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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO             .

Commission file number: 000-32897

UNITED SECURITY BANCSHARES
(Exact name of registrant as specified in its charter)
 
CALIFORNIA
 
91-2112732
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2126 Inyo Street, Fresno, California
 
93721
(Address of principal executive offices)
 
(Zip Code)

Registrants telephone number, including area code    (559) 248-4943

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No  x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days. Yes x No o   

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

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

Emerging growth company o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No  x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock, no par value
(Title of Class)

Shares outstanding as of April 30, 2020: 16,974,235

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TABLE OF CONTENTS

Facing Page

Table of Contents


PART I. Financial Information
 
 
 
 
 
 
Item 1. Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. Other Information
 
 
Item 1.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 
 
 

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PART I. Financial Information


United Security Bancshares and Subsidiaries
Consolidated Balance Sheets – (unaudited)
March 31, 2020 and December 31, 2019
(in thousands except shares)
March 31, 2020
 
December 31, 2019
Assets
 
 
 
Cash and non-interest-bearing deposits in other banks
$
28,134

 
$
27,291

Due from Federal Reserve Bank ("FRB")
171,719

 
191,704

Cash and cash equivalents
199,853

 
218,995

Investment securities (at fair value)
 
 
 
Available-for-sale ("AFS") securities
93,695

 
76,312

Marketable equity securities
3,791

 
3,776

Total investment securities
97,486

 
80,088

Loans
623,765

 
597,374

Unearned fees and unamortized loan origination costs - net
(79
)
 
(820
)
Allowance for credit losses
(9,120
)
 
(7,908
)
Net loans
614,566

 
588,646

Premises and equipment - net
9,279

 
9,380

Accrued interest receivable
8,285

 
8,208

Other real estate owned
5,745

 
6,753

Goodwill
4,488

 
4,488

Deferred tax assets - net
2,555

 
3,191

Cash surrender value of life insurance
21,086

 
20,955

Operating lease right-of-use assets
3,214

 
3,360

Other assets
10,689

 
12,855

Total assets
$
977,246

 
$
956,919

 
 
 
 
Liabilities & Shareholders' Equity
 

 
 

Liabilities
 

 
 

Deposits
 

 
 

Non-interest-bearing
$
324,167

 
$
311,950

Interest-bearing
516,270

 
506,412

Total deposits
840,437

 
818,362

 
 
 
 
Accrued interest payable
50

 
59

Operating lease liabilities
3,317

 
3,463

Other liabilities
7,486

 
8,239

Junior subordinated debentures (at fair value)
8,546

 
10,808

Total liabilities
859,836

 
840,931

Shareholders' Equity
 

 
 

Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 16,974,235 at March 31, 2020 and 16,973,885 at December 31, 2019
59,050

 
58,973

Retained earnings
58,534

 
57,647

Accumulated other comprehensive loss
(174
)
 
(632
)
Total shareholders' equity
117,410

 
115,988

Total liabilities and shareholders' equity
$
977,246

 
$
956,919


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United Security Bancshares and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 
 
Three Months Ended March 31,
(In thousands except shares and EPS)
2020
 
2019
Interest Income:
 
 
 
Interest and fees on loans
$
8,346

 
$
8,642

Interest on investment securities
428

 
477

Interest on deposits in FRB
567

 
1,298

Total interest income
9,341

 
10,417

 
 
 
 
Interest Expense:
 
 
 
Interest on deposits
664

 
834

Interest on other borrowed funds
97

 
123

Total interest expense
761

 
957

 
 
 
 
Net Interest Income
8,580

 
9,460

Provision for Credit Losses
1,707

 
6

Net Interest Income after Provision for Credit Losses
6,873

 
9,454

 
 
 
 
Noninterest Income:
 
 
 
Customer service fees
728

 
809

Increase in cash surrender value of bank-owned life insurance
131

 
145

Unrealized gain on fair value of marketable equity securities
15

 
57

Gain on fair value of junior subordinated debentures
1,498

 
414

Loss on dissolution of real estate investment trust

 
(109
)
Other
208

 
207

Total noninterest income
2,580

 
1,523

 
 
 
 
Noninterest Expense:
 
 
 
Salaries and employee benefits
2,995

 
2,772

Occupancy expense
853

 
813

Data processing
112

 
107

Professional fees
702

 
813

Regulatory assessments
85

 
93

Director fees
94

 
91

Correspondent bank service charges
15

 
14

Net cost on operation and sale of OREO
153

 
65

Other
582

 
579

Total noninterest expense
5,591

 
5,347

 
 
 
 
Income Before Provision for Taxes
3,862

 
5,630

Provision for Taxes on Income
1,108

 
1,623

Net Income
$
2,754

 
$
4,007


 
 
 
Net Income per common share
 
 
 
Basic
$
0.16

 
$
0.24

Diluted
$
0.16

 
$
0.24

Shares on which net income per common shares were based
 
 
 
Basic
16,974,100

 
16,947,040

Diluted
16,994,727

 
16,972,630


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

(In thousands)
Three Months Ended  
 March 31, 2020
 
Three Months Ended  
 March 31, 2019
Net Income
$
2,754

 
$
4,007

 
 
 
 
Unrealized holdings (loss) gain on securities
(125
)
 
288

Unrealized gains on unrecognized post-retirement costs
20

 
14

    Unrealized gain (loss) on junior subordinated debentures
755

 
(705
)
Other comprehensive gain (loss), before tax
650

 
(403
)
Tax benefit (expense) related to securities
37

 
(85
)
Tax expense related to unrecognized post-retirement costs
(6
)
 
(4
)
Tax (expense) benefit related to junior subordinated debentures
(223
)
 
208

Total other comprehensive gain (loss)
458

 
(284
)
Comprehensive Income
$
3,212

 
$
3,723



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United Security Bancshares and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)

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Common Stock
 
 
 
 
 
 
(In thousands except shares)
Number of Shares
 
Amount
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss) Gain
 
 Total
 
 
 
 
Balance December 31, 2018 (1)
16,946,622

 
$
58,624

 
$
49,942

 
$
674

 
$
109,240

(1) Excludes 59,217 unvested restricted shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Other comprehensive loss
 

 
 

 
 

 
(284
)
 
(284
)
Dividends payable ($0.11 per share)
 
 
 
 
(1,869
)
 
 
 
(1,869
)
Restricted stock units released
2,500

 
 
 
 
 
 
 

Stock-based compensation expense
 

 
99

 
 

 
 

 
99

Net income
 

 
 

 
4,007

 
 

 
4,007

Balance March 31, 2019 (2)
16,949,122

 
$
58,723

 
$
52,080

 
$
390

 
$
111,193

(2) Excludes 58,717 unvested restricted shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Other comprehensive loss
 

 
 

 
 

 
(182
)
 
(182
)
Dividends payable ($0.11 per share)
 
 
 
 
(1,865
)
 
 
 
(1,865
)
Restricted stock units released
4,622

 
 
 
 
 
 
 

Stock-based compensation expense
 

 
95

 
 

 
 

 
95

Net income
 

 
 

 
4,097

 
 

 
4,097

Balance June 30, 2019 (3)
16,953,744

 
$
58,818


$
54,312

 
$
208

 
$
113,338

(3) Excludes 55,713 unvested restricted shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Other comprehensive loss
 
 
 
 
 
 
(513
)
 
(513
)
Dividends payable ($0.11 per share)
 
 
 
 
(1,865
)
 
 
 
(1,865
)
Restricted stock units released
 
 
 
 
 
 
 
 

Stock-based compensation expense
 
 
78

 
 
 
 
 
78

Net income
 
 
 
 
4,173

 
 
 
4,173

Balance September 30, 2019 (4)
16,953,744

 
$
58,896

 
$
56,620

 
$
(305
)
 
$
115,211

(4) Excludes 55,713 unvested restricted shares
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 
  Other comprehensive loss
 
 
 
 
 
 
(327
)
 
(327
)
Dividends payable ($0.11 per share)
 
 
 
 
(1,868
)
 
 
 
(1,868
)
Restricted stock units released
20,141

 
 
 
 
 
 
 

Stock-based compensation expense
 
 
77

 
 
 
 
 
77

Net income
 
 
 
 
2,895

 
 
 
2,895

Balance December 31, 2019 (5)
16,973,885

 
$
58,973

 
$
57,647

 
$
(632
)
 
$
115,988

(5) Excludes 35,572 unvested restricted shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Other comprehensive income
 
 
 
 
 
 
458

 
458

Dividends payable ($0.11 per share)
 
 
 
 
(1,867
)
 
 
 
(1,867
)
Restricted stock units released
350

 
 
 
 
 
 
 

Tax benefit from restricted stock units released
 
 
(1
)
 
 
 
 
 
(1
)
Stock-based compensation expense
 
 
78

 
 
 
 
 
78

Net income
 
 
 
 
2,754

 
 
 
2,754

Balance March 31, 2020 (6)
16,974,235

 
$
59,050

 
$
58,534

 
$
(174
)
 
$
117,410

(6) Excludes 47,572 unvested restricted shares
 
 
 
 
 
 
 
 
 


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United Security Bancshares and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
 
Three months ended March 31,
(In thousands)
2020
 
2019
Cash Flows From Operating Activities:
 
 
 
Net Income
$
2,754

 
$
4,007

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

 
 

Provision for credit losses
1,707

 
6

Depreciation and amortization
343

 
355

Amortization of operating lease right-of-use assets
(146
)
 
(148
)
Amortization of premium/discount on investment securities, net
219

 
149

Increase in accrued interest receivable
(77
)
 
(1,143
)
(Decrease) increase in accrued interest payable
(9
)
 
24

(Decrease) increase in accounts payable and accrued liabilities
(740
)
 
905

(Increase) decrease in unearned fees and unamortized loan origination costs, net
(741
)
 
164

Decrease in income taxes payable
665

 
1,501

Unrealized gain on marketable equity securities
(15
)
 
(57
)
Stock-based compensation expense
77

 
99

Benefit (provision) for deferred income taxes
666

 
(86
)
Loss on sale of other real estate owned
113

 

Increase in cash surrender value of bank-owned life insurance
(131
)
 
(145
)
Gain on fair value option of junior subordinated debentures
(1,498
)
 
(414
)
Loss on dissolution of real estate investment trust

 
109

Net decrease (increase) in other assets
1,625

 
(2,503
)
Net cash provided by operating activities
4,812

 
2,823

 
 
 
 
Cash Flows From Investing Activities:
 

 
 

Purchase of correspondent bank stock

 
(9
)
Purchases of available-for-sale securities
(23,020
)
 

Principal payments of available-for-sale securities
5,293

 
3,677

Net (increase) decrease in loans
(26,886
)
 
8,050

Cash proceeds from sales of other real estate owned
895

 

Investment in limited partnership
(201
)
 

Capital expenditures of premises and equipment
(242
)
 
(111
)
Net cash (used in) provided by investing activities
(44,161
)
 
11,607

 
 
 
 
Cash Flows From Financing Activities:
 

 
 

Net increase in demand deposits and savings accounts
25,727

 
35,090

Net decrease in time deposits
(3,653
)
 
(9,156
)
Dividends on common stock
(1,867
)
 

Net cash provided by financing activities
20,207

 
25,934

 
 
 
 
Net (decrease) increase in cash and cash equivalents
(19,142
)
 
40,364

Cash and cash equivalents at beginning of period
218,995

 
220,337

Cash and cash equivalents at end of period
$
199,853

 
$
260,701


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United Security Bancshares and Subsidiaries - Notes to Consolidated Financial Statements - (Unaudited)
 
1.
Organization and Summary of Significant Accounting and Reporting Policies
 
The consolidated financial statements include the accounts of United Security Bancshares (Company or USB) and its wholly owned subsidiary United Security Bank (Bank). Intercompany accounts and transactions have been eliminated in consolidation.

These unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information on a basis consistent with the accounting policies reflected in the audited consolidated financial statements of the Company included in its 2019 Annual Report on Form 10-K. These interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of a normal, recurring nature) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

Revenue from Contracts with Customers:

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (Topic 606). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation.

The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers. The Company adopted Topic 606 using the modified retrospective method on all contracts not completed as of January 1, 2018. The adoption of Topic 606 did not result in a material change to the accounting for any of the in-scope revenue streams. As such, no cumulative effect adjustment was recorded.

Leases:

The Company determines if an arrangement is a lease at inception. Operating leases are included in other assets and other liabilities on the consolidated balance sheets. Finance leases, if necessary, are included in property and equipment, and other liabilities on the consolidated balance sheets.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

Recent Accounting Standards Not Yet Adopted:

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 was 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 formed a project team that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard. An

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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 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 Company presently plans to generate and evaluate model scenarios under CECL in tandem with its current reserving processes for interim and annual reporting periods in 2020. While the Company is currently unable to reasonably estimate the impact of adopting this new guidance, management expects the impact of adoption will be significantly influenced by the composition and quality of the Company’s loans and investment securities 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. Additionally, in regard to the recently approved delay in implementation, the Company is evaluating it's expected implementation date.

2.
Investment Securities

Following is a comparison of the amortized cost and fair value of securities available-for-sale, as of March 31, 2020 and December 31, 2019:
(in 000's)
 Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value (Carrying Amount)
March 31, 2020
 
 
 
Securities available-for-sale:
 
 
 
U.S. Government agencies
$
37,598

 
$
143

 
$
(188
)
 
$
37,553

U.S. Government sponsored entities & agencies collateralized by mortgage obligations
52,613

 
318

 
(267
)
 
52,664

Asset-backed securities
3,857

 

 
(379
)
 
3,478

Total securities available for sale
$
94,068

 
$
461

 
$
(834
)
 
$
93,695

(in 000's)
 Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value (Carrying Amount)
December 31, 2019
 
 
 
Securities available-for-sale:
 
 
 
U.S. Government agencies
$
28,737

 
$
152

 
$
(190
)
 
$
28,699

U.S. Government sponsored entities & agencies collateralized by mortgage obligations
47,824

 
120

 
(331
)
 
47,613

Total securities available for sale
$
76,561

 
$
272

 
$
(521
)
 
$
76,312

 
The amortized cost and fair value of securities available for sale at March 31, 2020, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties. Contractual maturities on collateralized mortgage obligations cannot be anticipated due to allowed paydowns.
 
March 31, 2020
 
Amortized Cost
 
Fair Value (Carrying Amount)
(in 000's)
 
Due in one year or less
$

 
$

Due after one year through five years

 

Due after five years through ten years
8,460

 
8,444

Due after ten years
32,993

 
32,586

Collateralized mortgage obligations
52,615

 
52,665

 
$
94,068

 
$
93,695


There were no realized gains or losses on sales of available-for-sale securities for the three month periods ended March 31, 2020 and March 31, 2019. There were no other-than-temporary impairment losses for the three month periods ended March 31, 2020 and March 31, 2019.


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At March 31, 2020, available-for-sale securities with an amortized cost of approximately $60,759,000 (fair value of $60,836,000) were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances.


The following summarizes temporarily impaired investment securities:
(in 000's)
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2020
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
$
8,411

 
$
(33
)
 
15,359

 
(155
)
 
$
23,770

 
$
(188
)
U.S. Government sponsored entities & agencies collateralized by mortgage obligations
23,787

 
(163
)
 
8,559

 
(104
)
 
32,346

 
(267
)
Asset-backed securities
3,478

 
(379
)
 

 

 
3,478

 
(379
)
Total impaired securities
$
35,676

 
$
(575
)
 
$
23,918

 
$
(259
)
 
$
59,594

 
$
(834
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 

 
 

 
 

 
 

 
 

 
 

Securities available for sale:
 

 
 

 
 

 
 

 
 

 
 

U.S. Government agencies
$
3,961

 
$
(12
)
 
$
15,989

 
$
(178
)
 
$
19,950

 
$
(190
)
U.S. Government sponsored entities & agencies collateralized by mortgage obligations
25,400

 
(187
)
 
11,244

 
(144
)
 
36,644

 
(331
)
Total impaired securities
$
29,361

 
$
(199
)
 
$
27,233

 
$
(322
)
 
$
56,594

 
$
(521
)
 
Temporarily impaired securities at March 31, 2020, were comprised of one asset-backed security, eleven U.S. government agency securities, and fourteen U.S. government sponsored entities and agencies collateralized by mortgage obligations securities.

The Company evaluates investment securities for other-than-temporary impairment (OTTI) at least quarterly, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under ASC Topic 320, Investments – Debt and Equity Instruments.

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.
 
Additionally, OTTI 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

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

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 March 31, 2020, the decline in fair value of the one asset-backed security, eleven U.S. government agency securities, and the fourteen U.S. government sponsored entities and agencies collateralized by mortgage obligations securities is attributable to changes in interest rates, and not credit quality. Because the Company does not have the intent to sell these impaired securities, and it is not more likely than not that it will be required to sell these securities before its anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2020.

During the quarters ended March 31, 2020 and 2019, the Company recognized $15,000 and $57,000 of unrealized holding gains related to equity securities in the consolidated statements of income, respectively.

The Company had no held-to-maturity or trading securities at March 31, 2020 or December 31, 2019.

3.
Loans

Loans are comprised of the following:
(in 000's)
March 31, 2020
 
December 31, 2019

Commercial and industrial:
 
 
 
Commercial and business loans
$
45,119

 
$
44,534

Government program loans
721

 
744

Total commercial and industrial
45,840

 
45,278

Real estate mortgage:
 

 
 

Commercial real estate
265,867

 
245,183

Residential mortgages
42,543

 
45,881

Home improvement and home equity loans
166

 
173

Total real estate mortgage
308,576

 
291,237

Real estate construction and development
151,962

 
138,784

Agricultural
49,648

 
52,197

Installment and student loans
67,739

 
69,878

Total loans
$
623,765

 
$
597,374

 
The Company's loans are predominantly in the San Joaquin Valley and the greater Oakhurst/East Madera County area, as well as the Campbell area of Santa Clara County. Although the Company does participate in loans with other financial institutions, they are primarily in the state of California.

Commercial and industrial loans represent 7.3% of total loans at March 31, 2020 and are generally made to support the ongoing operations of small-to-medium sized commercial businesses. Commercial and industrial loans have a high degree of industry diversification and provide working capital, financing for the purchase of manufacturing plants and equipment, or funding for growth and general expansion of businesses. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases, or other collateral including real estate. The remainder are unsecured; however, extensions of credit are predicated upon the financial capacity of the borrower. Repayment of commercial loans is generally from the cash flow of the borrower.


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Real estate mortgage loans, representing 49.5% of total loans at March 31, 2020, are secured by trust deeds on primarily commercial property, but are also secured by trust deeds on single family residences. Repayment of real estate mortgage loans generally comes from the cash flow of the borrower and or guarantor(s).

Commercial real estate mortgage loans comprise the largest segment of this loan category and are available on all types of income producing and non-income producing commercial properties, including: office buildings, shopping centers; apartments and motels; owner occupied buildings; manufacturing facilities and more. Commercial real estate mortgage loans can also be used to refinance existing debt. Commercial real estate loans are made under the premise that the loan will be repaid from the borrower's business operations, rental income associated with the real property, or personal assets.

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

Home Improvement and Home Equity loans comprise a relatively small portion of total real estate mortgage loans. Home equity loans are generally secured by junior trust deeds, but may be secured by 1st trust deeds.

Real estate construction and development loans, representing 24.4% of total loans at March 31, 2020, consist of loans for residential and commercial construction projects, as well as land acquisition and development, or land held for future development. Loans in this category are secured by real estate including improved and unimproved land, as well as single-family residential, multi-family residential, and commercial properties in various stages of completion. All real estate loans have established equity requirements. Repayment on construction loans generally comes from long-term mortgages with other lending institutions obtained at completion of the project or from the sale of the constructed homes to individuals.

Agricultural loans represent 8.0% of total loans at March 31, 2020 and are generally secured by land, equipment, inventory and receivables. Repayment is from the cash flow of the borrower.

Installment loans, including student loans, represent 10.8% of total loans at March 31, 2020 and generally consist of student loans, loans to individuals for household, family and other personal expenditures, automobiles or other consumer items. See "Note 4 - Student Loans" for specific information on the student 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 March 31, 2020 and December 31, 2019, these financial instruments include commitments to extend credit of $209,014,000 and $197,559,000, respectively, and standby letters of credit of $1,656,000 and $1,662,000, respectively. These instruments involve elements of credit risk in excess of the amount recognized on the consolidated balance sheet. The contract amounts of these instruments reflect the extent of the involvement the Company has in off-balance sheet financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. A majority of these commitments are at floating interest rates based on the Prime rate. Commitments generally have fixed expiration dates. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation. Collateral held varies but includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate and income-producing properties.

Standby letters of credit are generally unsecured and are issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

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


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Past Due Loans

The Company monitors delinquency and potential problem loans on an ongoing basis through weekly reports to the Loan Committee and monthly reports to the Board of Directors.

The following is a summary of delinquent loans at March 31, 2020 (in 000's):
March 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
$

 
$

 
$
666

 
$
666

 
$
44,453

 
$
45,119

 
$
591

Government program loans

 

 

 

 
721

 
721

 

Total commercial and industrial

 

 
666

 
666

 
45,174

 
45,840

 
591

Commercial real estate loans

 

 

 

 
265,867

 
265,867

 

Residential mortgages
188

 

 

 
188

 
42,355

 
42,543

 

Home improvement and home equity loans
18

 

 

 
18

 
148

 
166

 

Total real estate mortgage
206

 

 

 
206

 
308,370

 
308,576

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate construction and development loans

 

 
8,825

 
8,825

 
143,137

 
151,962

 

Agricultural loans

 

 
543

 
543

 
49,105

 
49,648

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Installment and student loans
1,452

 
686

 
470

 
2,608

 
64,772

 
67,380

 
470

Overdraft protection lines

 

 

 

 
34

 
34

 

Overdrafts

 

 

 

 
325

 
325

 

Total installment and student loans
1,452

 
686

 
470

 
2,608

 
65,131

 
67,739

 
470

Total loans
$
1,658

 
$
686

 
$
10,504

 
$
12,848

 
$
610,917

 
$
623,765

 
$
1,061



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The following is a summary of delinquent loans at December 31, 2019 (in 000's):
December 31, 2019
Loans
30-60 Days Past Due
 
Loans
61-89 Days Past Due
 
Loans
90 or More
Days Past Due
 
Total Past Due Loans
 
Current Loans
 
Total Loans
 
Accruing
Loans 90 or
More Days Past Due
Commercial and business loans
$
568

 
$

 
$
75

 
$
643

 
$
43,891

 
$
44,534

 
$

Government program loans

 

 

 

 
744

 
744

 

Total commercial and industrial
568

 

 
75

 
643

 
44,635

 
45,278

 

Commercial real estate loans

 

 

 

 
245,183

 
245,183

 

Residential mortgages
28

 

 

 
28

 
45,853

 
45,881

 

Home improvement and home equity loans

 

 

 

 
173

 
173

 

Total real estate mortgage
28

 

 

 
28

 
291,209

 
291,237

 

Real estate construction and development loans

 

 
8,825

 
8,825

 
129,959

 
138,784

 

Agricultural loans
957

 
423

 
144

 
1,524

 
50,673

 
52,197

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Installment and student loans
292

 
657

 
386

 
1,335

 
68,280

 
69,615

 
386

Overdraft protection lines

 

 

 

 
33

 
33

 

Overdrafts

 

 

 

 
230

 
230

 

Total installment and student loans
292

 
657

 
386

 
1,335

 
68,543

 
69,878

 
386

Total loans
$
1,845

 
$
1,080

 
$
9,430

 
$
12,355

 
$
585,019

 
$
597,374

 
$
386


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.

All loans, outside of student loans, where principal or interest is due and unpaid for 90 days or more are placed on nonaccrual and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income. 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 monthly payments on a loan with monthly amortization.

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There were no remaining undisbursed commitments to extend credit on nonaccrual loans at March 31, 2020 or December 31, 2019.

The following is a summary of nonaccrual loan balances at March 31, 2020 and December 31, 2019 (in 000's).
 
March 31, 2020
 
December 31, 2019
Commercial and business loans
$
75

 
$
75

Government program loans

 

Total commercial and industrial
75

 
75

 
 
 
 
Commercial real estate loans

 

Residential mortgages

 

Home improvement and home equity loans

 

Total real estate mortgage

 

 
 
 
 
Real estate construction and development loans
11,411

 
11,478

Agricultural loans
543

 
144

Installment and student loans

 

 
 
 
 
Total nonaccrual loans
$
12,029

 
$
11,697


Impaired Loans

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

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

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

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

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

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

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


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-
The observable market price method of measuring the impairment of a loan is only used by the Company when the sale of loans or a loan is in process.
 
The method for recognizing interest income on impaired loans is dependent on whether the loan is on nonaccrual status or is a troubled debt restructure. For income recognition, the existing nonaccrual and troubled debt restructuring policies are applied to impaired loans. Generally, except for certain troubled debt restructurings which are performing under the restructure agreement, the Company does not recognize interest income received on impaired loans, but reduces the carrying amount of the loan for financial reporting purposes.

Loans other than certain homogeneous loan portfolios are reviewed on a quarterly basis for impairment. Impaired loans are written down to estimated realizable values by the establishment of specific reserves for loan utilizing the discounted cash flow method, or charge-offs for collateral-based impaired loans, or those using observable market pricing.
 
The following is a summary of impaired loans at March 31, 2020 (in 000's).
March 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
 
Interest Recognized
Commercial and business loans
$
416

 
$
343

 
$
75

 
$
418

 
$
75

 
$
957

 
$
7

Government program loans
246

 
246

 

 
246

 

 
252

 
4

Total commercial and industrial
662

 
589

 
75

 
664

 
75

 
1,209

 
11

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate loans
2,058

 
1,170

 
897

 
2,067

 
259

 
2,075

 
30

Residential mortgages
1,048

 
510

 
542

 
1,052

 
23

 
1,057

 
14

Home improvement and home equity loans

 

 

 

 

 

 

Total real estate mortgage
3,106

 
1,680

 
1,439

 
3,119

 
282

 
3,132

 
44

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate construction and development loans
11,411

 
11,411

 

 
11,411

 

 
11,445

 
83

Agricultural loans
722

 
323

 
399

 
722

 
250

 
708

 
1

Installment and student loans

 

 

 

 

 

 

 


 


 


 


 


 


 


Total impaired loans
$
15,901

 
$
14,003

 
$
1,913

 
$
15,916

 
$
607

 
$
16,494

 
$
139


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


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Table of Contents

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

December 31, 2019
Unpaid
Contractual
Principal Balance
 
Recorded
Investment
With No Allowance (1)
 
Recorded
Investment
With Allowance (1)
 
Total
Recorded Investment
 
Related Allowance
 
Average
Recorded Investment (2)
 
Interest Recognized (2)
Commercial and business loans
$
1,484

 
$
368

 
$
1,128

 
$
1,496

 
$
606

 
$
1,930

 
$
116

Government program loans
257

 
258

 

 
258

 

 
275

 
18

Total commercial and industrial
1,741

 
626

 
1,128

 
1,754

 
606

 
2,205

 
134

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate loans
2,073

 
1,181

 
902

 
2,083

 
263

 
2,031

 
123

Residential mortgages
1,060

 
517

 
546

 
1,063

 
20

 
1,577

 
56

Home improvement and home equity loans

 

 

 

 

 

 

Total real estate mortgage
3,133

 
1,698

 
1,448

 
3,146

 
283

 
3,608

 
179

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate construction and development loans
11,478

 
11,478

 

 
11,478

 

 
11,572

 
231

Agricultural loans
684

 
262

 
432

 
694

 
256

 
726

 
57

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Installment and student loans

 

 

 

 

 
14

 

 


 


 


 


 


 


 


Total impaired loans
$
17,036

 
$
14,064

 
$
3,008

 
$
17,072

 
$
1,145

 
$
18,125

 
$
601


(1) The recorded investment in loans includes accrued interest receivable of $36.
(2) Information is based on the year ended December 31, 2019.

In most cases, the Company uses the cash basis method of income recognition for impaired loans. In the case of certain troubled debt restructurings for which the loan is performing under the current contractual terms for a reasonable period of time, income is recognized under the accrual method.

The average recorded investment in impaired loans for the quarters ended March 31, 2020 and 2019 was $16,494,000 and $18,570,000, respectively. Interest income recognized on impaired loans for the quarters ended March 31, 2020 and 2019 was approximately $139,000 and $138,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $81,000 and $43,000 for the quarters ended March 31, 2020 and 2019, respectively.

Troubled Debt Restructurings

In certain circumstances, when the Company grants a concession to a borrower as part of a loan restructuring, the restructuring is accounted for as a troubled debt restructuring (TDR). TDRs are reported as a component of impaired loans.

A TDR is a type of restructuring in which the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower and the Bank) to the 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:


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- A transfer from the borrower to the Company of receivables from third parties, real estate, other assets, or an equity interest in the borrower is granted to fully or partially satisfy the loan.

- A modification of terms of a debt such as one or a combination of:

The reduction (absolute or contingent) of the stated interest rate.
The extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.
The reduction (absolute or contingent) of the face amount or maturity amount of debt as stated in the instrument or agreement.
The reduction (absolute or contingent) of accrued interest.
For a restructured loan to return to accrual status there needs to be, among other factors, at least 6 months successful payment history and continued satisfactory performance is expected. To this end, the Company typically performs a financial analysis of the credit to determine whether the borrower has the ability to continue to meet payments over the remaining life of the loan. This includes, but is not limited to, a review of financial statements and cash flow analysis of the borrower. Only after determination that the borrower has the ability to perform under the terms of the loans, will the restructured credit be considered for accrual status. Although the Company does not have a policy which specifically addresses when a loan may be removed from TDR classification, as a matter of practice, loans classified as TDRs generally remain classified as such until the loan either reaches maturity, a confirming loan is renewed at market terms, or its outstanding balance is paid off.

There were no TDR additions or defaults for the quarter ended March 31, 2019.

The following tables illustrates TDR additions and defaults for the periods indicated:
 
Three Months Ended March 31, 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

 
$

 
$

 

 
$

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
1

 
179

 
179

 

 

Installment and student loans

 

 

 

 

Overdraft protection lines

 

 

 

 

Total loans
1

 
$
179

 
$
179

 

 
$


The Company makes various types of concessions when structuring TDRs including rate discounts, payment extensions, and other-than-temporary forbearance. At March 31, 2020, the Company had 14 restructured loans totaling $5,254,000 as compared to 13 restructured loans totaling $5,187,000 at December 31, 2019.


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Table of Contents

The following tables summarize TDR activity by loan category for the quarters ended March 31, 2020 and March 31, 2019 (in 000's).
Three Months Ended March 31, 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

 
$

 
$
2,654

 
$
566

 
$

 
$
5,187

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additions

 

 

 

 

 
179

 

 
179

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal (reductions) additions
(5
)
 
(5
)
 
(12
)
 

 
(67
)
 
(23
)
 

 
(112
)
Charge-offs

 

 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
4

 
$
893

 
$
1,048

 
$

 
$
2,587

 
$
722

 
$

 
$
5,254

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan loss
$

 
$
259

 
$
23

 
$

 
$

 
$
250

 
$

 
$
532

Defaults
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

Three Months Ended March 31, 2019
Commercial and Industrial
 
Commercial Real Estate
 
Residential Mortgages
 
Home Improvement and Home Equity
 
Real Estate Construction Development
 
Agricultural
 
Installment
and Student Loans
 
Total
Beginning balance
$
75

 
$
1,305

 
$
2,029

 
$

 
$
2,838

 
$
812

 
$

 
$
7,059

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additions

 

 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal (reductions) additions
(18
)
 
(389
)
 
(172
)
 

 
(34
)
 
(101