Loans

3 Months Ended

Mar. 31, 2017

Receivables [Abstract]

Loans

Loans

Loans are comprised of the following:

(in 000's)	March 31, 2017		December 31, 2016
Commercial and Business Loans	$	45,514	$	46,741
Government Program Loans	1,777		1,541
Total Commercial and Industrial	47,291		48,282
Real Estate – Mortgage:
Commercial Real Estate	199,348		200,661
Residential Mortgages	79,233		87,450
Home Improvement and Home Equity loans	585		230
Total Real Estate Mortgage	279,166		288,341
Real Estate Construction and Development	121,397		131,327
Agricultural	52,452		56,878
Installment	46,535		44,931
Total Loans	$	546,841	$	569,759

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

Commercial and industrial loans represent 8.6% of total loans at March 31, 2017 and are generally made to support the ongoing operations of small-to-medium sized commercial businesses. Commercial and industrial loans have a high degree of industry diversification and provide working capital, financing for the purchase of manufacturing plants and equipment, or funding for growth and general expansion of businesses. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases, or other collateral including real estate. The remainder are unsecured; however, extensions of credit are predicated upon the financial capacity of the borrower. Repayment of commercial loans is generally from the cash flow of the borrower.

Real estate mortgage loans, representing 51.1% of total loans at March 31, 2017, are secured by trust deeds on primarily commercial property, but are also secured by trust deeds on single family residences. Repayment of real estate mortgage loans generally comes from the cash flow of the borrower.

• Commercial real estate mortgage loans comprise the largest segment of this loan category and are available on all types of income producing and commercial properties, including: office buildings, shopping centers; apartments and motels; owner occupied buildings; manufacturing facilities and more. Commercial real estate mortgage loans can also be used to refinance existing debt. Although real estate associated with the business is the primary collateral for commercial real estate mortgage loans, the underlying real estate is not the source of repayment. Commercial real estate loans are made under the premise that the loan will be repaid from the borrower's business operations, rental income associated with the real property, or personal assets.

• Residential mortgage loans are provided to individuals to finance or refinance single-family residences. Residential mortgages are not a primary business line offered by the Company, and a majority are conventional mortgages that were purchased as a pool. Most residential mortgages originated by the Company are of a shorter term than conventional mortgages, with maturities ranging from 3 to 15 years on average.

• Home Improvement and Home Equity loans comprise a relatively small portion of total real estate mortgage loans, and are offered to borrowers for the purpose of home improvements, although the proceeds may be used for other purposes. Home equity loans are generally secured by junior trust deeds, but may be secured by 1^st trust deeds.

Real estate construction and development loans, representing 22.2% of total loans at March 31, 2017, consist of loans for residential and commercial construction projects, as well as land acquisition and development, or land held for future development. Loans in this category are secured by real estate including improved and unimproved land, as well as single-family residential, multi-family residential, and commercial properties in various stages of completion. All real estate loans have established equity requirements. Repayment on construction loans generally comes from long-term mortgages with other lending institutions obtained at completion of the project.

Agricultural loans represent 9.6% of total loans at March 31, 2017 and are generally secured by land, equipment, inventory and receivables. Repayment is from the cash flow of the borrower.

Installment loans represent 8.5% of total loans at March 31, 2017 and generally consist of student loans, loans to individuals for household, family and other personal expenditures such as credit cards, automobiles or other consumer items. Included in installment loans are $39,684,000 in student loans made to medical and pharmacy school students. Repayment on student loans is deferred until 6 months after graduation. Accrued interest on loans that have not entered repayment status totaled $2,493,000 at March 31, 2017.

In the normal course of business, the Company is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. At March 31, 2017 and December 31, 2016, these financial instruments include commitments to extend credit of $113,880,000 and $120,485,000, respectively, and standby letters of credit of $1,208,000 and $1,201,000, respectively. These instruments involve elements of credit risk in excess of the amount recognized on the consolidated balance sheet. The contract amounts of these instruments reflect the extent of the involvement the Company has in off-balance sheet financial instruments.

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

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

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

Past Due Loans

The Company monitors delinquency and potential problem loans on an ongoing basis through weekly reports to the Loan Committee and monthly reports to the Board of Directors. The following is a summary of delinquent loans at March 31, 2017 (in 000's):

March 31, 2017	Loans 30-60 Days Past Due		Loans 61-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Commercial and Business Loans	$	—	$	428	$	275	$	703	$	44,811	$	45,514	$	—
Government Program Loans	39		—		283		322		1,455		1,777		—
Total Commercial and Industrial	39		428		558		1,025		46,266		47,291		—
Commercial Real Estate Loans	—		—		—		—		199,348		199,348		—
Residential Mortgages	—		—		—		—		79,233		79,233		—
Home Improvement and Home Equity Loans	—		—		—		—		585		585		—
Total Real Estate Mortgage	—		—		—		—		279,166		279,166		—
Real Estate Construction and Development Loans	—		—		—		—		121,397		121,397		—
Agricultural Loans	—		—		—		—		52,452		52,452		—
Consumer Loans	—		—		965		965		45,232		46,197		—
Overdraft Protection Lines	—		—		—		—		46		46		—
Overdrafts	—		—		—		—		292		292		—
Total Installment	—		—		965		965		45,570		46,535		—
Total Loans	$	39	$	428	$	1,523	$	1,990	$	544,851	$	546,841	$	—

The following is a summary of delinquent loans at December 31, 2016 (in 000's):

December 31, 2016	Loans 30-60 Days Past Due		Loans 61-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Commercial and Business Loans	$	—	$	432	$	—	$	432	$	48,009	$	48,441	$	—
Government Program Loans	—		—		290		290		1,251		1,541		—
Total Commercial and Industrial	—		432		290		722		49,260		49,982		—
Commercial Real Estate Loans	—		—		—		—		199,810		199,810		—
Residential Mortgages	—		—		—		—		87,388		87,388		—
Home Improvement and Home Equity Loans	—		—		—		—		599		599		—
Total Real Estate Mortgage	—		—		—		—		287,797		287,797		—
Real Estate Construction and Development Loans	166		—		1,250		1,416		128,697		130,113		1,250
Agricultural Loans	—		—		—		—		56,918		56,918		—
Consumer Loans	—		—		965		965		43,785		44,750		—
Overdraft Protection Lines	—		—		—		—		48		48		—
Overdrafts	—		—		—		—		151		151		—
Total Installment	—		—		965		965		43,984		44,949		—
Total Loans	$	166	$	432	$	2,505	$	3,103	$	566,656	$	569,759	$	1,250

Nonaccrual Loans

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

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

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

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

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

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

All other loans where principal or interest is due and unpaid for 90 days or more are placed on nonaccrual and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income.

When a loan is placed on nonaccrual status and subsequent payments of interest (and principal) are received, the interest received may be accounted for in two separate ways.

Cost recovery method: If the loan is in doubt as to full collection, the interest received in subsequent payments is diverted from interest income to a valuation reserve and treated as a reduction of principal for financial reporting purposes.

Cash basis: This method is only used if the recorded investment or total contractual amount is expected to be fully collectible, under which circumstances the subsequent payments of interest are credited to interest income as received.

Loans on non-accrual status are usually not returned to accrual status unless all delinquent principal and/or interest has been brought current, there is no identified element of loss, and current and continued satisfactory performance is expected (loss of the contractual amount not the carrying amount of the loan). Return to accrual is generally demonstrated through the timely receipt of at least six monthly payments on a loan with monthly amortization.

Nonaccrual loans totaled $7,176,000 and $7,264,000 at March 31, 2017 and December 31, 2016, respectively. There were no remaining undisbursed commitments to extend credit on nonaccrual loans at March 31, 2017 or December 31, 2016.

The following is a summary of nonaccrual loan balances at March 31, 2017 and December 31, 2016 (in 000's).

	March 31, 2017		December 31, 2016
Commercial and Business Loans	$	275	$	275
Government Program Loans	282		290
Total Commercial and Industrial	557		565
Commercial Real Estate Loans	1,091		1,126
Residential Mortgages	—		—
Home Improvement and Home Equity Loans	—		—
Total Real Estate Mortgage	1,091		1,126
Real Estate Construction and Development Loans	4,563		4,608
Agricultural Loans	—		—
Consumer Loans	965		965
Overdraft Protection Lines	—		—
Overdrafts	—		—
Total Installment	965		965
Total Loans	$	7,176	$	7,264

Impaired Loans

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

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

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

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

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

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

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

- The observable market price method of measuring the impairment of a loan is only used by the Company when the sale of loans or a loan is in process.

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

Loans other than certain homogeneous loan portfolios are reviewed on a quarterly basis for impairment. Impaired loans are written down to estimated realizable values by the establishment of specific reserves for loan utilizing the discounted cash flow method, or charge-offs for collateral-based impaired loans, or those using observable market pricing.

The following is a summary of impaired loans at March 31, 2017 (in 000's).

March 31, 2017	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance (1)		Recorded Investment With Allowance (1)		Total Recorded Investment		Related Allowance		Average Recorded Investment (2)		Interest Recognized (2)
Commercial and Business Loans	$	4,324	$	738	$	3,604	$	4,342	$	767	$	4,497	$	63
Government Program Loans	345		345		—		345		—		351		1
Total Commercial and Industrial	4,669		1,083		3,604		4,687		767		4,848		64
Commercial Real Estate Loans	1,091		—		1,091		1,091		404		1,273		22
Residential Mortgages	2,448		520		1,937		2,457		148		2,466		34
Home Improvement and Home Equity Loans	—		—		—		—		—		—		—
Total Real Estate Mortgage	3,539		520		3,028		3,548		552		3,739		56
Real Estate Construction and Development Loans	6,960		6,975		—		6,975		—		6,624		90
Agricultural Loans	1,550		704		860		1,564		533		782		13
Consumer Loans	965		965		—		965		—		965		—
Overdraft Protection Lines	—		—		—		—		—		—		—
Overdrafts	—		—		—		—		—		—		—
Total Installment	965		965		—		965		—		965		—
Total Impaired Loans	$	17,683	$	10,247	$	7,492	$	17,739	$	1,852	$	16,958	$	223

(1) The recorded investment in loans includes accrued interest receivable of $56,000.

(2) Information is based on the three month period ended March 31, 2017.    

The following is a summary of impaired loans at December 31, 2016 (in 000's).

December 31, 2016	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance (1)		Recorded Investment With Allowance (1)		Total Recorded Investment		Related Allowance		Average Recorded Investment (2)		Interest Recognized (2)
Commercial and Business Loans	$	4,635	$	495	$	4,158	$	4,653	$	757	$	5,050	$	302
Government Program Loans	356		356		—		356		—		372		20
Total Commercial and Industrial	4,991		851		4,158		5,009		757		5,422		322
Commercial Real Estate Loans	1,454		—		1,456		1,456		450		1,503		89
Residential Mortgages	2,467		526		1,949		2,475		153		2,874		138
Home Improvement and Home Equity Loans	—		—		—		—		—		—		—
Total Real Estate Mortgage	3,921		526		3,405		3,931		603		4,377		227
Real Estate Construction and Development Loans	6,267		6,274		—		6,274		—		8,794		361
Agricultural Loans	—		—		—		—		—		5		8
Consumer Loans	965		965		—		965		—		968		35
Overdraft Protection Lines	—		—		—		—		—		—		—
Overdrafts	—		—		—		—		—		—		—
Total Installment	965		965		—		965		—		968		35
Total Impaired Loans	$	16,144	$	8,616	$	7,563	$	16,179	$	1,360	$	19,566	$	953

(1) The recorded investment in loans includes accrued interest receivable of $35,000.

(2) Information is based on the twelve month period ended December 31, 2016.

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

The average recorded investment in impaired loans for the three months endedMarch 31, 2017 and 2016 was $16,958,000 and $23,483,000, respectively. Interest income recognized on impaired loans for the three months endedMarch 31, 2017 and 2016 was approximately $223,000 and $363,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $79,000 and $149,000 for the three months endedMarch 31, 2017 and 2016, respectively.

Troubled Debt Restructurings

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

A TDR is a type of restructuring in which the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower and the Bank) to the borrower that it would not otherwise consider. Although the restructuring may take different forms, the Company's objective is to maximize recovery of its investment by granting relief to the borrower.

A TDR may include, but is not limited to, one or more of the following:

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

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

◦ The reduction (absolute or contingent) of the stated interest rate.

◦ The extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.

◦ The reduction (absolute or contingent) of the face amount or maturity amount of debt as stated in the instrument or agreement.

◦ The reduction (absolute or contingent) of accrued interest.

For a restructured loan to return to accrual status there needs to be, among other factors, at least 6 months successful payment history. In addition, the Company performs a financial analysis of the credit to determine whether the borrower has the ability to continue to meet payments over the remaining life of the loan. This includes, but is not limited to, a review of financial statements and cash flow analysis of the borrower. Only after determination that the borrower has the ability to perform under the terms of the loans, will the restructured credit be considered for accrual status. Although the Company does not have a policy which specifically addresses when a loan may be removed from TDR classification, as a matter of practice, loans classified as TDRs generally remain classified as such until the loan either reaches maturity or its outstanding balance is paid off.

The following tables illustrates TDR activity for the periods indicated:

	Three Months Ended March 31, 2017
($ in 000's)	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts which Defaulted During Period	Recorded Investment on Defaulted TDRs
Troubled Debt Restructurings
Commercial and Business Loans	1	$	69	$	69	—	$	—
Government Program Loans	—	—		—		—	—
Commercial Real Estate Term Loans	—	—		—		—	—
Single Family Residential Loans	—	—		—		—	—
Home Improvement and Home Equity Loans	—	—		—		—	—
Real Estate Construction and Development Loans	1	790		790		—	—
Agricultural Loans	1	850		850		—	—
Consumer Loans	—	—		—		—	—
Overdraft Protection Lines	—	—		—		—	—
Total Loans	3	$	1,709	$	1,709	—	$	—

	Three Months Ended   March 31, 2016
($ in 000's)	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts which Defaulted During Period	Recorded Investment on Defaulted TDRs
Troubled Debt Restructurings
Commercial and Business Loans	3	$	626	$	523	—	$	—
Government Program Loans	1	100		100		—	—
Commercial Real Estate Term Loans	—	—		—		—	—
Single Family Residential Loans	—	—		—		—	—
Home Improvement and Home Equity Loans	—	—		—		—	—
Real Estate Construction and Development Loans	—	—		—		—	—
Agricultural Loans	—	—		—		—	—
Consumer Loans	—	—		—		—	—
Overdraft Protection Lines	—	—		—		—	—
Total Loans	4	$	726	$	623	—	$	—

The Company makes various types of concessions when structuring TDRs including rate reductions, payment extensions, and forbearance. At March 31, 2017, the Company had 31 restructured loans totaling $13,429,000 as compared to 28 restructured loans totaling $12,410,000 at December 31, 2016.

The following tables summarize TDR activity by loan category for the three months endedMarch 31, 2017 and March 31, 2016 (in 000's).

Three Months Ended March 31, 2017	Commercial and Industrial			Commercial Real Estate			Residential Mortgages			Home Improvement and Home Equity		Real Estate Construction Development			Agricultural		Installment & Other		Total
Beginning balance	$	1,356		$	1,454		$	2,368		$	—	$	6,267		$	—	$	965	$	12,410
Defaults	—			—			—			—		—			—		—		—
Additions	69			—			—			—		790			850		—		1,709
Principal reductions	(213		)	(363		)	(17		)	—		(97		)	—		—		(690		)
Ending balance	$	1,212		$	1,091		$	2,351		$	—	$	6,960		$	850	$	965	$	13,429
Allowance for loan loss	$	54		$	321		$	148		$	—	$	—		$	180	$	—	$	703

Three Months Ended March 31, 2016	Commercial and Industrial		Commercial Real Estate		Residential Mortgages			Home Improvement and Home Equity		Real Estate Construction Development			Agricultural			Installment & Other		Total
Beginning balance	$	898	$	1,243	$	3,533		$	—	$	12,168		$	16		$	650	$	18,508
Defaults	—		—		—			—		—			—			—		—
Additions	623		—		—			—		—			—			—		623
Principal additions (reductions)	214		314		(853		)	—		(536		)	(6		)	327		(540		)
Ending balance	$	1,735	$	1,557	$	2,680		$	—	$	11,632		$	10		$	977	$	18,591
Allowance for loan loss	$	700	$	485	$	114		$	—	$	—		$	—		$	596	$	1,895

Credit Quality Indicators

As part of its credit monitoring program, the Company utilizes a risk rating system which quantifies the risk the Company estimates it has assumed during the life of a loan. The system rates the strength of the borrower and the facility or transaction, and is designed to provide a program for risk management and early detection of problems.

For each new credit approval, credit extension, renewal, or modification of existing credit facilities, the Company assigns risk ratings utilizing the rating scale identified in this policy. In addition, on an on-going basis, loans and credit facilities are reviewed for internal and external influences impacting the credit facility that would warrant a change in the risk rating. Each loan credit facility is to be given a risk rating that takes into account factors that materially affect credit quality.

When assigning risk ratings, the Company evaluates two risk rating approaches, a facility rating and a borrower rating as follows:

Facility Rating:

The facility rating is determined by the analysis of positive and negative factors that may indicate that the quality of a particular loan or credit arrangement requires that it be rated differently from the risk rating assigned to the borrower. The Company assesses the risk impact of these factors:

Collateral - The rating may be affected by the type and quality of the collateral, the degree of coverage, the economic life of the collateral, liquidation value and the Company's ability to dispose of the collateral.

Guarantees - The value of third party support arrangements varies widely. Unconditional guaranties from persons with demonstrable ability to perform are more substantial than that of closely related persons to the borrower who offer only modest support.

Unusual Terms - Credit may be extended on terms that subject the Company to a higher level of risk than indicated in the rating of the borrower.

Borrower Rating:

The borrower rating is a measure of loss possibility based on the historical, current and anticipated financial characteristics of the borrower in the current risk environment. To determine the rating, the Company considers at least the following factors:

-    Quality of management

-    Liquidity

-    Leverage/capitalization

-    Profit margins/earnings trend

-    Adequacy of financial records

-    Alternative funding sources

-    Geographic risk

-    Industry risk

-    Cash flow risk

-    Accounting practices

-    Asset protection

-    Extraordinary risks

The Company assigns risk ratings to loans other than consumer loans and other homogeneous loan pools based on the following scale. The risk ratings are used when determining borrower ratings as well as facility ratings. When the borrower rating and the facility ratings differ, the lowest rating applied is:

- Grades 1 and 2 – These grades include loans which are given to high quality borrowers with high credit quality and sound financial strength. Key financial ratios are generally above industry averages and the borrower’s strong earnings history or net worth. These may be secured by deposit accounts or high-grade investment securities.

- Grade 3 – This grade includes loans to borrowers with solid credit quality with minimal risk. The borrower’s balance sheet and financial ratios are generally in line with industry averages, and the borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans assigned this risk rating must have characteristics, which place them well above the minimum underwriting requirements for those departments. Asset-based borrowers assigned this rating must exhibit extremely favorable leverage and cash flow characteristics, and consistently demonstrate a high level of unused borrowing capacity.

- Grades 4 and 5 – These include “pass” grade loans to borrowers of acceptable credit quality and risk. The borrower’s balance sheet and financial ratios may be below industry averages, but above the lowest industry quartile. Leverage is above and liquidity is below industry averages. Inadequacies evident in financial performance and/or management sufficiency are offset by readily available features of support, such as adequate collateral, or good guarantors having the liquid assets and/or cash flow capacity to repay the debt. The borrower may have recognized a loss over three or four years, however recent earnings trends, while perhaps somewhat cyclical, are improving and cash flows are adequate to cover debt service and fixed obligations. Real estate and asset-borrowers fully comply with all underwriting standards and are performing according to projections would be assigned this rating. These also include grade 5 loans which are “leveraged” or on management’s “watch list.” While still considered pass loans (loans given a grade 5), the borrower’s financial condition, cash flow or operations evidence more than average risk and short term weaknesses, these loans warrant a higher than average level of monitoring, supervision and attention from the Company, but do not reflect credit weakness trends that weaken or inadequately protect the Company’s credit position. Loans with a grade rating of 5 are not normally acceptable as new credits unless they are adequately secured or carry substantial endorser/guarantors.

- Grade 6 – This grade includes “special mention” loans which are loans that are currently protected but are potentially weak. This generally is an interim grade classification and should usually be upgraded to an Acceptable rating or downgraded to Substandard within a reasonable time period. Weaknesses in special mention loans may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. Special mention loans are often loans with weaknesses inherent from the loan origination, loan servicing, and perhaps some technical deficiencies. The main theme in special mention credits is the distinct probability that the classification will deteriorate to a more adverse class if the noted deficiencies are not addressed by the loan officer or loan management.

- Grade 7 – This grade includes “substandard” loans which are inadequately supported by the current sound net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that may impair the regular liquidation of the debt. Substandard loans exhibit a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Substandard loans also include impaired loans.

- Grade 8 – This grade includes “doubtful” loans which exhibit the same characteristics as the Substandard loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include a proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.

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

The Company did not carry any loans graded as loss at March 31, 2017 or December 31, 2016.

The following tables summarize the credit risk ratings for commercial, construction, and other non-consumer related loans for March 31, 2017 and December 31, 2016:

	Commercial and Industrial		Commercial Real Estate		Real Estate Construction and Development		Agricultural		Total
March 31, 2017
(in 000's)
Grades 1 and 2	$	315	$	—	$	—	$	—	$	315
Grade 3	3,506		5,718		—		—		9,224
Grades 4 and 5 – pass	35,879		191,922		100,831		50,902		379,534
Grade 6 – special mention	3,339		617		1,894		—		5,850
Grade 7 – substandard	4,252		1,091		18,672		1,550		25,565
Grade 8 – doubtful	—		—		—		—		—
Total	$	47,291	$	199,348	$	121,397	$	52,452	$	420,488

	Commercial and Industrial		Commercial Real Estate		Real Estate Construction and Development		Agricultural		Total
December 31, 2016
(in 000's)
Grades 1 and 2	$	340	$	—	$	—	$	75	$	415
Grade 3	4,823		5,767		—		—		10,590
Grades 4 and 5 – pass	34,921		192,699		110,992		56,843		395,455
Grade 6 – special mention	4,416		621		928		—		5,965
Grade 7 – substandard	4,505		1,126		18,767		—		24,398
Grade 8 – doubtful	—		—		—		—		—
Total	$	49,005	$	200,213	$	130,687	$	56,918	$	436,823

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.

The following tables summarize the credit risk ratings for consumer related loans and other homogeneous loans for March 31, 2017 and December 31, 2016:

	March 31, 2017								December 31, 2016
	Residential Mortgages		Home Improvement and Home Equity		Installment		Total		Residential Mortgages		Home Improvement and Home Equity		Installment		Total
(in 000's)
Not graded	$	61,531	$	560	$	43,425	$	105,516	$	69,955	$	573	$	41,855	$	112,383
Pass	15,951		25		2,137		18,113		15,669		26		2,120		17,815
Special Mention	—		—		—		—		—		—		—		—
Substandard	1,751		—		8		1,759		1,764		—		9		1,773
Doubtful	—		—		965		965		—		—		965		965
Total	$	79,233	$	585	$	46,535	$	126,353	$	87,388	$	599	$	44,949	$	132,936

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 eleven 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 there 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 nine loans and are generally the result of short sales.

Home improvement and home equity loans – Because of their junior lien position, these loans have an inherently higher risk level. Because residential real estate has been severely distressed in the recent past, the anticipated risk for this loan segment has increased.

Real estate construction and development loans –This segment of loans is considered to have a higher risk profile due to construction and market value issues in conjunction with normal credit risks.

Agricultural loans – This segment is considered to have risks associated with weather, insects, and marketing issues. In addition, concentrations in certain crops or certain agricultural areas can increase risk.

Installment loans (Includes consumer loans, overdrafts, and overdraft protection lines) – This segment is higher risk because many of the loans are unsecured.

The following summarizes the activity in the allowance for credit losses by loan category for the three months endedMarch 31, 2017 and 2016 (in 000's).

Three Months Ended	Commercial and Industrial			Real Estate Mortgage			Real Estate Construction Development			Agricultural		Installment & Other			Unallocated			Total
March 31, 2017
Beginning balance	$	1,843		$	1,430		$	3,378		$	666	$	888		$	697		$	8,902
Provision (recovery of provision) for credit losses	(65		)	(150		)	(282		)	410		(41		)	149			21
Charge-offs	(7		)	(1		)	—			—		—			(5		)	(13		)
Recoveries	10			6			—			21		1			—			38
Net recoveries	3			5			—			21		1			(5		)	25
Ending balance	$	1,781		$	1,285		$	3,096		$	1,097	$	848		$	841		$	8,948
Period-end amount allocated to:
Loans individually evaluated for impairment	767			552			—			533		—			—			1,852
Loans collectively evaluated for impairment	1,014			733			3,096			564		848			841			7,096
Ending balance	$	1,781		$	1,285		$	3,096		$	1,097	$	848		$	841		$	8,948

Three Months Ended	Commercial and Industrial			Real Estate Mortgage			Real Estate Construction Development			Agricultural			Installment & Other			Unallocated			Total
March 31, 2016
Beginning balance	$	1,652		$	1,449		$	4,629		$	655		$	1,258		$	70		$	9,713
Provision (recovery of provision) for credit losses	645			25			(1,387		)	(110		)	(23		)	828			(22		)
Charge-offs	(3		)	(22		)	—			—			—			(7		)	(32		)
Recoveries	19			7			31			—			2			—			59
Net charge-offs	16			(15		)	31			—			2			(7		)	27
Ending balance	$	2,313		$	1,459		$	3,273		$	545		$	1,237		$	891		$	9,718
Period-end amount allocated to:
Loans individually evaluated for impairment	1,193			599			—			—			596			—			2,388
Loans collectively evaluated for impairment	1,120			860			3,273			545			641			891			7,330
Ending balance	$	2,313		$	1,459		$	3,273		$	545		$	1,237		$	891		$	9,718

The following summarizes information with respect to the loan balances at March 31, 2017 and 2016.

	March 31, 2017						March 31, 2016
	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans		Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans
(in 000's)
Commercial and Business Loans	$	4,342	$	41,172	$	45,514	$	5,490	$	51,522	$	57,012
Government Program Loans	345		1,432		1,777		408		1,639		2,047
Total Commercial and Industrial	4,687		42,604		47,291		5,898		53,161		59,059
Commercial Real Estate Loans	1,091		198,257		199,348		1,559		176,763		178,322
Residential Mortgage Loans	2,457		76,776		79,233		3,181		75,707		78,888
Home Improvement and Home Equity Loans	—		585		585		—		778		778
Total Real Estate Mortgage	3,548		275,618		279,166		4,740		253,248		257,988
Real Estate Construction and Development Loans	6,975		114,422		121,397		11,661		117,621		129,282
Agricultural Loans	1,564		50,888		52,452		11		44,756		44,767
Installment Loans	965		45,570		46,535		977		22,605		23,582
Total Loans	$	17,739	$	529,102	$	546,841	$	23,287	$	491,391	$	514,678