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Loans
 9 Months Ended
Sep. 30, 2020
Receivables [Abstract]  
Loans Loans
Loans are comprised of the following:
(in 000's)September 30, 2020December 31, 2019
Commercial and industrial:
Commercial and business loans$39,218 $44,534 
Government program loans26,524 744 
Total commercial and industrial65,742 45,278 
Real estate mortgage:  
Commercial real estate264,013 245,183 
Residential mortgages45,722 45,881 
Home improvement and home equity loans114 173 
Total real estate mortgage309,849 291,237 
Real estate construction and development171,889 138,784 
Agricultural51,587 52,197 
Installment and student loans62,415 69,878 
Total loans$661,482 $597,374 
 
The Company's loans are predominantly in the San Joaquin Valley and the greater Oakhurst/East Madera County area, as well as the Campbell area of Santa Clara County. Although the Company does participate in loans with other financial institutions, they are primarily in the state of California.

Commercial and industrial loans represent 10.0% of total loans at September 30, 2020 and are generally made to support the ongoing operations of small-to-medium sized commercial businesses. Commercial and industrial loans have a high degree of industry diversification and provide working capital, financing for the purchase of manufacturing plants and equipment, or funding for growth and general expansion of businesses. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases, or other collateral including real estate. The remainder are unsecured; however, extensions of credit are predicated upon the financial capacity of the borrower. Repayment of commercial loans is generally from the cash flow of the borrower. Included within the balance of Commercial and industrial loans is $25,889,000 in Paycheck Protection Program ("PPP") loans administrated by the SBA. PPP loans have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.
Real estate mortgage loans, representing 46.8% of total loans at September 30, 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 26.0% of total loans at September 30, 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 7.8% of total loans at September 30, 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 9.4% of total loans at September 30, 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 September 30, 2020 and December 31, 2019, these financial instruments include commitments to extend credit of $204,522,000 and $197,559,000, respectively, and standby letters of credit of $3,662,000 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.
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, 2020 (in 000's):
September 30, 2020Loans
30-60 Days Past Due		Loans
61-89 Days Past Due		Loans
90 or More
Days Past Due		Total Past Due LoansCurrent LoansTotal LoansAccruing
Loans 90 or
More Days Past Due
Commercial and business loans$— $— $— $— $39,218 $39,218 $— 
Government program loans— — — — 26,524 26,524 — 
Total commercial and industrial— — — — 65,742 65,742 — 
Commercial real estate loans— — — — 264,013 264,013 — 
Residential mortgages266 — — 266 45,456 45,722 — 
Home improvement and home equity loans— — — — 114 114 — 
Total real estate mortgage266 — — 266 309,583 309,849 — 
Real estate construction and development loans— — 8,573 8,573 163,316 171,889 — 
Agricultural loans— — 477 477 51,110 51,587 — 
Installment and student loans2,253 429 53 2,735 59,580 62,315 53 
Overdraft protection lines— — — — 30 30 — 
Overdrafts— — — — 70 70 — 
Total installment and student loans2,253 429 53 2,735 59,680 62,415 53 
Total loans$2,519 $429 $9,103 $12,051 $649,431 $661,482 $53 

The following is a summary of delinquent loans at December 31, 2019 (in 000's):
December 31, 2019Loans
30-60 Days Past Due		Loans
61-89 Days Past Due		Loans
90 or More
Days Past Due		Total Past Due LoansCurrent LoansTotal LoansAccruing
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 industrial568 — 75 643 44,635 45,278 — 
Commercial real estate loans— — — — 245,183 245,183 — 
Residential mortgages28 — — 28 45,853 45,881 — 
Home improvement and home equity loans— — — — 173 173 — 
Total real estate mortgage28 — — 28 291,209 291,237 — 
Real estate construction and development loans— — 8,825 8,825 129,959 138,784 — 
Agricultural loans957 423 144 1,524 50,673 52,197 — 
Installment and student loans292 657 386 1,335 68,280 69,615 386 
Overdraft protection lines— — — — 33 33 — 
Overdrafts— — — — 230 230 — 
Total installment and student loans292 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.

There were no remaining undisbursed commitments to extend credit on nonaccrual loans at September 30, 2020 or December 31, 2019.

The following is a summary of nonaccrual loan balances at September 30, 2020 and December 31, 2019 (in 000's).
September 30, 2020December 31, 2019
Commercial and business loans$— $75 
Government program loans— — 
Total commercial and industrial— 75 
Commercial real estate loans— — 
Residential mortgages— — 
Home improvement and home equity loans— — 
Total real estate mortgage— — 
Real estate construction and development loans11,058 11,478 
Agricultural loans477 144 
Installment and student loans— — 
Total nonaccrual loans$11,535 $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.

-     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, 2020 (in 000's).
September 30, 2020Unpaid
Contractual
Principal Balance		Recorded
Investment
With No Allowance (1)		Recorded
Investment
With Allowance (1)		Total
Recorded Investment		Related AllowanceAverage
Recorded Investment (2)		Interest Recognized (2)
Commercial and business loans$273 $274 $— $274 $— $627 $18 
Government program loans219 220 — 220 — 241 11 
Total commercial and industrial492 494 — 494 — 868 29 
Commercial real estate loans2,027 1,148 888 2,036 171 2,058 90 
Residential mortgages812 446 369 815 16 993 32 
Home improvement and home equity loans— — — — — — — 
Total real estate mortgage2,839 1,594 1,257 2,851 187 3,051 122 
Real estate construction and development loans11,058 11,058 — 11,058 — 11,264 210 
Agricultural loans655 313 343 656 215 692 23 
Installment and student loans— — — — — — — 
Total impaired loans$15,044 $13,459 $1,600 $15,059 $402 $15,875 $384 

(1) The recorded investment in loans includes accrued interest receivable of $15.
(2) Information is based on nine months ended September 30, 2020.
    
The following is a summary of impaired loans at December 31, 2019 (in 000's).
December 31, 2019Unpaid
Contractual
Principal Balance		Recorded
Investment
With No Allowance (1)		Recorded
Investment
With Allowance (1)		Total
Recorded Investment		Related AllowanceAverage
Recorded Investment (2)		Interest Recognized (2)
Commercial and business loans$1,484 $368 $1,128 $1,496 $606 $1,930 $116 
Government program loans257 258 — 258 — 275 18 
Total commercial and industrial1,741 626 1,128 1,754 606 2,205 134 
Commercial real estate loans2,073 1,181 902 2,083 263 2,031 123 
Residential mortgages1,060 517 546 1,063 20 1,577 56 
Home improvement and home equity loans— — — — — — — 
Total real estate mortgage3,133 1,698 1,448 3,146 283 3,608 179 
Real estate construction and development loans11,478 11,478 — 11,478 — 11,572 231 
Agricultural loans684 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 September 30, 2020 and 2019 was $15,256,000 and $18,208,000, respectively. Interest income recognized on impaired loans for the quarters ended September 30, 2020 and 2019 was approximately $121,000 and $120,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $77,000 and $44,000 for the quarters ended September 30, 2020 and 2019, respectively.

The average recorded investment in impaired loans for the nine months ended September 30, 2020 and 2019 was $15,875,000 and $18,390,000, respectively. Interest income recognized on impaired loans for the nine months ended September 30, 2020 and 2019 was approximately $384,000 and $454,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $225,000 and $173,000 for the nine months ended September 30, 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:

- 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 quarters ended September 30, 2020 or September 30, 2019. There was one addition during the nine months ended September 30, 2020 and none during the nine months ended September 30, 2019

The following tables illustrates TDR additions and defaults for the periods indicated:
Nine Months Ended September 30, 2020
($ in 000's)Number of
Contracts		Pre-
Modification
Outstanding
Recorded
Investment		Post-
Modification
Outstanding
Recorded
Investment		Number of Contracts which Defaulted During PeriodRecorded 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 loans1 179 179 — — 
Installment and student loans— — — — — 
Overdraft protection lines— — — — — 
Total loans1 $179 $179 — $— 

The Company makes various types of concessions when structuring TDRs including rate discounts, payment extensions, and other-than-temporary forbearance. At September 30, 2020, the Company had 9 restructured loans totaling $4,571,000 as compared to 13 restructured loans totaling $5,187,000 at December 31, 2019.
The following tables summarize TDR activity by loan category for the quarters ended September 30, 2020 and September 30, 2019 (in 000's).
Three Months Ended
September 30, 2020		Commercial and IndustrialCommercial Real EstateResidential MortgagesHome Improvement and Home EquityReal Estate Construction DevelopmentAgriculturalInstallment
and Student Loans		Total
Beginning balance$— $889 $1,037 $— $2,536 $693 $— $5,155 
Additions— — — — — — — — 
Principal (reductions) additions— (5)(491)— (50)(38)— (584)
Charge-offs— — — — — — — — 
Ending balance$— $884 $546 $— $2,486 $655 $— $4,571 
Allowance for loan loss$— $171 $16 $— $— $215 $— $402 
Defaults$— $— $— $— $— $— $— $— 

Three Months Ended
September 30, 2019		Commercial and IndustrialCommercial Real EstateResidential MortgagesHome Improvement and Home EquityReal Estate Construction DevelopmentAgriculturalInstallment
and Student Loans		Total
Beginning balance$38 $907 $1,842 $— $2,738 $658 $— $6,183 
Additions— — — — — — — — 
Principal (reductions) additions(18)(5)(771)— (33)(30)— (857)
Charge-offs— — — — — (30)— (30)
Ending balance$20 $902 $1,071 $— $2,705 $598 $— $5,296 
Allowance for loan loss$— $346 $15 $— $— $256 $— $617 
Defaults$— $— $— $— $— $— $— $— 

The following tables summarize TDR activity by loan category for the nine months ended September 30, 2020 and September 30, 2019 (in 000's).
Nine Months Ended
September 30, 2020		Commercial and IndustrialCommercial Real EstateResidential MortgagesHome Improvement and Home EquityReal Estate Construction DevelopmentAgriculturalInstallment
and Student Loans		Total
Beginning balance$9 $898 $1,060 $— $2,654 $566 $— $5,187 
Additions— — — — — 179 — 179 
Principal (reductions) additions(9)(14)(514)— (168)(90)— (795)
Charge-offs— — — — — — — — 
Ending balance$— $884 $546 $— $2,486 $655 $— $4,571 
Allowance for loan loss$— $171 $16 $— $— $215 $— $402 
Defaults$— $— $— $— $— $— $— $— 

Nine Months Ended
September 30, 2019		Commercial and IndustrialCommercial Real EstateResidential MortgagesHome Improvement and Home EquityReal Estate Construction DevelopmentAgriculturalInstallment
and Student Loans		Total
Beginning balance$75 $1,305 $2,029 $— $2,838 $812 $— $7,059 
Additions— — — — — — — — 
Principal (reductions) additions(55)(403)(958)— (133)(184)— (1,733)
Charge-offs— — — — (30)— (30)
Ending balance$20 $902 $1,071 $— $2,705 $598 $— $5,296 
Allowance for loan loss$— $346 $15 $— $— $256 $— $617 
Defaults$— $— $— $— $— $— $— $— 

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

The following tables summarize modification under the CARES Act by loan category as of September 30, 2020 (in 000's).
Loan CategoryCOVID-19 Modified Loan BalanceTotal Portfolio Balance
Commercial and Industrial:$667 $65,742 
Commercial Real Estate:
     Hospitality39,757 53,711 
     Health Club14,775 14,775 
     Construction and land development10,836 130,202 
     Commercial/Office/Retail2,687 101,195 
     Residential Mortgages— 45,722 
     Home improvement and home equity loans— 114 
     All other CRE 1,058 136,019 
Agricultural:— 51,587 
Installment and student loans:34 62,415 
Total:$69,814 $661,482 

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 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 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.

-    Grade 9 – This grade includes loans classified “loss” which are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off the asset even though partial recovery may be achieved in the future.
 
The Company did not carry any loans graded as loss at September 30, 2020 or December 31, 2019.

The following tables summarize the credit risk ratings for commercial, construction, and other non-consumer related loans for September 30, 2020 and December 31, 2019:
September 30, 2020Commercial and IndustrialCommercial Real EstateReal Estate Construction and DevelopmentAgriculturalTotal
(in 000's)
Grades 1 and 2$26,154 $2,754 $— $30 $28,938 
Grade 3— 735 — — 735 
Grades 4 and 5 – pass37,135 251,963 159,833 49,461 498,392 
Grade 6 – special mention1,945 7,418 998 1,441 11,802 
Grade 7 – substandard524 1,143 11,058 655 13,380 
Grade 8 – doubtful— — — — — 
Total$65,758 $264,013 $171,889 $51,587 $553,247 
December 31, 2019Commercial and IndustrialCommercial Real EstateReal Estate Construction and DevelopmentAgriculturalTotal
(in 000's)
Grades 1 and 2$278 $2,806 $— $— $3,084 
Grade 3— 981 — — 981 
Grades 4 and 5 – pass41,757 238,612 126,308 50,234 456,911 
Grade 6 – special mention919 1,608 998 1,279 4,804 
Grade 7 – substandard2,324 1,176 11,478 684 15,662 
Grade 8 – doubtful— — — — — 
Total$45,278 $245,183 $138,784 $52,197 $481,442 
 
The Company follows consistent underwriting standards outlined in its loan policy for consumer and other homogeneous loans but, does not specifically assign a risk rating when these loans are originated. Consumer loans are monitored for credit risk and are considered “pass” loans until some issue or event requires that the credit be downgraded to special mention or worse. Within the student loan portfolio, the Company does not grade these loan individually, but monitors credit quality indicators such as delinquency and program defined status codes such as forbearance.

The following tables summarize the credit risk ratings for consumer related loans and other homogeneous loans for September 30, 2020 and December 31, 2019:
 September 30, 2020December 31, 2019
 Residential MortgagesHome
Improvement and Home Equity		Installment and Student LoansTotalResidential MortgagesHome
Improvement and Home Equity		Installment and Student LoansTotal
(in 000's)
Not graded$32,738 $98 $61,974 $94,810 $33,059 $155 $68,752 $101,966 
Pass12,453 16 388 12,857 12,542 18 740 13,300 
Special mention354 — — 354 88 — 386 474 
Substandard177 — 53 230 192 — — 192 
Doubtful— — — — — — — — 
Total$45,722 $114 $62,415 $108,251 $45,881 $173 $69,878 $115,932 

 Allowance for Loan Losses

The Company analyzes risk characteristics inherent in each loan portfolio segment as part of the quarterly review of the adequacy of the allowance for loan losses. The following summarizes some of the key risk characteristics for the ten segments of the loan portfolio (Consumer loans include three 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 three loans and are generally the result of short sales.
 
Home improvement and home equity loans – Because of their junior lien position, these loans have an inherently higher risk level. Because residential real estate has been severely distressed in the recent past, the anticipated risk for this loan segment has increased.
 
Real estate construction and development loans –This segment of loans is considered to have a higher risk profile due to construction and market value issues in conjunction with normal credit risks.
 
Agricultural loans – This segment is considered to have risks associated with weather, insects, and marketing issues. In addition, concentrations in certain crops or certain agricultural areas can increase risk.

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

COVID-19 – As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. While the Company has not yet experienced any charge-offs related to COVID-19, the allowance for credit loss calculation and resulting provision for credit losses are significantly impacted by changes in economic conditions resulting from significant increase in unemployment. Given that economic scenarios have darkened significantly since the pandemic was declared in early March 2020, the credit risk in the loan portfolio has increased resulting in the need for an additional reserve for credit loss.
The following summarizes the activity in the allowance for credit losses by loan category for the quarters ended September 30, 2020 and 2019 (in 000's)

Three Months EndedCommercial and IndustrialReal Estate MortgageReal Estate Construction Development AgriculturalInstallment and Student Loans UnallocatedTotal
September 30, 2020
Beginning balance$756 $812 $3,572 $836 $2,746 $140 $8,862 
Provision (reversal of provision) for credit losses(46)(147)439 (68)(749)575 4 
Charge-offs— — (106)— (178)— (284)
Recoveries9 79 37 — 1 — 126 
Net recoveries (charge-offs)9 79 (69)— (177)— (158)
Ending balance$719 $744 $3,942 $768 $1,820 $715 $8,708 
Period-end amount allocated to:       
Loans individually evaluated for impairment— 187 — 215 — — 402 
Loans collectively evaluated for impairment719 557 3,942 553 1,820 715 8,306 
Ending balance$719 $744 $3,942 $768 $1,820 $715 $8,708 



Three Months EndedCommercial and IndustrialReal Estate MortgageReal Estate Construction Development AgriculturalInstallment and Student Loans UnallocatedTotal
September 30, 2019
Beginning balance$1,457 $864 $2,330 $1,132 $1,991 $678 $8,452 
Provision (recovery of provision) for credit losses(168)(109)(3)(227)388 124 5 
Charge-offs— — — (36)(263)— (299)
Recoveries7 52 — — 13 — 72 
Net recoveries (charge-offs)7 52 — (36)(250)— (227)
Ending balance$1,296 $807 $2,327 $869 $2,129 $802 $8,230 
Period-end amount allocated to:       
Loans individually evaluated for impairment525 361 — 256 — — 1,142 
Loans collectively evaluated for impairment771 446 2,327 613 2,129 802 7,088 
Ending balance$1,296 $807 $2,327 $869 $2,129 $802 $8,230 

The following summarizes the activity in the allowance for credit losses by loan category for the nine months ended September 30, 2020 and 2019 (in 000's)
Nine Months EndedCommercial and IndustrialReal Estate MortgageReal Estate Construction Development AgriculturalInstallment and Student Loans UnallocatedTotal
September 30, 2020
Beginning balance$1,322 $712 $2,808 $761 $2,132 $173 $7,908 
Provision (recovery of provision) for credit losses(625)(56)1,455 7 815 542 2,138 
Charge-offs— — (358)— (1,134)— (1,492)
Recoveries22 88 37 — 7 — 154 
Net recoveries (charge-offs)22 88 (321)— (1,127)— (1,338)
Ending balance$719 $744 $3,942 $768 $1,820 $715 $8,708 
Period-end amount allocated to:       
Loans individually evaluated for impairment— 187 — 215 — — 402 
Loans collectively evaluated for impairment719 557 3,942 553 1,820 715 8,306 
Ending balance$719 $744 $3,942 $768 $1,820 $715 $8,708 
Nine Months EndedCommercial and IndustrialReal Estate MortgageReal Estate Construction Development AgriculturalInstallment and Student Loans UnallocatedTotal
September 30, 2019
Beginning balance$1,673 $1,015 $2,424 $1,131 $1,559 $593 $8,395 
Provision (recovery of provision) for credit losses(441)(263)(97)(226)833 209 15 
Charge-offs— (5)— (36)(377)— (418)
Recoveries64 60 — — 114 — 238 
Net (charge-offs) recoveries64 55 — (36)(263)— (180)
Ending balance$1,296 $807 $2,327 $869 $2,129 $802 $8,230 
Period-end amount allocated to:       
Loans individually evaluated for impairment525 361 — 256 — — 1,142 
Loans collectively evaluated for impairment771 446 2,327 613 2,129 802 7,088 
Ending balance$1,296 $807 $2,327 $869 $2,129 $802 $8,230 
The following summarizes information with respect to the loan balances at September 30, 2020 and 2019.
 September 30, 2020September 30, 2019
Loans
Individually
Evaluated for Impairment		Loans
Collectively
Evaluated for Impairment		Total LoansLoans
Individually
Evaluated for Impairment		Loans
Collectively
Evaluated for Impairment		Total Loans
(in 000's)
Commercial and business loans$274 $38,944 $39,218 $1,652 $45,703 $47,355 
Government program loans220 26,304 26,524 266 516 782 
Total commercial and industrial494 65,248 65,742 1,918 46,219 48,137 
Commercial real estate loans2,036 261,977 264,013 3,105 221,608 224,713 
Residential mortgage loans815 44,907 45,722 1,074 49,988 51,062 
Home improvement and home equity loans— 114 114 — 184 184 
Total real estate mortgage2,851 306,998 309,849 4,179 271,780 275,959 
Real estate construction and development loans11,058 160,831 171,889 11,529 104,914 116,443 
Agricultural loans656 50,931 51,587 736 59,364 60,100 
Installment and student loans— 62,415 62,415 — 69,489 69,489 
Total loans$15,059 $646,423 $661,482 $18,362 $551,766 $570,128