Loans

9 Months Ended

Sep. 30, 2019

Receivables [Abstract]

Loans

Loans

Loans are comprised of the following:

(in 000's)	September 30, 2019		December 31, 2018
Commercial and industrial:
Commercial and business loans	$	47,355	$	55,929
Government program loans	782		1,049
Total commercial and industrial	48,137		56,978
Real estate mortgage:
Commercial real estate	224,713		229,448
Residential mortgages	51,062		59,431
Home improvement and home equity loans	184		321
Total real estate mortgage	275,959		289,200
Real estate construction and development	116,443		108,795
Agricultural	60,100		61,149
Installment and student loans	69,489		71,811
Total loans	$	570,128	$	587,933

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

Commercial and industrial loans represent 8.4% of total loans at September 30, 2019 and are generally made to support the ongoing operations of small-to-medium sized commercial businesses. Commercial and industrial loans have a high degree of industry diversification and provide working capital, financing for the purchase of manufacturing plants and equipment, or funding for growth and general expansion of businesses. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases, or other collateral including real estate. The remainder are unsecured; however, extensions of credit are predicated upon the financial capacity of the borrower. Repayment of commercial loans is generally from the cash flow of the borrower.

Real estate mortgage loans, representing 48.4% of total loans at September 30, 2019, 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 1^st trust deeds.

Real estate construction and development loans, representing 20.4% of total loans at September 30, 2019, 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 10.5% of total loans at September 30, 2019 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 12.2% of total loans at September 30, 2019 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, 2019 and December 31, 2018, these financial instruments include commitments to extend credit of $211,733,000 and $144,643,000, respectively, and standby letters of credit of $1,453,000 and $1,183,000, 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.

During the second quarter of 2018, the Bank 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, 2019 (in 000's):

September 30, 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	$	—	$	—	$	75	$	75	$	47,280	$	47,355	$	—
Government program loans	—		—		—		—		782		782		—
Total commercial and industrial	—		—		75		75		48,062		48,137		—
Commercial real estate loans	—		—		1,008		1,008		223,705		224,713		—
Residential mortgages	—		—		—		—		51,062		51,062		—
Home improvement and home equity loans	—		—		—		—		184		184		—
Total real estate mortgage	—		—		1,008		1,008		274,951		275,959		—
Real estate construction and development loans	—		—		8,825		8,825		107,618		116,443		—
Agricultural loans	455		—		144		599		59,501		60,100		—
Installment and student loans	1,225		317		326		1,868		67,480		69,348		326
Overdraft protection lines	—		—		—		—		38		38		—
Overdrafts	—		—		—		—		103		103		—
Total installment and student loans	1,225		317		326		1,868		67,621		69,489		326
Total loans	$	1,680	$	317	$	10,378	$	12,375	$	557,753	$	570,128	$	326

The following is a summary of delinquent loans at December 31, 2018 (in 000's):

December 31, 2018	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	$	—	$	—	$	—	$	—	$	55,929	$	55,929	$	—
Government program loans	—		—		—		—		1,049		1,049		—
Total commercial and industrial	—		—		—		—		56,978		56,978		—
Commercial real estate loans	—		—		389		389		229,059		229,448		—
Residential mortgages	32		—		—		32		59,399		59,431		—
Home improvement and home equity loans	—		—		—		—		321		321		—
Total real estate mortgage	32		—		389		421		288,779		289,200		—
Real estate construction and development loans	—		—		8,825		8,825		99,970		108,795		—
Agricultural loans	—		—		—		—		61,149		61,149		—
Installment and student loans	130		139		—		269		71,362		71,631		—
Overdraft protection lines	—		—		—		—		41		41		—
Overdrafts	—		—		—		—		139		139		—
Total installment and student loans	130		139		—		269		71,542		71,811		—
Total loans	$	162	$	139	$	9,214	$	9,515	$	578,418	$	587,933	$	—

Nonaccrual Loans

Commercial, construction and commercial real estate loans are placed on nonaccrual status under the following circumstances:

- When there is doubt regarding the full repayment of interest and principal.

- When principal and/or interest on the loan has been in default for a period of 90-days or more, unless the asset is both well secured and in the process of collection that will result in repayment in the near future.

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

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

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

All 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, 2019 or December 31, 2018.

The following is a summary of nonaccrual loan balances at September 30, 2019 and December 31, 2018 (in 000's).

	September 30, 2019		December 31, 2018
Commercial and business loans	$	75	$	—
Government program loans	—		—
Total commercial and industrial	75		—
Commercial real estate loans	1,008		389
Residential mortgages	—		—
Home improvement and home equity loans	—		—
Total real estate mortgage	1,008		389
Real estate construction and development loans	11,529		11,663
Agricultural loans	144		—
Installment and student loans	—		—
Total nonaccrual loans	$	12,756	$	12,052

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, 2019 (in 000's).

September 30, 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	$	1,646	$	398	$	1,254	$	1,652	$	525	$	2,039	$	93
Government program loans	264		266		—		266		—		279		14
Total commercial and industrial	1,910		664		1,254		1,918		525		2,318		107
Commercial real estate loans	3,096		2,199		906		3,105		346		2,018		93
Residential mortgages	1,071		524		550		1,074		15		1,705		42
Home improvement and home equity loans	—		—		—		—		—		—		—
Total real estate mortgage	4,167		2,723		1,456		4,179		361		3,723		135
Real estate construction and development loans	11,529		11,529		—		11,529		—		11,596		167
Agricultural loans	727		273		463		736		256		735		45
Installment and student loans	—		—		—		—		—		18		—
Total impaired loans	$	18,333	$	15,189	$	3,173	$	18,362	$	1,142	$	18,390	$	454

(1) The recorded investment in loans includes accrued interest receivable of $29.

(2) Information is based on the nine months ended ended September 30, 2019.    

The following is a summary of impaired loans at December 31, 2018 (in 000's).

December 31, 2018	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	$	2,513	$	470	$	2,054	$	2,524	$	787	$	2,955	$	179
Government program loans	291		292		—		292		—		254		20
Total commercial and industrial	2,804		762		2,054		2,816		787		3,209		199
Commercial real estate loans	1,305		389		919		1,308		394		1,370		60
Residential mortgages	2,028		391		1,646		2,037		75		2,412		117
Home improvement and home equity loans	—		—		—		—		—		—		—
Total real estate mortgage	3,333		780		2,565		3,345		469		3,782		177
Real estate construction and development loans	11,663		11,663		—		11,663		—		9,144		331
Agricultural loans	543		—		818		818		520		1,014		81
Installment and student loans	41		41		—		41		—		48		5
Total impaired loans	$	18,384	$	13,246	$	5,437	$	18,683	$	1,776	$	17,197	$	793

(1) The recorded investment in loans includes accrued interest receivable of $299.

(2) Information is based on the twelve month period ended December 31, 2018.

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, 2019 and 2018 was $18,208,000 and $19,469,000, respectively. Interest income recognized on impaired loans for the quarters ended September 30, 2019 and 2018 was approximately $120,000 and $173,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $44,000 and $64,000 for the quarters ended September 30, 2019 and 2018, respectively.

The average recorded investment in impaired loans for the nine months endedSeptember 30, 2019 and 2018 was $18,390,000 and $16,825,000, respectively. Interest income recognized on impaired loans for the nine months endedSeptember 30, 2019 and 2018 was approximately $454,000 and $625,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $173,000 and $277,000 for the nine months endedSeptember 30, 2019 and 2018, 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 or its outstanding balance is paid off.

There were no TDR additions or defaults for the three and nine months ended September 30, 2019.

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

	Three Months Ended September 30, 2018
($ 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	—	—		—		1	393
Single family residential loans	—	—		—		—	—
Home improvement and home equity loans	—	—		—		—	—
Real estate construction and development loans	—	—		—		—	—
Agricultural loans	—	—		—		—	—
Installment and student loans	—	—		—		—	—
Overdraft protection lines	—	—		—		—	—
Total loans	—	$	—	$	—	1	$	393

	Nine Months Ended September 30, 2018
($ 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	—	—		—		1	393
Single family residential loans	—	—		—		—	—
Home improvement and home equity loans	—	—		—		—	—
Real estate construction and development loans	—	—		—		1	310
Agricultural loans	—	—		—		—	—
Installment and student loans	—	—		—		—	—
Overdraft protection lines	—	—		—		—	—
Total loans	—	$	—	$	—	2	$	703

The Company makes various types of concessions when structuring TDRs including rate discounts, payment extensions, and other-than-temporary forbearance. At September 30, 2019, the Company had 13 restructured loans totaling $5,296,000 as compared to 17 restructured loans totaling $7,059,000 at December 31, 2018.

The following tables summarize TDR activity by loan category for the quarters ended September 30, 2019 and September 30, 2018 (in 000's).

Three Months Ended September 30, 2019	Commercial and Industrial			Commercial Real Estate			Residential Mortgages			Home Improvement and Home Equity		Real Estate Construction Development			Agricultural			Installment and Student Loans		Total
Beginning balance	$	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	$	—		$	—		$	—		$	—	$	—		$	—		$	—	$	—

Three Months Ended September 30, 2018	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	$	110		$	1,362		$	2,219		$	—	$	2,939		$	1,010		$	—	$	7,640
Additions	—			—			—			—		—			—			—		—
Principal (reductions) additions	(17		)	(6		)	(16		)	—		(51		)	(102		)	—		(192		)
Charge-offs	—			(46		)	—			—		—			—			—		—
Ending balance	$	93		$	1,310		$	2,203		$	—	$	2,888		$	908		$	—	$	7,402
Allowance for loan loss	$	—		$	396		$	68		$	—	$	—		$	620		$	—	$	1,084
Defaults	$	—		$	(393	)	$	—		$	—	$	—		$	—		$	—	$	(393	)

The following tables summarize TDR activity by loan category for the nine months endedSeptember 30, 2019 and September 30, 2018 (in 000's).

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

Nine Months Ended September 30, 2018	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	$	436		$	1,233		$	2,542		$	—	$	5,951		$	1,200		$	—	$	11,362
Additions	—			—			—			—		—			—			—		—
Principal additions (reductions)	(280		)	123			(339		)	—		(3,063		)	(292		)	—		(3,851		)
Charge-offs	(63		)	(46		)	—			—		—			—			—		(109		)
Ending balance	$	93		$	1,310		$	2,203		$	—	$	2,888		$	908		$	—	$	7,402
Allowance for loan loss	$	—		$	396		$	68		$	—	$	—		$	620		$	—	$	1,084
Defaults	$	—		$	(393	)	$	—		$	—	$	(310	)	$	—		$	—	$	(703	)

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, 2019 or December 31, 2018.

The following tables summarize the credit risk ratings for commercial, construction, and other non-consumer related loans for September 30, 2019 and December 31, 2018:

	Commercial and Industrial		Commercial Real Estate		Real Estate Construction and Development		Agricultural		Total
September 30, 2019
(in 000's)
Grades 1 and 2	$	310	$	2,825	$	—	$	—	$	3,135
Grade 3	—		989		—		—		989
Grades 4 and 5 – pass	44,276		217,044		104,914		58,036		424,270
Grade 6 – special mention	1,051		1,661		—		1,337		4,049
Grade 7 – substandard	2,500		2,194		11,529		727		16,950
Grade 8 – doubtful	—		—		—		—		—
Total	$	48,137	$	224,713	$	116,443	$	60,100	$	449,393

	Commercial and Industrial		Commercial Real Estate		Real Estate Construction and Development		Agricultural		Total
December 31, 2018
(in 000's)
Grades 1 and 2	$	324	$	2,881	$	—	$	80	$	3,285
Grade 3	—		1,028		—		—		1,028
Grades 4 and 5 – pass	53,843		222,970		97,132		60,256		434,201
Grade 6 – special mention	48		2,180		—		—		2,228
Grade 7 – substandard	2,763		389		11,663		813		15,628
Grade 8 – doubtful	—		—		—		—		—
Total	$	56,978	$	229,448	$	108,795	$	61,149	$	456,370

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 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, 2019 and December 31, 2018:

	September 30, 2019								December 31, 2018
	Residential Mortgages		Home Improvement and Home Equity		Installment and Student Loans		Total		Residential Mortgages		Home Improvement and Home Equity		Installment and Student Loans		Total
(in 000's)
Not graded	$	37,800	$	165	$	68,379	$	106,344	$	49,563	$	300	$	70,990	$	120,853
Pass	12,486		19		784		13,289		9,186		21		780		9,987
Special mention	579		—		326		905		470		—		—		470
Substandard	197		—		—		197		212		—		41		253
Doubtful	—		—		—		—		—		—		—		—
Total	$	51,062	$	184	$	69,489	$	120,735	$	59,431	$	321	$	71,811	$	131,563

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.

The following summarizes the activity in the allowance for credit losses by loan category for the quarters ended September 30, 2019 and 2018 (in 000's).

Three Months Ended	Commercial and Industrial			Real Estate Mortgage			Real Estate Construction Development				Agricultural			Installment & Student Loans			Unallocated		Total
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		)
Recoveries	7			52			—				—			13			—		72
Net 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 impairment	525			361			—				256			—			—		1,142
Loans collectively evaluated for impairment	771			446			2,327			0.006	613			2,129			802		7,088
Ending balance	$	1,296		$	807		$	2,327			$	869		$	2,129		$	802	$	8,230

Three Months Ended	Commercial and Industrial			Real Estate Mortgage			Real Estate Construction Development			Agricultural			Installment & Student Loans			Unallocated		Total
September 30, 2018
Beginning balance	$	1,547		$	1,213		$	2,687		$	1,301		$	840		$	837	$	8,425
Provision (recovery of provision) for credit losses	(734		)	(81		)	(215		)	(69		)	687			39		(373		)
Charge-offs	—			(47		)	—			—			(5		)	—		(52		)
Recoveries	678			4			—			—			116			—		798
Net charge-offs	678			(43		)	—			—			111			—		746
Ending balance	$	1,491		$	1,089		$	2,472		$	1,232		$	1,638		$	876	$	8,798
Period-end amount allocated to:
Loans individually evaluated for impairment	633			464			—			620			—			—		1,717
Loans collectively evaluated for impairment	858			625			2,472			612			1,638			876		7,081
Ending balance	$	1,491		$	1,089		$	2,472		$	1,232		$	1,638		$	876	$	8,798

The following summarizes the activity in the allowance for credit losses by loan category for the nine months endedSeptember 30, 2019 and 2018 (in 000's).

Nine Months Ended	Commercial and Industrial			Real Estate Mortgage			Real Estate Construction Development			Agricultural			Installment and Student Loans			Unallocated		Total
September 30, 2019
Beginning balance	$	1,673		$	1,015		$	2,424		$	1,131		$	1,559		$	593	$	8,395
Provision (recovery of provision) for credit losses	(441		)	(263		)	(97		)	(226		)	833			209		15
Charge-offs	—			(5		)	—			(36		)	(377		)	—		(418		)
Recoveries	64			60			—			—			114			—		238
Net recoveries (charge-offs)	64			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 impairment	525			361			—			256			—			—		1,142
Loans collectively evaluated for impairment	771			446			2,327			613			2,129			802		7,088
Ending balance	$	1,296		$	807		$	2,327		$	869		$	2,129		$	802	$	8,230

Nine Months Ended	Commercial and Industrial			Real Estate Mortgage			Real Estate Construction Development			Agricultural			Installment and Student Loans			Unallocated			Total
September 30, 2018
Beginning balance	$	1,408		$	1,182		$	2,903		$	1,631		$	887		$	1,256		$	9,267
Provision (recovery of provision) for credit losses	(915		)	(70		)	(431		)	(399		)	496			(380		)	(1,699		)
Charge-offs	(88		)	(47		)	—			—			(16		)	—			(151		)
Recoveries	1,086			24			—			—			271			—			1,381
Net (charge-offs) recoveries	998			(23		)	—			—			255			—			1,230
Ending balance	$	1,491		$	1,089		$	2,472		$	1,232		$	1,638		$	876		$	8,798
Period-end amount allocated to:
Loans individually evaluated for impairment	633			464			—			620			—			—			1,717
Loans collectively evaluated for impairment	858			625			2,472			612			1,638			876			7,081
Ending balance	$	1,491		$	1,089		$	2,472		$	1,232		$	1,638		$	876		$	8,798

The following summarizes information with respect to the loan balances at September 30, 2019 and 2018.

	September 30, 2019						September 30, 2018
	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans		Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans
(in 000's)
Commercial and business loans	$	1,652	$	45,703	$	47,355	$	2,738	$	51,901	$	54,639
Government program loans	266		516		782		301		583		884
Total commercial and industrial	1,918		46,219		48,137		3,039		52,484		55,523
Commercial real estate loans	3,105		221,608		224,713		1,314		211,325		212,639
Residential mortgage loans	1,074		49,988		51,062		2,210		66,053		68,263
Home improvement and home equity loans	—		184		184		—		333		333
Total real estate mortgage	4,179		271,780		275,959		3,524		277,711		281,235
Real estate construction and development loans	11,529		104,914		116,443		11,713		97,441		109,154
Agricultural loans	736		59,364		60,100		914		58,741		59,655
Installment and student loans	—		69,489		69,489		52		71,496		71,548
Total loans	$	18,362	$	551,766	$	570,128	$	19,242	$	557,873	$	577,115