Notes to Consolidated Financial Statements
1.Organization and Summary of Significant Accounting and Reporting Policies
Basis of Presentation – The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, with rules and regulations of the Securities and Exchange Commission ("SEC"), and with prevailing practices within the banking industry. The consolidated financial statements include the accounts of United Security Bancshares, and its wholly-owned subsidiaries, United Security Bank and subsidiary (the “Bank”) and USB Capital Trust II (the "Trust"). The Trust is deconsolidated pursuant to ASC 810. As a result, the Trust Preferred Securities are not presented on the Company’s consolidated financial statements as equity, but instead they are presented as Junior Subordinated Debentures and are presented as a separate liability category (see Note 10 to the Company’s consolidated financial statements). Intercompany accounts and transactions have been eliminated in consolidation. In the following notes, references to the Bank are references to United Security Bank. References to the Company are references to United Security Bancshares (including the Bank). United Security Bancshares operates as one business segment providing banking services to commercial establishments and individuals primarily in the San Joaquin Valley of California.
Nature of Operations – United Security Bancshares is a bank holding company, incorporated in the state of California for the purpose of acquiring all the capital stock of the Bank through a holding company reorganization (the “Reorganization”) of the Bank. The Reorganization, which was accounted for in a manner similar to a pooling of interests, was completed on June 12, 2001. Management believes the Reorganization has provided the Company greater operating and financial flexibility and has permitted expansion into a broader range of financial services and other business activities.
The Bank was founded in 1987 and currently operates twelve branches, one commercial lending office, one consumer lending office, and one construction lending office in an area from eastern Madera County to western Fresno County, as well as Taft and Bakersfield in Kern County, and Campbell in Santa Clara County. The Bank’s primary source of revenue is interest income through providing loans to customers, who are predominantly small and middle-market businesses and individuals. The Bank engages in a full compliment of lending activities, including real estate mortgage, commercial and industrial, real estate construction, agricultural and consumer loans, with particular emphasis on short and medium term obligations.
The Bank offers a wide range of deposit instruments. These include personal and business checking accounts and savings accounts, interest-bearing negotiable order of withdrawal (NOW) accounts, money market accounts and time certificates of deposit. Most of the Bank's deposits are attracted from individuals and from small and medium-sized business-related sources.
The Bank also offers a wide range of specialized services designed to attract and service the needs of commercial customers and account holders. These services include cashiers checks, travelers checks, money orders, and foreign drafts. In addition, the Bank offers Internet banking services to its commercial and retail customers. The Bank does not operate a trust department, however it makes arrangements with its correspondent bank to offer trust services to its customers upon request.
York Monterey Properties, Inc. (“YMP”) was incorporated in California on April 17, 2019, for the purpose of holding specific parcels of real estate acquired by the Bank through, or in lieu of, loan foreclosures in Monterey County. These properties exceeded the 10-year holding period for other real estate owned, or “OREO.” YMP was funded with a $250,000 cash investment and the transfer of those parcels by the Bank to YMP. As of December 31, 2020, these properties are included within the consolidated balance sheets as part of “other real estate owned.”
Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, goodwill, fair value of junior subordinated debt and certain collateralized mortgage obligations, and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.
Subsequent events - The Company has evaluated events and transactions for potential recognition or disclosure through the day the financial statements were issued.
Significant Accounting Policies - The Company follows accounting standards set by the Financial Accounting Standards Board, commonly referred to as “FASB.” FASB sets generally accepted accounting principles (GAAP) that the Company follows to ensure the consistent reporting of its consolidated financial condition, consolidated results of operations, and consolidated cash flows. References to GAAP issued by FASB in these footnotes are to FASB Accounting Standards Codification, sometimes referred to as the Codification or ASC. The following is a summary of significant policies:
a.Cash and cash equivalents – Cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and repurchase agreements. At times throughout the year, balances can exceed FDIC insurance limits. Generally, federal funds sold and repurchase agreements are sold for one-day periods. The Bank did not have any repurchase agreements during 2020 or 2019, or at December 31, 2020 and 2019. All cash and cash equivalents have maturities when purchased of three months or less.
b.Securities - Debt securities classified as available for sale are reported at fair value, with unrealized gains and losses excluded from net income and reported, net of tax, as a separate component of comprehensive income and shareholders’ equity. Debt securities classified as held to maturity are carried at amortized cost. Gains and losses on disposition are reported using the specific identification method for the adjusted basis of the securities sold. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.
The Company classifies its debt securities as available for sale or held to maturity, and periodically reviews its investment portfolio on an individual security basis. Securities that are to be held for indefinite periods of time (including, but not limited to, those that management intends to use as part of its asset/liability management strategy, and those which may be sold in response to changes in interest rates, changes in prepayments or any such other factors) are classified as securities available for sale. Securities which the Company has the ability and intent to hold to maturity are classified as held to maturity.
Debt securities with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates. At each financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other-than-temporary based upon the positive and negative evidence available. Evidence evaluated includes, but is not limited to, industry analyst reports, credit market conditions, and interest rate trends. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between the amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which is recognized in the income statement; and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
Equity securities are reported at fair value with gains and losses included in net income on the Consolidated Statement of Operations.
c.Loans - Interest income on loans is credited to income as earned and is calculated by using the simple interest method on the daily balance of the principal amounts outstanding. Outside of student loans, loans are typically placed on non-accrual status when principal or interest is past due for 90 days and/or when management believes the collection of amounts due is doubtful. Student loans are typically placed on non-accrual status when principal or interest is past due for 120 days. For loans placed on nonaccrual status, the accrued and unpaid interest receivable may be reversed based upon management's assessment of collectability, and interest is thereafter credited to principal to the extent necessary to eliminate doubt as to the collectability of the net carrying amount of the loan.
Nonrefundable fees and related direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. The net deferred fees and costs are generally amortized into interest income over the loan term using the interest method. Other credit-related fees, such as standby letter of credit fees and loan placement fees are recognized as noninterest income during the period the related service is performed.
d.Allowance for Credit Losses and Reserve for Unfunded Loan Commitments - The allowance for credit losses is maintained to provide for losses that can reasonably be anticipated. The allowance is based on ongoing quarterly assessments of the probable losses inherent in the loan portfolio, and to a lesser extent, unfunded loan commitments. The reserve for unfunded loan commitments is a liability on the Company’s consolidated financial statements and is included in other
liabilities. The liability is computed using a methodology similar to that used to determine the allowance for credit losses, modified to take into account the probability of a drawdown on the commitment.
The allowance for credit losses is increased by provisions charged to operations during the current period and reduced by negative provisions and loan charge-offs, net of recoveries. Loans are charged against the allowance when management believes that the collection of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans, based on evaluations of the probability of collection. In evaluating the probability of collection, management is required to make estimates and assumptions that affect the reported amounts of loans, allowance for credit losses and the provision for credit losses charged to operations. Actual results could differ significantly from those estimates. These evaluations take into consideration such factors as the composition of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current economic conditions that may affect the borrowers' ability to pay.
The Company’s methodology for assessing the adequacy of the allowance for credit losses consists of several key elements, which include:
•The formula allowance
•Specific allowances for problem graded loans identified as impaired; and
•The unallocated allowance
The formula allowance is calculated by applying loss factors to outstanding loans and certain unfunded loan commitments. Loss factors are based on the Company’s historical loss experience and on the internal risk grade of those loans, and may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. Factors that may affect collectability of the loan portfolio include:
•Levels of, and trends in delinquencies and nonaccrual loans;
•Trends in volumes and term of loans;
•Effects of any changes in lending policies and procedures including those for underwriting, collection, charge-off, and recovery;
•Experience, ability, and depth of lending management and staff;
•National and local economic trends and conditions and;
•Concentrations of credit that might affect loss experience across one or more components of the portfolio, including high-balance loan concentrations and participations.
Management determines the loss factors for problem graded loans (substandard, doubtful, and loss), special mention loans, and pass graded loans, based on a loss migration model. The migration analysis incorporates loan losses over the previous quarters as determined by management (time horizons adjusted as business cycles or environment changes) and loss factors are adjusted to recognize and quantify the loss exposure from changes in market market conditions and trends in the Company’s loan portfolio. For purposes of this analysis, loans are grouped by internal risk classifications and categorized as pass, special mention, substandard, doubtful, or loss. Certain loans are homogeneous in nature and are therefore pooled by risk grade. These homogeneous loans include consumer installment and home equity loans. Special mention loans are currently performing but are potentially weak, as the borrower has begun to exhibit deteriorating trends which, if not corrected, could jeopardize repayment of the loan and result in further downgrades. Substandard loans have well-defined weaknesses which, if not corrected, could jeopardize the full satisfaction of the debt. A loan classified as doubtful has critical weaknesses that make full collection of the obligation improbable.
The student loan portfolio is reviewed for allowance adequacy under the same guidelines as other loans in the Company's portfolio, with additional emphasis for specific risks associated with the portfolio. For student loans, principal amounts outstanding also include interest that has been capitalized. Charge-offs and recoveries of amounts that relate to capitalized interest on student loans are treated as principal charge-offs and recoveries, affecting the allowance for loan losses rather than interest income. Capitalized interest earned in the current year is reversed from interest income. Accrued but unpaid interest related to charged-off student loans is reversed against interest income. In general, the Company reserves for a percentage of loans in forbearance and loans rated substandard.
Loan participations are reviewed for allowance adequacy under the same guidelines as other loans in the Company’s portfolio, with an additional participation factor added, if required, for specific risks associated with participations. In general, participations are subject to certain thresholds set by the Company, and are reviewed for geographic location as well as the well-being of the underlying agent bank.
Specific allowances are established based on management’s periodic evaluation of the loss exposure inherent in impaired loans. For impaired loans, specific allowances are determined based on the collateralized value of the underlying properties, the net present value of the anticipated cash flows, or the market value of the underlying assets.
Specific allowances are established based on management’s periodic evaluation of loss exposure inherent in impaired loans. For impaired loans, specific allowances are determined based on the net realizable value of the underlying collateral, the net present value of the anticipated cash flows, or the market value of the underlying assets. Formula allowances for classified loans, excluding impaired loans, are determined on the basis of additional risks involved with individual loans that may be in excess of risk factors associated with the loan portfolio as a whole. The specific allowance is different from the formula allowance in that the specific allowance is determined on a loan-by-loan basis based on risk factors directly related to a particular loan, as opposed to the formula allowance which is determined for a pool of loans with similar risk characteristics, based on past historical trends and other risk factors which may be relevant on an ongoing basis.
The unallocated portion of the allowance is based upon management’s evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions.
e.Premises and Equipment - Premises and equipment are carried at cost less accumulated depreciation. Depreciation expense is computed principally on the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows:
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|
|
|
|
|
|
|
|
|
|
|
Buildings
|
31 years
|
Furniture and equipment
|
3 -7 years
|
f.Other Real Estate Owned - Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value of the property, less estimated costs to sell. The excess, if any, of the loan amount over the fair value is charged to the allowance for credit losses. Subsequent declines in the fair value of other real estate owned, along with related revenue and expenses from operations, are charged to noninterest expense.
g.Intangible Assets and Goodwill - Intangible assets are comprised of core deposit intangibles, other specific identifiable intangibles, and goodwill acquired in certain branch acquisitions where the consideration given exceeded the fair value of the net assets acquired.
Goodwill amounts resulting from acquisitions are considered to have an indefinite life and are not amortized. At December 31, 2020, goodwill totaled $4.5 million, held at the Company as the reporting unit. During 2020 and 2019, the Company did not recognize impairment charges on goodwill.
h.Income Taxes - Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities using the liability method, and are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. Estimates are based on the enacted tax rate of the applicable period.
i.Net Income per Share - Basic income per common share is computed based on the weighted average number of common shares outstanding. Diluted income per share includes the effect of stock options and other potentially dilutive securities using the treasury stock method to the extent they have a dilutive impact. If applicable, net income per share is retroactively adjusted for all stock dividends declared.
j.Cash Flow Reporting - For purposes of reporting cash flows, cash and cash equivalents include cash on hand, noninterest-bearing amounts due from banks, federal funds sold and securities purchased under agreements to resell. Federal funds and securities purchased under agreements to resell are generally sold for one-day periods. Net cash flows are reported for interest-bearing deposits with other banks, loans to customers, and deposits held for customers.
k.Transfers of Financial Assets - Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right, beyond a trivial benefit) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
l.Stock Based Compensation - The Company has a stock-based employee compensation plan, which is described more fully in Note 12. The Company accounts for all share-based payments to employees, including grants of employee stock options and restricted stock units and awards, to be recognized in the consolidated financial statements based on the grant date fair value of the award. The fair value is amortized over the requisite service period (generally the vesting period). Included in salaries and employee benefits for the years ended December 31, 2020 and 2019 are $425,000 and $349,000, respectively, of share-based compensation.
m.Federal Home Loan Bank Stock and Federal Reserve Stock - As a member of the Federal Home Loan Bank of San Francisco ("FHLB"), the Company is required to maintain an investment in capital stock of the FHLB. In addition, as a member of the Federal Reserve Bank of San Francisco ("FRB"), the Company is required to maintain an investment in capital stock of the FRB. The investments in both the FHLB and the FRB are carried at cost in the accompanying consolidated balance sheets under other assets and are subject to certain redemption requirements by the FHLB and FRB. Stock redemptions are at the discretion of the FHLB and FRB.
While technically these are considered equity securities, there is no market for the FHLB or FRB stock. Therefore, the shares are considered as restricted investment securities. Management periodically evaluates the stock for other-than-temporary impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB or FRB as compared to the capital stock amount of the FHLB or FRB and the length of time this situation has persisted, (2) commitments by the FHLB or FRB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB or FRB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB or FRB, and (4) the liquidity position of the FHLB or FRB.
n.Comprehensive Income - Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes items recorded directly to equity, such as unrealized gains and losses on securities available-for-sale, unrecognized costs of salary continuation defined benefit plans, and unrealized gains and losses on trust preferred securities. Comprehensive income is presented in the Consolidated Statements of Other Comprehensive Income.
o.Segment Reporting - The Company's operations are solely in the financial services industry and include providing to its customers traditional banking and other financial services. The Company operates primarily in California's San Joaquin Valley. Management makes operating decisions and assesses performance based on an ongoing review of the Company's consolidated financial results. Therefore, the Company has a single operating segment for financial reporting purposes.
p.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 is 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. The contracts evaluated that are in scope of Topic 606 are primarily related to service charges and fees on deposit accounts, debit card fees, ATM processing fees, and other service charges, commissions and fees. 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.
q.Leases - The Company recognizes lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements. The Company combines lease and associated non-lease components by class of underlying asset in contract that meet certain criteria. The lease and related non-lease components have the same timing and pattern of transfer, and the lease component, when accounted for on a stand-alone basis, is classified as an operating lease.
r.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 external provider specializing in community bank loss driver and the Current Expected Credit Loss ("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 has begun to generate and evaluate model scenarios under CECL in tandem with its current reserving processes for interim and annual reporting beginning in March 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 loan portfolio as well as the economic conditions as of the date of adoption. The Company also anticipates significant changes to the processes and procedures for calculating the reserve for credit losses and continues to evaluate the potential impact on the Company's consolidated financial statements. Additionally, in regard to the recently approved delay in implementation, the Company continues to evaluate its expected implementation date.
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements.
s.Reclassifications - Certain reclassifications have been made to prior year financial statements to conform to the classifications used in 2020. None of the reclassifications had an impact on equity or net income.
2.Investment Securities
Following is a comparison of the amortized cost and approximate fair value of investment securities at December 31, 2020 and December 31, 2019:
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|
|
(In thousands)
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Amortized Cost
|
|
Gross Unrealized Gains
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|
Gross Unrealized Losses
|
|
Fair Value (Carrying Amount)
|
December 31, 2020
|
|
|
|
Securities available for sale:
|
|
|
|
U.S. Government agencies
|
$
|
33,800
|
|
|
$
|
142
|
|
|
$
|
(232)
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|
|
$
|
33,710
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|
U.S. Government sponsored entities & agencies collateralized by mortgage obligations
|
37,732
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|
|
722
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|
|
(9)
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|
|
38,445
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|
Asset-backed securities
|
3,871
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|
|
38
|
|
|
—
|
|
|
3,909
|
|
Municipal bonds
|
1,045
|
|
|
13
|
|
|
—
|
|
|
1,058
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|
Corporate bonds
|
5,000
|
|
|
219
|
|
|
—
|
|
|
5,219
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|
Total securities available for sale
|
$
|
81,448
|
|
|
$
|
1,134
|
|
|
$
|
(241)
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|
|
$
|
82,341
|
|
December 31, 2019
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|
|
|
|
|
|
|
Securities available for sale:
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|
|
|
|
|
|
|
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
|
|
There were no sales of securities and no gross realized losses or gains on available-for-sale securities during the years ended December 31, 2020 and 2019. There were no other-than-temporary impairment losses during the years ended December 31, 2020 and 2019.
The amortized cost and fair value of securities available for sale at December 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.
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|
December 31, 2020
|
|
Amortized Cost
|
|
Fair Value (Carrying Amount)
|
(In thousands)
|
Due in one year or less
|
$
|
—
|
|
|
$
|
—
|
|
Due after one year through five years
|
491
|
|
|
489
|
|
Due after five years through ten years
|
17,301
|
|
|
17,451
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|
Due after ten years
|
25,924
|
|
|
25,956
|
|
U.S. Government sponsored entities & agencies collateralized by mortgage obligations
|
37,732
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|
|
38,445
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|
|
$
|
81,448
|
|
|
$
|
82,341
|
|
At December 31, 2020 and 2019, available-for-sale securities with an amortized cost of approximately $80,527,000 and $65,874,000 (fair value of $81,420,000 and $65,683,000, respectively) were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances, respectively.
The following summarizes temporarily impaired investment securities at December 31, 2020 and 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
(In thousands)
|
Fair Value (Carrying Amount)
|
|
Unrealized Losses
|
|
Fair Value (Carrying Amount)
|
|
Unrealized Losses
|
|
Fair Value (Carrying Amount)
|
|
Unrealized Losses
|
December 31, 2020
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
U.S. Government agencies
|
$
|
9,013
|
|
|
$
|
(73)
|
|
|
$
|
16,963
|
|
|
$
|
(159)
|
|
|
$
|
25,976
|
|
|
$
|
(232)
|
|
U.S. Government sponsored entities & agencies collateralized by mortgage obligations
|
30
|
|
|
(1)
|
|
|
1,684
|
|
|
(8)
|
|
|
1,714
|
|
|
(9)
|
|
Asset-backed securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Municipal bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total impaired securities
|
$
|
9,043
|
|
|
$
|
(74)
|
|
|
$
|
18,647
|
|
|
$
|
(167)
|
|
|
$
|
27,690
|
|
|
$
|
(241)
|
|
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 December 31, 2020, were comprised of twelve U.S. Government agency securities, and three U.S. Government sponsored entities & agencies collateralized by mortgage obligations. Temporarily impaired securities at December 31, 2019, were comprised of ten U.S. Government agency securities, and nineteen U.S. Government sponsored entities & agencies collateralized by mortgage obligations.
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 of high credit quality are generally evaluated for OTTI under ASC Topic 320-10, "Investments – Debt and Equity Instruments" and ASC Topic 321, "Investment – Equity Securities".
In the first segment, the Company considers many factors in determining OTTI, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to the Company at the time of the evaluation.
The second segment of the portfolio uses the OTTI guidance that is specific to purchased beneficial interests including private label mortgage-backed securities. Under this model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.
Other-than-temporary-impairment occurs when the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis, 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 an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary-impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary-impairment related to the credit loss is 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.
At December 31, 2020, the decline in fair value of the twelve U.S. Government agency securities, and the three 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 December 31, 2020.
During the year ended December 31, 2020, the Company recognized $74,000 of unrealized gains related to marketable equity securities, related to one mutual fund, held at December 31, 2020 in the consolidated statements of income. During the year ended December 31, 2019, the Company recognized $117,000 of unrealized gains related to marketable equity securities held at December 31, 2019 in the consolidated statements of income.
The Company had no held-to-maturity or trading securities at December 31, 2020 or December 31, 2019.
3. Loans
Loans are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
December 31, 2020
|
|
December 31, 2019
|
|
Commercial and business loans
|
$
|
37,349
|
|
|
$
|
44,534
|
|
Government program loans
|
10,165
|
|
|
744
|
|
Total commercial and industrial
|
47,514
|
|
|
45,278
|
|
Real estate – mortgage:
|
|
|
|
Commercial real estate
|
282,951
|
|
|
245,183
|
|
Residential mortgages
|
37,236
|
|
|
45,881
|
|
Home improvement and home equity loans
|
107
|
|
|
173
|
|
Total real estate mortgage
|
320,294
|
|
|
291,237
|
|
Real estate construction and development
|
175,016
|
|
|
138,784
|
|
Agricultural
|
51,079
|
|
|
52,197
|
|
Installment and student loans
|
61,508
|
|
|
69,878
|
|
Total loans
|
$
|
655,411
|
|
|
$
|
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 7.2% of total loans at December 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 and industrial loans generally comes from the cash flow of the borrower. Included within the balance of Commercial and industrial loans is $9,547,000 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 48.9% of total loans at December 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 is generally from the cash flow of the borrower.
•Commercial real estate mortgage loans comprise the largest segment of this loan category and are available on all types of income producing and commercial properties, including: office buildings and 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. The majority of residential mortgages 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 26.7% of total loans at December 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 7.8% of total loans at December 31, 2020, and are generally secured by land, equipment, inventory and receivables. Repayment is from the cash flow of the borrower.
Installment loans represent 9.4% of total loans at December 31, 2020 and generally consist of student loans as well as loans to individuals for household, family, and other personal expenditures such as credit cards, 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 December 31, 2020 and 2019, these financial instruments include commitments to extend credit of $216,799,000 and $197,559,000, respectively, and standby letters of credit of $3,668,000 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. Substantially all 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.
Loans to directors, officers, principal shareholders and their affiliates are summarized below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
2020
|
2019
|
|
Aggregate amount outstanding, beginning of year
|
$
|
1,093
|
|
$
|
7,408
|
|
|
New loans or advances during year
|
4,950
|
|
2,675
|
|
|
Repayments during year
|
(4,143)
|
|
(8,990)
|
|
|
Aggregate amount outstanding, end of year
|
$
|
1,900
|
|
$
|
1,093
|
|
|
Undisbursed commitments, end of year
|
$
|
21,000
|
|
$
|
12,000
|
|
|
Key terms and conditions for loans to directors, officers, principal shareholders and their affiliates do not differ from that of other borrowers.
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 December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Loans
30-60 Days Past Due
|
|
Loans
61-89 Days Past Due
|
|
Loans
90 or More
Days Past Due
|
|
Total Past Due Loans
|
|
Current Loans
|
|
Total Loans
|
|
Accruing
Loans 90 or
More Days Past Due
|
Commercial and business loans
|
$
|
184
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
184
|
|
|
37,165
|
|
|
37,349
|
|
|
$
|
—
|
|
Government program loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,165
|
|
|
10,165
|
|
|
—
|
|
Total commercial and industrial
|
184
|
|
|
—
|
|
|
—
|
|
|
184
|
|
|
47,330
|
|
|
47,514
|
|
|
—
|
|
Commercial real estate loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
282,951
|
|
|
282,951
|
|
|
—
|
|
Residential mortgages
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
37,236
|
|
|
37,236
|
|
|
—
|
|
Home improvement and home equity loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
107
|
|
|
107
|
|
|
—
|
|
Total real estate mortgage
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
320,294
|
|
|
320,294
|
|
|
—
|
|
Real estate construction and development loans
|
—
|
|
|
—
|
|
|
8,605
|
|
|
8,605
|
|
|
166,411
|
|
|
175,016
|
|
|
—
|
|
Agricultural loans
|
—
|
|
|
—
|
|
|
439
|
|
|
439
|
|
|
50,640
|
|
|
51,079
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment and student loans
|
510
|
|
|
875
|
|
|
513
|
|
|
1,898
|
|
|
59,077
|
|
|
60,975
|
|
|
513
|
|
Overdraft protection lines
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
29
|
|
|
—
|
|
Overdrafts
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
504
|
|
|
504
|
|
|
—
|
|
Total installment and student loans
|
510
|
|
|
875
|
|
|
513
|
|
|
1,898
|
|
|
59,610
|
|
|
61,508
|
|
|
513
|
|
Total loans
|
$
|
694
|
|
|
$
|
875
|
|
|
$
|
9,557
|
|
|
$
|
11,126
|
|
|
$
|
644,285
|
|
|
$
|
655,411
|
|
|
$
|
513
|
|
The following is a summary of delinquent loans at December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 non-accrual 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 include 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 non-accrual 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. Student loans are generally charged off at the end of the month during which an account becomes 120 days contractually past due. Charge-offs and recoveries of amounts that relate to capitalized interest on student loans are treated as principal charge-offs and recoveries, affecting the allowance for loan losses rather than interest income. Capitalized interest earned in the current year is reversed from interest income. Accrued but unpaid interest related to charged-off student loans is reversed against interest income. In general, the Company reserves for a percentage of loans in forbearance and loans rated substandard.
When a loan is placed on non-accrual 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 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 is credited to interest income as received.
Loans on non-accrual status are usually not returned to accruing status unless and until 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). Repayment ability 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 December 31, 2020 and 2019.
The following is a summary of nonaccrual loan balances at December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 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 loans
|
11,057
|
|
|
11,478
|
|
Agricultural loans
|
439
|
|
|
144
|
|
|
|
|
|
Installment and student loans
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total installment and student loans
|
—
|
|
|
—
|
|
Total loans
|
$
|
11,496
|
|
|
$
|
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 loans 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 December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Unpaid
Contractual
Principal Balance
|
|
Recorded
Investment
With No Allowance (1)
|
|
Recorded
Investment
With Allowance (1)
|
|
Total
Recorded Investment
|
|
Related Allowance
|
|
Average
Recorded Investment (2)
|
|
Interest Recognized (2)
|
Commercial and business loans
|
$
|
250
|
|
|
$
|
251
|
|
|
$
|
—
|
|
|
$
|
251
|
|
|
$
|
—
|
|
|
$
|
551
|
|
|
$
|
23
|
|
Government program loans
|
214
|
|
|
215
|
|
|
—
|
|
|
215
|
|
|
—
|
|
|
236
|
|
|
14
|
|
Total commercial and industrial
|
464
|
|
|
466
|
|
|
—
|
|
|
466
|
|
|
—
|
|
|
787
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans
|
874
|
|
|
878
|
|
|
—
|
|
|
878
|
|
|
—
|
|
|
1,822
|
|
|
54
|
|
Residential mortgages
|
365
|
|
|
—
|
|
|
366
|
|
|
366
|
|
|
13
|
|
|
867
|
|
|
17
|
|
Home improvement and home equity loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total real estate mortgage
|
1,239
|
|
|
878
|
|
|
366
|
|
|
1,244
|
|
|
13
|
|
|
2,689
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction and development loans
|
11,057
|
|
|
11,057
|
|
|
—
|
|
|
11,057
|
|
|
—
|
|
|
11,223
|
|
|
252
|
|
Agricultural loans
|
610
|
|
|
293
|
|
|
316
|
|
|
609
|
|
|
196
|
|
|
675
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment and student loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total installment and student loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total impaired loans
|
$
|
13,370
|
|
|
$
|
12,694
|
|
|
$
|
682
|
|
|
$
|
13,376
|
|
|
$
|
209
|
|
|
$
|
15,374
|
|
|
$
|
399
|
|
(1) The recorded investment in loans includes accrued interest receivable of $6.
(2) Information is based on the year ended December 31, 2020.
The following is a summary of impaired loans at December 31, 2019 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 twelve month period 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 restructuring for which the loan is performing under the current contractual terms for a reasonable period of time, income is recognized under the accrual method.
Troubled Debt Restructurings
Under the 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 six months successful payment history. In addition, the Company performs a financial analysis of the credit to determine whether the borrower has the ability to continue to meet payments over the remaining life of the loan. This includes, but is not limited to, a review of financial statements and cash flow analysis of the borrower. Only after determination that the borrower has the ability to perform under the terms of the loans will the restructured credit be considered for accrual status. Although the Company does not have a policy which specifically addresses when a loan may be removed from TDR classification, as a matter of practice, loans classified as TDRs generally remain classified as such until the loan either reaches maturity or its outstanding balance is paid off.
There was one new TDR and no defaults during the year ended December 31, 2020. Additionally there were no modifications or defaults during the year ended December 31, 2019.
The following tables illustrate TDR modification activity for the year ended December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2020
|
|
Number of
Contracts
|
|
Pre-
Modification
Outstanding
Recorded
Investment
|
|
Post-
Modification
Outstanding
Recorded
Investment
|
|
Number of Contracts in Default
|
|
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 following tables summarizes all TDR activity by loan category for the years ended December 31, 2020 and 2019 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defaults
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
179
|
|
|
—
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal reductions
|
(9)
|
|
|
(898)
|
|
|
(695)
|
|
|
—
|
|
|
(202)
|
|
|
(136)
|
|
|
—
|
|
|
(1,940)
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
365
|
|
|
$
|
—
|
|
|
$
|
2,452
|
|
|
$
|
609
|
|
|
$
|
—
|
|
|
$
|
3,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
196
|
|
|
$
|
—
|
|
|
$
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defaults
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal reductions
|
(66)
|
|
|
(407)
|
|
|
(969)
|
|
|
—
|
|
|
(184)
|
|
|
(210)
|
|
|
—
|
|
|
(1,836)
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(36)
|
|
|
$
|
—
|
|
|
(36)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
9
|
|
|
$
|
898
|
|
|
$
|
1,060
|
|
|
$
|
—
|
|
|
$
|
2,654
|
|
|
$
|
566
|
|
|
$
|
—
|
|
|
$
|
5,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss
|
$
|
—
|
|
|
$
|
262
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
256
|
|
|
$
|
—
|
|
|
$
|
538
|
|
The Company makes various types of concessions when structuring TDRs including rate reductions, payment extensions, and forbearance. At December 31, 2020, the Company had 7 restructured loans totaling $3,426,000, as compared to 13 restructured loans totaling $5,187,000 at December 31, 2019. The Company had no unfunded commitments outstanding for TDRs at December 31, 2020 and December 31, 2019.
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. Throughout 2020 the company made $69,800,000 in COVID-19 related modifications, which were generally no more than six months in duration and were not considered troubled debt restructurings. As of December 31, 2020, the Company had one payment modification outstanding with a loan balance of $12,500,000 in connection with the COVID-19 relief provided by the CARES Act.
Credit Quality Indicators
As part of its credit monitoring program, the Company utilizes a risk rating system which quantifies the risk the Company estimates it has assumed during the life of a loan. The system rates the strength of the borrower and the facility or transaction, and is designed to provide a program for risk management and early detection of problems.
For each new credit approval, credit extension, renewal, or modification of existing credit facilities, the Company assigns risk ratings utilizing the rating scale identified in this policy. In addition, on an on-going basis, loans and credit facilities are reviewed for internal and external influences impacting the credit facility that would warrant a change in the risk rating. Each loan credit facility is 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. While the borrower may have recognized a loss over three or four years, 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 complying with all underwriting
standards and 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 endorsers/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 these loans will usually be upgraded to an "acceptable" rating or downgraded to a "substandard" rating 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 in the loan origination and loan servicing, and may have 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. When a loan has been downgraded to "substandard," there exists a distinct possibility that the Company will sustain a 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. Additionally, loan 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 following tables summarize the credit risk ratings for commercial, construction, and other non-consumer related loans for December 31, 2020 and 2019. The Company did not carry any loans graded as loss at December 31, 2020 or December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
Commercial Real Estate
|
|
Real Estate Construction and Development
|
|
Agricultural
|
|
Total
|
December 31, 2020
|
|
|
|
|
(In thousands)
|
|
|
|
|
Grades 1 and 2
|
$
|
9,811
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
9,841
|
|
Grade 3
|
—
|
|
|
519
|
|
|
—
|
|
|
—
|
|
|
519
|
|
Grades 4 and 5 – pass
|
35,919
|
|
|
267,215
|
|
|
163,959
|
|
|
49,006
|
|
|
516,099
|
|
Grade 6 – special mention
|
1,307
|
|
|
14,343
|
|
|
—
|
|
|
1,434
|
|
|
17,084
|
|
Grade 7 – substandard
|
477
|
|
|
874
|
|
|
11,057
|
|
|
609
|
|
|
13,017
|
|
Grade 8 – doubtful
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
47,514
|
|
|
$
|
282,951
|
|
|
$
|
175,016
|
|
|
$
|
51,079
|
|
|
$
|
556,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
Commercial Real Estate
|
|
Real Estate Construction and Development
|
|
Agricultural
|
|
Total
|
December 31, 2019
|
|
|
|
|
(In thousands)
|
|
|
|
|
Grades 1 and 2
|
$
|
278
|
|
|
$
|
2,806
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,084
|
|
Grade 3
|
—
|
|
|
981
|
|
|
—
|
|
|
—
|
|
|
981
|
|
Grades 4 and 5 – pass
|
41,757
|
|
|
238,612
|
|
|
126,308
|
|
|
50,234
|
|
|
456,911
|
|
Grade 6 – special mention
|
919
|
|
|
1,608
|
|
|
998
|
|
|
1,279
|
|
|
4,804
|
|
Grade 7 – substandard
|
2,324
|
|
|
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 loans individually, but monitors credit quality indicators such as delinquency and program defined status codes such as forbearance.
The following table summarizes the credit risk ratings for consumer related loans and other homogeneous loans for December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Residential Mortgages
|
|
Home
Improvement and Home Equity
|
|
Installment and Student Loans
|
|
Total
|
|
Residential Mortgages
|
|
Home
Improvement and Home Equity
|
|
Installment and Student Loans
|
|
Total
|
|
|
|
|
|
|
|
|
Not graded
|
$
|
27,484
|
|
|
$
|
92
|
|
|
$
|
60,414
|
|
|
$
|
87,990
|
|
|
$
|
33,059
|
|
|
$
|
155
|
|
|
$
|
68,752
|
|
|
$
|
101,966
|
|
Pass
|
9,752
|
|
|
15
|
|
|
570
|
|
|
10,337
|
|
|
12,542
|
|
|
18
|
|
|
740
|
|
|
13,300
|
|
Special Mention
|
—
|
|
|
—
|
|
|
11
|
|
|
11
|
|
|
88
|
|
|
—
|
|
|
386
|
|
|
474
|
|
Substandard
|
—
|
|
|
—
|
|
|
513
|
|
|
513
|
|
|
192
|
|
|
—
|
|
|
—
|
|
|
192
|
|
Doubtful
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
37,236
|
|
|
$
|
107
|
|
|
$
|
61,508
|
|
|
$
|
98,851
|
|
|
$
|
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. Additionally, from time to time, California experiences severe droughts, which can significantly harm the business of customers and the credit quality of the loans to those customers. Water resources and related issues affecting customers are closely monitored. Signs of deterioration within the loan portfolio are also monitored in an effort to manage credit quality and work with borrowers where possible to mitigate any losses.
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 has engaged 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 and resulting provision for credit losses are significantly impacted by changes in economic conditions resulting from significant increase in unemployment and weakened economy in our markets.
The following summarizes the activity in the allowance for credit losses by loan category for the years ended December 31, 2020 and 2019 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Commercial and Industrial
|
|
Real Estate Mortgage
|
|
Real Estate Construction Development
|
|
Agricultural
|
|
Installment & Student Loans
|
|
|
|
Unallocated
|
|
Total
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
1,322
|
|
|
$
|
712
|
|
|
$
|
2,808
|
|
|
$
|
761
|
|
|
$
|
2,132
|
|
|
|
|
$
|
173
|
|
|
$
|
7,908
|
|
(Recovery of provision) provision for credit losses
|
(726)
|
|
|
(227)
|
|
|
1,235
|
|
|
(50)
|
|
|
2,435
|
|
|
|
|
102
|
|
|
2,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
—
|
|
|
(1)
|
|
|
(358)
|
|
|
—
|
|
|
(1,961)
|
|
|
|
|
—
|
|
|
(2,320)
|
|
Recoveries
|
29
|
|
|
91
|
|
|
37
|
|
|
—
|
|
|
8
|
|
|
|
|
—
|
|
|
165
|
|
Net recoveries (charge-offs)
|
29
|
|
|
90
|
|
|
(321)
|
|
|
—
|
|
|
(1,953)
|
|
|
|
|
—
|
|
|
(2,155)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
625
|
|
|
$
|
575
|
|
|
$
|
3,722
|
|
|
$
|
711
|
|
|
$
|
2,614
|
|
|
|
|
$
|
275
|
|
|
$
|
8,522
|
|
Period-end amount allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
—
|
|
|
13
|
|
|
—
|
|
|
196
|
|
|
—
|
|
|
|
|
—
|
|
|
209
|
|
Loans collectively evaluated for impairment
|
625
|
|
|
562
|
|
|
3,722
|
|
|
515
|
|
|
2,614
|
|
|
|
|
275
|
|
|
8,313
|
|
Ending balance
|
$
|
625
|
|
|
$
|
575
|
|
|
$
|
3,722
|
|
|
$
|
711
|
|
|
$
|
2,614
|
|
|
|
|
$
|
275
|
|
|
$
|
8,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Commercial and Industrial
|
|
Real Estate Mortgage
|
|
Real Estate Construction and Development
|
|
Agricultural
|
|
Installment
|
|
Unallocated
|
|
Total
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
1,673
|
|
|
$
|
1,015
|
|
|
$
|
2,424
|
|
|
$
|
1,131
|
|
|
$
|
1,559
|
|
|
$
|
593
|
|
|
$
|
8,395
|
|
Provision (recovery of provision) for credit losses
|
(421)
|
|
|
(352)
|
|
|
384
|
|
|
(334)
|
|
|
1,163
|
|
|
(420)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
—
|
|
|
(16)
|
|
|
—
|
|
|
(36)
|
|
|
(761)
|
|
|
—
|
|
|
(813)
|
|
Recoveries
|
70
|
|
|
65
|
|
|
—
|
|
|
0
|
|
171
|
|
|
—
|
|
|
306
|
|
Net recoveries (charge-offs)
|
70
|
|
|
49
|
|
|
—
|
|
|
(36)
|
|
|
(590)
|
|
|
—
|
|
|
(507)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
1,322
|
|
|
$
|
712
|
|
|
$
|
2,808
|
|
|
$
|
761
|
|
|
$
|
2,132
|
|
|
$
|
173
|
|
|
$
|
7,908
|
|
Period-end amount allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
606
|
|
|
283
|
|
|
—
|
|
|
256
|
|
|
—
|
|
|
—
|
|
|
1,145
|
|
Loans collectively evaluated for impairment
|
716
|
|
|
429
|
|
|
2,808
|
|
|
505
|
|
|
2,132
|
|
|
173
|
|
|
6,763
|
|
Ending balance
|
$
|
1,322
|
|
|
$
|
712
|
|
|
$
|
2,808
|
|
|
$
|
761
|
|
|
$
|
2,132
|
|
|
$
|
173
|
|
|
$
|
7,908
|
|
The following summarizes information with respect to the loan balances at December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Loans
Individually
Evaluated for Impairment
|
|
Loans
Collectively
Evaluated for Impairment
|
|
Total Loans
|
(In thousands)
|
|
|
Commercial and business loans
|
$
|
251
|
|
|
$
|
37,098
|
|
|
$
|
37,349
|
|
Government program loans
|
215
|
|
|
9,950
|
|
|
10,165
|
|
Total commercial and industrial
|
466
|
|
|
47,048
|
|
|
47,514
|
|
|
|
|
|
|
|
Commercial real estate loans
|
878
|
|
|
282,073
|
|
|
282,951
|
|
Residential mortgage loans
|
366
|
|
|
36,870
|
|
|
37,236
|
|
Home improvement and home equity loans
|
—
|
|
|
107
|
|
|
107
|
|
Total real estate mortgage
|
1,244
|
|
|
319,050
|
|
|
320,294
|
|
|
|
|
|
|
|
Real estate construction and development loans
|
11,057
|
|
|
163,959
|
|
|
175,016
|
|
|
|
|
|
|
|
Agricultural loans
|
609
|
|
|
50,470
|
|
|
51,079
|
|
|
|
|
|
|
|
Installment and student loans
|
—
|
|
|
61,508
|
|
|
61,508
|
|
|
|
|
|
|
|
Total loans
|
$
|
13,376
|
|
|
$
|
642,035
|
|
|
$
|
655,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Loans
Individually
Evaluated for Impairment
|
|
Loans
Collectively
Evaluated for Impairment
|
|
Total Loans
|
(In thousands)
|
|
|
Commercial and business loans
|
$
|
1,496
|
|
|
$
|
43,038
|
|
|
$
|
44,534
|
|
Government program loans
|
258
|
|
|
486
|
|
|
744
|
|
Total commercial and industrial
|
1,754
|
|
|
43,524
|
|
|
45,278
|
|
|
|
|
|
|
|
Commercial real estate loans
|
2,083
|
|
|
243,100
|
|
|
245,183
|
|
Residential mortgage loans
|
1,063
|
|
|
44,818
|
|
|
45,881
|
|
Home improvement and home equity loans
|
—
|
|
|
173
|
|
|
173
|
|
Total real estate mortgage
|
3,146
|
|
|
288,091
|
|
|
291,237
|
|
|
|
|
|
|
|
Real estate construction and development loans
|
11,478
|
|
|
127,306
|
|
|
138,784
|
|
|
|
|
|
|
|
Agricultural loans
|
694
|
|
|
51,503
|
|
|
52,197
|
|
|
|
|
|
|
|
Installment and student loans
|
—
|
|
|
69,878
|
|
|
69,878
|
|
|
|
|
|
|
|
Total loans
|
$
|
17,072
|
|
|
$
|
580,302
|
|
|
$
|
597,374
|
|
4.Student Loans
Included in installment loans are $57,385,000 and $65,800,000 in student loans at December 31, 2020 and 2019 made to medical and pharmacy school students. Upon graduation the loan is automatically placed on deferment for six months. This may be extended up to 48 months for graduates enrolling in internship, medical residency, or fellowship. As approved, the student may receive additional deferment for hardship or administrative reasons in the form of forbearance for a maximum of 24 months throughout the life of the loan. Accrued interest on loans that had not entered repayment status totaled $3,201,000 at December 31, 2020 and $4,689,000 at December 31, 2019. At December 31, 2020 there were 944 loans within repayment, deferment, and forbearance which represented $28,906,000, $7,407,000, and $7,179,000, respectively. At December 31, 2019, there were 855 loans within repayment, deferment, and forbearance which represented $24,986,000, $4,392,000 and $10,626,000, respectively. As of December 31, 2020 and December 31, 2019, the reserve against the student loan portfolio was $2,546,000 and $2,091,000, respectively. There were no TDRs within the portfolio as of December 31, 2020 or December 31, 2019. At December 31, 2020 and December 31, 2019, student loans totaling $513,000 were included in the substandard category and $386,000 in the special mention category, respectively.
ZuntaFi (previously known as Reunion Student Loan Finance Corporation (RSLFC)) is the third-party servicer for the student loan portfolio. ZuntaFi's services include application administration, processing, approval, documenting, funding, and collection. They also provide borrower file custodial responsibilities. Except in cases where applicants/loans do not meet program requirements, or extreme delinquency, ZuntaFi is responsible for complete program management. ZuntaFi is paid a monthly servicing fee based on the outstanding principal balance.
The following tables summarize the credit quality indicators for outstanding student loans as of December 31, 2020 and December 31, 2019 (in 000's, except for number of borrowers):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Number of Loans
|
|
Amount
|
|
Accrued Interest
|
|
Number of Loans
|
|
Amount
|
|
Accrued Interest
|
School
|
319
|
|
|
$
|
12,905
|
|
|
$
|
3,201
|
|
|
601
|
|
|
$
|
24,198
|
|
|
$
|
4,689
|
|
Grace
|
34
|
|
|
988
|
|
|
719
|
|
|
49
|
|
|
1,598
|
|
|
394
|
|
Repayment
|
623
|
|
|
28,906
|
|
|
292
|
|
|
507
|
|
|
24,986
|
|
|
203
|
|
Deferment
|
187
|
|
|
7,407
|
|
|
209
|
|
|
124
|
|
|
4,392
|
|
|
204
|
|
Forbearance
|
134
|
|
|
7,179
|
|
|
553
|
|
|
224
|
|
|
10,626
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
1,297
|
|
|
$
|
57,385
|
|
|
$
|
4,974
|
|
|
1,505
|
|
|
$
|
65,800
|
|
|
$
|
5,678
|
|
School - The time in which the borrower is still actively in school at least half time. No payments are expected during this stage, though the borrower may begin immediate payments.
Grace - A six month period of time granted to the borrower immediately upon graduation, or if deemed no longer an active student. Interest continues to accrue. Upon completion of the six month grace period the loan is transferred to repayment status. Additionally, if applicable, this status may represent a borrower activated to military duty while in their in-school period, they will be allowed to return to that status once their active duty has expired. The borrower must return to an at least half time status within six months of the active duty end date in order to return to an in-school status.
Repayment - The time in which the borrower is no longer actively in school at least half time, and has not received an approved grace, deferment, or forbearance. Regular payment is expected from these borrowers under an allotted payment plan.
Deferment - May be granted up to 48 months for borrowers who have begun the repayment period on their loans but are (1) actively enrolled in an eligible school at least half time, or (2) are actively enrolled in an approved and verifiable medical residency, internship, or fellowship program.
Forbearance - The period of time during which the borrower may postpone making principal and interest payments, which may be granted for either hardship or administrative reasons. Interest will continue to accrue on loans during periods of authorized forbearance. If the borrower is delinquent at the time the forbearance is granted, the delinquency will be covered by the forbearance and all accrued and unpaid interest from the date of delinquency or if none, from the date of beginning of the forbearance period, will be capitalized at the end of each forbearance period. The term of the loan will not change and payments may be increased to allow the loan to pay off in the required time frame. A forbearance that results in only a delay in payment considered insignificant, is not a concessionary change in terms provided the borrower affirms the obligation. Forbearance is not an uncommon status designation, this designation is standard industry practice, and is consistent with the succession of students migrating to employed medical professionals.
Student Loan Aging
Student loans are generally charged off at the end of the month during which an account becomes 120 days contractually past due. Accrued but unpaid interest related to charged off student loans is reversed and charged against interest income. For the year ended December 31, 2020, $125,000 in accrued interest receivable was reversed due to charge-offs of $1,947,000 within the student loan portfolio. For the year ended December 31, 2019, $43,000 in accrued interest receivable was reversed due to charge-offs of $740,000 within the student loan portfolio.
The following tables summarize the student loan aging for loans in repayment and forbearance as of December 31, 2020 and December 31, 2019 (in 000's, except for number of borrowers):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Number of Borrowers
|
|
Amount
|
|
Number of Borrowers
|
|
Amount
|
Current or less than 31 days
|
304
|
|
|
$
|
34,188
|
|
|
295
|
|
|
$
|
34,277
|
|
31 - 60 days
|
4
|
|
|
510
|
|
|
4
|
|
|
292
|
|
61 - 90 days
|
10
|
|
|
875
|
|
|
7
|
|
|
657
|
|
Greater than 90 days
|
5
|
|
|
513
|
|
|
6
|
|
|
386
|
|
|
|
|
|
|
|
|
|
Total
|
323
|
|
|
$
|
36,086
|
|
|
312
|
|
|
$
|
35,612
|
|
5.Premises and Equipment
The components of premises and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
December 31, 2020
|
|
December 31, 2019
|
Land
|
$
|
968
|
|
|
$
|
968
|
|
Buildings and improvements
|
16,111
|
|
|
15,868
|
|
Furniture and equipment
|
9,921
|
|
|
9,372
|
|
|
27,000
|
|
|
26,208
|
|
Less accumulated depreciation and amortization
|
(17,890)
|
|
|
(16,828)
|
|
Total premises and equipment
|
$
|
9,110
|
|
|
$
|
9,380
|
|
The depreciation expense on Company premises and equipment totaled $1,411,000 and $1,402,000, for the years ended December 31, 2020 and 2019, respectively, and is included in occupancy expense in the accompanying consolidated statements of operations.
6.Investment in Limited Partnership
The Bank owns a 3.01% interest in a limited partnership which provides private capital for small to mid-sized businesses used to finance later stage growth, strategic acquisitions, ownership transitions, and recapitalizations, or mezzanine capital. At December 31, 2020 and December 31, 2019, the total investment in this limited partnership was $2,322,000, and $2,183,000, respectively. The investment is accounted for under the cost method. No income was recognized for the years ended December 31, 2020 and 2019. Remaining unfunded commitments as of December 31, 2020 and 2019 totaled $2,239,000 and $2,817,000, respectively.
7.Deposits
Deposits include the following:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
December 31, 2020
|
|
December 31, 2019
|
Noninterest-bearing deposits
|
$
|
391,897
|
|
|
$
|
311,950
|
|
Interest-bearing deposits:
|
|
|
|
NOW and money market accounts
|
402,565
|
|
|
360,934
|
|
Savings accounts
|
96,669
|
|
|
80,078
|
|
Time deposits:
|
|
|
|
Under $250,000
|
40,303
|
|
|
44,926
|
|
$250,000 and over
|
21,217
|
|
|
20,474
|
|
Total interest-bearing deposits
|
560,754
|
|
|
506,412
|
|
Total deposits
|
$
|
952,651
|
|
|
$
|
818,362
|
|
At December 31, 2020, the scheduled maturities of all certificates of deposit and other time deposits are as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
December 31, 2020
|
December 31, 2019
|
One year or less
|
$
|
49,253
|
|
$
|
46,103
|
|
More than one year, but less than or equal to two years
|
10,577
|
|
16,563
|
|
More than two years, but less than or equal to three years
|
1,021
|
|
1,617
|
|
More than three years, but less than or equal to four years
|
184
|
|
882
|
|
More than four years, but less than or equal to five years
|
385
|
|
135
|
|
Greater than five years
|
100
|
|
100
|
|
|
$
|
61,520
|
|
$
|
65,400
|
|
Deposit balances representing overdrafts reclassified as loan balances totaled $506,000 and $230,000 as of December 31, 2020 and 2019, respectively.
Deposits of directors, officers and other related parties to the Bank totaled $11,192,000 and $6,809,000 at December 31, 2020 and 2019, respectively. The rates paid on these deposits were similar to those customarily paid to the Bank’s customers in the normal course of business.
8.Short-term Borrowings/Other Borrowings
At December 31, 2020, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling $336,788,000, as well as Federal Home Loan Bank (FHLB) lines of credit totaling $4,881,000. At December 31, 2020, the Company had uncollateralized lines of credit with Pacific Coast Bankers Bank (PCBB) and Union Bank totaling $10,000,000 each and a Fed Funds line of $20,000,000 with Zions First National Bank. All lines of credit are on an “as available” basis and can be revoked by the grantor at any time. These lines of credit have interest rates that are generally tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or LIBOR. FHLB advances are collateralized by the Company’s stock in the FHLB, investment securities, and certain qualifying mortgage loans.
As of December 31, 2020, $5,294,000 in investment securities at FHLB were pledged as collateral for FHLB advances. Additionally, $517,516,000 in real-estate secured loans were pledged at December 31, 2020, as collateral for used and unused borrowing lines with the Federal Reserve Bank. At December 31, 2020, and for the year then ended, the Company had no outstanding borrowing balances.
The Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling $313,445,000, as well as Federal Home Loan Bank (FHLB) lines of credit totaling $5,815,000 at December 31, 2019. At December 31, 2019, the Company had uncollateralized lines of credit with Pacific Coast Bankers Bank (PCBB) and Union Bank totaling $10,000,000 each and a Fed Funds line of $20,000,000 with Zions First National Bank. All lines of credit are on an “as available” basis and can be revoked by the grantor at any time. These lines of credit have interest rates that are generally tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or LIBOR. FHLB advances are collateralized by the Company’s stock in the FHLB, investment securities, and certain qualifying mortgage loans.
As of December 31, 2019, $6,201,000 in investment securities at FHLB were pledged as collateral for FHLB advances. Additionally, $462,937,000 in real-estate secured loans were pledged at December 31, 2019, as collateral for used and unused borrowing lines with the Federal Reserve Bank. At December 31, 2019, and for the year then ended, the Company had no outstanding borrowing balances.
9. Leases
The Company leases land and premises for its branch banking offices, administration facilities, and ATMs. The initial terms of these leases expire at various dates through 2030. Under the provisions of most of these leases, the Company has the option to extend the leases beyond their original terms at rental rates adjusted for changes reported in certain economic indices or as reflected by market conditions. Lease terms may include options to extend or terminate the lease when it is reasonably certain the Company will exercise that option. As of December 31, 2020, the Company had 13 operating leases and no financing leases.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended
|
Year Ended
|
(in 000's)
|
December 31, 2020
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Operating lease expense
|
$
|
764
|
|
$
|
765
|
|
Short-term lease expense
|
—
|
|
—
|
|
Variable lease expense
|
249
|
|
205
|
|
Sublease income
|
—
|
|
—
|
|
Total
|
$
|
1,013
|
|
$
|
970
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
|
|
(in 000's)
|
December 31, 2020
|
December 31, 2019
|
Operating cash flows used in operating leases (years ended)
|
$
|
764
|
|
$
|
741
|
|
ROU assets obtained in exchange for new operating lease liabilities
|
104
|
|
3,944
|
|
Weighted-average remaining lease terms in years for operating leases
|
5.85
|
6.36
|
Weighted-average discount rate for operating leases
|
5.16
|
%
|
5.15
|
%
|
Maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
(in 000's)
|
|
|
December 31, 2020
|
2021
|
|
|
$
|
665
|
|
2022
|
|
|
675
|
|
2023
|
|
|
674
|
|
2024
|
|
|
513
|
|
2025
|
|
|
333
|
|
Thereafter
|
|
|
580
|
|
Total undiscounted cash flows
|
|
|
3,440
|
|
Less: present value discount
|
|
|
(473)
|
|
Present value of net future minimum lease payments
|
|
|
$
|
2,967
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
(in 000's)
|
|
|
December 31, 2019
|
2020
|
|
|
$
|
763
|
|
2021
|
|
|
653
|
|
2022
|
|
|
663
|
|
2023
|
|
|
661
|
|
2024
|
|
|
501
|
|
Thereafter
|
|
|
826
|
|
Total undiscounted cash flows
|
|
|
4,067
|
|
Less: present value discount
|
|
|
(604)
|
|
Present value of net future minimum lease payments
|
|
|
$
|
3,463
|
|
10.Junior Subordinated Debt/Trust Preferred Securities
Effective September 30, 2009 and beginning with the interest payment due October 1, 2009, the Company elected to defer interest payments on the Company's $15.0 million of junior subordinated debentures relating to its trust preferred securities for the allowable five-year period. Interest payments were subsequently resumed at the end of the allowable deferment. In September 2015, the Company redeemed $3.0 million at par value. The contractual principal balance of the Company's debentures relating to its trust preferred securities is $12.0 million as of December 31, 2020. The Company may redeem the junior subordinated debentures at any time at par.
The Company accounts for its junior subordinated debt issued under USB Capital Trust II at fair value. The Company believes the election of fair value accounting for the junior subordinated debentures better reflects the true economic value of the debt instrument on the consolidated balance sheet. As of December 31, 2020, the rate paid on the junior subordinated debt issued under USB Capital Trust II is 3-month LIBOR plus 129 basis points, and is adjusted quarterly.
At December 31, 2020, the Company performed a fair value measurement analysis on its junior subordinated debt using a cash flow model approach to determine the present value of those cash flows. The cash flow model utilizes the forward 3-month LIBOR curve to estimate future quarterly interest payments due over the thirty-year life of the debt instrument. These cash flows are discounted at a rate which incorporates a current market rate for similar-term debt instruments, adjusted for
additional credit and liquidity risks associated with junior subordinated debt. The 3.57% discount rate used represents what a market participant would consider under the circumstances based on current market assumptions. At December 31, 2020, the total cumulative gain recorded on the debt was $1,586,000.
The net fair value calculation performed as of December 31, 2020 resulted in a pretax loss adjustment of $174,000 for the year ended December 31, 2020, compared to a pretax loss adjustment of $661,000 for the year ended December 31, 2019.
For the year ended December 31, 2020, the $174,000 fair value loss adjustment was separately presented as a $970,000 gain recognized on the consolidated statements of income, and a $1,144,000 loss associated with the instrument-specific credit risk recognized in other comprehensive income. For the year ended December 31, 2019, the $661,000 fair value loss adjustment was separately presented as a $1,165,000 gain recognized on the consolidated statements of income, and a $1,826,000 loss associated with the instrument-specific credit risk recognized in other comprehensive income. The Company calculated the change in the discounted cash flows based on updated market credit spreads for the periods ended.
11.Taxes on Income
The tax effects of significant items comprising the Company’s net deferred tax assets (liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Credit losses not currently deductible
|
$
|
2,906
|
|
|
$
|
1,837
|
|
Deferred compensation
|
1,506
|
|
|
1,438
|
|
Depreciation
|
256
|
|
|
180
|
|
Accrued reserves
|
109
|
|
|
120
|
|
Write-down on other real estate owned
|
291
|
|
|
89
|
|
Unrealized gain on retirement obligation
|
325
|
|
|
285
|
|
Unrealized gain (loss) on TRUPs
|
246
|
|
|
(91)
|
|
Interest on nonaccrual loans
|
443
|
|
|
336
|
|
Lease liability
|
875
|
|
|
1,021
|
|
Other
|
467
|
|
|
1,499
|
|
Total deferred tax assets
|
7,424
|
|
|
6,714
|
|
Deferred tax liabilities:
|
|
|
|
State Tax
|
(211)
|
|
|
(196)
|
|
FHLB dividend
|
(46)
|
|
|
(46)
|
|
Loss on limited partnership investment
|
(1,353)
|
|
|
(1,014)
|
|
Deferred gain ASC 825 – fair value option
|
(771)
|
|
|
(462)
|
|
Fair value adjustments for purchase accounting
|
(98)
|
|
|
(98)
|
|
Deferred loan costs
|
(689)
|
|
|
(548)
|
|
Prepaid expenses
|
(239)
|
|
|
(241)
|
|
Unrealized (gain) loss on available for sale securities
|
(265)
|
|
|
73
|
|
Right-of-use asset
|
(845)
|
|
|
(991)
|
|
Total deferred tax liabilities
|
(4,517)
|
|
|
(3,523)
|
|
Net deferred tax assets
|
$
|
2,907
|
|
|
$
|
3,191
|
|
The Company periodically evaluates its deferred tax assets to determine whether a valuation allowance is required based upon a determination that some or all of the deferred assets may not be ultimately realized. The Company did not record a valuation allowance at December 31, 2020 or December 31, 2019.
Income tax expense for the years ended December 31, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
2020
|
Federal
|
|
State
|
|
Total
|
Current
|
$
|
1,871
|
|
|
$
|
1,256
|
|
|
$
|
3,127
|
|
Deferred
|
399
|
|
|
(75)
|
|
|
324
|
|
|
$
|
2,270
|
|
|
$
|
1,181
|
|
|
$
|
3,451
|
|
2019
|
|
|
|
|
|
Current
|
$
|
3,627
|
|
|
$
|
1,937
|
|
|
$
|
5,564
|
|
Deferred
|
269
|
|
|
264
|
|
|
533
|
|
|
$
|
3,896
|
|
|
$
|
2,201
|
|
|
$
|
6,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
|
Statutory federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
|
State franchise tax, net of federal income tax benefit
|
8.2
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
(1.4)
|
|
|
(0.6)
|
|
|
|
|
27.8
|
%
|
|
28.7
|
%
|
|
|
The Company periodically reviews its tax positions under the accounting standards related to uncertainty in income taxes, which defines the criteria that an individual tax position would have to meet for some or all of the income tax benefit to be recognized in a taxable entity’s financial statements. Under the guidelines, an entity should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that the position will be sustained on examination. The term, “more likely than not," means a likelihood of more than 50 percent. In assessing whether the more-likely-than-not criterion is met, the entity should assume that the tax position will be reviewed by the applicable taxing authority and all available information is known to the taxing authority. As of December 31, 2020 and 2019, the Company has no uncertain tax positions.
The Company and its subsidiary file income tax returns in the U.S federal jurisdiction and California. There are no filings in foreign jurisdictions. The Company is no longer subject to income tax examinations by taxing authorities for years before 2017 and 2016 for Federal and California jurisdictions, respectively.
The Company's policy is to recognize any interest or penalties related to uncertain tax positions in income tax expense. Interest and penalties recognized during the periods ended December 31, 2020 and December 31, 2019 were insignificant.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has evaluated the impact of the CARES Act and determined that none of the changes would result in a material income tax benefit to the Company
12.Stock Based Compensation
On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law and extends several provisions of the CARES Act. As of December 31, 2020 the Company has determined that neither this Act nor changes to income tax laws or regulations in other jurisdictions have a significant impact on our effective tax rate.
Options and restricted stock units and awards have been granted to officers and key employees at an exercise price equal to estimated fair value at the date of grant as determined by the Board of Directors. All options, units, and awards granted are service awards, and are based solely upon fulfilling a requisite service period (the vesting period). At December 31, 2020, the Company had two stock based compensation plans.
In May 2005, the Company adopted the United Security Bancshares 2005 Stock Option Plan (2005 Plan) for which 34,601 shares remain reserved for issuance for options already granted to employees and directors under incentive and nonstatutory agreements. The 2005 plan expired in May 2015. While outstanding arrangements to issue shares under this plan, including options, continue in force until their expiration, no new options will be granted under this plan.
In May 2015, the Company adopted the United Security Bancshares 2015 Equity Incentive Award Plan (2015 Plan). The 2015 Plan provides for the granting of up to 758,000 shares of authorized and unissued shares of common stock in the form of stock options, restricted stock units, and restricted stock awards. The 2015 Plan requires that the exercise price may not be less than the fair value of the stock at the date the option is granted, and that the option price must be paid in full at the time it is exercised.
The options granted (incentive stock options for employees and non-qualified stock options for Directors) have an exercise price at the prevailing market price on the date of grant. All options granted are exercisable 20% each year commencing one year after the date of grant and expire ten years after the date of grant. Restricted stock awards are granted at the prevailing market price of the Company's stock and typically vest over a five-year period. Restricted stock awards are subject to forfeiture if employment terminates prior to vesting. The cost of these awards is recognized over the vesting period of the awards based on the fair value of the common stock on the date of the grant.
Under the 2005 Plan, 34,601 granted options are outstanding and vested (34,601 incentive stock options and 0 nonqualified stock options) as of December 31, 2020. No options were granted under this plan during the year ended December 31, 2020.
Under the 2015 Plan, 71,924 granted stock instruments are outstanding as of December 31, 2020, of which 36,000 are exercisable. Of the 71,924 granted stock instruments, 11,924 are restricted stock units and 60,000 are nonqualified stock options.
A summary of the status of the Company's stock option plan and changes during the year are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(a)
|
|
Weighted
Average
Exercise Price
|
Options outstanding December 31, 2019
|
94,601
|
|
|
$
|
7.87
|
|
Granted during the year
|
—
|
|
|
—
|
|
Exercised during the year
|
—
|
|
|
—
|
|
Forfeited during the year
|
—
|
|
|
—
|
|
Options outstanding December 31, 2020
|
94,601
|
|
|
$
|
7.87
|
|
A summary of the status of the Company's restricted stock and changes during the year are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(a)
|
|
Weighted
Average
Grant-Date Fair Value
|
Non-vested units at December 31, 2019
|
35,572
|
|
|
$
|
9.96
|
|
Granted during the year
|
12,500
|
|
|
9.73
|
|
Vested during the year
|
36,148
|
|
|
9.58
|
|
Forfeited during the year
|
—
|
|
|
—
|
|
Non-vested units at December 31, 2020
|
11,924
|
|
|
$
|
10.85
|
|
Included in total outstanding options at December 31, 2020, are 70,601 exercisable shares at a weighted average price of $7.10, a weighted average remaining contract term of 4.75 years and intrinsic value of $108,000.
Included in salaries and employee benefits for the years ended December 31, 2020 and 2019 is $425,000 and $349,000 of share-based compensation, respectively. The related tax benefit on share-based compensation recorded in the provision for income taxes was not material to any year.
As of December 31, 2020 and 2019 there was $147,000 and $226,000, respectively, of total unrecognized compensation expense related to non-vested stock options. This cost is expected to be recognized over a weighted average period of approximately 6.68 years.
A summary of the status of the Company's stock option values and activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
Weighted average grant-date fair value per share of stock options granted
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Weighted average fair value of stock options vested
|
$
|
86,000
|
|
|
$
|
90,000
|
|
|
|
Total intrinsic value of stock options exercised
|
$
|
—
|
|
|
$
|
—
|
|
|
|
As of December 31, 2020 and 2019 there was $106,000 and $300,000, respectively, of total unrecognized compensation expense related to restricted stock. This cost is expected to be recognized over a weighted-average period of approximately 2.72 years.
The Bank determines fair value of stock options at grant date using the Black-Scholes-Merton pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividend yield and the risk-free interest rate over the expected life of the option. The Bank determines fair value of restricted stock based on the quoted stock price as of the grant date.
The expected term of options granted is derived from management's experience, which is based upon historical data on employee exercise and post-vesting behavior. The risk free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected volatility is based on the historical volatility of the Bank's stock over a period commensurate with the expected term of the options. The Company believes that historical volatility is indicative of expectations about its future volatility over the expected term of the options.
The Bank expenses the fair value of the option on a straight-line basis over the vesting period for each separately vesting portion of the award. The Bank estimates forfeitures and only recognizes expense for those shares expected to vest. Based upon historical evidence, the Company has determined that because options are granted to a limited number of key employees rather than a broad segment of the employee base, expected forfeitures, if any, are not material.
The Black-Scholes-Merton option valuation model requires the input of highly subjective assumptions, including the expected life of the stock based award and stock price volatility. The assumptions listed above represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, the Bank's recorded stock-based compensation expense could have been materially different from that previously reported in proforma disclosures. In addition, the Bank is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If the Bank's actual forfeiture rate is materially different from the estimate, the share-based compensation expense could be materially different.
13.Employee Benefit Plans
401K Plan
The Company has a Cash or Deferred 401(k) Stock Ownership Plan (the “401(k) Plan”) organized under Section 401(k) of the Code. All employees of the Company are initially eligible to participate in the 401(k) Plan upon the first day of the month after date of hire. Under the terms of the plan, the participants may elect to make contributions to the 401(k) Plan as determined by the Board of Directors. Participants are automatically vested 100% in all employee contributions. Participants may direct the investment of their contributions to the 401(k) Plan in any of several authorized investment vehicles. The Company contributes funds to the Plan up to 4% of the employees’ eligible annual compensation. Company contributions are immediately 100% vested at the time of contribution. The Company made matching contributions of $250,000 and $256,000 to the 401(k) Plan for the years ended December 31, 2020 and 2019, respectively.
Salary Continuation Plan
The Company has an unfunded, non-qualified Salary Continuation Plan for senior executive officers and certain other key officers of the Company, which provides additional compensation benefits upon retirement for a period of at least 15 years.
Future compensation under the Plan is earned by the employees for services rendered through retirement and vests over a period of 12 to 32 years. As of December 31, 2020, the Company maintains a total of eleven Salary Continuation agreements.
The Company’s current benefit liability is determined based upon vesting and the present value of the benefits at a corresponding discount rate. The discount rate used is an equivalent rate for high-quality investment-grade bonds with lives matching those of the service periods remaining for the salary continuation contracts, which averages approximately 20 years. At December 31, 2020 and 2019, $4,731,000 and $4,516,000, respectively, had been accrued to date, based on a discounted cash flow using an average discount rate of 1.36% and 2.43%, respectively, and is included in other liabilities on the consolidated balance sheets. Salary continuation expense is included in salaries and benefits expense, and totaled $284,000 and $272,000 for the years ended December 31, 2020 and 2019, respectively.
Included within the eleven total Salary Continuation agreements, the Company entered into three separate agreements with officers of the Bank in 2015. The Company accrues for this salary continuation liability based on anticipated years of service and vesting schedules provided under the individual agreements. The three policies are considered individual contracts, and the Company applies guidance contained in ASC Topic 710. Additionally, the Company purchased company owned life insurance (COLI) policies on the life of the officers in connection with the Salary Continuation agreements. The COLI policy premiums are paid over a seven year period. Life insurance premium expense totaled $30,000 and $37,000 for the years ended December 31, 2020 and 2019.
For the eight Salary Continuation agreements in place prior to 2015, the Company recognizes in accumulated other comprehensive (loss) income, the amounts that have not yet been recognized as components of net periodic benefit costs, per the guidance contained in ASC Topic 715 “Compensation”. These unrecognized costs arise from changes in estimated interest rates used in the calculation of net liabilities under the Plan. As of December 31, 2020 and 2019, the Company had approximately $770,000 and $675,000, respectively in unrecognized net periodic benefit costs arising from changes in interest rates used in calculating the current post-retirement liability required under the Plan. This amount represents the difference between the plan liabilities calculated under net present value calculations, and the net plan liabilities actually recorded on the Company’s books at December 31, 2020 and 2019.
Officer Supplemental Life Insurance Plan
The Company owns Bank-owned life insurance policies (BOLI) and Company-owned life insurance policies (COLI) on certain officers, including those covered under the Salary Continuation Plan, with a portion of the death benefits available to the officers’ beneficiaries. The BOLI and COLI initial net cash surrender value is equivalent to the premium paid, and it adds income through non-taxable increases in its cash surrender value, net of the cost of insurance, plus any death benefits ultimately received by the Company. The cash surrender value of these insurance policies totaled $20,715,000 and $20,955,000 at December 31, 2020 and 2019, and is included on the consolidated balance sheet in cash surrender value of life insurance. These policies resulted in income, net of expense, of approximately $474,000 and $491,000 for the years ended December 31, 2020 and 2019, respectively. Although the Plan remains unfunded, the Company intends to utilize the proceeds of such policies to settle the Plan obligations. Under Internal Revenue Service regulations, the life insurance policies are the property of the Company and are available to satisfy the Company's general creditors.
14.Commitments and Contingent Liabilities
Financial Instruments with Off-Balance Sheet Risk: The Company is party to financial instruments with off-balance sheet risk which arise in the normal course of business. These instruments may contain elements of credit risk, interest rate risk and liquidity risk, and include commitments to extend credit and standby letters of credit. The credit risk associated with these instruments is essentially the same as that involved in extending credit to customers and is represented by the contractual amount indicated in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual amount – December 31,
|
(In thousands)
|
2020
|
|
2019
|
Commitments to extend credit
|
$
|
216,799
|
|
|
$
|
197,559
|
|
Standby letters of credit
|
3,668
|
|
|
1,662
|
|
Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Substantially all of these commitments are at floating interest rates based on the Prime rate, and most have fixed expiration dates. The Company evaluates each customer's creditworthiness on a case-by-case basis, and the amount of
collateral obtained, if deemed necessary, is based on management's credit evaluation. Collateral held varies but includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate, and income-producing properties. Many of the commitments are expected to expire without being drawn upon and, as a result, the total commitment amounts do not necessarily represent future cash requirements of the Company.
Standby letters of credit are generally unsecured and are issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company’s letters of credit are short-term guarantees and generally have terms from less than one month to approximately 3 years. At December 31, 2020, the maximum potential amount of future undiscounted payments the Company could be required to make under outstanding standby letters of credit totaled $3,668,000.
In the ordinary course of business, the Company becomes involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material to the financial position of the Company.
15.Fair Value Measurements and Disclosure
The following summary disclosures are made in accordance with the guidance provided by ASC Topic 825 “Fair Value Measurements and Disclosures” which requires the disclosure of fair value information for both on- and off-balance sheet financial instruments where it is practicable to estimate that value.
GAAP guidance clarifies the definition of fair value, describes methods used to appropriately measure fair value in accordance with generally accepted accounting principles and expands fair value disclosure requirements. This guidance applies whenever other accounting pronouncements require or permit fair value measurements.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2, and Level 3). Level 1 inputs are unadjusted quoted prices in active markets (as defined) for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability, and reflect the reporting entity’s assumptions regarding the pricing of an asset or liability by a market participant (including assumptions about risk).
The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized at the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(In thousands)
|
Carrying Amount
|
|
Estimated Fair Value
|
|
Quoted Prices In Active Markets for Identical Assets Level 1
|
|
Significant Other Observable Inputs Level 2
|
|
Significant Unobservable Inputs Level 3
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
$
|
86,192
|
|
|
$
|
91,768
|
|
|
$
|
3,851
|
|
|
$
|
87,917
|
|
|
$
|
—
|
|
Loans
|
645,825
|
|
|
636,470
|
|
|
—
|
|
|
—
|
|
|
636,470
|
|
Accrued interest receivable
|
8,164
|
|
|
8,164
|
|
|
—
|
|
|
8,164
|
|
|
—
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
391,897
|
|
|
430,210
|
|
|
430,210
|
|
|
—
|
|
|
—
|
|
NOW and money market
|
402,565
|
|
|
406,707
|
|
|
406,707
|
|
|
—
|
|
|
—
|
|
Savings
|
96,669
|
|
|
94,467
|
|
|
94,467
|
|
|
—
|
|
|
—
|
|
Time deposits
|
61,520
|
|
|
61,519
|
|
|
—
|
|
|
—
|
|
|
61,519
|
|
Total deposits
|
952,651
|
|
|
992,903
|
|
|
931,384
|
|
|
—
|
|
|
61,519
|
|
Junior subordinated debt
|
10,924
|
|
|
10,924
|
|
|
—
|
|
|
—
|
|
|
10,924
|
|
Accrued interest payable
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(In thousands)
|
Carrying Amount
|
|
Estimated Fair Value
|
|
Quoted Prices In Active Markets for Identical Assets Level 1
|
|
Significant Other Observable Inputs Level 2
|
|
Significant Unobservable Inputs Level 3
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
$
|
80,088
|
|
|
$
|
80,088
|
|
|
$
|
3,776
|
|
|
$
|
76,312
|
|
|
$
|
—
|
|
Loans
|
588,646
|
|
|
581,695
|
|
|
—
|
|
|
—
|
|
|
581,695
|
|
Accrued interest receivable
|
8,208
|
|
|
8,208
|
|
|
—
|
|
|
8,208
|
|
|
—
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
311,950
|
|
|
311,950
|
|
|
311,950
|
|
|
—
|
|
|
—
|
|
NOW and money market
|
360,934
|
|
|
360,934
|
|
|
360,934
|
|
|
—
|
|
|
—
|
|
Savings
|
80,078
|
|
|
80,078
|
|
|
80,078
|
|
|
—
|
|
|
—
|
|
Time deposits
|
65,400
|
|
|
65,236
|
|
|
—
|
|
|
—
|
|
|
65,236
|
|
Total deposits
|
818,362
|
|
|
818,198
|
|
|
752,962
|
|
|
—
|
|
|
65,236
|
|
Junior subordinated debt
|
10,808
|
|
|
10,808
|
|
|
—
|
|
|
—
|
|
|
10,808
|
|
Accrued interest payable
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
The Company performs fair value measurements on certain assets and liabilities as the result of the application of current accounting guidelines. Some fair value measurements, such as available-for-sale securities (AFS) and junior subordinated debt are performed on a recurring basis, while others, such as collateral dependent impaired loans, other real estate owned, goodwill and other intangibles, are performed on a nonrecurring basis.
The Company’s Level 1 financial assets consist of money market funds and highly liquid mutual funds for which fair values are based on quoted market prices. The Company’s Level 2 financial assets include highly liquid debt instruments of U.S. Government agencies, collateralized mortgage obligations, and debt obligations of states and political subdivisions, whose fair values are obtained from readily-available pricing sources for the identical or similar underlying security that may, or may not, be actively traded. The Company’s Level 3 financial assets include certain impaired loans, other real estate owned, goodwill, and intangible assets where the assumptions may be made by us or third parties about assumptions that market participants would use in pricing the asset or liability. From time to time, the Company recognizes transfers between Level 1, 2, and 3 when a change in circumstances warrants a transfer. There were no transfers in or out of Level 1 and Level 2 fair value measurements during the year ended December 31, 2020.
The following methods and assumptions were used in estimating the fair values of financial instruments measured at fair value on a recurring and non-recurring basis:
Investments Available for sale and marketable securities are valued based upon open-market price quotes obtained from reputable third-party brokers that actively make a market in those securities. Market pricing is based upon specific CUSIP identification for each individual security. To the extent there are observable prices in the market, the mid-point of the bid/ask price is used to determine fair value of individual securities. If that data is not available for the last 30 days, a Level 2-type matrix pricing approach based on comparable securities in the market is utilized. Level-2 pricing may include using a forward spread from the last observable trade or may use a proxy bond such as a TBA mortgage to determine a price for the security being valued. Changes in fair market value are recorded through other comprehensive income as the securities are available for sale.
Impaired Loans – Fair value measurements for collateral dependent impaired loans are performed pursuant to authoritative accounting guidance and are based upon either collateral values supported by appraisals and observed market prices. Collateral dependent loans are measured for impairment using the fair value of the collateral. Changes are recorded directly as an adjustment to current earnings.
Other Real Estate Owned – Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Junior Subordinated Debt – The fair value of the junior subordinated debt was determined based upon a discounted cash flows model utilizing observable market rates and credit characteristics for similar debt instruments. In its analysis, the Company used characteristics that market participants generally use, and considered factors specific to (a) the liability, (b) the principal (or most advantageous) market for the liability, and (c) market participants with whom the reporting entity would transact in that market. Cash flows are discounted at a rate which incorporates a current market rate for similar-term debt instruments, adjusted for credit and liquidity risks associated with similar junior subordinated debt and circumstances unique to the Company. The Company believes that the subjective nature of these inputs, and credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of the market spreads, require the junior subordinated debt to be classified as a Level 3 fair value.
The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s liabilities classified as Level 3 and measured at fair value on a recurring basis at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Financial Instrument
|
Valuation Technique
|
Unobservable Input
|
Weighted Average
|
|
Financial Instrument
|
Valuation Technique
|
Unobservable Input
|
Weighted Average
|
Subordinated Debt
|
Discounted cash flow
|
Discount Rate
|
3.57%
|
|
Subordinated Debt
|
Discounted cash flow
|
Discount Rate
|
4.46%
|
Management believes that the credit risk adjusted spread utilized in the fair value measurement of the junior subordinated debentures carried at fair value is indicative of the nonperformance risk premium a willing market participant would require under current market conditions, that is, the inactive market. Management attributes the change in fair value of the junior subordinated debentures during the period to market changes in the nonperformance expectations and pricing of this type of debt, and not as a result of changes to the entity-specific credit risk. The narrowing of the credit risk adjusted spread above the Company’s contractual spreads has primarily contributed to the negative fair value adjustments. Generally, an increase in the credit risk adjusted spread and/or a decrease in the three month LIBOR swap curve will result in positive fair value adjustments (and decrease the fair value measurement). Conversely, a decrease in the credit risk adjusted spread and/or an increase in the three month LIBOR swap curve will result in negative fair value adjustments (and increase the fair value measurement).
The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of December 31, 2020 (in 000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Assets
|
December 31, 2020
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
AFS Securities (2):
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
33,710
|
|
|
$
|
—
|
|
|
$
|
33,710
|
|
|
$
|
—
|
|
U.S Govt collateralized mortgage obligations
|
38,445
|
|
|
—
|
|
|
38,445
|
|
|
—
|
|
Asset-backed securities
|
3,909
|
|
|
—
|
|
|
3,909
|
|
|
—
|
|
Municipal bonds
|
1,058
|
|
|
—
|
|
|
1,058
|
|
|
—
|
|
Corporate bonds
|
5,219
|
|
|
—
|
|
|
5,219
|
|
|
—
|
|
Total AFS securities
|
82,341
|
|
|
—
|
|
|
82,341
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Marketable equity securities (2)
|
3,851
|
|
|
3,851
|
|
|
—
|
|
|
—
|
|
Impaired Loans (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RE construction & development
|
3,364
|
|
|
—
|
|
|
—
|
|
|
3,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
3,364
|
|
|
—
|
|
|
—
|
|
|
3,364
|
|
|
|
|
|
|
|
|
|
Other real estate owned (1)
|
5,004
|
|
|
—
|
|
|
—
|
|
|
5,004
|
|
Total
|
$
|
94,560
|
|
|
$
|
3,851
|
|
|
$
|
82,341
|
|
|
$
|
8,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Liabilities
|
December 31, 2020
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Junior subordinated debt (2)
|
$
|
10,924
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,924
|
|
Total
|
$
|
10,924
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,924
|
|
(1)Nonrecurring
(2)Recurring
The following table presents quantitative information about Level 3 fair value measurements for the Company's assets measured at fair value on a non-recurring basis at December 31, 2020 (in 000's).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Financial Instrument
|
Fair Value
|
Valuation Technique
|
Unobservable Input
|
Adjustment Percentage
|
Impaired Loans:
|
|
|
|
|
RE construction & development
|
$3,364
|
Fair Value of Collateral Method for Collateral Dependent Loans
|
Adjustment for difference between appraised value and net realizable value
|
7.02%
|
Other Real Estate Owned:
|
$5,004
|
Fair Value of Collateral Method for Collateral Dependent Loans
|
Adjustment for difference between appraised value and net realizable value
|
13.69%
|
The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of December 31, 2019 (in 000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Assets
|
December 31, 2019
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
AFS Securities (2):
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
28,699
|
|
|
$
|
—
|
|
|
$
|
28,699
|
|
|
$
|
—
|
|
U.S Govt collateralized mortgage obligations
|
47,613
|
|
|
—
|
|
|
47,613
|
|
|
—
|
|
Total AFS securities
|
76,312
|
|
|
—
|
|
|
76,312
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Marketable equity securities (2)
|
3,776
|
|
|
3,776
|
|
|
—
|
|
|
—
|
|
Impaired Loans (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgage
|
144
|
|
|
—
|
|
|
—
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
144
|
|
|
—
|
|
|
—
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
80,232
|
|
|
$
|
3,776
|
|
|
$
|
76,312
|
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Liabilities
|
December 31, 2019
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Junior subordinated debt (2)
|
$
|
10,808
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,808
|
|
Total
|
$
|
10,808
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,808
|
|
(1)Nonrecurring
(2)Recurring
The following table presents quantitative information about Level 3 fair value measurements for the Company's assets measured at fair value on a non-recurring basis at December 31, 2019 (in 000's).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Financial Instrument
|
Fair Value
|
Valuation Technique
|
Unobservable Input
|
Adjustment Percentage
|
Impaired Loans:
|
|
|
|
|
Real estate mortgage
|
$144
|
Fair Value of Collateral Method for Collateral Dependent Loans
|
Adjustment for difference between appraised value and net realizable value
|
6.00%
|
The Company did not record a write-down on other real estate owned during the year ended December 31, 2019.
The following tables provide a reconciliation of liabilities at fair value using significant unobservable inputs (Level 3) on a recurring basis during the period (in 000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
Reconciliation of Liabilities:
|
Junior
Subordinated
Debt
|
|
Junior
Subordinated
Debt
|
|
|
Beginning balance
|
$
|
10,808
|
|
|
$
|
10,155
|
|
|
|
Total gains included in earnings
|
(970)
|
|
|
(1,165)
|
|
|
|
Total losses included in OCI
|
1,144
|
|
|
1,826
|
|
|
|
|
|
|
|
|
|
Capitalized interest
|
(58)
|
|
|
(8)
|
|
|
|
Ending balance
|
$
|
10,924
|
|
|
$
|
10,808
|
|
|
|
The amount of total gains for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date
|
$
|
(970)
|
|
|
$
|
(1,165)
|
|
|
|
16.Supplemental Cash Flow Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(In thousands)
|
2020
|
|
2019
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Interest
|
$
|
2,316
|
|
|
$
|
3,887
|
|
|
|
Income Taxes
|
3,443
|
|
|
5,910
|
|
|
|
Noncash activities:
|
|
|
|
|
|
Transfer to other real estate owned
|
—
|
|
|
1,008
|
|
|
|
Unrealized losses on junior subordinated debentures
|
(1,144)
|
|
|
(1,826)
|
|
|
|
Unrealized gains on available for sale securities
|
1,143
|
|
|
279
|
|
|
|
Unrealized losses on unrecognized post retirement costs
|
(135)
|
|
|
(307)
|
|
|
|
|
|
|
|
|
|
Cash dividend declared
|
1,870
|
|
|
1,868
|
|
|
|
Right-of-use assets and liabilities recognized
|
104
|
|
|
3,944
|
|
|
|
Adoption of ASU 2016-02: recognition of lease right-of-use (ROU) asset
|
—
|
|
|
3,502
|
|
|
|
Adoption of ASU 2016-02: recognition of lease liability
|
—
|
|
|
3,593
|
|
|
|
17.Dividends on Common Stock
On March 24, 2020, the Company’s Board of Directors declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on April 15, 2020, to shareholders of record as of April 6, 2020. Approximately $1,867,000 was transferred from retained earnings to dividends payable to allow for distribution of the dividend to shareholders.
On June 23, 2020, the Company’s Board of Directors declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on July 15, 2020, to shareholders of record as of July 6, 2020. Approximately $1,866,000 was transferred from retained earnings to dividends payable to allow for distribution of the dividend to shareholders.
On September 22, 2020, the Company’s Board of Directors declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on October 16, 2020, to shareholders of record as of October 6, 2020. Approximately $1,867,000 was transferred from retained earnings to dividends payable to allow for distribution of the dividend to shareholders.
On December 15, 2020, the Company's Board of Directors declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on January 19, 2021, to shareholders of record as of January 4, 2021. Approximately $1,870,000 was transferred from retained earnings to other liabilities to allow for distribution of the dividend to shareholders.
During 2019, the Company's Board of Directors declared cash dividends of $0.11 on March 26,2019, June 25, 2019, September 24, 2019, and December 17, 2019.
18.Net Income Per Share
The following table provides a reconciliation of the numerator and the denominator of the basic net income per share computation with the numerator and the denominator of the diluted net income per share computation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(In thousands, except earnings per share data)
|
2020
|
|
2019
|
|
|
Net income available to common shareholders
|
$
|
8,961
|
|
|
$
|
15,172
|
|
|
|
Weighted average shares outstanding
|
16,976,704
|
|
|
16,951,955
|
|
|
|
Add: dilutive effect of stock options
|
21,880
|
|
|
32,841
|
|
|
|
Weighted average shares outstanding adjusted for potential dilution
|
16,998,584
|
|
|
16,984,796
|
|
|
|
Basic earnings per share
|
$
|
0.53
|
|
|
$
|
0.90
|
|
|
|
Diluted earnings per share
|
$
|
0.53
|
|
|
$
|
0.89
|
|
|
|
Anti-dilutive shares excluded from earnings per share calculation
|
72,000
|
|
|
60,000
|
|
|
|
Dilutive income per share includes the effect of stock options, unvested restricted stock awards, and other potentially dilutive securities using the treasury stock method. There is only one form of outstanding common stock. Holders of unvested restricted stock awards do not receive dividends.
19. Common Stock Repurchase Plan
During 2017, the Board of Directors authorized the repurchase of up to $3 million of the outstanding common stock of the Company. The timing of the purchases will depend on certain factors, including but not limited to, market conditions and prices, available funds, and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, or negotiated private transactions. At this time, no shares have been repurchased.
The Company did not repurchase any common shares during the years ended December 31, 2020 and 2019.
20.Goodwill and Intangible Assets
At December 31, 2020, the Company had goodwill in the amount of $4,488,000 in connection with various business combinations and purchases. This amount was unchanged from the balance of $4,488,000 at December 31, 2019. While goodwill is not amortized, the Company does conduct periodic impairment analysis on goodwill at least annually or more often as conditions require. The Company performed interim analyses of goodwill impairment throughout 2020 due to a triggering event of the current stock price falling below the Company's calculated book value. Additionally, the Company determined that the COVID-19 pandemic was a triggering event based on adverse impact on our business and results of operations.
Historically the goodwill analysis had been performed for the specific goodwill assessed to each of the Company's two reporting units, Legacy and Taft, with no impairment recommended to date. As the COVID-19 pandemic took over 2020, the Company had to dramatically evolve its understanding of the economies affecting the business as a whole, and the branches individually. The pandemic also forced the Company to prioritize strategic goals related to technology and branch banking. With this in mind, the Board approved increasing the Company's ITM fleet and modifying the structure of certain branch locations to ITM exclusive locations. The Board’s focus on ITMs represents a change in the Company’s business structure. As a result these factors we consolidated the Taft and Legacy reporting units into a single consolidated Company-level reporting unit. Goodwill as assessed at December 31, 2019 remained unchanged.
At December 31, 2020, the Company performed a quantitative assessment of goodwill, utilizing a third party valuation specialist, and concluded that it is more likely than not that the fair value of the reporting units exceeds the carrying value and no impairment was recommended. However, it is reasonably possible if adverse economic conditions worsen, or recent stock price fluctuation and market capitalization as a result of the COVID-19 pandemic were to be deemed sustained rather than temporary, it may impact the fair value of the Company's goodwill and result in impairment.
21.Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income, included in shareholders’ equity, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(in 000's)
|
Net unrealized loss on available for sale securities
|
|
Unfunded status of the supplemental retirement plans
|
|
Net unrealized gain on junior subordinated debentures
|
|
Net unrealized loss on available for sale securities
|
|
Unfunded status of the supplemental retirement plans
|
|
Net unrealized gain on junior subordinated debentures
|
Beginning balance
|
$
|
(175)
|
|
|
$
|
(675)
|
|
|
$
|
218
|
|
|
$
|
(372)
|
|
|
$
|
(459)
|
|
|
$
|
1,505
|
|
Current period comprehensive income (loss)
|
805
|
|
|
(95)
|
|
|
(806)
|
|
|
197
|
|
|
(216)
|
|
|
(1,287)
|
|
Ending balance
|
$
|
630
|
|
|
$
|
(770)
|
|
|
$
|
(588)
|
|
|
$
|
(175)
|
|
|
$
|
(675)
|
|
|
$
|
218
|
|
Accumulated other comprehensive loss
|
|
|
|
|
$
|
(728)
|
|
|
|
|
|
|
$
|
(632)
|
|
22.Investment in York Monterey Properties
The Bank wholly-owns the subsidiary York Monterey Properties Inc., organized as a California corporation. The Bank capitalized the subsidiary through a transfer of eight unimproved lots at a historical cost of $5.3 million comprised of approximately 186.97 acres in the York Highlands subdivision of the Monterra Ranch residential development in Monterey County, California ("Properties") together with $250,000 in cash. The Bank transferred the Properties to York Monterey Properties Inc, in order to maintain ownership beyond the ten year regulatory holding period applicable to a national bank. The Bank acquired five of the lots through a non-judicial foreclosure on or about May 29, 2009. In addition, the Bank purchased three of the lots from another bank. The Bank had continuously held the Properties since the date of foreclosure and acquisition. At the time of transfer, the Properties had reached the end of the ten year regulatory holding period limit.
As of December 31, 2020, the Bank's investment in York Monterey Properties Inc. totaled $4,736,000. York Monterey Properties Inc. is included within the consolidated financial statements of the Company, with $4,582,000 of the total investment recognized within the balance of other real estate owned on the consolidated balance sheets.
23. Parent Company Only Financial Statements
The following are the condensed financial statements of United Security Bancshares and should be read in conjunction with the consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
United Security Bancshares – (parent only)
|
|
|
|
Balance Sheets - December 31, 2020 and 2019
|
|
|
|
(In thousands)
|
2020
|
|
2019
|
Assets
|
|
|
|
Cash and equivalents
|
$
|
2,810
|
|
|
$
|
2,659
|
|
Investment in bank subsidiary
|
126,459
|
|
|
124,663
|
|
|
|
|
|
Other assets
|
1,332
|
|
|
2,025
|
|
Total assets
|
130,601
|
|
|
129,347
|
|
Liabilities & Shareholders' Equity
|
|
|
|
Liabilities:
|
|
|
|
Junior subordinated debt securities (at fair value)
|
10,924
|
|
|
10,808
|
|
|
|
|
|
Dividends declared
|
1,870
|
|
|
1,868
|
|
Other liabilities
|
—
|
|
|
683
|
|
Total liabilities
|
12,794
|
|
|
13,359
|
|
Shareholders' Equity:
|
|
|
|
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 17,009,883 at December 31, 2020 and 16,973,885 at December 31, 2019
|
59,397
|
|
|
58,973
|
|
Retained earnings
|
59,138
|
|
|
57,647
|
|
Accumulated other comprehensive (loss) income
|
(728)
|
|
|
(632)
|
|
Total shareholders' equity
|
117,807
|
|
|
115,988
|
|
Total liabilities and shareholders' equity
|
$
|
130,601
|
|
|
$
|
129,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Security Bancshares – (parent only)
|
Year ended December 31,
|
|
|
Income Statements
|
|
|
(In thousands)
|
2020
|
|
2019
|
|
|
Income
|
|
|
|
|
|
Gain (loss) on fair value of junior subordinated debentures
|
$
|
970
|
|
|
$
|
1,165
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiary
|
8,025
|
|
|
8,346
|
|
|
|
Total income
|
8,995
|
|
|
9,511
|
|
|
|
Expense
|
|
|
|
|
|
Interest expense
|
276
|
|
|
455
|
|
|
|
Other expense
|
305
|
|
|
253
|
|
|
|
Total expense
|
581
|
|
|
708
|
|
|
|
Income before taxes and equity in undistributed income of subsidiary
|
8,414
|
|
|
8,803
|
|
|
|
Income tax expense
|
115
|
|
|
135
|
|
|
|
Equity in undistributed income of subsidiary
|
662
|
|
|
6,504
|
|
|
|
Net Income
|
$
|
8,961
|
|
|
$
|
15,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Security Bancshares – (parent only)
|
Year ended December 31,
|
Statement of Cash Flows
|
(In thousands)
|
2020
|
|
2019
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
Net income
|
$
|
8,961
|
|
|
$
|
15,172
|
|
|
|
Adjustments to reconcile net income to cash provided by operating activities:
|
|
|
|
|
|
Equity in undistributed income of subsidiary
|
(662)
|
|
|
(6,504)
|
|
|
|
Provision for deferred income taxes
|
54
|
|
|
343
|
|
|
|
(Gain) loss on fair value of junior subordinated debentures
|
(970)
|
|
|
(1,165)
|
|
|
|
Decrease in income tax receivable
|
51
|
|
|
30
|
|
|
|
Net change in other assets
|
185
|
|
|
(56)
|
|
|
|
Net cash provided by operating activities
|
7,619
|
|
|
7,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
(7,468)
|
|
|
(7,458)
|
|
|
|
|
|
|
|
|
|
Net cash used in by financing activities
|
(7,468)
|
|
|
(7,458)
|
|
|
|
Net increase in cash and cash equivalents
|
151
|
|
|
362
|
|
|
|
Cash and cash equivalents at beginning of year
|
2,659
|
|
|
2,297
|
|
|
|
Cash and cash equivalents at end of year
|
$
|
2,810
|
|
|
$
|
2,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24. Summary of Quarterly Results of Operations (unaudited)
The following table sets forth the results of operations for the four quarters of 2020 and 2019, and is unaudited; however, in the opinion of Management, it reflects all adjustments (which include only normal recurring adjustments) necessary to present fairly the summarized results for such periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Quarters Ended
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
(dollars in thousands, except per share data)
|
Interest income:
|
|
|
|
|
|
|
|
Loans, including fees
|
$
|
8,672
|
|
|
$
|
7,563
|
|
|
$
|
7,713
|
|
|
$
|
8,346
|
|
Investment securities, interest bearing cash at Banks
|
369
|
|
|
405
|
|
|
394
|
|
|
995
|
|
Total interest income
|
9,041
|
|
|
7,968
|
|
|
8,107
|
|
|
9,341
|
|
Interest expense
|
499
|
|
|
500
|
|
|
530
|
|
|
761
|
|
Net interest income
|
8,542
|
|
|
7,468
|
|
|
7,577
|
|
|
8,580
|
|
Provision for credit losses
|
631
|
|
|
4
|
|
|
427
|
|
|
1,707
|
|
Net interest income after provision for credit losses
|
7,911
|
|
|
7,464
|
|
|
7,150
|
|
|
6,873
|
|
Noninterest income
|
467
|
|
|
911
|
|
|
1,216
|
|
|
2,580
|
|
Noninterest expense
|
5,805
|
|
|
5,210
|
|
|
5,554
|
|
|
5,591
|
|
Income before provision for taxes
|
2,573
|
|
|
3,165
|
|
|
2,812
|
|
|
3,862
|
|
Provision for taxes on income
|
651
|
|
|
894
|
|
|
798
|
|
|
1,108
|
|
Net income
|
$
|
1,922
|
|
|
$
|
2,271
|
|
|
$
|
2,014
|
|
|
$
|
2,754
|
|
Net income per common share
|
|
|
|
|
|
|
|
Basic
|
$
|
0.11
|
|
|
$
|
0.13
|
|
|
$
|
0.12
|
|
|
$
|
0.16
|
|
Diluted
|
$
|
0.11
|
|
|
$
|
0.13
|
|
|
$
|
0.12
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Quarters Ended
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
(dollars in thousands, except per share data)
|
Interest income:
|
|
|
|
|
|
|
|
Loans, including fees
|
$
|
8,872
|
|
|
$
|
8,648
|
|
|
$
|
8,443
|
|
|
$
|
8,642
|
|
Investment securities, interest bearing cash at Banks
|
1,266
|
|
|
1,769
|
|
|
1,867
|
|
|
1,775
|
|
Total interest income
|
10,138
|
|
|
10,417
|
|
|
10,310
|
|
|
10,417
|
|
Interest expense
|
862
|
|
|
1,061
|
|
|
1,008
|
|
|
957
|
|
Net interest income
|
9,276
|
|
|
9,356
|
|
|
9,302
|
|
|
9,460
|
|
Provision for credit losses
|
5
|
|
|
5
|
|
|
4
|
|
|
6
|
|
Net interest income after provision for credit losses
|
9,271
|
|
|
9,351
|
|
|
9,298
|
|
|
9,454
|
|
Noninterest income
|
647
|
|
|
1,853
|
|
|
1,731
|
|
|
1,523
|
|
Noninterest expense
|
5,915
|
|
|
5,335
|
|
|
5,262
|
|
|
5,347
|
|
Income before provision for taxes
|
4,003
|
|
|
5,869
|
|
|
5,767
|
|
|
5,630
|
|
Provision for taxes on income
|
1,108
|
|
|
1,696
|
|
|
1,670
|
|
|
1,623
|
|
Net income
|
$
|
2,895
|
|
|
$
|
4,173
|
|
|
$
|
4,097
|
|
|
$
|
4,007
|
|
Net income per common share
|
|
|
|
|
|
|
|
Basic
|
$
|
0.17
|
|
|
$
|
0.25
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
Diluted
|
$
|
0.17
|
|
|
$
|
0.25
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
25. Regulatory Matters
Capital Adequacy
The Company and Bank are subject to various regulatory capital requirements adopted by the Board of Governors of the Federal Reserve System and the FDIC. Failure to meet minimum capital requirements can initiate certain mandates and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework, the consolidated Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, includes quantitative measures designed to ensure capital adequacy. The Basel III Rules require the Company and the Bank to maintain (i) a minimum common equity Tier 1 ratio minimum of 4.50 percent plus a 2.50 percent “capital conservation buffer” , (ii) Tier 1 risk-based capital minimum of 6.00 percent plus the capital conservation buffer, (iii) total risk-based capital ratio minimum of 8.00 percent plus the capital conservation buffer and (iv) Tier 1 leverage capital ratio minimum of 4.00 percent. The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios. Failure to meet minimum capital requirements may result in certain actions by regulators that could have a direct material effect on the consolidated financial statements.
The federal banking agencies published a final rule on November 13, 2019, that provided a simplified measure of capital adequacy for qualifying community banking organizations. A qualifying community banking organization that opts into the community bank leverage ratio framework and maintains a leverage ratio greater than 9 percent will be considered to have met the minimum capital requirements, the capital ratio requirements for the well capitalized category under the Prompt Corrective Action framework, and any other capital or leverage requirements to which the qualifying banking organization is subject. A qualifying community banking organization with a leverage ratio of greater than 9 percent may opt into the community bank leverage ratio framework if it has average consolidated total assets of less than $10 billion, has off-balance-sheet exposures of 25% or less of total consolidated assets, and has total trading assets and trading liabilities of 5 percent or less of total consolidated assets. Further, the bank must not be an advance approaches banking organization.
The final rule became effective January 1, 2020 and banks that meet the qualifying criteria can elect to use the community bank leverage framework starting with the quarter ended March 31, 2020. The CARES Act reduced the required community bank leverage ratio to 8% until the earlier of December 31, 2020, or the national emergency is declared over. The federal bank regulatory agencies adopted an interim final rule to implement this change from the CARES Act. The Company and the Bank meet the criteria outlined in the final rule and the interim final rule and adopted the community bank leverage ratio framework in the third quarter 2020. As of December 31, 2020, the Company and Bank met all capital adequacy requirements to which they were subject.
The following table shows the Company's and the Bank's regulatory capital and regulatory capital ratios at December 31, 2020 and 2019 as compared to the applicable capital adequacy guidelines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
Minimum requirement for Community Bank Leverage Ratio (2) (4)
|
For Capital Adequacy Purposes (1) (3)
|
To be Well Capitalized Under Prompt Corrective Action Provisions (1) (3)
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
As of December 31, 2020 (Company):
|
|
|
|
|
|
|
|
|
Tier 1 Leverage (to Average Assets)
|
$124,507
|
11.37%
|
$87,577
|
8.00%
|
N/A
|
N/A
|
N/A
|
N/A
|
As of December 31, 2020 (Bank):
|
|
|
|
|
|
|
|
|
Tier 1 Leverage (to Average Assets)
|
$122,112
|
11.17%
|
$87,491
|
8.00%
|
N/A
|
N/A
|
N/A
|
N/A
|
As of December 31, 2019 (Company):
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
$130,936
|
17.98%
|
N/A
|
N/A
|
$58,275
|
8.00%
|
N/A
|
N/A
|
Tier 1 Capital (to Risk Weighted Assets)
|
122,476
|
16.81%
|
N/A
|
N/A
|
43,706
|
6.00%
|
N/A
|
N/A
|
Common Equity Tier 1 (to Risk Weighted Assets)
|
112,132
|
15.39%
|
N/A
|
N/A
|
32,779
|
4.50%
|
N/A
|
N/A
|
Tier 1 Leverage (to Average Assets)
|
122,476
|
12.82%
|
N/A
|
N/A
|
38,190
|
4.00%
|
N/A
|
N/A
|
As of December 31, 2019 (Bank):
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
$129,485
|
17.78%
|
N/A
|
N/A
|
$58,275
|
8.00%
|
$72,843
|
10.00%
|
Tier 1 Capital (to Risk Weighted Assets)
|
121,025
|
16.61%
|
N/A
|
N/A
|
56,599
|
6.00%
|
58,275
|
8.00%
|
Common Equity Tier 1 (to Risk Weighted Assets)
|
121,025
|
16.61%
|
N/A
|
N/A
|
32,779
|
4.50%
|
47,348
|
6.50%
|
Tier 1 Leverage (to Average Assets)
|
121,025
|
12.83%
|
N/A
|
N/A
|
37,733
|
4.00%
|
47,737
|
5.00%
|
(1) Current data is not applicable as the Bank adopted the Community Bank Leverage Ratio Framework as of the third quarter of 2020.
(2) The minimum required Community Bank Leverage Ratio is 9.00%, but the CARES Act temporarily lowers this to 8% as described below.
(3) The Company was subject to these minimum requirements under the regulatory framework for Prompt Corrective Action at December 31, 2019.
(4) If the subsidiary bank’s Leverage Ratio exceeds the minimum ratio under the Community Bank Leverage Ratio Framework, it is deemed to be “well capitalized” under all other regulatory capital requirements. The Company may revert back to the regulatory framework for Prompt Corrective Action if the subsidiary bank’s Leverage Ratio falls below the minimum under the Community Bank Leverage Ratio Framework
Dividends
Dividends paid to shareholders are subject to restrictions set forth in the California General Corporation Law. The California General Corporation Law provides that distributions may be made to shareholders if retained earnings immediately prior to the dividend payment are at least equal to the amount of the proposed distribution or if, immediately after the distribution, the value of assets equals the sum of total liabilities. The primary source of funds with which dividends will be paid to shareholders come from cash dividends received by the Holding Company from the Bank. During the year ended December 31, 2020, the Holding Company paid $7,468,000 in cash dividends to shareholders.
The Bank is subject to dividend restrictions set forth in California state banking law and administered by the DFPI. Under such restrictions, the Bank may not pay cash dividends in an amount which exceeds the lesser of the retained earnings of the Bank or the Bank’s net income for the last three fiscal years (less the amount of distributions to shareholders during that period of time). If the above test is not met, cash dividends may only be paid with the prior approval of the DFPI, in an amount not exceeding
the Bank’s net income for its last fiscal year or the amount of its net income for the current fiscal year. Such restrictions do not apply to stock dividends, which generally require neither the satisfaction of any tests nor the approval of the DFPI. Notwithstanding the foregoing, if the DFPI finds that the shareholders’ equity is not adequate or that the declarations of a dividend would be unsafe or unsound, the DFPI may prevent the bank from paying a dividend. The FRB may also limit dividends paid by the Bank. During the year ended December 31, 2020, the Bank paid cash dividends of $8,025,000 to the Holding Company in order to fund the Holding Company's operating costs, payments of interest on junior subordinated debentures, estimated tax payments, and cash dividends paid to shareholders.
26. Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events occurred requiring accrual or disclosure.