, the Company assesses both the amount and timing of cash flows expected from impaired loans. The estimated cash flows are discounted using the loan's effective interest rate. The difference between the amount of the loan on the Bank's books and the discounted cash flow amounts determines the amount of impairment to be provided. This method is used for most of the Company’s troubled debt restructurings or other impaired loans where some payment stream is being collected. - The observable market price method of measuring the impairment of a loan is only used by the Company when the sale of loans or a loan is in process. The method for recognizing interest income on impaired loans is dependent on whether the loan is on nonaccrual status or is a troubled debt restructure. For income recognition, the existing nonaccrual and troubled debt restructuring policies are applied to impaired loans. Generally, except for certain troubled debt restructurings which are performing under the restructure agreement, the Company does not recognize interest income received on impaired loans, but reduces the carrying amount of the loan for financial reporting purposes. Loans other than certain homogeneous loan portfolios are reviewed on a quarterly basis for impairment. Impaired loans are written down to estimated realizable values by the establishment of specific reserves for loan utilizing the discounted cash flow method, or charge-offs for collateral-based impaired loans, or those using observable market pricing. The following is a summary of impaired loans at September 30, 2017 (in 000's). 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) Information is based on the nine month period ended September 30, 2017 . The following is a summary of impaired loans at December 31, 2016 (in 000's). 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 . (2) Information is based on the twelve month period ended December 31, 2016 . In most cases, the Company uses the cash basis method of income recognition for impaired loans. In the case of certain troubled debt restructurings for which the loan is performing under the current contractual terms for a reasonable period of time, income is recognized under the accrual method. The average recorded investment in impaired loans for the quarters ended September 30, 2017 and 2016 was $15,681,000 and $19,397,000 , respectively. Interest income recognized on impaired loans for the quarters ended September 30, 2017 and 2016 was approximately $192,000 and $34,000 , respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $70,000 and $126,000 for the quarters ended September 30, 2017 and 2016 , respectively. The average recorded investment in impaired loans for the nine months ended September 30, 2017 and 2016 was $16,366,000 and $21,440,000 , respectively. Interest income recognized on impaired loans for the nine months ended September 30, 2017 and 2016 was approximately $738,000 and $741,000 , respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $260,000 and $362,000 for the nine months ended September 30, 2017 and 2016 , 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 borrower that it would not otherwise consider. Although the restructuring may take different forms, the Company's objective is to maximize recovery of its investment by granting relief to the borrower. A TDR may include, but is not limited to, one or more of the following: - A transfer from the borrower to the Company of receivables from third parties, real estate, other assets, or an equity interest in the borrower is granted to fully or partially satisfy the loan. - A modification of terms of a debt such as one or a combination of: ◦ The reduction (absolute or contingent) of the stated interest rate. ◦ The extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk. ◦ The reduction (absolute or contingent) of the face amount or maturity amount of debt as stated in the instrument or agreement. ◦ The reduction (absolute or contingent) of accrued interest. For a restructured loan to return to accrual status there needs to be, among other factors, at least 6 months successful payment history. In addition, the Company performs a financial analysis of the credit to determine whether the borrower has the ability to continue to meet payments over the remaining life of the loan. This includes, but is not limited to, a review of financial statements and cash flow analysis of the borrower. Only after determination that the borrower has the ability to perform under the terms of the loans, will the restructured credit be considered for accrual status. Although the Company does not have a policy which specifically addresses when a loan may be removed from TDR classification, as a matter of practice, loans classified as TDRs generally remain classified as such until the loan either reaches maturity or its outstanding balance is paid off. The following tables illustrates TDR activity for the periods indicated: Three Months Ended September 30, 2017 ($ in 000's) Number of Pre- Post- 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 Pre- Post- 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 Pre- Post- 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 Pre- Post- 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, payment extensions, and forbearance. At September 30, 2017 , the Company had 29 restructured loans totaling $12,150,000 as compared to 28 restructured loans totaling $12,410,000 at December 31, 2016 . The following tables summarize TDR activity by loan category for the quarters ended September 30, 2017 and September 30, 2016 . 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 Total Beginning balance $ 1,055 $ 1,062 $ 2,573 $ — $ 6,868 $ 400 $ — $ 11,958 Defaults — — — — — — — — Additions — — 167 — — 587 — 754 — Principal (reductions) additions (425 ) 85 (52 ) — (70 ) (100 ) — (562 ) Ending balance $ 630 $ 1,147 $ 2,688 $ — $ 6,798 $ 887 $ — $ 12,150 Allowance for loan loss $ 15 $ 221 $ 206 $ — $ — $ 743 $ — $ 1,185 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 Total Beginning balance $ 1,236 $ 1,510 $ 2,400 $ — $ 12,100 $ 6 $ 965 $ 18,217 Defaults — — — — — — — — Additions — — — — — — — — — Principal reductions 10 (25 ) (15 ) — (6,991 ) (5 ) — (7,026 ) Ending balance $ 1,246 $ 1,485 $ 2,385 $ — $ 5,109 $ 1 $ 965 $ 11,191 Allowance for loan loss $ 38 $ 472 $ 163 $ — $ — $ — $ — $ 673 The following tables summarize TDR activity by loan category for the nine months ended September 30, 2017 and September 30, 2016 (in 000's). 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 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 risk rating approaches, a facility rating and a borrower rating as follows: Facility Rating: The facility rating is determined by the analysis of positive and negative factors that may indicate that the quality of a particular loan or credit arrangement requires that it be rated differently from the risk rating assigned to the borrower. The Company assesses the risk impact of these factors: Collateral - The rating may be affected by the type and quality of the collateral, the degree of coverage, the economic life of the collateral, liquidation value and the Company's ability to dispose of the collateral. Guarantees - The value of third party support arrangements varies widely. Unconditional guaranties from persons with demonstrable ability to perform are more substantial than that of closely related persons to the borrower who offer only modest support. Unusual Terms - Credit may be extended on terms that subject the Company to a higher level of risk than indicated in the rating of the borrower. Borrower Rating: The borrower rating is a measure of loss possibility based on the historical, current and anticipated financial characteristics of the borrower in the current risk environment. To determine the rating, the Company considers at least the following factors: - Quality of management - Liquidity - Leverage/capitalization - Profit margins/earnings trend - Adequacy of financial records - Alternative funding sources - Geographic risk - Industry risk - Cash flow risk - Accounting practices - Asset protection - Extraordinary risks The Company assigns risk ratings to loans other than consumer loans and other homogeneous loan pools based on the following scale. The risk ratings are used when determining borrower ratings as well as facility ratings. When the borrower rating and the facility ratings differ, the lowest rating applied is: - Grades 1 and 2 – These grades include loans which are given to high quality borrowers with high credit quality and sound financial strength. Key financial ratios are generally above industry averages and the borrower’s strong earnings history or net worth. These may be secured by deposit accounts or high-grade investment securities. - Grade 3 – This grade includes loans to borrowers with solid credit quality with minimal risk. The borrower’s balance sheet and financial ratios are generally in line with industry averages, and the borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans assigned this risk rating must have characteristics, which place them well above the minimum underwriting requirements for those departments. Asset-based borrowers assigned this rating must exhibit extremely favorable leverage and cash flow characteristics, and consistently demonstrate a high level of unused borrowing capacity. - Grades 4 and 5 – These include “pass” grade loans to borrowers of acceptable credit quality and risk. The borrower’s balance sheet and financial ratios may be below industry averages, but above the lowest industry quartile. Leverage is above and liquidity is below industry averages. Inadequacies evident in financial performance and/or management sufficiency are offset by readily available features of support, such as adequate collateral, or good guarantors having the liquid assets and/or cash flow capacity to repay the debt. The borrower may have recognized a loss over three or four years, however recent earnings trends, while perhaps somewhat cyclical, are improving and cash flows are adequate to cover debt service and fixed obligations. Real estate and asset-borrowers fully comply with all underwriting standards and are performing according to projections would be assigned this rating. These also include grade 5 loans which are “leveraged” or on management’s “watch list.” While still considered pass loans (loans given a grade 5), the borrower’s financial condition, cash flow or operations evidence more than average risk and short term weaknesses, these loans warrant a higher than average level of monitoring, supervision and attention from the Company, but do not reflect credit weakness trends that weaken or inadequately protect the Company’s credit position. Loans with a grade rating of 5 are not normally acceptable as new credits unless they are adequately secured or carry substantial endorser/guarantors. - Grade 6 – This grade includes “special mention” loans which are loans that are currently protected but are potentially wea |
