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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021.
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM              TO             .
Commission file number: 000-32987
UNITED SECURITY BANCSHARES
(Exact name of registrant as specified in its charter)
CALIFORNIA       91-2112732
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
2126 Inyo Street, Fresno, California 
 93721
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code    (559) 248-4943
Securities registered pursuant to Section 12(b) of the Act:  Common Stock, no par value    UBFO        Nasdaq
                             (Title of Class)     (Trading Symbol) (Exchange)
Securities registered pursuant to Section 12(g) of the Act:   NONE
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐  No  ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act.
Yes ☐ No  ☒ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.
Yes ☒  No ☐ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K. ☐ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Small reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No  ☒ 
Aggregate market value of the Common Stock held by non-affiliates as of the last business day of the registrant's most recently completed second fiscal quarter - June 30, 2021: $111,143,275
Shares outstanding as of February 28, 2022:   17,028,239
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K will be found in the Company's definitive proxy statement for its 2022 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and such information is incorporated herein by this reference.
1
Table of Contents
UNITED SECURITY BANCSHARES
TABLE OF CONTENTS
 
PART I:  
 
Item 1A - Risk Factors
 
 
 
 
   
PART II:  
 
Item 6 - [Reserved]
 
 
 
 
 
   
PART III:  
 
 
 
 
 
   
PART IV:  
 
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Table of Contents

 PART 1

Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K (this “Report”) including, but not limited to, those described in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. All statements contained in this Report that are not clearly historical in nature are forward-looking, and the words “anticipate,” “assume,” “intend,” “believe,” “forecast,” “expect,” “estimate,” “plan,” “continue,” “will,” “should,” “look forward” and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on these statements as they involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from those expressed in them. Actual results could differ materially from those anticipated in such forward-looking statements as a result of risks and uncertainties. Factors that might cause such differences include, but are not limited to:

•the effects of the COVID-19 pandemic, including the effects of the steps being taken to address the pandemic and their impact on the Company’s markets, customers and employees;
•the impacts on the Company’s markets and customers of severe weather or natural disasters, such as wildfires, earthquakes, drought, or flood;
•the impacts of supply chain disruption and inflation on our customers, employees, and suppliers;
•asset/liability matching risks and liquidity risks;
•volatility and devaluation in the securities markets;
•our ability to compete effectively against other financial service providers in our markets;
•the effect of the current interest rate environment or impact of changes in interest rates or levels of market activity, especially on the fair value of our loan and investment portfolio;
•economic deterioration or a recession that may affect the ability of borrowers to make contractual payments on loans and may affect the value of real property or other property held as collateral for such loans, including the value of other real estate owned;
•changes in credit quality and the effect of credit quality on our allowance for loan and lease losses;
•our ability to attract and retain deposits and other sources of funding or liquidity;
•the need to retain capital for strategic or regulatory reasons;
•the impact of the Dodd-Frank Act on our business, business strategies and cost of operations;
•compression of the net interest margin due to changes in the interest rate environment, forward yield curves, loan products offered, spreads on newly originated loans and leases and/or asset mix;
•reduced demand for our services due to strategic or regulatory reasons;
•our ability to successfully execute on initiatives relating to enhancements of our technology infrastructure, including client-facing systems and applications;
•information security breaches;
•legislative or regulatory requirements or changes, including an increase to capital requirements, change in tax policy. and increased political and regulatory uncertainty;
•the impact on our reputation and business from our interactions with business partners, counterparties, service providers and other third parties;
•higher than anticipated increases in operating expenses;
•inability for the Bank to pay dividends to the Holding Company;
•a deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge;
•the effectiveness of our risk management framework and quantitative models;
•the costs and effects of legal, compliance, and regulatory actions, changes and developments, including the impact of adverse judgments or settlements in litigation, the initiation and resolution of regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews;
•the impact of the changes in tax laws or regulations on our business and business strategies, or if other changes are made to tax laws or regulations affecting our business, including the disallowance of tax benefits by tax authorities and/or changes in tax filing jurisdictions or entity classifications; and
•our success at managing risks involved in the foregoing items and all other risk factors described in our audited consolidated financial statements, and other risk factors described in this Report and other documents filed or furnished by the Company with the SEC.

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Therefore, the information set forth therein should be carefully considered when evaluating the business prospects of the Company.

Item 1 - Business

General

United Security Bancshares is a California corporation incorporated in March 2001 and is registered with the Board of Governors of the Federal Reserve System (the “FRB”) as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The stock of United Security Bancshares is listed on Nasdaq under the symbol “UBFO.”
United Security Bank was chartered under the laws of the State of California in 1987 as a commercial bank. On June 12, 2001, United Security Bank reorganized into the bank holding company form of ownership and thereby became the wholly-owned subsidiary of United Security Bancshares and each share of United Security Bank stock was exchanged for a share of United Security Bancshares stock on a one-for-one basis. The principal business of United Security Bancshares is to serve as the holding company for United Security Bank.

References to the “Bank” refer to United Security Bank together with its wholly-owned subsidiary, York Monterey Properties. References to “we,” “us,” or the “Company” refer to United Security Bancshares together with its subsidiaries on a consolidated basis. References to the “Holding Company,” refer to United Security Bancshares, the parent company, on a stand-alone basis.

United Security Bank

The Bank is a California state-chartered bank headquartered in Fresno, California. At December 31, 2021, the Bank operates three branches (including its main office), one construction lending office, and one commercial lending office in Fresno, California and one branch each in Oakhurst, Caruthers, San Joaquin, Firebaugh, Coalinga, Bakersfield, Taft, Campbell, and Mendota California. The Bank has ATMs at all branch locations, off-site ATMs at nine different non-branch locations, and Interactive Teller Machines ("ITMs") at seven branch locations . In addition, the Holding Company and the Bank have administrative headquarters located at 2126 Inyo Street, Fresno, California, 93721.

York Monterey Properties, Inc.

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, foreclosures in Monterey County. These properties exceeded the 10-year regulatory 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. In December 2021 $805,000 in additional funding was transferred to the subsidiary to fund estimated expenses over a five-year period. As of December 31, 2021, these properties are included within the consolidated balance sheets as part of “other real estate owned.”

USB Capital Trust II

During July 2007, the Holding Company formed USB Capital Trust II as a wholly-owned special purpose entity for the purpose of issuing Trust Preferred Securities. USB Capital Trust II is a Variable Interest Entity (VIE) and a deconsolidated entity pursuant to current accounting standards related to variable interest entities. On July 23, 2007, USB Capital Trust II issued $15 million in Trust Preferred Securities. These securities have a thirty-year maturity and bear a floating rate of interest (repricing quarterly) of 1.29% over the three-month LIBOR rate. Interest is payable quarterly. Concurrent with the issuance of the Trust Preferred Securities, USB Capital Trust II used the proceeds of the Trust Preferred Securities offering to purchase a like amount of junior subordinated debentures issued by the Holding Company. The Holding Company pays interest on the junior subordinated debentures to USB Capital Trust II, which represents the sole source of dividend distributions to the holders of the Trust Preferred Securities. During 2015, $3.0 million of the $15.0 million principal balance of the subordinated debentures related to the Trust Preferred Securities was purchased by the Bank and subsequently purchased by the Company from the Bank. The Company redeemed the $3.0 million in par value of the subordinated debentures, resulting in a remaining contractual principal balance of $12.0 million since year-end 2015. The Company may redeem the junior subordinated debentures at any time at par.

The following discussion of services should be read in conjunction with "Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

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Bank Services

The Bank offers a full range of commercial banking services primarily to the business and professional community and individuals located in Fresno, Madera, Kern, and Santa Clara Counties, including a variety of deposit instruments including 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 deposits are comprised of accounts from individuals and from small- and medium-sized business-related sources. Time deposits represent 5.7% and 6.5% of total deposits at December 31, 2021 and 2020, respectively.

The Bank also offers a full complement of lending activities, including real estate mortgage (64.2% of total loans at December 31, 2021), commercial and industrial (5.2% of total loans at December 31, 2021), real estate construction (17.7% of total loans at December 31, 2021), agricultural (6.9% of total loans at December 31, 2021), and installment loans (5.9% of total loans at December 31, 2021). Approximately 81.9% of the Bank's loans are secured by real estate at December 31, 2021. A loan may be secured (in whole or in part) by real estate even though the purpose of the loan is not to facilitate the purchase or development of real estate. At December 31, 2021, the Bank had total loans (net of unearned fees) outstanding of $871.5 million, which represented approximately 73.4% of total deposits and approximately 65.5% of total assets.
 
Real estate mortgage loans are secured by deeds of trust primarily on commercial property. The repayment of real estate mortgage loans generally is from the cash flow of the borrower. Commercial and industrial loans are diversified by industry. Loans may be originated in the Bank's market area, purchased, or participated with other financial institutions outside the market area. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases or other collateral. The remainder are unsecured. However, extensions of credit are predicated on the financial capacity of the borrower to repay. Repayment of commercial loans is generally from the cash flow of the borrower. Real estate construction loans consist of loans to residential and commercial contractors, which are secured by single-family residential or multi-family properties. All real estate loans have established equity requirements. The repayment of real estate construction loans is generally from long-term mortgages with other lending institutions. Agricultural loans are generally secured by land, equipment, inventory and receivables. Repayment of agricultural loans is generally from the expected cash flow of the borrower.

While the Bank has a high concentration of commercial real estate loans, it is not in the business of making residential mortgage loans to individuals. Residential mortgage loans totaled $226.9 million, or 26.1% of the portfolio at December 31, 2021. The residential mortgage loan portfolio is primarily comprised of purchased fixed rate 30-year residential mortgage pools. The Bank does not originate, or have in the loan portfolio, any subprime, Alt-A, or option adjustable rate loans. The Bank does originate interest-only loans which are generally revolving lines of credit to commercial and agricultural businesses or for real estate development where the borrowers business may be seasonal or cash flows may be restricted until the completion of the project. In addition, the Bank has restructured certain loans to allow the borrower to continue to perform on the loan under a troubled debt restructuring plan.

Loan participations are purchased from and sold to other financial institutions. The underwriting standards for loan participations or purchases are the same as non-participated loans, and are subject to the same limitations, collateral requirements, and borrower requirements. As of December 31, 2021, purchased participation loans totaled $9.6 million. There were $9.7 million purchased loan participations held at December 31, 2020. Loan participations sold comprised 1.7% and 2.0% of the total loan portfolio at December 31, 2021 and 2020, respectively.

In the normal course of business, we make various loan commitments, including granting customers collateralized and uncollateralized lines of credit, and incur certain contingent liabilities. Due to the nature of the business of the Bank's customers, there is no absolute predictability to the utilization of unused loan commitments, including collateralized and uncollateralized lines of credit, and, therefore, it is not possible to forecast the extent to which these commitments will be exercised within the current year. While no assurance can be provided, it is not believed that any such utilization will constitute a material liquidity demand.

In addition to the loan and deposit services discussed above, 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 online banking, mobile banking, safe deposit boxes, wire transfers, ITM services, ATM services, payroll direct deposit, cashier's checks, and cash management services. We do not operate a trust department; however, we make arrangements with correspondent banks to offer trust services to customers upon request.
 
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Competition and Market Share

The banking business in California as well as the Bank's market area is highly competitive with respect to both loans and deposits. The Bank competes for loans and deposits with other commercial banks, savings and loan associations, money market funds, credit unions, and other financial institutions, including a number that are substantially larger than us. The bank competes for loans and deposits by offering competitive interest rates and by seeking to provide a higher level of personalized service than is generally offered by larger competitors. Regulatory restrictions on interstate bank branching and acquisitions and on the provision of certain financial services, such as securities underwriting and insurance, have been reduced or eliminated. The availability of online and mobile banking services continues to expand. Changes in laws and regulations governing the financial services industry cannot be predicted; however, past legislation has served to intensify the competitive environment. Many of the major commercial banks operating in the Bank's market areas offer certain services, such as trust and wealth management services, which the Bank does not offer directly. In addition, banks with larger capitalization have larger lending limits and are thereby able to serve larger customers.

The primary market area at December 31, 2021 was located in Fresno, Madera, Santa Clara, and Kern Counties, California, in which 58 FDIC-insured financial institutions compete for business. The following table sets forth information regarding deposit market share and ranking by county as of June 30, 2021, which is the most current information available.
 RankShare
Fresno County9th4.35%
Madera County7th6.76%
Kern County15th0.74%
Santa Clara County43rd0.01%
   Total of Fresno, Madera, Kern, and Santa Clara Counties18th0.37%

Supervision and Regulation

Banking is a complex, highly regulated industry. Federal and state laws and the regulations of the federal and state bank regulatory agencies govern most aspects of a bank’s business, including capital adequacy ratios, reserves against deposits, limitations on the nature and amount of loans which may be made, the location of branch offices, borrowings, and dividends. The primary goals of the regulatory scheme are to maintain a safe and sound banking system, protect depositors and the FDIC’s insurance fund, and facilitate the conduct of sound monetary policy. In furtherance of these goals, Congress and the states have created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and the financial services industry. Consequently, the growth and earnings performance of the Company and the Bank can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes, regulations and the policies of various governmental regulatory authorities, including:

•the Federal Deposit Insurance Corporation, or FDIC;
•the California Department of Financial Protection and Innovation, or DFPI (formerly known as the Department of Business Oversight); and
•the Federal Reserve Board, or FRB.

Changes in applicable law or regulations, and in their application by the regulatory agencies, whether as the result of changes in the political climate or otherwise, cannot be predicted and may have a material effect on the business, operations, and financial results of the Company or the Bank.

Described below are elements of selected laws and regulations applicable to the Company and/or the Bank. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described.

Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”),which was enacted in 2010, significantly revised and expanded the rulemaking, supervisory and enforcement authority of the federal bank regulatory agencies. The numerous rules and regulations being promulgated pursuant to the Dodd-Frank Act are impacting banks’ operations and compliance costs. Provisions of the Dodd-Frank Act include: revisions in the deposit insurance assessment base for FDIC insurance and the permanent increase in deposit insurance coverage to $250,000; reduced interchange fees on debit
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card transactions; interest payments on business checking accounts; the removal of barriers to interstate branching; and required disclosure and shareholder advisory votes on executive compensation. Other provisions of the Dodd-Frank Act include:

•Capital Requirements. The Dodd-Frank Act: increased the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets; created a new category and required 4.50% of risk-weighted assets ratio for “common equity Tier 1” as a subset of Tier 1 capital limited to common equity; established a minimum non-risk-based leverage ratio set at 4.00%, eliminating a 3.00% exception for higher rated banks; changed the permitted composition of Tier 1 capital to exclude trust preferred securities (unless issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets), mortgage servicing rights and certain deferred tax assets and included unrealized gains and losses on available for sale debt and equity securities; added an additional capital conservation buffer of 2.5% of risk-weighted assets over each of the required capital ratios, which must be met to avoid limitations on the ability to pay dividends, repurchase shares or pay discretionary bonuses; changed the risk weights of certain assets for purposes of calculating the risk-based capital ratios for high volatility commercial real estate acquisition, development and construction loans, certain past due non-residential mortgage loans and certain mortgage-backed and other securities exposures.
•Deposit Insurance. The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds.
•Corporate Governance. The Dodd-Frank Act directed the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion.
•Interstate Branching. The Dodd-Frank Act authorized national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted to branch.
•Consumer Financial Protection Bureau. The Dodd-Frank Act created an independent federal agency called the Consumer Financial Protection Bureau (the "CFPB"), which has been granted broad rulemaking, supervisory, and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, the Consumer Financial Privacy provisions of the GLBA, and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but are still examined and supervised by their federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorized the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower's ability to repay. In addition, the Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a "qualified mortgage" as defined by the CFPB. The Dodd- Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.
•Final Volcker Rule. In December 2013, the federal bank regulatory agencies adopted final rules that implemented a part of the Dodd-Frank Act commonly referred to as the "Volcker Rule." The final rules were amended in August 2019. Under these rules and subject to certain exceptions, banking entities, including the Bank, are restricted from engaging in activities that are considered proprietary trading and from sponsoring or investing in certain entities, including hedge or private equity funds that are considered "covered funds." Banks that do not have significant trading activities, such as the Bank, will be assumed to operate under a presumption of compliance.

The Dodd-Frank Act also resulted in the creation of a new systemic risk oversight body, the Financial Stability Oversight Council (the “FSOC”) to oversee and coordinate the efforts of the primary U.S financial regulatory agencies in establishing regulations to address financial stability matters.

The Dodd-Frank Act was enacted under the administration of former President Barack Obama and many of the rules and regulations implementing the provisions of the Dodd-Frank Act were enacted during that administration. The subsequent administration under President Donald Trump sought to roll-back key pieces of the Dodd-Frank Act in an effort to loosen regulatory restrictions on financial institutions including, but not limited to, easing the “Volker Rule,”
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stress tests, and other constraints on financial institutions. The Biden administration has expressed a commitment to reemphasize restrictions on financial institutions which were loosened during the previous administration. The Company cannot predict which provisions of the Dodd-Frank Act will be repealed, put in to effect, delayed, or enforced and, therefore, cannot predict the effect, if any, that the Dodd-Frank Act and regulations promulgated thereunder or actions initiated by the Biden administration will have on its future results of operations and financial condition.

The Holding Company

    General

The Holding Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and is registered with, and regulated and examined by, the Board of Governors of the Federal Reserve System, or FRB. The Holding Company is subject to regulation by the Securities and Exchange Commission ("SEC") and to the disclosure and regulatory requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition, as the Holding Company lists its common stock on Nasdaq, it is subject to the listing standards and rules of Nasdaq.

    Source of Strength

The Dodd-Frank Act codified existing FRB policy requiring the Holding Company to act as a source of financial strength to the Bank, and to commit resources to support the Bank in circumstances where it might not otherwise do so. However, because the Gramm-Leach-Bliley Act (“GLBA”) provides for functional regulation of financial holding company activities by various regulators, the GLBA prohibits the FRB from requiring payment by a holding company to a depository institution if the functional regulator of the depository institution objects to the payment. In those cases, the FRB could instead require the divestiture of the depository institution and impose operating restrictions pending the divestiture. As a result of the Dodd-Frank Act, non-bank subsidiaries of a holding company that engage in activities permissible for an insured depository institution must be examined and regulated in a manner that are at least as stringent as if the activities were conducted by the lead depository institution of the holding company.

    Bank Holding Company Liquidity

As a legal entity, separate and distinct from the Bank, the Holding Company must rely on its own resources to pay its operating expenses and dividends to its shareholders. In addition to raising capital on its own behalf or borrowing from external sources, the Holding Company may also obtain funds from dividends paid by, and fees charged for services provided to, the Bank. However, statutory and regulatory constraints on the Bank may restrict or totally preclude the payment of dividends by the Bank to the Holding Company.

    Transactions with Affiliates and Insiders

The Holding Company and any subsidiaries it may purchase or organize are deemed to be affiliates of the Bank within the meaning of Sections 23A and 23B of the Federal Reserve Act, and the FRB's Regulation W. Under Sections 23A and 23B and Regulation W, loans by the Bank to affiliates, investments by them in affiliates' stock, and taking affiliates' stock as collateral for loans to any borrower is limited to 10% of the Bank's capital, in the case of any one affiliate, and is limited to 20% of the Bank's capital, in the case of all affiliates. In addition, transactions between the Bank and any affiliates must be on terms and conditions that are consistent with safe and sound banking practices and substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving non-affiliates. In particular, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the Federal Reserve Act. These restrictions also prevent a bank holding company and a bank subsidiary’s other affiliates from borrowing from the bank subsidiary unless the loans are secured by marketable collateral of designated amounts.
The Holding Company and the Bank are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities.

The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or extensions of credit to a bank or bank holding company’s executive officers, directors and principal shareholders; any company controlled by any such executive officer, director or shareholder; or any political or campaign committee controlled by such executive officer, director or principal shareholder. Additionally, such loans or extensions of credit must comply with loan-to-one-borrower limits; require prior full board approval when aggregate extensions of credit to the person exceed specified amounts; must be made on
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substantially the same and follow credit-underwriting procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders; must not involve more than the normal risk of repayment or present other unfavorable features; and must not exceed the bank’s unimpaired capital and unimpaired surplus in the aggregate.

    Limitations on Business and Investment Activities

Under the BHCA, a bank holding company must obtain the FRB’s approval before: (i) directly or indirectly acquiring more than 5% ownership or control of any voting shares of another bank or bank holding company; (ii) acquiring all or substantially all of the assets of another bank; (iii) or merging or consolidating with another bank holding company.

The FRB may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the FRB must give effect to applicable state laws limiting the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institutions in the state in which the target bank is located, provided that those limits do not discriminate against out-of-state depository institutions or their holding companies, and state laws which require that the target bank have been in existence for a minimum period of time, not to exceed five years, before being acquired by an out-of-state bank holding company.

In addition to owning or managing banks, bank holding companies may own subsidiaries engaged in certain businesses that the FRB has determined to be “so closely related to banking as to be a proper incident thereto.” The Holding Company, therefore, is permitted to engage in a variety of banking-related businesses.

Additionally, qualifying bank holding companies making an appropriate election to the FRB may engage in a full range of financial activities, including insurance, securities, and merchant banking. The Holding Company has not elected to qualify for these financial services.

Federal law prohibits a bank holding company and any subsidiary banks from engaging in certain tie-in arrangements in connection with the extension of credit. Thus, for example, the Bank may not extend credit, lease or sell property, or furnish any services, or fix or vary the consideration for any of the foregoing on the condition that:

•the customer must obtain or provide some additional credit, property, or services from or to the Bank other than a loan, discount, deposit or trust services;
•the customer must obtain or provide some additional credit, property, or service from or to the Holding Company or any subsidiaries; or
•the customer must not obtain some other credit, property, or services from competitors, except reasonable requirements to assure soundness of credit extended.

    Capital Adequacy

Bank holding companies must maintain minimum levels of capital under the FRB’s risk-based capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.

The FRB’s risk-based capital adequacy guidelines, discussed in more detail below in the section entitled “The Bank - Capital Standards,” assign various risk percentages or weights to different categories of assets and capital is measured as a percentage of risk-weighted assets. Under the terms of the guidelines, bank holding companies are expected to meet capital adequacy guidelines based both on total risk-weighted assets and on total assets, without regard to risk weights.

The risk-based guidelines are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual organizations. For example, the FRB’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Moreover, any banking organization experiencing or anticipating significant growth or expansion into new activities, particularly under the expanded powers under the GLBA, would be expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.

    Limitations on Dividend Payments

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As applicable to the Holding Company, California Corporations Code Section 500 provides that neither the Holding Company nor any of its subsidiaries shall make a distribution to the Holding Company’s shareholders unless the board of directors has determined in good faith that either:

•The amount of retained earnings of the Holding Company immediately prior to the distribution equals or exceeds the sum of (A) the amount of the proposed distribution plus (B) the preferential dividends arrears amount; or

•Immediately after the distribution, the value of the Holding Company's assets would equal or exceed the sum of its total liabilities plus the preferential rights amount.

Additionally, the FRB’s policy regarding dividends provides that a bank holding company should not pay cash dividends exceeding its net income for the past year or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The FRB also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.

    Securities Registration and Listing

The Company's common stock is registered with the SEC under the Exchange Act and, as a result, is subject to the information, proxy solicitation, insider trading, corporate governance, and other disclosure requirements and restrictions of the Exchange Act, as well as the Securities Act, both administered by the SEC. The Company is required to file annual, quarterly and other current reports with the SEC. The SEC maintains an Internet site, http://www.sec.gov, where SEC filings may be accessed. The SEC filings are also available on the Bank's website at http://investors.unitedsecuritybank.com/Docs.

The Company's common stock is listed on Nasdaq and trades under the symbol “UBFO.” The Company is subject to Nasdaq standards for listed companies. Nasdaq has adopted corporate governance rules, which are intended to allow shareholders and investors to more easily and efficiently monitor the performance of companies and their directors.

The Bank

General

As a California state-chartered bank and a member of the FRB, the Bank is subject to regulation, supervision and regular examination by the FRB and the DFPI. The Bank is subject to California laws insofar as they are not preempted by federal banking law. Deposits of the Bank are insured by the FDIC up to the applicable limits in an amount up to $250,000 per customer and, as such, the Bank is subject to the applicable provisions of the Federal Deposit Insurance Act and the regulations of the FDIC. As a consequence of the extensive regulation of commercial banking activities in California and the United States, the Bank’s business is particularly susceptible to changes in California and federal legislation and regulation, which may have the effect of increasing the cost of doing business, limiting permissible activities or increasing competition.

Capital Standards

Federal regulations require FDIC-insured depository institutions, including the Bank, to maintain adequate capital based on the size, asset composition, and complexity of the institution. Generally, FDIC-insured depository institutions must maintain several minimum capital ratios: a common equity tier 1 capital to risk-based assets ratio; a tier 1 capital to risk-based assets ratio; a total capital to risk-based assets; and a tier 1 capital to total assets leverage ratio. These ratios involve complex calculations of various categories of capital and various categories of assets. 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 institution's financial condition and results of operations.

Effective January 1, 2020, pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act, enacted in May 2018, the Federal regulatory agencies adopted simplified capital requirements for certain qualifying “community” banking organizations. Depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9 percent, are eligible to opt into the community bank leverage ratio framework. Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 9 percent are considered to have satisfied the applicable risk-based and leverage capital requirements in the agencies’ capital rules and are considered to have met the “well capitalized” ratio requirements. Institutions that cease meeting
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the qualifying criteria have two calendar quarters within which to re-qualify, so long as the institution maintains a leverage ratio of greater than 8 percent during the grace period.

The Company and the Bank met the criteria and adopted the community bank leverage ratio framework in the third quarter of 2020.

As of December 31, 2021, the Company and the Bank were "well capitalized" under the applicable standards. The actual capitalization ratios for the Bank and the Company as of December 31, 2021 are set forth under FN 25 - Regulatory Matters.

Prompt Corrective Action

The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. Pursuant to FDICIA, the FRB promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios:

Under the regulations, a bank shall be deemed to be:

•“well capitalized” if it has a total risk-based capital ratio of 10% or more, has a Tier 1 risk-based capital ratio of 8% or more, has a common equity Tier 1 capital ratio of 6.5% or more, has a Tier 1 leverage capital ratio of 5% or more, and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure;
•“adequately capitalized” if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 6% or more and a leverage capital ratio of 4% or more (3% under certain circumstances) and does not meet the definition of “well capitalized”;
•“undercapitalized” if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4%, or a leverage capital ratio that is less than 4% (3% under certain circumstances);
•“significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage capital ratio that is less than 3%; and
•“critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2%.

A bank’s category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

While these benchmarks have not changed, due to market turbulence, the regulators have strongly encouraged and, in many instances, required, banks and bank holding companies to achieve and maintain higher ratios as a matter of safety and soundness.

Banks are prohibited from paying dividends or management fees to controlling persons or entities if, after making the payment, the bank would be “undercapitalized,” that is, the bank fails to meet the required minimum level for any relevant capital measure. Asset growth and branching restrictions apply to “undercapitalized” banks. Banks classified as “undercapitalized” are required to submit acceptable capital plans guaranteed by its holding company, if any. Broad regulatory authority was granted with respect to “significantly undercapitalized” banks, including forced mergers, growth restrictions, ordering new elections for directors, forcing divestiture by its holding company, if any, requiring management changes, and prohibiting the payment of bonuses to senior management. Even more severe restrictions are applicable to “critically undercapitalized” banks. Restrictions for these banks include the appointment of a receiver or conservator. All of the federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action.

A bank, based upon its capital levels, that is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. Further, a bank that otherwise meets the capital levels to be categorized as “well capitalized,” will be deemed to be “adequately capitalized,” if the bank is subject to a written agreement requiring that the bank maintain specific capital levels. At each successive lower capital category, an insured bank is subject to more restrictions. The federal banking agencies, however, may not treat an institution as “critically undercapitalized” unless its capital ratios actually warrant such treatment.

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Banking organizations that meet the criteria and have adopted the community bank leverage ratio framework, such as the Company and the Bank, are deemed to be "well capitalized" for "prompt corrective action" purposes.

In addition to measures taken under the prompt corrective action provisions, commercial banking organizations, such as the Bank, may be subject to potential enforcement actions by the federal or state banking agencies for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease‑and‑desist order that can be judicially enforced, the termination of insurance for deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, and the issuance of removal and prohibition orders against institution‑affiliated parties.

Brokered Deposit Restrictions

Well-capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the rate paid on such deposits. Undercapitalized institutions are generally not permitted to accept, renew, or roll over brokered deposits. As of December 31, 2021, the Bank was deemed to be “well-capitalized” and, therefore, eligible to accept brokered deposits.

Limitations on Dividend Payments

California law restricts the amount available for cash dividends the Bank may pay to the Holding Company. Under California law, funds available for cash dividend payments by a bank are restricted to the lesser of: (1) retained earnings; or (2) the bank’s net income for its last three fiscal years (less any distributions to shareholders made during such period). Cash dividends may also be paid out of the greater of: (i) net income for a bank’s last preceding fiscal year; (ii) a bank’s retained earnings; or (iii) net income for a bank’s current fiscal year, upon the prior approval of the DFPI. If the DFPI finds that the stockholders’ equity of a bank is not adequate or that the payment of a dividend would be unsafe or unsound for the bank, the DFPI may order the bank not to pay any dividends.

Premiums for Deposit Insurance

The FDIC insures deposits up to $250,000 per qualified account. The FDIC utilizes a risk-based assessment system to set quarterly insurance premium assessments which categorizes banks into four risk categories based on capital levels and supervisory “CAMELS” ratings and names them Risk Categories I, II, III and IV. The CAMELS rating system is based upon an evaluation of the six critical elements of an institution’s operations: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to risk. This rating system is designed to take into account and reflect all significant financial and operational factors financial institution examiners assess in their evaluation of an institution’s performance.

The Federal Deposit Insurance Act required the FDIC to maintain a reserve ratio of the FDIC’s deposit insurance fund at not less than 1.35% of insured deposits and to adopt a restoration plan to achieve the statutory minimum within 8 years if the ratio falls below 1.35%. During 2020 the reserve ratio fell below 1.35% to 1.30% due to extraordinary growth in insured deposits and, accordingly, in September 2020, the FDIC adopted a restoration plan providing for FDIC monitoring deposit balance trends, potential losses, and other factors that affect the reserve ratio, while maintaining the current schedule of assessment rates for all insured institutions. Under the restoration plan, the FDIC is to provide updates at least semi-annually. In setting the assessments, the FDIC is required to offset the effect of the higher reserve ratio against insured depository institutions with total consolidated assets of less than $10 billion. Assessments are based on the average consolidated total assets less average tangible equity capital of a financial institution rather than on its insured deposits.

The FDIC is authorized to terminate a depository institution’s deposit insurance upon a finding by the FDIC that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency. The termination of deposit insurance would result in the forced closure of the Bank which would have a material adverse effect on the Company’s business, financial condition, and results of operations.

Safety and Soundness Standards

The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and
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addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fees and benefits. In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide nine standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating.

Federal Home Loan Bank System

The Bank is a member of the Federal Home Loan Bank of San Francisco (the “FHLB-SF”).  Among other benefits, each Federal Home Loan Bank (“FHLB”) serves as a reserve or central bank for its members within its assigned region.  Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system.  Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. The FHLB-SF utilizes a single class of stock with a par value of $100 per share, which may be issued, exchanged, redeemed and repurchased only at par value. As an FHLB member, the Bank is required to own FHLB –SF capital stock in an amount equal to the greater of:

•a membership stock requirement with an initial cap of $25 million (100% of “membership asset value” as defined), or
•an activity based stock requirement (based on percentage of outstanding advances).

The FHLB – SF capital stock is redeemable on five years' written notice, subject to certain conditions. At December 31, 2021 the Bank owned 28,941 shares of the FHLB-SF capital stock.

Federal Reserve Bank

The FRB requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts and non-personal time deposits.  At December 31, 2021, the Bank was in compliance with these requirements.

Consumer Regulation

The Company is subject to a number of federal and state consumer protection laws that extensively govern relationships with customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which we operate, and civil money penalties. Failure to comply with consumer protection regulations may result in the failure to obtain required bank regulatory approval for merger or acquisition transactions or other transactions where approval is not required.

The CFPB has broad rulemaking, supervisory, and enforcement powers under various federal consumer financial protection laws. The CFPB is also authorized to engage in consumer financial education, track consumer complaints, request data, and promote the availability of financial services to underserved consumers and communities. The CFPB has broad supervisory, examination, and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties. State regulation of financial products and potential enforcement actions could also adversely affect business, financial condition, or results of operations. For example, on November 29, 2021 the DFPI proposed rules under the California Consumer Financial Protection Law to allow the DFPI to require businesses that provide financial products such as debt settlement, student debt relief, education financing, and wage-based advances to register with the DFPI and provide records to facilitate the oversight of the registrants in their interaction with consumers in California. The DFPI's expanding its authority to have an increased emphasis on consumer protection that may be viewed as an effort to create a state-run equivalent of the CFPB.

USA PATRIOT Act
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The PATRIOT Act, designed to deny terrorists and others the ability to obtain access to the United States financial system, has significant implications for depository institutions, brokers, dealers, and other businesses involved in the transfer of money. The PATRIOT Act, as implemented by various federal regulatory agencies, requires the Company and the Bank to establish and implement policies and procedures with respect to, among other matters, anti‑money laundering, compliance, suspicious activity and currency transaction reporting and due diligence on customers and prospective customers. The PATRIOT Act and its underlying regulations permit information sharing for counter‑terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the FRB, the FDIC and other federal banking agencies to evaluate the effectiveness of an applicant in combating money laundering activities when considering a bank holding company acquisition and/or a bank merger.
 
The Bank regularly evaluates and continues to enhance the systems and procedures to continue to comply with the PATRIOT Act and other anti‑money laundering initiatives. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal, strategic, and reputational consequences for the institution and result in material fines and sanctions.

ANTI-MONEY LAUNDERING ACT OF 2020

The Anti-Money Laundering Act of 2020 (the “AML Act”) was enacted effective January 1, 2021 and presents the most comprehensive revisions and enhancements to anti-money laundering and counter terrorism laws since the Currency and Foreign Transactions Reporting Act of 1970 and the USA PATRIOT Act of 2001 (the “BSA”). The impact of the new legislation will not be fully known until required regulations are adopted and implemented, but the AML Act represents significant changes and reaffirms and broadens the government’s oversight and commitment to addressing the illicit activities and financing of terrorism.

Many of the provisions of the AML Act deal with the operations of the federal agencies primarily responsible for addressing terrorism financing and the safeguarding of the national security of the United States, such as the U.S. Treasury and its Financial Crimes Enforcement Network (“FinCEN”), including the requirement for FinCEN to engage anti-money laundering (“AML”) and terrorist financing investigations experts and the requirement to facilitate information sharing with other federal and state and even foreign law enforcement agencies. On June 30, 2021, FinCEN issued the first government-wide priorities for anti-money laundering and countering the financing of terrorism to encourage banks to incorporate the priorities into their risk-based BSA compliance programs. The priorities identified were: (i) corruption; (ii) cybercrime and cyber security; (iii) terrorist financing; (iv) fraud; (v) transnational crime organizations; (vi) drug trafficking; (vii) human trafficking; and (viii) proliferation financing through support networks.

The AML Act also expands the reach of federal AML laws by extending their applicability to a broader range of industries, such as entities involved in futures, precious metals, precious stones and jewels, antiquities, and cryptocurrency. On September 24, 2021, FinCEN issued proposed rules to include a person engaged in the trade of antiquities under the definition of “financial institution” subjecting such person to regulations prescribed by the Secretary of the Treasury.

The AML Act aims to balance the burdens imposed by reporting on financial institutions and the benefits derived by Federal law enforcement agencies. The AML Act requires a review of currency transaction and suspicious activity reports submitted by financial institutions to determine to what extent the reporting can be streamlined and made more useful. Included is the obligation to review the dollar thresholds for reporting currency transactions and to establish automated processes for filing simple, non-complex categories of reports. It calls for greater integration between financial institution systems and the electronic filing system to allow for automatic population of report fields and the submission of transaction data.

Other provisions of the AML Act enhance enforcement. One section provides protection for financial institutions keeping open a customer’s account or transaction at the request of a federal law enforcement agency or at the request of a state or local agency with the concurrence of FinCEN. Other sections increase civil penalties for financial institutions and persons violating the recordkeeping and reporting obligations. Persons found to have committed repeated “egregious violations” may be barred from serving on boards of directors of financial institutions and fined in an amount that is equal to the profit gained by such person by reason of such violation. If that person is a partner, director, officer or employee of a financial institution, that person may be ordered to repay any bonus paid to that person, irrespective of the amount of the bonus or how it was calculated.
New criminal penalties have been created for concealing from or misrepresenting to a financial institution any material facts concerning: (i) the ownership or control of assets involved in a monetary transaction involving a senior foreign political figure in amounts exceeding $1 million; or (ii) the source of funds in a monetary transaction involving an entity found to be a primary money laundering concern. Other enforcement enhancement provisions in the AML Act authorize the Treasury to pay whistleblower awards leading to fines or forfeitures of at least $50,000 up to the lower of $150,000 or 25% of the fine or forfeiture and allows for the payment to whistleblowers of up to 30% of the fine or forfeiture.

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One of the most significant portions of the AML Act is The Corporate Transparency Act (“CTA”), which will require the reporting of certain information regarding “beneficial owners” of “reporting companies” to a confidential database to be established by FinCEN. Reporting companies are defined as any corporation, limited liability company or other entity formed in the U.S. under the laws of a state or Indian Tribe or registered as a foreign entity to do business in the U.S., other than those specifically excluded, such as: (i) companies reporting or with a class of securities registered with the SEC under the Securities Act of 1934; (ii) banks, bank holding companies, and credit unions; (iii) money transmitters, registered broker‑dealers, registered investment advisors, and investment companies; (iv) public utilities and insurance companies; (v) 503(c)(3) entities; (vi) entities that employ more than 20 employees, have reported gross receipts or sales to the Internal Revenue Service in excess of $5.0 million in the prior year, and have an operating presence in the U.S.; and (vii) certain “inactive” entities.

A beneficial owner is any individual who directly, or indirectly exercises substantial control over an entity or owns or controls 25% or more of the ownership interest of an entity. The reporting company will be required to provide FinCEN with the legal name, date of birth, current resident or business address, and an acceptable identification number of the beneficial owner. In December 2021, FinCEN issued proposed rules to implement the beneficial ownership information reporting addressing who, when, and what will be required to be reported.
Under the CTA, the Treasury is to minimize the burden on reporting companies and ensure the information deposited in the database is maintained in the strictest confidence and made available for inspection or disclosure by FinCEN only for the purposes set forth in the AML Act and only to: (i) federal agencies engaged in national security, intelligence or law enforcement; (ii) state, local or Tribal law enforcement agencies, subject to authorization by a court of competent jurisdiction; (iii) financial institutions subject to customer due diligence requirements with the consent of the reporting company; (iv) requests by a federal or other appropriate regulatory agency; (v) certain Treasury officials for tax administration purposes; and (vi) authorized federal agencies on behalf of a properly recognized foreign authority. On January 25, 2022, FinCEN issued proposed regulations for a pilot program to permit financial institutions to share suspicious activity information with their foreign branches, subsidiaries and affiliates to combat illicit finance risks under the AML Act.

The foregoing is only a summary of selected provisions of the AML Act. Given that regulations implementing the new AML Act are being proposed but have not yet been adopted or implemented, the Company cannot determine at this time the effect, if any, the AML Act will have on the Company’s future results of operations or financial condition.

Office of Foreign Assets Control ("OFAC") Regulation

The United States has imposed economic sanctions that affect transactions with designated foreign countries, designated nationals, and others. These rules are based on their administration by OFAC. The OFAC‑administered sanctions targeting designated countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment‑related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal, strategic, and reputational consequences, and result in civil money penalties on the Company and the Bank.

Community Reinvestment Act

The Community Reinvestment Act (the “CRA”) generally requires the Bank to identify the communities it serves and to make loans and investments, offer products, make donations in, and provide services designed to meet the credit needs of these communities. The CRA also requires the Bank to maintain comprehensive records of its CRA activities to demonstrate how we are meeting the credit needs of the Bank's communities. These documents are subject to periodic examination by the FRB. During these examinations, the FRB rates such institutions’ compliance with CRA as “Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.” The CRA requires the FRB to take into account the record of a bank in meeting the credit needs of all of the communities served, including low‑ and moderate‑income neighborhoods, in determining such rating. Failure of an institution to receive at least a “Satisfactory” rating could inhibit such institution or its holding company from undertaking certain activities, including acquisitions. The Bank received a CRA rating of “Satisfactory” as of its most recent examination. In the case of a bank holding company, such as the Company, when applying to acquire a bank, savings association, or a bank holding company, the FRB will assess the CRA record of each depository institution of the applicant bank holding company in considering the application.

Customer Information Privacy and Cybersecurity
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The FRB and other bank regulatory agencies have adopted guidelines for safeguarding confidential, personal, and non‑public customer information. These guidelines require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement, and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazard to the security or integrity of such information, and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. We have adopted a customer information security program to comply with these requirements.

In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties.

Privacy

The GLBA and the California Financial Information Privacy Act require financial institutions to implement policies and procedures regarding the disclosure of non-public personal information about consumers to non‑affiliated third parties. In general, the statutes require disclosures to consumers on policies and procedures regarding the disclosure of such non-public personal information and, except as otherwise required by law, prohibit disclosing such information except as provided in the Bank’s policies and procedures. We have implemented privacy policies addressing these restrictions that are distributed regularly to all existing and new customers of the Bank.

Other Aspects of Banking Law

The Bank is subject to federal statutory and regulatory provisions covering, among other things, security procedures, management interlocks, funds availability and truth-in-savings. There are also a variety of federal statutes that regulate acquisitions of control and the formation of bank holding companies, and the activities beyond owning banks that are permissible.

Moreover, additional initiatives may be proposed or introduced before Congress, the California Legislature, and other government bodies in the future which, if enacted, may further alter the structure, regulation, and competitive relationship among financial institutions and may subject the bank holding companies and banks to increased supervision and disclosure, compliance costs and reporting requirements. In addition, the various bank regulatory agencies often adopt new rules and regulations and policies to implement and enforce existing legislation. Bank regulatory agencies have been very aggressive in responding to concerns and trends identified in examinations, and this has resulted in the increased issuance of enforcement actions to financial institutions requiring action to address credit quality, liquidity and risk management, capital adequacy, compliance with Bank Secrecy Act, as well as other safety and soundness concerns.

It cannot be predicted whether, or in what form, any such legislation or regulatory changes in policy may be enacted or the extent to which the Bank’s businesses would be affected thereby. In addition, the outcome of examinations, any litigation, or any investigations initiated by state or federal authorities may result in necessary changes in the Bank’s operations and increased compliance costs. 

Human Capital

The Company employed 119 full-time equivalent staff as of December 31, 2021. The employees are not represented by a collective bargaining unit, and the Company believes its relationship with its employees is good.

The Company’s ability to attract, retain, and develop employees is a key to its success. We provide competitive pay that is consistent with the employee's position and experience. Annual increases in compensation are based on merit, which is documented throughout internal systems and communicated at the time of review and upon promotion or transfer. Certain
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employees participate in the Company's performance-based incentive programs, which may include additional bonus and incentive compensation and equity-based awards. Certain benefits are subject to eligibility, vesting, and performance requirements. Employee performance is measured formally at least annually.

Our employees' health, wellness, and safety are a priority to the Company. Employees receive a comprehensive benefits package that includes paid time off, sick time, company contributions of 100% up to 4% of salary contributions to a qualified retirement plan, and other health and wellness benefits including participation in Company paid or subsidized medical, dental, term-life, accidental death and dismemberment (AD&D), long-term disability, and employee assistance programs.

The Company’s code of ethics prohibits discrimination or harassment. The Company requires all employees to agree to the code of ethics and participate in harassment prevention training annually.

Available Information

The Company files periodic reports and other reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission. These reports, as well as the Company’s Code of Ethics, are posted and are available at no cost on the Company’s website at http://www.unitedsecuritybank.com as soon as reasonably practical after the Company files such reports with the SEC. The Company’s periodic and other reports filed with the SEC are also available at the SEC’s website (http://www.sec.gov).
Item 1A - Risk Factors

Not required for smaller reporting companies.

Item 1B - Unresolved Staff Comments

The Company had no unresolved staff comments at December 31, 2021.
 
Item 2 - Properties

The Bank’s main bank branch is located at 2151 West Shaw Avenue, Fresno, California. The Company owns the building and leases the land under a sublease dated December 1, 1986, between Central Bank and USB. The current sublessor under the master ground lease is Bank of the West, which acquired the position through the purchase of Central Bank. The lessor under the ground lease (Master Lease) is Thomas F. Hinds. A lease extension was executed for an additional 5- year term starting January 1, 2021, as the most recently renewed lease agreement expired December 31, 2020. The Company holds additional options to extend the term for two (2) more periods of five (5) years under the same terms and conditions.

The Company leases the banking premises of approximately 6,450 square feet for its second of three Fresno branches at 7088 N. First St, Fresno, California, under a lease which commenced August 2005 and renewed July 2015 for a term of 10 years expiring July 2025. The facility provides space for the branch as well as the Real Estate Construction Department and the Indirect Consumer Lending Department.
 
The Company leases the Oakhurst bank branch located at the Old Mill Village Shopping Center, 40074 Highway 49, Oakhurst, California. The branch facility consists of approximately 5,000 square feet. The original lease agreement was signed April 1999 for 15 years with two 5-year options to extend the lease. In May 2019, the Company renegotiated terms and signed a new 5-year lease which is set to expire in April 2024.

The Company owns the Caruthers bank branch located at 13356 South Henderson, Caruthers, California, which consists of approximately 5,000 square feet of floor space.

The Company owns the San Joaquin bank branch facility located at 21574 Manning Avenue, San Joaquin, California. The Bank branch is approximately 2,500 square feet.

The Company owns the Firebaugh bank branch located at 1067 O Street, Firebaugh, California. The premises are comprised of approximately 4,666 square feet of office space situated on land totaling approximately one-third of an acre.

The Company owns the Coalinga bank branch located at 145 East Durian, Coalinga, California. The office building has a total of 6,184 square feet of interior floor space situated on approximately 0.45 acres of land.

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The Company leases the Convention Center bank branch located at 855 “M” Street, Suite 130, Fresno, California. Total space leased is approximately 4,520 square feet, and was occupied during March 2004. The Company signed a 5-year lease renewal in June 2019 which is set to expire in May 2024. The new lease provides two potential 5-year options to extend.

The Company owns the Taft bank branch office premises located at 523 Cascade Place, Taft, California. The branch facility consists of approximately 9,200 square feet of office space.
 
 The Company owns the Bakersfield bank branch facility located at 3404 Coffee Road, Bakersfield, California, which has approximately 6,130 square feet of office space located on 1.15 acres.

The Company leases the Campbell bank branch located at 1875 S. Bascom Ave., Suite 119, Campbell, California, which has approximately 1,470 square feet. The original lease commenced on January 1, 2011 and expired on December 31, 2020. In July 2021 terms were negotiated on a modified and fully renovated space and a new 5-year lease was signed which is set to expire in June 2026. From December 2020 to July 2021 the Company and lessor were operating under a month-to-month arrangement under the terms of the previous lease agreement.

The Company leases the new Mendota bank branch located at 643 Quince St., Ste B, Mendota, California, which has approximately 480 square feet. The lease commenced on October 1, 2020 and expires on September 30, 2030.

The Company owns its administrative headquarters at 2126 Inyo Street, Fresno, California and is occupied by the Company’s administrative staff. The facility consists of approximately 21,400 square feet. A portion of the premises has been subleased to a third-party under a lease term which expires in March 2025.

The Company also has nine remote ATM locations leased from unrelated parties.

Item 3 - Legal Proceedings

From time to time, the Company is party to claims and legal proceedings arising in the ordinary course of business. At this time, the management of the Company is not aware of any pending legal proceedings to which it is a party or of which any of its property is the subject, nor is the Company aware of any such proceedings known to be contemplated by governmental entities, which proceedings will have a material adverse effect on the financial condition or results of operations of the Company.
 
Item 4 - Mine Safety Disclosures

Not applicable
 
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PART II

Item 5 - Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Trading History

The common stock trades on The Nasdaq Global Select Market and is traded under the symbol UBFO. At December 31, 2021, there were approximately 549 record holders of common stock. This does not reflect the number of persons or entities who hold their stock in nominee or street name through various brokerage firms.

The following table sets forth the high and low closing sales prices by quarter for the common stock, for the years ended December 31, 2021 and 2020.

 Closing PricesVolume
QuarterHighLow 
4th Quarter 2021$8.21 $7.75 981,342 
3rd Quarter 2021$8.25 $7.77 1,754,001 
2nd Quarter 2021$8.56 $7.70 5,946,233 
1st Quarter 2021$8.85 $6.76 2,631,103 
4th Quarter 2020$7.75 $5.89 1,595,565 
3rd Quarter 2020$7.13 $5.74 1,679,943 
2nd Quarter 2020$7.68 $5.07 1,971,912 
1st Quarter 2020$10.58 $5.20 1,495,926 

Dividends

The Company's shareholders are entitled to dividends when and if declared by the Board of Directors out of funds legally available therefore. Dividends paid to shareholders are subject to restrictions set forth in the California General Corporation Law, which provides that a California corporation may make a distribution, including paying dividends on its capital stock, from retained earnings to the extent that the retained earnings exceed (a) the amount of the proposed distribution plus (b) the amount, if any, of dividends in arrears on shares with preferential dividend rights. Alternatively, a California corporation may make a distribution, if, immediately after the distribution, the value of its assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the rights of shareholders receiving the distribution. As a bank holding company without significant assets other than its equity position in the Bank, the ability to pay dividends to shareholders depends primarily upon dividends received from the Bank. Such dividends paid by the Bank to our Holding Company are subject to certain limitations. See “Management’s Discussion and Analysis of Financial and Results of Operations - Regulatory Matters.”

Cash dividends issued 2021 and 2020:
20212020
Date DeclaredDate PaidDividend AmountDate DeclaredDate PaidDividend Amount
March 23, 2021April 16, 2021$0.11March 24, 2020April 15, 2020$0.11
June 22, 2021July 16, 2021$0.11June 23, 2020July 15, 2020$0.11
September 28, 2021October 25, 2021$0.11September 22, 2020October 16, 2020$0.11
December 14, 2021January 18, 2022$0.11December 15, 2020January 19, 2021$0.11

The amount and payment of dividends to our shareholders are set by the Board of Directors with numerous factors being taken into consideration including but not limited to earnings, financial condition, and the need for capital for expanded growth and general economic conditions. No assurance can be given that cash or stock dividends will be paid in the future.



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Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth securities authorized for issuance under equity compensation plans as of December 31, 2021.
 
 
 
 
 
Plan Category		Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(column a)		Weighted-average
exercise price of
outstanding options,
warrants and rights		Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
Equity compensation plans approved by security holders94,601 (1)$7.87 515,494 
Equity compensation plans not approved by security holdersN/AN/AN/A
Total94,601 $7.87 515,494 
(1) Under the United Security Bancshares 2015 Equity Incentive Award Plan (the "2015 Plan"), we are authorized to issue restricted stock awards. Restricted stock awards are not included in the total in column (a). At December 31, 2021, there were 27,949 shares of restricted stock issued and outstanding.

A complete description of the above plans is included in Note 12 of the Financial Statements, within Item 8 of this Report, and is hereby incorporated by reference.

Recent Sales of Unregistered Securities and Use of Proceeds

None.

Purchases of Equity Securities by Affiliates and Associated Purchasers

On April 25, 2017, the Company’s Board of Directors approved the repurchase of up to $3 million of the outstanding common stock of the Company. The duration of the program is open-ended and the timing of purchases will depend on market conditions. The Company did not repurchase any common shares under the stock repurchase plan during the years ended December 31, 2021 and 2020.
 
Item 6 - [Reserved]
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Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company's financial condition and results of operations should be read together with the consolidated financial statements and related notes included in this report.

Overview

The Company

United Security Bancshares, a California corporation, is a bank holding company registered under the BHCA with corporate headquarters located in Fresno, California. The principal business of United Security Bancshares is to serve as the holding company for its wholly-owned subsidiary, United Security Bank. References to the “Bank” refer to United Security Bank together with its wholly-owned subsidiary, York Monterey Properties, Inc. References to the “Company” refer to United Security Bancshares together with its subsidiaries on a consolidated basis. References to the “Holding Company” refer to United Security Bancshares, the parent company, on a stand-alone basis. The Bank currently has twelve banking branches, which provide banking services in Fresno, Madera, Kern, and Santa Clara counties in the state of California. In addition to full-service branches, the Bank has several stand-alone ATM and ITM machines within its geographic footprint.

Executive Summary

During 2021, the Company executed a multi-phase strategy to deploy excess liquidity in a challenging interest rate environment with weak loan demand.

2021 Financial Summary and 2020 Comparison
▪Total assets increased 21.8% to $1.3 billion, compared to $1.1 billion at December 31, 2020.
▪Total loans, net of unearned fees, increased 33.2% to $871.5 million, compared to $654.3 million at December 31, 2020.
▪Total investments increased 111.9%, or $96.5 million, to $182.6 million, compared to $86.2 million at December 31, 2020.
▪Total deposits increased 24.7% to $1.2 billion, compared to $952.7 million at December 31, 2020.
▪Net interest income before the provision for credit losses increased 10.45% to $35.7 million for the year ended December 31, 2021, compared to $32.3 million for the year ended December 31, 2020.
▪Book value per share increased to $7.06, compared to $6.93 at December 31, 2020.
▪Net charge-offs totaled $1.3 million, compared to net charge-offs of $2.2 million for the year ended December 31, 2020.
▪Capital position remains well-capitalized with a 9.79% Tier 1 Leverage Ratio compared to 11.37% as of December 31, 2020.
▪Return on average assets ("ROAA") was 0.82%, compared to 0.86% for the year ended December 31, 2020.
▪Return on average equity ("ROAE") was 8.47%, compared to 7.55% for the year ended December 31, 2020.

Current Trends Affecting Results of Operations and Financial Position
The Company’s overall operations are impacted by a number of factors, including not only interest rates and margin spreads, which impact the results of operations, but also the composition of the Company’s balance sheet. One of the primary strategic goals of the Company is to maintain a mix of assets that will generate a reasonable rate of return without undue risk, and to finance those assets with a low-cost and stable source of funds. Liquidity and capital resources must also be considered in the planning process to mitigate risk and allow for growth.
Since the Bank primarily conducts banking operations in California’s Central Valley, its operations and cash flows are subject to changes in the economic condition of the Central Valley. Our business results are dependent in large part upon the business activity, population, income levels, deposits and real estate activity in the Central Valley, and declines in economic conditions can have adverse material effects upon the Bank. In addition, the Central Valley remains largely dependent on agriculture. A downturn in agriculture and agricultural related business could indirectly and adversely affect the Company as many borrowers and customers are involved in, or are impacted to some extent, by the agricultural industry. While a great number of our borrowers are not directly involved in agriculture, they would likely be impacted by difficulties in the agricultural industry since many jobs in our market areas are ancillary to the regular production, processing, marketing and sale of agricultural commodities. The state of California is experiencing a severe drought and water allocations have been significantly reduced for farmers in the Central Valley. Due to these water issues the impact on businesses and consumers located in the Company's market areas is not possible to quantify. In response the California state legislature passed the Sustainable Groundwater
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Management Act with the purpose to ensure better local and regional management of groundwater use and sustainable groundwater management in California by 2042. The local districts began to develop, prepare, and begin implementation of the Groundwater Sustainability Plans in 2020. The effect of such plans to Central Valley agriculture, if any, is still unknown.

The Company's earnings are impacted by monetary and fiscal policies of the United States government and its agencies. The FRB has, and is likely to continue to have, an important impact on the operating results of depository institutions through its power to implement national monetary policy, among other things, in order to curb inflation or combat a recession. The FRB affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. The FOMC has indicated that due to rising inflation it expects to raise interest rates in the near term. While the expectation is that the FRB will raise short-term interest rates in 2022, it is unknown what effects the current international instability will have on inflation and the FRB's monetary policies.

The Company continually evaluates its strategic business plan as economic and market factors change in its market area. Balance sheet management, enhancing revenue sources, and maintaining market share will continue to be of primary importance.

COVID-19

The COVID-19 pandemic has impacted the local economy in the Central Valley. Federal, State and local shelter-in-place recommendations were enacted in our markets in March 2020 causing many businesses to close and workers to be furloughed or lose jobs. Essential purpose entities such as medical professionals, food and agricultural businesses, and transportation and logistical businesses were exempted from the closures; however, unemployment rates have increased in our local market area. As of December 2021, the unemployment rate in Fresno County was 7.0%, a decrease from 10.4% as of December 31, 2020. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package, and the Consolidated Appropriations Act, 2021 was signed into law at the end of December 2020 as a $900 billion legislative package. The goal of the CARES Act and Consolidated Appropriations Act, were to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts may have a material impact on our operations. While it is not possible to know the full universe or extent of these impacts as of the date this filing, we are disclosing potentially material items of which we are aware.

Financial position and results of operations

Pertaining to the Company's December 31, 2021 financial condition and results of operations, COVID-19 has had an impact on the allowance for credit losses. While the Company has not yet experienced any charge-offs related to COVID-19, its allowance for credit loss calculation and resulting provision for credit losses are significantly impacted by changes in economic conditions resulting from a significant increase in unemployment. Although economic scenarios improved since the pandemic was declared in March 2020, the credit risk in the loan portfolio remains heightened resulting in the need for an additional reserve for credit loss. Should economic conditions worsen, the Company could experience further increases in its required allowance for credit loss and record additional provision expense.

Capital and liquidity

As of December 31, 2021, the Company and Bank's capital ratios were in excess of all regulatory requirements. The Company's management team believes that while the Company and Bank have sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses. The Company relies on cash on hand as well as dividends from the Bank to service its debt. If the Bank is unable to pay dividends for an extended period of time, the Company may not be able to service its debt.

The Company maintains access to multiple sources of liquidity. If extended economic weakness caused large numbers of its deposit customers to withdraw their funds, it might become more reliant on volatile or more expensive sources of funding. Wholesale funding markets are available to the Company.

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Table of Contents
Asset valuation

Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on the balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

Processes, controls and business continuity plan

The Company maintains a Business Continuity Plan to prepare, and respond to unforeseen circumstances, such as, natural disasters and pandemics. Upon the COVID-19 pandemic declaration, the Company invoked its Business Continuity Plan. Shortly after invoking the plan, the Company implemented protocols for team member safety, provided timely communication to team members and customers, established remote work capabilities to isolate certain personnel essential to critical business continuity operations, and initiated strategies for monitoring and responding to local COVID-19 impacts. Due to the nature of their functions, many team members continue to operate from physical Company locations, while effectively employing social distancing standards. The Company's Management Team continues to meet regularly to anticipate and respond to any future COVID-19 interruptions or developments. As of December 31, 2021, the Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures it has taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of its business continuity plans.

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation, the Company executed a payment deferral program for our commercial lending clients that are adversely affected by the pandemic. During 2020, the Company had executed 23 payment deferrals or modifications on outstanding loan balances of $69,814,000 in connection with the COVID-19 relief provided by the CARES Act and interagency guidance issued in March 2020. The Company has not recognized any losses on the loan modifications and as of December 31, 2021, there were no modifications outstanding.

The Company participated in the first and second draw of the Paycheck Protection Program ("PPP"), administered by the SBA. The first PPP draw ended on August 8, 2020, the second draw and PPP program ended May 31, 2021. PPP loans earn interest at 1% and have either a two or five year term. In addition to interest, the Company receives a processing fee ranging from 3%-5% of the loan balance for each PPP loan. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of December 31, 2021, there were 15 SBA PPP loans outstanding, representing $1,731,000 in funding and $57,000 in unearned fees.

The Company is working with customers directly affected by COVID-19. The Company has provided and continues to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. The Company is engaging in more frequent communication with the servicer and individual schools participating in the student loan portfolio to better understand the effects of COVID-19 on school closures and students in school or in clinical programs. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

The Company continually evaluates its strategic business plan as economic and market factors change in its market area. The Company may see a short-term slowdown in new loan originations. There remain shortages in raw materials, manufactured products and labor across many industries resulting in rising prices, which may disrupt business operations and negatively impact financial performance and operating results for the Company's borrowers. Balance sheet management, enhancing revenue sources, and maintaining market share will continue to be of primary importance heading into 2022 and beyond.

Results of Operations
The following table sets forth selected historical consolidated financial information for each of the years in the three‑year period ended December 31, 2021. The selected financial data should be read in conjunction with our "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements as of December 31, 2021 and 2020, and the related Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.”
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For the Year Ended December 31,
(in thousands except per share data and ratios)202120202019
Summary of Year-to-Date Earnings:
Interest income$37,730 $34,567 $41,282 
Interest expense2,079 2,290 3,888 
   Net interest income35,651 32,277 37,394 
Provision for credit losses2,107 2,769 20 
Net interest income after provision for credit losses33,544 29,508 37,374 
Noninterest income3,385 5,174 5,754 
Noninterest expense23,615 22,270 21,859 
    Income before taxes on income13,314 12,412 21,269 
Taxes on income3,216 3,451 6,097 
   Net income $10,098 $8,961 $15,172 
Per Share Data:
Net income - Basic$0.59 $0.53 $0.90 
Net income - Diluted$0.59 $0.53 $0.89 
Average shares outstanding - Basic17,011,379 16,976,704 16,951,955 
Average shares outstanding - Diluted17,030,874 16,998,584 16,984,796 
Book value per share$7.06 $6.93 $6.83 
Financial Position at Period-end:
Total assets$1,330,944 $1,092,654 $956,919 
Total net loans and leases862,200 645,825 588,646 
Total deposits1,188,106 952,651 818,362 
Total shareholders' equity120,207 117,807 115,988 
Selected Financial Ratios:
Return on average assets0.82 %0.86 %1.58 %
Return on average equity8.47 %7.55 %13.30 %
Average equity to average assets9.69 %11.45 %11.89 %
Net interest margin (1)3.16 %3.34 %4.22 %
Allowance for credit losses as a percentage of total nonperforming assets56.06 %48.56 %37.26 %
Net charge-offs to net loans0.15 %0.33 %0.08 %
Allowance of credit losses as a percentage of period-end loans1.07 %1.30 %1.33 %
 Dividend payout ratio74.16 %83.34 %49.16 %
(1)Fully taxable equivalent

Net income for the year ended December 31, 2021 was $10.1 million or $0.59 per basic share ($0.59 diluted) compared to $9.0 million or $0.53 per basic share ($0.53 diluted) for year ended December 31, 2020. The increase of $1.1 million between December 31, 2020 and December 31, 2021 is primarily the result of increases in net interest income, offset by a loss on the fair value of a financial liability. Interest income increased by $3.2 million, or 9.2%, between December 31, 2020 and December 31, 2021. Taxes on income decreased by $235,000, or 6.8%.

Return on average assets was 0.82% for the year ended December 31, 2021 compared to 0.86% for the year ended December 31, 2020. Return on average equity was 8.47% for the year ended December 31, 2021 compared to 7.55% for the year ended December 31, 2020.

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The decline in the return on average assets experienced by the Company during 2021 and 2020 were the result of large increases in assets during the second half of the year resulting from loan and security purchases. Increases in the return on average equity were the result of growth in net income outpacing growth in shareholder's equity. Lower equity growth rate is attributed to a higher dividend payout ratio. A high dividend payout ratio results slower growth in retained earnings, which is a component of shareholders' equity.

Net Interest Income

Net interest income, the most significant component of earnings, is the difference between the interest and fees received on earning assets and the interest paid on interest-bearing liabilities. Earning assets consist primarily of loans and, to a lesser extent, investments in securities issued by federal, state and local authorities, and corporations, as well as interest-bearing deposits and overnight investments in federal funds loaned to other financial institutions. These earning assets are funded by a combination of interest-bearing and noninterest-bearing liabilities, primarily customer deposits, and may include short-term and long-term borrowings.
 
Net interest income before provision for credit losses was $35.7 million for the year ended December 31, 2021, representing an increase of $3.4 million, or 10.5%, compared to net interest income before provision for credit losses of $32.3 million for the year ended December 31, 2020. As market rates remained low in the current year, even a disciplined deposit pricing effort saw the net interest margin, as shown in Table 1 below, decrease to 3.16% for the year ended December 31, 2021. The net interest margin was 3.41% for the year ended December 31, 2020.


Table 1. Distribution of Average Assets, Liabilities and Shareholders’ Equity:
The following table summarizes the distribution of average assets, liabilities and shareholders’ equity, as well as interest income and yields earned on average interest‑earning assets and interest expense and rates paid on average interest‑bearing liabilities, presented on a tax equivalent basis for the years indicated:
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  2021  2020 
Average BalanceInterestYield/RateAverage BalanceInterestYield/Rate
(Dollars in thousands)
Assets:      
Interest-earning assets:      
Loans and leases (1)$779,062 $35,154 4.51 %$639,815 $32,404 5.06 %
Investment Securities – taxable150,748 2,337 1.55 %90,685 1,433 1.58 %
Interest-bearing deposits in FRB199,610 239 0.12 %217,273 730 0.34 %
Total interest-earning assets1,129,420 $37,730 3.34 %947,773 $34,567 3.65 %
Allowance for credit losses(8,866)  (8,661)  
Noninterest-earning assets:      
Cash and due from banks44,269   30,300   
Premises and equipment, net9,043   9,385   
Accrued interest receivable7,755   8,389   
Other real estate owned4,847   5,815   
Other assets47,002   43,968   
Total average assets$1,233,470   $1,036,969   
Liabilities and Shareholders' Equity:      
Interest-bearing liabilities:      
NOW accounts$157,014 $226 0.14 %$126,115 $173 0.14 %
Money market accounts319,858 1,152 0.36 %258,196 1,145 0.44 %
Savings accounts106,979 118 0.11 %88,562 108 0.12 %
Time deposits65,386 403 0.62 %62,945 588 0.93 %
Junior subordinated debentures11,089 180 1.62 %9,746 276 2.83 %
Total interest-bearing liabilities660,326 $2,079 0.31 %545,564 $2,290 0.42 %
Noninterest-bearing liabilities:      
Noninterest-bearing checking443,639   363,004   
Accrued interest payable106   110   
Other liabilities9,908   9,564   
Total average liabilities1,113,979   918,242   
Total average shareholders' equity119,491   118,727   
Total average liabilities and shareholders' equity$1,233,470   $1,036,969   
Interest income as a percentage  of average earning assets  3.34 %  3.65 %
Interest expense as a percentage of average earning assets  0.18 %  0.24 %
Net interest margin  3.16 %  3.41 %
(1) Loan amounts include nonaccrual loans, but the related interest income has been included only if collected for the period prior to the loan being placed on a nonaccrual basis. Loan interest income includes loan fees of approximately $1,681 for the year ended December 31, 2021 and loan fees of approximately $1,226 for the year ended December 31, 2020.
 
For the years ended 2021 and 2020 the prime rate remained at 3.25%. Future increases or decreases will affect rates for both interest income and expense and the resultant net interest margin.

Both net interest income and net interest margin are affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as "volume change." Both are also affected by changes in yields on interest-earning assets and rates paid on interest-bearing liabilities, referred to as "rate change." The following table sets forth the changes in interest income and interest expense for each major category of interest-earning asset and interest-bearing liability, and the amount of change attributable to volume and rate changes for the years ended December 31, indicated.

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Table 2.  Rate and Volume Analysis
 
2021 compared to 2020
(In thousands)TotalRateVolume
Increase (decrease) in interest income:   
Loans$2,750 $(3,790)6,540 
Investment securities904 (28)932 
Interest-bearing deposits in other banks— — — 
Interest-bearing deposits in FRB(491)(474)(17)
Total interest income3,163 (4,292)7,455 
Increase (decrease) in interest expense:   
Interest-bearing demand accounts60 (227)287 
Savings accounts10 (11)21 
Time deposits(185)(207)22 
Subordinated debentures(96)(130)34 
Total interest expense(211)(575)364 
Increase in net interest income$3,374 $(3,717)7,091 

The net interest margin decreased in 2021 due to decreases in loan portfolio yields, yields on overnight investments with the Federal Reserve Bank ("FRB"), and investment securities yields, offset by decreases in interest expense. The decreases in yields are a result of repricing of variable-rate loans, floating-rate investment securities, and interest-bearing deposits in FRB to lower rates. Interest-bearing deposits in FRB are the Company's lowest-yielding interest-earning asset. The yield on the loan portfolio was 4.5% for the year ended December 31, 2021, as compared to 5.1% for the year ended December 31, 2020.  For the year ended December 31, 2021, total interest income increased approximately $3.2 million, or 9.2%, as compared to the year ended December 31, 2020, reflective of increases of $2.8 million in loan interest income and $904,000 in investment income. Average interest-earning assets increased approximately $181.6 million between 2021 and 2020 and the rate on interest-earning assets decreased 31 basis points during the two periods. The increase in average earning assets between 2021 and 2020 was the result of an increase of $139.2 million in loans and an increase of $60.1 million in investment securities, offset by a decrease of $17.7 million in interest-bearing deposits held with the FRB.

For the year ended December 31, 2021, total interest expense decreased approximately $211,000, or 9.2%, as compared to the year ended December 31, 2020. Between the two periods, average interest-bearing liabilities increased by $114.8 million, and the average rates paid on these liabilities decreased by 11 basis points. While the Company may utilize brokered deposits as an additional source of funding, the Company held no brokered deposits at December 31, 2021 or 2020.

The following table summarizes the year-to-date averages of the components of interest-earning assets as a percentage of total interest-earning assets, and the components of interest-bearing liabilities as a percentage of total interest-bearing liabilities:

YTD Average
12/31/21
YTD Average
12/31/20
Loans68.99 %67.51 %
Investment securities available for sale13.35 %9.57 %
Interest-bearing deposits in FRB17.66 %22.92 %
Total earning assets100.00 %100.00 %
NOW accounts23.77 %23.12 %
Money market accounts48.44 %47.32 %
Savings accounts16.20 %16.23 %
Time deposits9.90 %11.54 %
Subordinated debentures1.69 %1.79 %
Total interest-bearing liabilities100.00 %100.00 %

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Provision for Credit Losses

Provisions for credit losses are determined on the basis of management's periodic credit review of the loan portfolio, consideration of past loan loss experience, current and future economic conditions, and other pertinent factors. After reviewing these factors, management, at times, makes adjustments in order to maintain an allowance for credit losses adequate for the coverage of estimated losses inherent in the loan portfolio. Based on the condition of the loan portfolio, management believes the allowance is appropriate to cover risk elements in the loan portfolio.

For the year ended December 31, 2021, a $2.1 million provision was made to the allowance for credit losses. A provision totaling $2.8 million was made for the year ended December 31, 2020.

The allowance for credit losses decreased to 1.07% of total loans during the year ended December 31, 2021, as compared to 1.30% at December 31, 2020. The provision of $2.8 million recorded in 2020, and the provision of $2.1 million recorded during 2021, are a result of charge-offs recognized within the student loan portfolio and adjustment in qualitative factors related to the economic uncertainties caused by COVID-19. For further discussion, refer to Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset Quality and Allowance for Credit Losses.

Noninterest Income

The following table summarizes significant components of noninterest income for the years indicated and the net changes between those years:
 
(In thousands)2021% of Total2020% of Total
Customer service fees$2,793 82.51 %$2,663 51.47 %
Increase in cash surrender value of bank-owned life insurance555 16.40 %504 9.74 %
(Loss) gain on fair value of marketable equity securities(106)(3.13)%74 1.43 %
Gain on proceeds from bank-owned life insurance— — %310 5.99 
(Loss) gain on fair value of junior subordinated debentures(660)(19.50)%970 18.75 %
Gain on sale of assets8 0.23 %— — %
Other795 23.49 %653 12.62 %
Total$3,385 100.00 %$5,174 100.00 %

Noninterest income consists primarily of fees and commissions earned on services provided to banking customers, fair value adjustments to the value of the junior subordinated debentures, and, to a lesser extent, gains on sales of Company assets and other miscellaneous income.

Noninterest income for the year ended December 31, 2021 decreased $1.8 million, or 34.6%, when compared to the same period of 2020. Customer service fees, the primary component of noninterest income, increased $130,000, or 4.9%, between the two periods presented. The decrease in noninterest income of $1.8 million between the two periods is primarily the result of changes in the fair value of junior subordinated debentures. A loss of $660,000 was recorded during the year ended 2021 as compared to a gain of $970,000 recorded during the year ended 2020. The change in the fair value of junior subordinated debentures was primarily caused by fluctuations in the LIBOR yield curve.

 Noninterest Expense

The following table sets forth the components of total noninterest expense in dollars and as a percentage of average earning assets for the years ended December 31, 2021 and 2020:
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 20212020
(Dollars in thousands)Amount% of
Average
Earning Assets		Amount% of
Average
Earning Assets
Salaries and employee benefits$11,713 1.04 %$10,825 1.14 %
Occupancy expense3,537 0.31 %3,475 0.37 %
Data processing565 0.05 %493 0.05 %
Professional fees3,572 0.32 %3,327 0.35 %
Regulatory assessments743 0.07 %459 0.05 %
Director fees385 0.03 %376 0.04 %
Correspondent bank service charges88 0.01 %71 0.01 %
Net cost on operation and sale of OREO256 0.02 %972 0.10 %
Other2,756 0.24 %2,272 0.24 %
Total$23,615 2.09 %$22,270 2.35 %
 
Noninterest expense increased $1.3 million, or 6.0%, between the years ended December 31, 2021 and 2020. The net increase in noninterest expense between the comparative periods is primarily the result of increases in salaries and employee benefits, regulatory assessments, and professional fees, partially offset by declines in the net cost on operation of OREO. The net cost on operation of OREO in 2020 included a $727,000 write-down on one property and a $113,000 loss on the sale of another property. The increase in regulatory assessments was due to an increase in the FDIC assessment rate. The increase in professional fees for the year ended December 31, 2021 is attributed to increases in legal fees and consulting expense. Included in net costs on operations of OREO for the years ended December 31, 2021 and 2020 are OREO operating expenses totaling $255,000 and $133,000, respectively.

During the years ended December 31, 2021 and 2020, the Company recognized stock-based compensation expense of $238,000 ($0.02 per share basic and diluted) and $425,000 ($0.02 per share basic and diluted), respectively. This expense is included in noninterest expense under salaries and employee benefits.

Income Taxes

Income tax expense is impacted to some degree by permanent taxable differences between income reported for book purposes and income reported for tax purposes, as well as certain tax credits which are not reflected in the statements of operations and comprehensive income. As pretax income or loss amounts become smaller, the impact of these differences become more significant and are reflected as variances in the effective tax rate for the periods presented. In general, the permanent differences and tax credits affecting tax expense have a positive impact and tend to reduce the effective tax rates shown in the statements of operations and comprehensive income. The effective tax rate for the year ended December 31, 2021 was 24.2% compared to 27.8% for the year ended December 31, 2020.
 
Financial Condition

Total assets increased by $238.3 million, or 21.8%, from $1.1 billion at December 31, 2020 to $1.3 billion at December 31, 2021. During the year ended December 31, 2021, net loans increased by $216.4 million and investment securities increased by $96.5 million. Overnight interest-bearing deposits in the Federal Reserve Bank and federal funds sold decreased a net $76.4 million. Total deposits of $1.2 billion at December 31, 2021, increased $235.5 million, or 24.7%, from $952.7 million at December 31, 2020.

Interest-earning assets averaged approximately $1.1 billion during the year ended December 31, 2021, as compared to $947.8 million for the year ended December 31, 2020. Average interest-bearing liabilities increased to $660.3 million for the year ended December 31, 2021, as compared to $545.6 million for the year ended December 31, 2020.

Loans

The Company's primary business is that of acquiring deposits and making loans, with the loan portfolio representing the largest component of earning assets. Loans totaled $869.3 million at December 31, 2021, an increase of $213.9 million, or 32.6%, from total loans of $655.4 million at December 31, 2020. During 2021, average loans increased 21.8% when compared to the
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year ended December 31, 2020. Average loans totaled $779.1 million and $639.8 million for the years ended December 31, 2021 and 2020, respectively.
 
The following table sets forth the amounts of loans outstanding by category and the category percentages as of the year-end dates indicated:
 20212020
   (In thousands)
Dollar Amount% of LoansDollar Amount% of Loans
Commercial and industrial$45,504 5.2 %$47,514 7.2 %
Real estate mortgage558,056 64.2 %320,294 48.9 %
RE construction & development154,270 17.7 %175,016 26.7 %
Agricultural60,239 6.9 %51,079 7.8 %
Installment and student loans51,245 5.9 %61,508 9.4 %
Total loans$869,314 100.0 %$655,411 100.0 %
 
Loan volume continues to be highest in what has historically been the primary lending emphasis: real estate mortgage, and construction lending. Total loans increased $213.9 million during 2021. There were increases of $237.8 million, or 74.2%, in real estate mortgage loans and $9.2 million, or 17.9%, in agriculture loans. There were decreases of $20.7 million, or 11.9%, in real estate construction and development loans, $10.3 million, or 16.7%, in installment loans, and $2.0 million, or 4.2% in commercial and industrial loans. The Bank is subject to internal limits of 115% of capital on the real estate construction and development portfolio and 330% of capital for the non-owner occupied commercial real estate portfolio, which also includes construction and development loans. At December 31, 2021, the real estate construction and development portfolio totaled 100% of capital and non-owner occupied commercial real estate totaled 299% of capital. The current limits may affect the ability of the Bank to significantly grow these segments of the loan portfolio. The Bank is not approaching internal or regulatory concentration limits in other loan segments.

The real estate mortgage loan portfolio, totaling $558.1 million at December 31, 2021, consists of commercial real estate, residential mortgages, and home equity loans. Commercial real estate loans have remained a significant percentage of total loans over the past year, amounting to 38.1% and 43.2%, of the total loan portfolio at December 31, 2021 and December 31, 2020, respectively. Commercial real estate balances increased to $331.1 million at December 31, 2021 from $283.0 million at December 31, 2020. Commercial real estate loans are generally a mix of short to medium-term, fixed and floating rate instruments and are mainly secured by commercial income and multi-family residential properties. Residential mortgage loans are generally 30-year amortizing loans with an average life of six to eight years. These loans totaled $226.9 million or 26.1% of the portfolio at December 31, 2021, and $37.2 million, or 5.7% of the portfolio at December 31, 2020. Real estate mortgage loans in total increased $237.8 million during 2021. Residential mortgage loans are not generally a large part of the loan portfolio, but some residential mortgage loans have been made over the past several years to facilitate take-out loans for construction borrowers who were unable to obtain permanent financing elsewhere. The Company does purchase residential mortgage portfolios and purchased $201.0 million in 2021 and entered into a firm commitment to purchase $15.8 million in 2022. The home equity loan portfolio totaled $80,000 at December 31, 2021, and $107,000 at December 31, 2020. Real estate construction and development loans, representing 17.7% and 26.7% of total loans at December 31, 2021 and December 31, 2020, respectively, 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.

Purchased loan participations totaled $9.6 million at December 31, 2021. There were $9.7 million purchased loan participations held at December 31, 2020. Loan participations sold increased from $12.9 million, or 2.0%, of the portfolio at December 31, 2020, to $14.4 million, or 1.7%, at December 31, 2021.

At December 31, 2021, approximately 76.3% of commercial and industrial loans have floating rates and, although some may be secured by real estate, many are secured by accounts receivable, inventory, and other business assets. Construction loans are generally short-term, floating-rate obligations, which consist of both residential and commercial projects. Agricultural loans, are primarily short-term, floating rate loans for crop financing.

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Included within the installment loan portfolio are $48.5 million in student loans as of December 31, 2021, as compared to $57.4 million at December 31, 2020, a decrease of $8.9 million. The student loan portfolio consists of unsecured loans to medical and pharmacy students currently enrolled in medical and pharmacy schools in the US and the Caribbean.  The medical student loans are made to US citizens attending medical schools in the US and Antigua, while the pharmacy student loans are made to pharmacy students attending pharmacy school in the US. 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. The outstanding balance of student loans that have not entered repayment status totaled $7.5 million at December 31, 2021. Accrued interest on loans that have not entered repayment status totaled $3.9 million at December 31, 2021. At December 31, 2021, there were 901 loans within repayment, deferment, and forbearance which represented $23.8 million, $9.0 million, and $8.2 million in outstanding balances, respectively. No new student loans were originated during the years ended December 31, 2021 and 2020.

Repayment of the unsecured student loans is premised on the medical and pharmacy students graduating and becoming high-income earners. Under program guidelines repayment terms can vary per borrower, however repayment occurs on average within 10 to 20 years. Underwriting is premised on qualifying credit scores. Currently the weighted average credit score for the portfolio is in the mid-700s. In addition, there are non-student co-borrowers for roughly one-third of the portfolio that provide additional repayment capacity. Graduation and employment placement rates are high for both medical and pharmacy students. The average student loan balance per borrower as of December 31, 2021 was approximately $80,577. Loan interest rates range from 2.6% to 7.6%.

At December 31, 2021, $23.8 million in loans were in repayment compared to $28.9 million as of December 31, 2020. Accrued interest on student loans was $4,638,000 and $4,974,000 as of December 31, 2021 and 2020, respectively. At December 31, 2021, the reserve against the student loan portfolio totaled $2,647,000. Additionally, during the year ended December 31, 2021, $122,000 in accrued interest receivable was reversed, due to charge-offs of $1,439,000. At December 31, 2020, the reserve totaled $2,546,000 and $125,000 in accrued interest was reversed due to charge-offs of $1,947,000. There were no TDRs within the portfolio as of December 31, 2021 or 2020.

The following table sets forth the Bank's student loan portfolio with activity from December 31, 2020 and December 31, 2021:
   (In thousands)
Student Loan Portfolio Balance as of December 31, 2019$65,800 
Disbursements38 
Capitalized Interest3,936 
Payments Received(10,442)
Loans Charged-off(1,947)
Student Loan Portfolio Balance as of December 31, 202057,385 
Disbursements— 
Capitalized Interest2,375 
Payments Received(9,865)
Loans Charged-off(1,439)
Student Loan Portfolio Balance as of December 31, 2021$48,456 

Student Loan Finance Corporation (ZuntaFi) is the third-party servicer for the student loan portfolio. ZuntaFi provides servicing for the student loan portfolio, including application administration, processing, approval, documenting, funding, and collection of current and charged off balances. They also provide file custodial responsibilities. Except in cases where applicants/loans do not meet program requirements, or extreme delinquency, ZuntaFi provides complete program management. ZuntaFi is paid a monthly servicing fee based on the principal balance outstanding. This servicing fee is presented as part of professional fees within noninterest expense.

The following table sets forth the maturities of the Bank's loan portfolio at December 31, 2021. Amounts presented are shown by maturity dates rather than repricing periods:
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   (In thousands)
Due in one year or lessDue after one year through five yearsDue after five years through fifteen yearsDue after fifteen yearsTotal
Commercial and agricultural$37,752 $55,507 $12,484 $— $105,743 
Real estate construction & development117,826 30,412 6,032 — 154,270 
Real estate – mortgage27,714 142,194 159,188 228,960 558,056 
All other loans1,036 1,739 6,628 41,842 51,245 
Total loans$184,328 $229,852 $184,332 $270,802 $869,314 
 
For the years ended December 31, 2021 and 2020, the average yield on loans was 4.5% and 5.1%, respectively.  Rate floors are occasionally used to mitigate interest rate risk if interest rates fall, as well as to compensate for additional credit risk under current market conditions. The loan portfolio is generally comprised of short-term or floating-rate loans that adjust in alignment to changes in market rates of interest.

At December 31, 2021 and 2020, approximately 46.5% and 60.8%, respectively, of the loan portfolio consisted of floating rate instruments, with the majority of those tied to the prime rate.

The following table sets forth the contractual maturities of the Bank's fixed and floating-rate loans at December 31, 2021. Amounts presented are shown by maturity dates rather than repricing periods, and do not consider renewals or prepayments of loans:
Due in oneDue after one
Year through		Due after
   (In thousands)
year or lessFive yearsFive yearsTotal
Accruing loans:    
Fixed rate loans$33,521 $150,317 $278,905 $462,743 
Floating rate loans139,368 79,535 176,230 395,133 
Total accruing loans172,889 229,852 455,135 857,876 
Nonaccrual loans:    
Fixed rate loans11,226 — — 11,226 
Floating rate loans212 — — 212 
Total nonaccrual loans11,438 — — 11,438 
Total Loans$184,327 $229,852 $455,135 $869,314 
 
Securities
 
The following table sets forth certain information regarding carrying values and percentage of total carrying value of available-for-sale securities for the years indicated:
 December 31, 2021December 31, 2020
   (In thousands)
Carrying ValuePercent of TotalCarrying ValuePercent of Total
Available-for-sale:  
U.S. Government agencies$33,376 18.7 %$33,710 40.9 %
U.S. Government sponsored entities & agencies collateralized by mortgage obligations64,735 36.1 %38,445 46.8 %
Corporate bonds11,423 6.4 %5,219 6.3 %
Asset-backed securities4,130 2.3 %3,909 4.7 %
Municipal bonds50,052 28.0 %1,058 1.3 %
U.S. Treasury securities15,187 8.5 %— — %
Total available-for-sale$178,903 100.0 %$82,341 100.0 %

As of December 31, 2021 and 2020, there were no securities classified as held for trading or held to maturity.
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The contractual maturities of investment securities as well as yields based on carrying value of those securities at December 31, 2021 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.
 One year or lessAfter one year to five yearsAfter five years to ten yearsAfter ten yearsTotal
  (Dollars in thousands)
AmountYield (1)AmountYield (1)AmountYield (1)AmountYield (1)AmountYield (1)
Available-for-sale:          
U.S. Government agencies$— — %$137 2.10 %$8,805 1.32 %$24,434 1.44 %$33,376 1.41 %
U.S. Government sponsored entities & agencies collateralized by mortgage obligations— — %936 2.10 %2,479 0.70 %61,320 1.57 %64,735 1.54 %
Corporate bonds— — %— — %11,423 3.82 %— — %11,423 3.82 %
Asset-backed securities510 0.64 %— — %— — %3,620 0.79 %4,130 0.77 %
Municipal bonds— — %397 1.11 %32,253 1.65 %17,402 1.95 %50,052 1.75 %
U.S. Treasury securities— — %15,187 0.72 %— — %— — %15,187 0.72 %
Total amortized cost$510 0.64 %$16,657 0.82 %$54,960 2.01 %$106,776 1.58 %$178,903 1.63 %
(1) Weighted average yields are not computed on a tax equivalent basis

At December 31, 2021 and 2020, available-for-sale securities with an amortized cost of approximately $94.9 million and $80.5 million, respectively (fair value of $95.2 million and $81.4 million, respectively) were pledged as collateral for public funds and FHLB borrowings.

During the year ended December 31, 2021, the Company recognized unrealized losses of $106,000 related to marketable equity securities within the consolidated statements of income, compared to unrealized gains of $74,000 during the year ended December 31, 2020.

Deposits

The Bank attracts commercial deposits primarily from local businesses and professionals, as well as retail checking accounts, savings accounts and time deposits. Core deposits, consisting of all deposits other than time deposits of $250,000 or more and brokered deposits, continue to provide the foundation for the Bank's principal sources of funding and liquidity. Core deposits amounted to 98.2% and 97.8% of the total deposit portfolio at December 31, 2021 and 2020, respectively. The Bank currently holds no brokered deposits as part of its continuing effort to maintain sufficient liquidity without a reliance on brokered deposits.

 The following table sets forth the year-end amounts of deposits and balances as a percentage of total deposits by category for the years indicated:
 December 31,
   (In thousands)
202120202019
Noninterest-bearing deposits$476,749 40.13 %$391,897 41.14 %$311,950 38.12 %
Interest-bearing deposits:   
NOW and money market accounts529,841 44.60 %402,566 42.26 %$360,934 44.10 %
Savings accounts113,930 9.59 %96,669 10.15 %$80,078 9.79 %
Time deposits:   
Under $250,00046,631 3.92 %40,302 4.23 %$44,926 5.49 %
$250,000 and over20,955 1.76 %21,217 2.23 %$20,474 2.50 %
Total interest-bearing deposits711,357 59.87 %560,754 58.86 %$506,412 61.88 %
Total deposits$1,188,106 100.00 %$952,651 100.00 %$818,362 100.00 %
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The Bank's deposit base consists of two major components represented by noninterest-bearing (demand) deposits and interest-bearing deposits. Interest-bearing deposits consist of time certificates, NOW and money market accounts, and savings deposits. During the year ended December 31, 2021, NOW and money market deposits increased $127.3 million, or 31.6%, noninterest-bearing deposits increased $84.9 million, or 21.7%, total time deposits increased $6.1 million, or 9.9%, and savings accounts increased $17.3 million, or 17.9%. Uninsured deposits totaled $739.4 million and $540.4 million at December 31, 2021 and 2020, respectively.Included at December 31, 2021, are $21.0 million in uninsured time deposits exceeding $250,000, of which $4.2 million mature in three months or less, $16.1 million mature between three to twelve months, and $564,000 mature in one to three years.

On a year-to-date average basis, total deposits increased $194.1 million, or 21.6%, between the years ended December 31, 2020 and December 31, 2021. Interest-bearing deposits increased by $113.4 million, or 21.2%, and noninterest-bearing deposits increased $80.6 million, or 22.2%, during 2021. On average, balances increased in all categories between the years ended December 31, 2020 and December 31, 2021.

The following table sets forth the average deposits and average rates paid on those deposits for the years ended December 31, 2021 and 2020:
 20212020
  (Dollars in thousands)
Average BalanceRate %Average BalanceRate %
Interest-bearing deposits:    
NOW and money market accounts$476,872 0.29 %$384,311 0.34 %
Savings106,979 0.11 %88,562 0.12 %
Time deposits 65,386 0.62 %62,945 0.93 %
Total interest-bearing deposits649,237 535,818 
Noninterest-bearing deposits443,639  363,004  

Short-term Borrowings

The Bank has access to short-term borrowings which may consist of federal funds purchased, discount window borrowings, securities sold under agreements to repurchase (“repurchase agreements”), and Federal Home Loan Bank (FHLB) advances as alternatives to retail deposit funds. Collateralized and uncollateralized lines of credit have been established with several correspondent banks. The FRB discount window, as well as a securities dealer, may also be accessed as needed. Funds may be borrowed in the future as part of the Company's asset/liability strategy, and may be used to acquire assets as deemed appropriate by management for investment purposes or for capital utilization purposes. Federal funds purchased represent temporary overnight borrowings from correspondent banks and are generally unsecured. Repurchase agreements are collateralized by mortgage backed securities and securities of U.S. Government agencies, and generally have maturities of one to six months, but may have longer maturities if deemed appropriate. FHLB advances are collateralized by investments in FHLB stock, securities, and certain qualifying mortgage loans. Additionally, borrowings collateralized by pledged loans may be secured from the Federal Reserve Bank of San Francisco (FRB). Credit lines are subject to periodic review by the credit lines grantors relative to the Company's financial statements. Lines of credit may be modified or revoked at any time.

Lines of credit with the FRB of $320.6 million and $336.8 million, as well as FHLB lines of credit totaling $3.1 million and $4.9 million were held at December 31, 2021 and 2020, respectively. In addition, the Company maintains a $50 million uncollateralized line of credit with Pacific Coast Bankers Bank,a $40 million uncollateralized line of credit with PNC Bank, a $20 million uncollateralized line of credit with Zion's Bank, and a $10 million uncollateralized line of credit with Union Bank. At December 31, 2021, there were no outstanding balances drawn against any lines of credit. These lines of credit generally have interest rates tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or LIBOR.

Asset Quality and Allowance for Credit Losses

Lending money is the principal business activity, and ensuring appropriate evaluation, diversification, and control of credit risks is a primary management responsibility. Losses are implicit in lending activities and the amount of such losses will vary, depending on the risk characteristics of the loan portfolio as affected by local economic conditions and the financial experience of borrowers.

34
The allowance for credit losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in existing loans and commitments to extend credit. The adequacy of the allowance for credit losses is based upon management's continuing assessment of various factors affecting the collectability of loans and commitments to extend credit, including current economic conditions, past credit experience, collateral, and concentrations of credit. There is no precise method of predicting specific losses which may ultimately be charged off on particular segments of the loan portfolio. The conclusion that a loan may become uncollectible, either in part or in whole is judgmental and subject to economic, environmental, and other conditions which cannot be predicted with certainty. The allowance for credit losses is determined in accordance with GAAP and the guidelines set forth in the Revised Interagency Policy Statement on the Allowance for Loan and Lease Losses (“Statement”) issued by banking regulators in December 2006. The Statement is a revision of the previous guidance released in July 2001, and outlines characteristics that should be used in the segmentation of the loan portfolio for analytical purposes such as including risk classification, past due status, type of loan, industry and collateral. It also outlines factors to consider when adjusting the loss factors for various segments of the loan portfolio and updates previous guidance that describes the responsibilities of the board of directors, management, and bank examiners regarding the allowance for credit losses. Securities and Exchange Commission Staff Accounting Bulletin No. 102, released during July 2001, provides additional guidance regarding methodologies and supporting documentation for the Allowance for Loan and Lease Losses that are consistent with federal securities laws and the Commission’s interpretations.  Their guidance is generally consistent with the guidance published by banking regulators.

The allowance for loan losses includes an asset-specific component, as well as a general or formula-based component. The loan portfolio is divided into eight (8) segments and categorized primarily by loan class homogeneity and commonality of purpose for analysis under the formula-based component of the allowance. Loans which are determined to be impaired under current accounting guidelines are not subject to the formula-based reserve analysis, and are instead evaluated individually for specific impairment under the asset-specific component of the allowance.

The eight segments of the loan portfolio are as follows (subtotals are provided as needed to allow the reader to reconcile the amounts to loan classifications reported elsewhere in this Report):
Loan Segments for Loan Loss Reserve AnalysisLoan Balances at December 31,
(Dollars in thousands)20212020
Commercial and business loans$42,194 $37,349 
Government program loans3,310 10,165 
Total commercial and industrial45,504 47,514 
Real estate – mortgage:
Commercial real estate331,050 282,951 
Residential mortgages226,926 37,236 
Home improvement and home equity loans80 107 
Total real estate mortgage558,056 320,294 
Real estate construction and development154,270 175,016 
Agricultural60,239 51,079 
Installment and student loans51,245 61,508 
Total loans$869,314 $655,411 
The 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
    - 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 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;
35
•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 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). Loss factors are adjusted to recognize and quantify the loss exposure due to changes in market conditions as well as trends in the loan portfolio. For purposes of 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. Classified loans include impaired loans and loans categorized as substandard, doubtful, and loss, which are not considered impaired. At December 31, 2021, impaired and classified loans totaled $13.7 million, or 1.6%, of gross loans as compared to $13.4 million, or 2.0%, of gross loans at December 31, 2020.

Loan participations are reviewed for allowance adequacy under the same guidelines as other loans in the portfolio, with an additional participation factor added, if required, for specific risks associated with participations. In general, participations are subject to certain thresholds and are reviewed for geographic location as well as the financial status of the underlying agent bank.

The formula allowance includes reserves for certain off-balance sheet risks including letters of credit, unfunded loan commitments, and lines of credit. Reserves for undisbursed commitments are generally formula allocations based on historical loss experience and other loss factors, rather than specific loss contingencies. At December 31, 2021 and 2020, the formula reserve allocated to undisbursed commitments totaled $669,000 and $606,000, respectively. The reserve for unfunded commitments is considered a reserve for contingent liabilities and is therefore carried as a liability on the balance sheet for all periods presented.
 
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 key lending areas, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions.
 
The following table summarizes the specific allowance, formula allowance, and unallocated allowance at December 31, 2021 and 2020.
36
(In thousands)December 31, 2021December 31, 2020
Specific allowance – impaired loans$130 $209 
Formula allowance – classified loans not impaired523 100 
Formula allowance – special mention loans503 256 
Total allowance for special mention and classified loans1,156 565 
Formula allowance for pass loans7,408 7,682 
Unallocated allowance769 275 
Total allowance9,333 8,522 
Impaired loans12,034 13,376 
Classified loans not considered impaired1,645 14 
Total classified and impaired loans13,679 13,390 
Special mention loans not considered impaired40,288 17,095 

 The following table summarizes allowance for loan losses, nonperforming loans, and classified loans for the periods shown:
(Dollars in thousands)December 31, 2021December 31, 2020
Allowance for loan losses ("ALLL") - beginning of period$8,522 $7,908 
Net loans charged-off during period1,296 2,155 
Provision for credit loss2,107 2,769 
Allowance for loan losses - end of period9,333 8,522 
Loans outstanding at period-end869,314 655,411 
ALLL as % of loans at period-end1.07 %1.30 %
Nonaccrual loans11,438 11,496 
Accruing restructured loans176 535 
Loans, past due 90 days or more, still accruing453 513 
Total non-performing loans12,067 12,544 
ALLL as % of nonperforming loans77.34 %67.94 %
Impaired loans12,034 13,376 
Classified loans not considered impaired1,645 14 
Total classified and impaired loans$13,679 $13,390 
ALLL as % of classified loans68.23 %63.64 %
 
Impaired loans decreased $1.3 million between December 31, 2020 and December 31, 2021 and the specific allowance related to those impaired loans decreased $79,000 between December 31, 2020 and December 31, 2021. The level of “pass” loans increased approximately $190.3 million between December 31, 2020 and December 31, 2021, and the related formula allowance decreased $274,000 during the same period. The formula allowance for "pass loans" is derived from loss factors using migration analysis and management's consideration of qualitative factors. The increase in formula allowance for "pass loans" was partially attributed to an adjustment in qualitative factor for COVID-19 related economic uncertainty. The unallocated reserve totaled $769,000, or 8.2% of the total allowance for credit losses at December 31, 2021, and $275,000, or 3.2%, of the total allowance for credit losses at December 31, 2020. In evaluating the level of the unallocated reserve, management considered loan relationships, construction and land development concentrations, and loss history relative to peers.

The specific allowance portion of the analysis is designed to be self-correcting by taking into account the current loan loss experience based on that segment of the portfolio. By analyzing the estimated losses inherent in the loan portfolio on a quarterly basis, management is able to adjust specific and inherent loss estimates using the most recent information available. In performing the periodic migration analysis, management believes that historical loss factors used in the computation of the formula allowance need to be adjusted to reflect current changes in market conditions and trends in the loan portfolio. There are a number of other factors which are reviewed when determining adjustments in the historical loss factors. Those factors include (1) trends in delinquent and nonaccrual loans, (2) trends in loan volume and terms, (3) effects of changes in lending policies, (4)
37
concentrations of credit, (5) competition, (6) national and local economic trends and conditions, (7) experience of lending staff, (8) loan review and Board of Directors oversight, (9) high balance loan concentrations, and (10) other business conditions.

The general reserve requirements (ASC 450-70) were adjusted as a result of the overall condition of the local, state, and national economies and resultant impact on the local lending base. This has resulted in a lower qualitative component being used for the general reserve calculation. The stake-in-the-ground methodology requires the Company to use December 31, 2005 as the starting point of the look back period to capture loss history and better capture an entire economic cycle. Time horizons are subject to Management's assessment of the current period, taking into consideration changes in business cycles and environment changes.

Management and the Company’s lending officers evaluate the loss exposure of classified and impaired loans on a weekly basis and, through discussions and officer meetings, as conditions change. The Company’s Loan Committee meets weekly, serving as a forum to discuss specific problem assets that pose significant concerns to the Company and to keep the Board of Directors informed through committee minutes. All special mention and classified loans are reported quarterly on Problem Asset Reports and Impaired Loan Reports and are reviewed by senior management. Migration analysis and impaired loan analysis are performed on a quarterly basis and adjustments are made to the allowance as deemed necessary. The Board of Directors is kept abreast of any changes or trends in problem assets on a monthly basis, or more often if required.

The specific allowance for impaired loans is measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. The amount of impaired loans is not directly comparable to the amount of nonperforming loans. The primary differences between impaired loans and nonperforming loans are: (i) all loan categories are considered in determining nonperforming loans while impaired loan recognition is limited to commercial and industrial loans, commercial and residential real estate loans, construction loans, and agricultural loans, and (ii) impaired loan recognition considers not only loans 90 days or more past due, restructured loans and nonaccrual loans but may also include problem loans other than delinquent loans.

A loan is considered to be impaired when, based upon current information and events, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans include nonaccrual loans, troubled debt restructures, and performing loans in which full payment of principal or interest is not expected. Management bases the measurement of these impaired loans either on the fair value of the loan's collateral or the expected cash flows on the loans discounted at the loan's stated interest rates. Cash receipts on impaired loans not performing to contractual terms and that are on nonaccrual status are used to reduce principal balances. Impairment losses are included in the allowance for credit losses through a charge to the provision, if applicable.

At December 31, 2021 and 2020, the recorded investment in loans for which impairment has been recognized totaled $12.0 million and $13.4 million, respectively. Included in total impaired loans at December 31, 2021, are $355,000 of impaired loans for which the related specific allowance is $130,000, as well as $11.7 million of impaired loans that, as a result of excess collateral or excess in the calculation of net present value of future cash flows, did not need a specific allowance. Total impaired loans at December 31, 2020 included $682,000 of impaired loans for which the related specific allowance was $209,000, as well as $12.7 million of impaired loans that as a result of excess collateral or excess in the calculation of net present value of future cash flows, did not have a specific allowance. The average recorded investment in impaired loans was $12.8 million and $15.4 million during the years ended December 31, 2021 and 2020, respectively. 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, income is recognized under the accrual method.

The largest category of impaired loans at December 31, 2021 was real estate construction and development loans, comprising 93.3% of total impaired loans. Impaired commercial and industrial loans decreased $466,000, impaired real estate mortgage loans decreased $1,098,000, impaired construction loans increased $169,000, and impaired agricultural loans increased $53,000 during the year ended December 31, 2021. Specific collateral related to impaired loans is reviewed for current appraisal information, economic trends within geographic markets, loan-to-value ratios, and other factors that may impact the value of the loan collateral. Adjustments are made to collateral values as needed for these factors. Of total impaired loans, approximately $11.4 million, or 94.5%, were secured by real estate at December 31, 2021, as compared to $12.8 million, or 95.4%, of total impaired loans at December 31, 2020.

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The following table summarizes the components of impaired loans and their related specific allowance at December 31, 2021 and 2020. 
 BalanceAllowanceBalanceAllowance
(In thousands)December 31, 2021December 31, 2021December 31, 2020December 31, 2020
Commercial and industrial$— $— $466 $— 
Real estate – mortgage146 3 1,244 13 
Real estate construction and development11,226 — 11,057 — 
Agricultural662 127 609 196 
Installment and student loans— — — — 
Total impaired loans$12,034 $130 $13,376 $209 

Included in impaired loans are loans modified in troubled debt restructurings (TDRs), where concessions have been granted to borrowers experiencing financial difficulties in an attempt to enhance collection. The Company makes various types of concessions when structuring TDRs including rate reductions, payment extensions, and forbearance.

At December 31, 2021, total TDRs of $2,594,000 included $2,206,000 in real estate construction balances, $146,000 in residential mortgage balances, and $242,000 in agricultural balances. At December 31, 2020, total TDRs of $3,426,000 included $2,452,000 in real estate construction balances, $609,000 in agricultural balances, and $365,000 in residential mortgage balances.

Total TDRs decreased by 24.3% at December 31, 2021, as compared to December 31, 2020. Nonaccrual TDRs decreased by 16.4% and accruing TDRs decreased by 67.1% over the same period. Concessions granted include lengthened maturities and/or rate reductions that enabled the borrower to complete projects. Current decreases are related to a recovering real estate market.
 
The following tables summarizes TDRs by type, classified separately as nonaccrual or accrual, which are included in impaired loans at December 31, 2021 and December 31, 2020.
 Total TDRsNonaccrual TDRsAccruing TDRs
 (In thousands)
December 31, 2021December 31, 2021December 31, 2021
Commercial and industrial$— $— $— 
Real estate - mortgage:   
Commercial real estate— — — 
Residential mortgages146 — 146 
Total real estate mortgage146 — 146 
Real estate construction and development2,206 2,206 — 
Agricultural242 212 30 
Installment and student loans— — — 
Total Troubled Debt Restructurings$2,594 $2,418 $176 
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 Total TDRsNonaccrual TDRsAccruing TDRs
 (In thousands)
December 31, 2020December 31, 2020December 31, 2020
Commercial and industrial$— $— $— 
Real estate - mortgage:   
Commercial real estate— — — 
Residential mortgages365 — 365 
Total real estate mortgage365 — 365 
Real estate construction and development2,452 2,452 — 
Agricultural609 439 170 
Installment and student loans— — — 
Total Troubled Debt Restructurings$3,426 $2,891 $535 

Of the $2.6 million in total TDRs at December 31, 2021, $2.4 million were on nonaccrual status at period-end. Of the $3.4 million in total TDRs at December 31, 2020, $2.9 million were on nonaccrual status at period-end. As of December 31, 2021, the Company has no commercial real estate (CRE) workouts whereby an existing loan was restructured into multiple new loans.

For a restructured loan to return to accrual status there needs to be at least six months successful payment history. In addition, the Company’s Credit Administration performs a financial analysis of the credit to determine whether the borrower has the ability to continue to perform successfully over the remaining life of the loan. This includes, but is not limited to, a review of financial statements and a cash flow analysis of the borrower. Only after determining that the borrower has the ability to perform under the terms of the loans will the restructured credit be considered for accrual status.
 
The following table summarizes special mention loans by type for the years ended December 31, 2021 and December 31, 2020.
(In thousands)December 31, 2021December 31, 2020
Commercial and industrial$— $1,307 
Real estate - mortgage:  
Commercial real estate29,092 14,343 
Residential mortgages— — 
Home equity loans— — 
Total real estate mortgage29,092 14,343 
RE construction & development— — 
Agricultural11,197 1,434 
Installment and student loans— 11 
Total Special Mention Loans$40,289 $17,095 

The Company focuses on competition and other economic conditions within its market area and other geographical areas in which it does business, which may ultimately affect the risk assessment of the portfolio. The Company continues to experience increased competition from major banks, local independents and non-bank institutions which creates pressure on loan pricing. The Company continues to place increased emphasis on reducing both the level of nonperforming assets and the level of losses on the disposition of these assets. It is in the best interest of both the Company and the borrowers to seek alternative options to foreclosure in an effort to reduce the impacts on the real estate market. As part of this strategy, the Company enters into troubled debt restructurings, when it improves collection prospects. While business and consumer spending have shown improvement over the last several years, it is difficult to forecast the impact COVID-19 will have on the economy. Local unemployment rates in the San Joaquin Valley have improved, but are expected to substantially increase due to closure of non-essential business and shelter-in-place orders. Management recognizes the increased risk of loss due to the Company's exposure to local and worldwide economic conditions, as well as potentially volatile real estate markets, and takes these factors into consideration when analyzing the adequacy of the allowance for credit losses.

The following table provides a summary of the Company's allowance for credit losses, provisions made to that allowance, and charge-off and recovery activity affecting the allowance for the years indicated.
40
 December 31,
  (Dollars in thousands)20212020
Total loans outstanding at end of period before deducting allowances for credit losses$871,533 $654,347 
Average net loans outstanding during period779,062 639,815 
Balance of allowance at beginning of period8,522 7,908 
Loans charged off:
Real estate— (359)
Commercial, industrial & agricultural— — 
Installment and student loans(1,543)(1,961)
Total loans charged off(1,543)(2,320)
Recoveries of loans previously charged off:  
Real estate18 128 
Commercial, industrial & agricultural91 29 
Installment and student loans138 8 
Total loan recoveries247 165 
Net loans (charged off) recovered(1,296)(2,155)
Provision (recovery of provision) charged to operating expense2,107 2,769 
Balance of allowance for credit losses at end of period$9,333 $8,522 
Net loan (charge-offs) recoveries to total average loans(0.17)%(0.34)%
Net loan (charge-offs) recoveries to loans at end of period(0.15)%(0.33)%
Allowance for credit losses to total loans at end of period1.07 %1.30 %
Net loan (charge-offs) recoveries to allowance for credit losses(13.89)%(25.29)%
Net loan (charge-offs) recoveries to provision (recovery of provision) for credit losses(61.51)%(77.83)%
 
Loan charge-offs decreased $777,000 during the year ended December 31, 2021, when compared to the year ended December 31, 2020. Loan recoveries increased $165,000 during the same period. Student loan charge-offs totaled $1,439,000 and $1,947,000 during the years ended 2021 and 2020, respectively. The charge-offs in the student loan portfolio were primarily related to the Antigua medical school loans. Additions to the overdraft reserve of $7,000 and $14,000 were made during the same periods.

At December 31, 2021 and 2020, $669,000 and $606,000, respectively, of the formula allowance was allocated to unfunded loan commitments and was, therefore, carried separately in Other Liabilities on the consolidated balance sheets.

Management believes that the 1.07% credit loss allowance to total loans at December 31, 2021 is adequate to absorb known and inherent risks in the loan portfolio. There is no guarantee, however, against economic conditions or other circumstances materializing which could adversely affect the Company's service areas resulting in increased losses in the loan portfolio not captured by the current allowance for loan losses. Management is not currently aware of any conditions that may adversely affect the levels of losses incurred in the Company’s loan portfolio.

The allocations to specific loan categories are estimates based upon the same factors considered by management in determining the amount of additional provisions to the credit loss allowance and the overall adequacy of the allowance for credit losses. The unallocated portion provides for coverage of credit losses inherent in the loan portfolio but not captured in the loss factors used in the risk rating-based component or in the specific impairment reserve component of the allowance for credit losses. The unallocated portion acknowledges the inherent imprecision of all loss prediction models.
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 20212020
  (Dollars in thousands)Allowance
for Credit Losses		% of LoansAllowance
for Credit Losses		% of Loans
Commercial and industrial$597 0.07 %$625 0.10 %
Real estate – mortgage1,174 0.14 %575 0.09 %
RE construction and development2,840 0.33 %3,722 0.57 %
Agricultural1,233 0.14 %711 0.11 %
Installment and student loans2,720 0.31 %2,614 0.40 %
Not allocated769 0.10 %275 0.04 %
 $9,333 1.07 %$8,522 1.30 %
 
During 2021, reserve allocations as a percentage of loans decreased for commercial and industrial, real estate construction and development, and installment and student loans These decreases are a result of a combination of factors including decreases in charge-offs, classified and past due loans, and credit quality improvements. Increases in reserve allocations for real estate mortgage loans was primarily due to the growth of the loan segment, adjusted by the change in the qualitative factors related to portfolio concentrations and uncertainty related to COVID-19. Reserves for installment and student loans increased although the allowance as a percentage of loans decreased for that segment. The increase in reserve was attributed to an increase in loss factor on installment and student loans.

During 2020, reserve allocations as a percentage of loans decreased for commercial and industrial, real estate mortgage, and agricultural loans. These decreases are a result of a combination of factors including decreases in charge-offs, classified and past due loans, and credit quality improvements. Increases in reserve allocations for real estate construction an development loans were primarily due to the growth of the loan segment, adjusted by the change in the qualitative factors related to portfolio concentrations and uncertainty related to COVID-19. Increases in reserve allocation for installment loans were a result of an increase in loss factors attributed to the student loan portfolio and qualitative adjustments related to student loan forbearance balances. The qualitative adjustments related to the student loan forbearance balances result in a 5% reserve for pharmacy school forbearance balances and a 15% reserve for medical school forbearance balances.

The following summarizes the allowance for credit losses related to the specific, formula, and unallocated reserves for the year-ends shown:
 December 31,
(In thousands)20212020
Formula allowance$8,434 $8,038 
Specific allowance130 209 
Unallocated allowance769 275 
Total allowance$9,333 $8,522 
 
The total formula allowance has increased in the current period as a result of increased loan balances, qualitative adjustments for COVID-19, and the allowance attributed to student loans.

No loans were classified as doubtful at December 31, 2021 or December 31, 2020.

The accrual of interest income on loans is discontinued when reasonable doubt exists with respect to the timely collectability of interest or principal due to the inability of the borrower to comply with the terms of the loan agreement. Outside of student loans, loans are typically placed on nonaccrual status when the payment of principal or interest is 90 days past due or earlier when the conditions warrant. Interest collected thereafter is credited to principal to the extent necessary to eliminate doubt as to the collectability of the net carrying amount of the loan. Exceptions may be granted to this policy if the loans are well secured and in the process of collection.
 
 The following table sets forth nonperforming assets as of the dates indicated:
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 December 31,
   (Dollars in thousands)20212020
Nonaccrual loans (1)$11,438 $11,496 
Accruing restructured loans176 535 
Loans, past due 90 days or more, still accruing453 513 
Total non-performing loans12,067 12,544 
Other real estate owned4,582 5,004 
Total non-performing assets$16,649 $17,548 
Non-performing loans to total gross loans1.39 %1.91 %
Non-performing assets to total gross loans1.92 %2.68 %
Allowance for loan losses to nonaccrual loans78.49 %70.96 %
 (1) Included in nonaccrual loans at December 31, 2021 and 2020 are restructured loans totaling $2,418 and $2,891, respectively.

Non-performing assets at December 31, 2021 decreased $899,000 between December 31, 2021 and December 31, 2020, due to decreases of $359,000 in accruing restructured loans, decreases of $58,000 in nonaccrual loans, and decreases in other real estate owned.

Non-performing assets decreased $3,677,000 between December 31, 2020 and December 31, 2019, due to decreases of $1,854,000 in accruing restructured loans, decreases of $1,749,000 in other real estate owned, and decreases of $201,000 in nonaccrual loans, offset by increases loans past due more than 90 days and still accruing.

The following table summarizes various nonperforming components of the loan portfolio as compared to total loans for the periods shown.
(In thousands)December 31, 2021December 31, 2020
Provision for credit losses during period$2,107 $2,769 
Allowance as % of nonaccrual loans78.49 %70.96 %
Nonperforming loans as % total loans1.39 %1.91 %
Restructured loans as % total loans0.30 %0.52 %

In determining the adequacy of the underlying collateral related to these loans, management monitors trends within specific geographical areas, loan-to-value ratios, appraisals, and other credit issues related to specific loans.

Management continues to monitor and reduce the level of problem assets by working with borrowers to identify options, such as loan restructures, which may help borrowers facing difficulties. Restructured loan numbers have been greatly reduced over the last four years. Net loan charge-offs during the year ended December 31, 2021 totaled $1.3 million, as compared to net loan charge-offs of $2.2 million for the year ended December 31, 2020. Approximately 39 loans were charged-off during the year ended December 31, 2021, compared to 49 loans during the year ended December 31, 2020. Net loan charge-offs totaling $1,296,000 during the year ended December 31, 2021, included $348,000 in net charge-offs during the quarter ended March 31, 2021, $175,000 in net charge-offs during the quarter ended June 30, 2021, $509,000 in net charge-offs during the quarter ended September 30, 2021, and $264,000 in net charge-offs during the fourth quarter of 2021. Charge-offs of $1,439,000 during the year were related to the student loan portfolio. The percentage of net charge-offs to average loans was 0.17%, for the year ended December 31, 2021.

The loan portfolio increased from $655.4 million at December 31, 2020 to $869.3 million at December 31, 2021. Nonperforming loans decreased to $12.1 million at December 31, 2021, from $12.5 million at December 31, 2020. Nonaccrual loans and accruing restructured loans are included in nonperforming loans. During the same period, total impaired and classified loans increased from $13.4 million at December 31, 2020, to $13.7 million at December 31, 2021.

The following table summarizes the nonaccrual totals by loan category for the periods shown:
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 BalanceChange
(In thousands)December 31, 2021December 31, 20202021-2020
Commercial and industrial$— $— $— 
Real estate - mortgage— — — 
Real estate - construction11,226 11,057 169 
Agricultural212 439 (227)
Total Nonaccrual Loans$11,438 $11,496 $(58)
 
Loans past due more than 30 days receive management attention and are monitored for increased risk. As of December 31, 2021 and 2020 loans past due more than 30 days totaled $18.4 million and $11.1 million, respectively. Impaired loans, nonaccrual and restructured loans are reviewed for specific reserve allocations and the allowance for credit losses is adjusted accordingly.

Except for the loans included in the above tables, there were no loans at December 31, 2021, where the known credit problems of a borrower made doubtful the ability of such borrower to comply with the present loan repayment terms resulting in such loan being included as nonaccrual, past due, or restructured at some future date.

Liquidity and Capital Resources
The Company's asset/liability management, liquidity strategy, and capital planning is guided by policies, formulated and monitored by the Asset and Liability Management Committee ("ALCO") and Management, to provide adequate liquidity and maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities.

Liquidity

Liquidity management may be described as the ability to maintain sufficient cash flows to fulfill both on- and off-balance sheet financial obligations, including loan funding commitments and customer deposit withdrawals, without straining the Company’s equity structure. To maintain an adequate liquidity position, the Company relies on, in addition to cash and cash equivalents, cash inflows from deposits and short-term borrowings, repayments of principal on loans and investments, and interest income received. The Company's principal cash outflows are for loan origination, purchases of investment securities, depositor withdrawals and payment of operating expenses.

The Company's liquid asset base, which generally consists of cash and due from banks, federal funds sold, and investment securities, is maintained at levels deemed sufficient to provide the cash necessary to fund loan growth, unfunded loan commitments, and deposit runoff. Included in this framework is the objective of maximizing the yield on earning assets. This is generally achieved by maintaining a high percentage of earning assets in loans and investment securities, which are higher yielding assets compared to cash. At December 31, 2021, loans represented 65.5% of total assets and accounted for a loan to deposit ratio of 73.4%, as compared to 59.9% of total assets and a loan to deposit ratio of 68.7% at December 31, 2020. Investment securities represented 13.72% of total assets at December 31, 2021, compared to 7.89% at December 31, 2020. Liquid assets at December 31, 2021 include cash and cash equivalents totaling $219.2 million, as compared to $294.1 million at December 31, 2020.

Liabilities used to fund liquidity sources include core and non-core deposits as well as short-term borrowings capability. Core deposits, which comprised approximately 98.2% of total deposits at December 31, 2021, provide a significant and stable funding source for the Company. At December 31, 2021, unused lines of credit with the Federal Home Loan Bank, Pacific Coast Banker's Bank, Zion's Bank, Union Bank and the Federal Reserve Bank totaling $403.7 million were collateralized in part by certain qualifying loans in the Company’s loan portfolio. The carrying value of loans pledged on these used and unused borrowing lines totaled $490.5 million at December 31, 2021. For a further detail of the Company’s borrowing arrangements, see Note 8 of the consolidated financial statements..
 
Cash and cash equivalents have fluctuated during the two years ended December 31, 2021 and 2020, with period-end balances as follows (from Consolidated Statements of Cash Flows – in 000’s):
 Balance
December 31, 2021$219,219 
December 31, 2020$294,069 
December 31, 2019$218,995 
44
Cash and cash equivalents decreased $74.9 million during the year ended December 31, 2021, and increased $75.1 million during the year ended December 31, 2020.

The Company had a net cash inflow from operations of $16.6 million for the year ended December 31, 2021, and a net cash inflow from operations totaling $13.8 million for the period ended December 31, 2020. The Company experienced net cash outflows from investing activities totaling $319.4 million and net cash outflows of $65.5 million during the years ended December 31, 2021 and December 31, 2020, respectively.

During the year ended December 31, 2021, the Company experienced net cash inflows from financing activities totaling $228.0 million due primarily to increases in demand deposits and savings accounts. The Company experienced net cash outflows from investing activities totaling $319.4 million as a result of purchases of residential mortgage loan pools and purchases of investment securities.

Liquidity risk arises from the possibility the Company may not be able to satisfy current or future financial commitments, or the Company may become unduly reliant on alternative funding sources. The Company maintains a liquidity risk management policy and contingency funding plan to address and manage this risk. The policy identifies the primary sources of liquidity, sets wholesale funding limits, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. The liquidity position is continually monitored and reported on a monthly basis to the Board of Directors. In addition to ongoing monitoring, the Company performs liquidity stress testing in accordance with industry best practices to ensure cash flow requirements are met under stressed scenarios.

The liquidity of the parent company, United Security Bancshares, is separate from the Bank and is primarily dependent on the payment of cash dividends by its subsidiary, United Security Bank, subject to limitations imposed by the Financial Code of the State of California and federal and state banking regulations. During the years ended December 31, 2021 and December 31, 2020, the Bank paid $7.9 million and $8.0 million in cash dividends to the parent company, respectively.

Capital and Dividends

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements adopted by the Board of Governors of the Federal Reserve System (the “Board of Governors”). 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.

The Company has adopted a capital plan that includes guidelines and trigger points to ensure sufficient capital is maintained at the Bank and the Company, and that capital ratios are maintained at a level deemed appropriate under regulatory guidelines given the level of classified assets, concentrations of credit, allowance for credit losses, current and projected growth, and projected retained earnings. The capital plan also contains contingency strategies to obtain additional capital as required to fulfill future capital requirements for both the Bank, as a separate legal entity, and the Company on a consolidated basis. The capital plan requires the Bank to maintain a ratio of tangible shareholders' equity to total tangible assets equal to or greater than 9%. The Bank’s ratio of tangible shareholders’ equity to total tangible assets was 9.5% and 11.2% at December 31, 2021 and 2020, respectively.

The Company's equity capital totaled $120.2 million at December 31, 2021, compared to $117.8 million at December 31, 2020. During the year ended December 31, 2021, the Holding Company paid $7.5 million in cash dividends to shareholders.

For a more detailed discussion of regulatory capital requirements and dividends, see Note 21 to the consolidated financial statements, as well as under the captions “Supervision and Regulation - The Holding Company - Capital Adequacy” and "Supervision and Regulation - The Bank - Capital Standards” set forth in Part I, Item I. of this Annual Report.

As of December 31, 2021, the Company and the Bank meet all capital adequacy requirements to which they are subject. Management believes that, under the current regulations, both will continue to meet their minimum capital requirements in the foreseeable future.
45
Reserve Balances

The Bank is required to maintain average reserve balances with the Federal Reserve Bank.The Bank implemented a deposit reclassification program which allows the Company to reclassify a portion of transaction accounts to non-transaction accounts for reserve purposes. The deposit reclassification program is provided by a third-party vendor and has been approved by the Federal Reserve Bank. At December 31, 2021, the Bank was not subject to a reserve requirement.
46
Critical Accounting Estimates and Policies

The Company has identified certain accounting estimates which involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact of its financial condition or results of operations. The Company We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 - Operations and Summary of Significant Accounting Policies in the notes to the consolidated financial statements included elsewhere in this report. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, the policies noted below could be deemed to meet the SEC’s definition of a critical accounting policy.

Allowance for Credit Losses

The allowance for credit losses represents management's estimate of probable incurred credit losses inherent in the loan portfolio. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment. The use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions may be susceptible to significant variations. The loan portfolio represents the largest asset type on the consolidated balance sheet. Notes 1 and 3 to the consolidated financial statements describe the methodology used to determine the allowance for credit losses. A discussion of the factors driving changes in the amount of the allowance for credit losses is included in the Asset Quality and Allowance for Credit Losses section of this financial review.

Fair Value

Effective January 1, 2007, a fair value option accounting standard was applied to the Company's junior subordinated debt. Concurrently, the accounting standards related to fair value measurements were adopted. The accounting standards related to fair value measurements define how applicable assets and liabilities are to be valued, and requires expanded disclosures in regard to financial instruments carried at fair value. The fair value measurement accounting standard establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices, or whose fair value can be measured from actively quoted prices of related financial instruments, generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments infrequently traded or not quoted in an active market will generally have little or no pricing observability and a higher degree of subjectivity. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market, and the characteristics specific to the transaction. Determining fair values under the accounting standards may include judgments related to measurement factors that may vary from actual transactions executed in the marketplace. For the years ended December 31, 2021 and 2020, fair value adjustments related to the junior subordinated debt resulted in losses of $268,000 and $174,000, respectively. (See Notes 10 and 15 of the Notes to Consolidated Financial Statements for additional information about financial instruments carried at fair value.)


47

Item 8 - Financial Statements and Supplementary Data

Index to Consolidated Financial Statements:

Management’s Report on Internal Control over Financial Reporting

Report of Independent Registered Public Accounting Firm (PCAOB ID: 659)

Consolidated Balance Sheets - December 31, 2021 and 2020

Consolidated Statements of Income -
Years Ended December 31, 2021 and 2020

Consolidated Statements of Comprehensive Income -
Years Ended December 31, 2021 and 2020

Consolidated Statements Changes in Shareholders' Equity -
Years Ended December 31, 2021 and 2020

Consolidated Statements of Cash Flows -
Years Ended December 31, 2021 and 2020

Notes to Consolidated Financial Statements
48
Table of Contents
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
Management of United Security Bancshares, including its consolidated subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2021. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
 
The Company’s system of internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and fair presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
 
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 based upon criteria in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As a result of this assessment, management has concluded that the Company’s internal control over financial reporting is effective as of
December 31, 2021.

49
Table of Contents
Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of
United Security Bancshares and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of United Security Bancshares and Subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the PCAOB. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Credit Losses

As described in Notes 1 and 3 to the consolidated financial statements, the Company’s allowance for credit losses balance was $9.3 million at December 31, 2021. The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company’s loan portfolio as of the balance sheet date. The overall allowance consists of three primary components: specific allowance related to impaired loans; formula allowance for inherent losses related to loans that are evaluated on a collective basis, and an unallocated allowance that is based on management’s evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. The determination of the formula allowance for credit loss is calculated by applying loss factors to outstanding loans based on estimates made by management. Loss factors are based on the historical loss experience and on the internal risk grade of those loans and may be adjusted for qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. Qualitative factors that may affect collectability of the loan portfolio include, consideration of 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
50
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.

We identified management’s use of qualitative factors that affect the collectability of the loan portfolio and internal risk classification of loans as critical audit matters. The Company uses qualitative factors to estimate losses that are not captured in the historical loss rates. The Company assigned loans by internal risk classification categorized as pass, special mention, substandard, doubtful, or loss. Determination of qualitative factors and internal risk classifications involves significant management judgement. Auditing management’s judgments regarding the determination of qualitative factors and internal risk classifications involved a high degree of subjectivity and judgement.

The primary procedures we performed to address these critical audit matters included:

•We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s calculation of the allowance for credit losses, including, the determination of the accuracy, appropriateness, approval of the risk classifications and identification and determination of the qualitative assumptions used in the measurement of the qualitative factors, and evaluation of the appropriateness of the changes made to the qualitative factors.

•Testing a risk-based targeted selection of loans to gain substantive evidence that the Company is appropriately rating these loans in accordance with its policies, and that the risk classifications for the loans are reasonable.

•Obtained management’s analysis and supporting documentation related to the qualitative factors and evaluated whether the qualitative factors used in the calculation of the allowance for credit losses are reasonable.

•Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses, and testing the calculation itself, including completeness and accuracy of the data used in the calculation, application of the loan risk classifications determined by management and used in the calculation, application of the qualitative factors determined by management and used in the calculation, and recalculation of the Allowance for Credit Losses balance.



/s/ Moss Adams LLP

San Francisco, California
March 9, 2022

We have served as the Company’s auditor since 1999.


51
United Security Bancshares and Subsidiaries
Consolidated Balance Sheets
December 31, 2021 and 2020
(In thousands except shares)December 31, 2021December 31, 2020
Assets  
Cash and noninterest-bearing deposits in other banks$31,057 $29,490 
Due from Federal Reserve Bank ("FRB")188,162 264,579 
Cash and cash equivalents219,219 294,069 
Investment securities (at fair value)
Available-for-sale ("AFS") securities178,902 82,341 
Marketable equity securities3,744 3,851 
Total investment securities182,646 86,192 
Loans 869,314 655,411 
Unearned fees and unamortized loan origination costs - net2,219 (1,064)
Allowance for credit losses(9,333)(8,522)
Net loans862,200 645,825 
Premises and equipment - net8,950 9,110 
Accrued interest receivable7,530 8,164 
Other real estate owned ("OREO")4,582 5,004 
Goodwill4,488 4,488 
Deferred tax assets - net3,615 2,907 
Cash surrender value of life insurance22,338 20,715 
Operating lease right-of-use assets2,594 2,864 
Other assets12,782 13,316 
Total assets$1,330,944 $1,092,654 
Liabilities & Shareholders' Equity  
Liabilities  
Deposits  
Noninterest-bearing$476,749 $391,897 
Interest-bearing711,357 560,754 
Total deposits1,188,106 952,651 
Operating lease liabilities2,705 2,967 
Other liabilities8,737 8,305 
Junior subordinated debentures (at fair value)11,189 10,924 
Total liabilities1,210,737 974,847 
Commitments and contingencies (Note 14)
Shareholders' Equity  
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 17,028,239 at December 31, 2021 and 17,009,883 at December 31, 2020
59,636 59,397 
Retained earnings61,745 59,138 
Accumulated other comprehensive loss(1,174)(728)
Total shareholders' equity120,207 117,807 
Total liabilities and shareholders' equity$1,330,944 $1,092,654 
See accompanying notes to consolidated financial statements
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United Security Bancshares and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2021 and 2020
(In thousands except shares and EPS)20212020
Interest Income:  
Interest and fees on loans$35,154 $32,404 
Interest on investment securities2,337 1,433 
Interest on deposits in FRB239 730 
Total interest income37,730 34,567 
Interest Expense:  
Interest on deposits1,899 2,014 
Interest on other borrowed funds180 276 
Total interest expense2,079 2,290 
Net Interest Income 35,651 32,277 
Provision for Credit Losses2,107 2,769 
Net Interest Income after Provision for Credit Losses33,544 29,508 
Noninterest Income:  
Customer service fees2,793 2,663 
Increase in cash surrender value of bank-owned life insurance555 504 
Unrealized (loss) gain on fair value of marketable equity securities(106)74 
Gain on proceeds from bank-owned life insurance— 310 
   (Loss) gain on fair value of junior subordinated debentures (660)970 
   Gain on sale of assets8 — 
Other795 653 
Total noninterest income3,385 5,174 
Noninterest Expense:  
Salaries and employee benefits11,713 10,825 
Occupancy expense3,537 3,475 
Data processing565 493 
Professional fees3,572 3,327 
Regulatory assessments743 459 
Director fees385 376 
Correspondent bank service charges88 71 
Net cost on operation and sale of OREO256 972 
Other2,756 2,272 
Total noninterest expense23,615 22,270 
Income Before Provision for Taxes13,314 12,412 
Provision for Taxes on Income3,216 3,451 
Net Income$10,098 $8,961 
Net Income per common share  
Basic$0.59 $0.53 
Diluted$0.59 $0.53 
Shares on which net income per common share were based  
Basic17,011,379 16,976,704 
Diluted17,030,874 16,998,585 
 See accompanying notes to consolidated financial statements
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United Security Bancshares and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2021 and 2020
  (In thousands)
20212020
Net Income$10,098 $8,961 
Unrealized holdings (losses) gains on debt securities(1,229)1,143 
Unrealized gain (loss) on unrecognized post-retirement costs203 (135)
Unrealized gain (loss) on junior subordinated debentures392 (1,144)
Other comprehensive loss, before tax(634)(136)
Tax benefit (expense) related to debt securities363 (338)
Tax (expense) benefit related to unrecognized post-retirement costs(60)40 
Tax (expense) benefit related to junior subordinated debentures(115)338 
Total other comprehensive loss(446)(96)
Comprehensive Income$9,652 $8,865 
See accompanying notes to consolidated financial statements

United Security Bancshares and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2021 and 2020
Common Stock
(In thousands except shares)Number of SharesAmountRetained EarningsAccumulated Other Comprehensive Income (Loss)Total
Balance December 31, 2019 (1)16,973,885 $58,973 $57,647 $(632)$115,988 
(1) Excludes 35,575 unvested restricted shares
Other comprehensive income(96)(96)
Dividends on common stock ($0.33 per share)
(5,600)(5,600)
Dividends payable ($0.11 per share)
(1,870)(1,870)
Restricted stock units released35,998 
Tax benefit from restricted stock units released(1)(1)
Stock-based compensation expense425 425 
Net Income8,961 8,961 
Balance December 31, 2020 (2)17,009,883 59,397 59,138 (728)117,807 
(2) Excludes 11,924 unvested restricted shares
Other comprehensive loss   (446)(446)
Dividends on common stock ($0.33 per share)
(5,619)(5,619)
Dividends payable ($0.11 per share)
(1,872)(1,872)
Restricted stock units released18,356 
Tax benefit from restricted stock units released(10)(10)
Stock-based compensation expense 249  249 
Net Income  10,098  10,098 
Balance December 31, 2021 (3)17,028,239 $59,636 $61,745 $(1,174)$120,207 
(3) Excludes 27,949 unvested restricted shares
See accompanying notes to consolidated financial statements
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United Security Bancshares and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2021 and 2020
(In thousands)20212020
Cash Flows From Operating Activities:  
Net Income $10,098 $8,961 
Adjustments to reconcile net income to cash provided by operating activities:  
Provision for credit losses2,107 2,769 
Depreciation and amortization1,408 1,411 
Amortization of operating lease right-of-use assets(262)(600)
Amortization of premium/discount on investment securities, net953 1,073 
Decrease in accrued interest receivable634 44 
Decrease in accrued interest payable(4)(27)
(Increase) decrease in unearned fees and unamortized loan origination costs, net(151)244 
(Increase) decrease in income taxes receivable(73)367 
Stock-based compensation expense and tax benefit238 425 
(Provision) benefit for deferred income taxes(521)324 
Increase (decrease) in accounts payable and accrued liabilities623 (160)
Write down on other real estate owned— 727 
Loss on sale of other real estate owned1 113 
Unrealized loss (gain) on marketable equity securities106 (74)
Loss (gain) on fair value option of junior subordinated debentures660 (970)
Gain on bank owned life insurance— (310)
Increase in cash surrender value of bank-owned life insurance(555)(504)
Gain on sale of premises and equipment(8)— 
Net decrease (increase) in other assets1,296 (13)
Net cash provided by operating activities16,550 13,800 
Cash Flows From Investing Activities: 
Purchase of correspondent bank stock(8)(45)
Principal payments on available-for-sale securities27,009 23,055 
Purchases of available-for-sale securities(125,749)(29,016)
Purchase of bank-owned life insurance(1,140)(220)
Net increase in loans(218,331)(60,192)
Cash proceeds from sales of other real estate owned251 909 
Cash proceeds from sales of premises and equipment13 — 
Proceeds from bank owned life insurance— 1,243 
Capital expenditures of premises and equipment(1,253)(1,141)
Investment in limited partnership(158)(140)
Net cash used in investing activities(319,366)(65,547)
Cash Flows From Financing Activities:  
Net increase in demand deposit and savings accounts229,389 138,171 
Net increase (decrease) in time deposits6,066 (3,882)
Dividends on common stock(7,489)(7,468)
Net cash provided by financing activities227,966 126,821 
Net (decrease) increase in cash and cash equivalents(74,850)75,074 
Cash and cash equivalents at beginning of year294,069 218,995 
Cash and cash equivalents at end of year$219,219 $294,069 
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Table of Contents
See accompanying notes to consolidated statements
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Table of Contents
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. United Security Bancshares 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 complement 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, 2021 and 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, deferred tax assets and liabilities, 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
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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 and amounts due from banks. 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 2021 or 2020. 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. 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".

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. 

Equity securities are reported at fair value with gains and losses included in non interest income on the Consolidated Statements of Income.

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.
 
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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 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 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
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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:
Buildings31 yearsFurniture 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, 2021 and 2020, goodwill totaled $4.5 million, held at the Company as the reporting unit. During 2021 and 2020, 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, 2021 and 2020 are $238,000 and $425,000, respectively, of share-based compensation.
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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. Disclosures related to key lease components and leasing arrangements are included within the footnotes. 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
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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. 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.

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. The Company anticipates impacts to junior subordinated debt and floating rate loans tied to LIBOR.
s.Reclassifications - Certain reclassifications have been made to prior year financial statements to conform to the classifications used in 2021. 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, 2021 and December 31, 2020:
 
(In thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value (Carrying Amount)
December 31, 2021
Securities available for sale:
U.S. Government agencies$33,206 $260 $(90)$33,376 
U.S. Government sponsored entities & agencies collateralized by mortgage obligations64,880 184 (329)64,735 
Asset-backed securities4,092 38 — 4,130 
Municipal bonds50,872 86 (906)50,052 
Corporate bonds11,000 429 (7)11,422 
U.S. Treasury securities15,186 1 — 15,187 
Total securities available for sale$179,236 $998 $(1,332)$178,902 
December 31, 2020   
Securities available for sale:    
U.S. Government agencies$33,800 $142 $(232)$33,710 
U.S. Government sponsored entities & agencies collateralized by mortgage obligations37,732 722 (9)38,445 
Asset-backed securities3,871 38 — 3,909 
Municipal bonds1,045 13 — 1,058 
Corporate bonds5,000 219 — 5,219 
Total securities available for sale$81,448 $1,134 $(241)$82,341 
 
There were no sales of securities and no gross realized losses or gains on available-for-sale securities during the years ended December 31, 2021 and 2020. There were no other-than-temporary impairment losses during the years ended December 31, 2021 and 2020.

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The amortized cost and fair value of securities available for sale at December 31, 2021, 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.
 December 31, 2021
 Amortized CostFair Value (Carrying Amount)
(In thousands)
Due in one year or less$510 $510 
Due after one year through five years15,725 15,721 
Due after five years through ten years52,700 52,481 
Due after ten years45,421 45,456 
U.S. Government sponsored entities & agencies collateralized by mortgage obligations64,880 64,734 
 $179,236 $178,902 
At December 31, 2021 and 2020, available-for-sale securities with an amortized cost of approximately $94.9 million and $80.5 million (fair value of $95.2 million and $81.4 million, respectively) were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances.

The following summarizes temporarily impaired investment securities at December 31, 2021 and 2020:
 Less than 12 Months12 Months or MoreTotal
(In thousands)Fair Value (Carrying Amount) Unrealized LossesFair Value (Carrying Amount) Unrealized LossesFair Value (Carrying Amount) Unrealized Losses
December 31, 2021
Securities available for sale:
U.S. Government agencies$— $— $9,699 $(90)$9,699 $(90)
U.S. Government sponsored entities & agencies collateralized by mortgage obligations37,258 (329)23 — 37,281 (329)
Municipal bonds39,551 (896)228 (10)39,779 (906)
Corporate bonds5,993 (7)— — 5,993 (7)
U.S. Treasury securities7,416 — 7,416 — 
Total impaired securities$90,218 $(1,232)$9,950 $(100)$100,168 $(1,332)
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 obligations30 (1)1,684 (8)1,714 (9)
Total impaired securities$9,043 $(74)$18,647 $(167)$27,690 $(241)
 
Temporarily impaired securities at December 31, 2021, were comprised of thirty-six municipal bonds, twelve U.S. Government sponsored entities & agencies collateralized by mortgage obligations, six U.S. Government agency securities, two corporate bonds, and one U.S. treasury security. 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.

At December 31, 2021, the decline in fair value of the thirty-six municipal bonds, the twelve U.S. Government sponsored entities and agencies collateralized by mortgage obligations securities, the six U.S. Government agency securities, the two corporate bonds, and one U.S. treasury security 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 more likely than not that it will not 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, 2021.

During the year ended December 31, 2021, the Company recognized $106,000 of unrealized losses related to marketable equity securities, related to one mutual fund, held at December 31, 2021 in the consolidated statements of income. During the year
63
ended December 31, 2020, the Company recognized $74,000 of unrealized gains related to marketable equity securities held at December 31, 2020 in the consolidated statements of income.

The Company had no held-to-maturity or trading securities at December 31, 2021 or December 31, 2020.

3. Loans

Loans are comprised of the following:
 
(In thousands)December 31, 2021December 31, 2020
Commercial and business loans$42,194 $37,349 
Government program loans3,310 10,165 
Total commercial and industrial45,504 47,514 
Real estate – mortgage:  
Commercial real estate331,050 282,951 
Residential mortgages226,926 37,236 
Home improvement and home equity loans80 107 
Total real estate mortgage558,056 320,294 
Real estate construction and development154,270 175,016 
Agricultural60,239 51,079 
Installment and student loans51,245 61,508 
Total loans$869,314 $655,411 
 
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 5.2% of total loans at December 31, 2021, 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 $1,731,000 in Paycheck Protection Program ("PPP") loans administrated by the Small Business Administration ("SBA"). PPP loans have a two or five years term and earn interest at 1%. In addition to interest, the Company receives a processing fee ranging from 3%-5% of the loan balance for each PPP loan. The fees are recognized as income over the contractual life of the loan. At December 31, 2021, there were $129,000 outstanding in net unearned PPP fees. 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 64.2% of total loans at December 31, 2021, are secured by trust deeds on primarily commercial property and 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, and a majority are conventional mortgages that were purchased as a pool.
•Home improvement and home equity loans comprise a relatively small portion of total real estate mortgage loans. Home equity loans are generally secured by junior trust deeds, but may be secured by 1st trust deeds.
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Real estate construction and development loans, representing 17.7% of total loans at December 31, 2021, 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 6.9% of total loans at December 31, 2021, and are generally secured by land, equipment, inventory and receivables. Repayment is from the cash flow of the borrower.

Installment loans, including student loans, represent 5.9% of total loans at December 31, 2021 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, 2021 and 2020, these financial instruments include commitments to extend credit of $239.1 million and $216.8 million, respectively, and standby letters of credit of $1.7 million and $3.7 million, 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:
(In thousands)20212020
Aggregate amount outstanding, beginning of year$1,900 $1,093 
New loans or advances during year7,899 4,950 
Repayments during year(198)(4,143)
Aggregate amount outstanding, end of year$9,601 $1,900 
Undisbursed commitments, end of year$13,100 $21,000 
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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, 2021 (in thousands):
December 31, 2021Loans
30-60 Days Past Due		Loans
61-89 Days Past Due		Loans
90 or More
Days Past Due		Total Past Due LoansCurrent LoansTotal LoansAccruing
Loans 90 or
More Days Past Due
Commercial and business loans$— $— $— $— 42,194 42,194 $— 
Government program loans— — — — 3,310 3,310 — 
Total commercial and industrial— — — — 45,504 45,504 — 
Commercial real estate loans— — — — 331,050 331,050 — 
Residential mortgages6,745 — — 6,745 220,181 226,926 — 
Home improvement and home equity loans12 — — 12 68 80 — 
Total real estate mortgage6,757 — — 6,757 551,299 558,056 — 
Real estate construction and development loans— — 9,021 9,021 145,249 154,270 — 
Agricultural loans— — 209 209 60,030 60,239 — 
Installment and student loans1,628 328 453 2,409 48,836 51,245 453 
Total loans$8,385 $328 $9,683 $18,396 $850,918 $869,314 $453 

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The following is a summary of delinquent loans at December 31, 2020 (in thousands):
December 31, 2020Loans
30-60 Days Past Due		Loans
61-89 Days Past Due		Loans
90 or More
Days Past Due		Total Past Due LoansCurrent LoansTotal LoansAccruing
Loans 90 or
More Days Past Due
Commercial and business loans$184 $— $— $184 $37,165 $37,349 $— 
Government program loans— — — — 10,165 10,165 — 
Total commercial and industrial184 — — 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 loans510 875 513 1,898 59,610 61,508 513 
Total loans$694 $875 $9,557 $11,126 $644,285 $655,411 $513 

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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.

All loans, outside of student loans, where principal or interest is due and unpaid for 90 days or more are placed on nonaccrual and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income. See Note 4- Student Loans for specific information on the student loan portfolio.

When a loan is placed on 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, 2021 and 2020.
 
The following is a summary of nonaccrual loan balances at December 31, 2021 and 2020 (in thousands):
December 31, 2021December 31, 2020
Commercial and business loans$— $— 
Government program loans— — 
Total commercial and industrial— — 
Commercial real estate loans— — 
Residential mortgages— — 
Home improvement and home equity loans— — 
Total real estate mortgage— — 
Real estate construction and development loans11,226 11,057 
Agricultural loans212 439 
Installment and student loans— — 
Total loans$11,438 $11,496 
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.

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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.

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The following is a summary of impaired loans at December 31, 2021 (in thousands):
December 31, 2021Unpaid
Contractual
Principal Balance		Recorded
Investment
With No Allowance (1)		Recorded
Investment
With Allowance (1)		Total
Recorded Investment		Related AllowanceAverage
Recorded Investment (2)		Interest Recognized (2)
Commercial and business loans$— $— $— $— $— $156 $— 
Government program loans— — — — — 110 — 
Total commercial and industrial— — — — — 266 — 
Commercial real estate loans— — — — — 538 — 
Residential mortgages146 — 146 146 3 377 6 
Home improvement and home equity loans— — — — — — — 
Total real estate mortgage146 — 146 146 3 915 6 
Real estate construction and development loans11,226 11,226 — 11,226 — 11,133 272 
Agricultural loans660 453 209 662 127 499 41 
Installment and student loans— — — — — — — 
Total impaired loans$12,032 $11,679 $355 $12,034 $130 $12,813 $319 
(1) The recorded investment in loans includes accrued interest receivable of $2.
(2) Information is based on the year ended December 31, 2021.    


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The following is a summary of impaired loans at December 31, 2020 (in thousands).
December 31, 2020Unpaid
Contractual
Principal Balance		Recorded
Investment
With No Allowance (1)		Recorded
Investment
With Allowance (1)		Total
Recorded Investment		Related AllowanceAverage
Recorded Investment (2)		Interest Recognized (2)
Commercial and business loans$250 $251 $— $251 $— $551 $23 
Government program loans214 215 — 215 — 236 14 
Total commercial and industrial464 466 — 466 — 787 37 
Commercial real estate loans874 878 — 878 — 1,822 54 
Residential mortgages365 — 366 366 13 867 17 
Home improvement and home equity loans— — — — — — — 
Total real estate mortgage1,239 878 366 1,244 13 2,689 71 
Real estate construction and development loans11,057 11,057 — 11,057 — 11,223 252 
Agricultural loans610 293 316 609 196 675 39 
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 twelve month period ended December 31, 2020.
 
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.
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◦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 and continued satisfactory performance is expected. In addition, the Company typically performs a financial analysis of the credit to determine whether the borrower has the ability to continue to meet payments over the remaining life of the loan. This includes, but is not limited to, a review of financial statements and cash flow analysis of the borrower. Only after determination that the borrower has the ability to perform under the terms of the loans will the restructured credit be considered for accrual status. Although the Company does not have a policy which specifically addresses when a loan may be removed from TDR classification, as a matter of practice, loans classified as TDRs generally remain classified as such until the loan either reaches maturity, a conforming loan is renewed at market terms, or its outstanding balance is paid off.

There were no TDR modifications or defaults during year ended December 31, 2021. There was one new TDR and no defaults during the year ended December 31, 2020.

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 DefaultRecorded Investment on Defaulted TDRs
Troubled Debt Restructurings   
Commercial and business loans— $— $— — $— 
Government program loans— — — — — 
Commercial real estate term loans— — — — — 
Single family residential loans— — — — — 
Home improvement and home equity loans— — — — — 
Real estate construction and development loans— — — — — 
Agricultural loans1 179 — — — 
Installment and student loans— — — — — 
Overdraft protection lines— — — — — 
Total loans1 $179 $— — $— 

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The following tables summarizes all TDR activity by loan category for the years ended December 31, 2021 and 2020 (in thousands).
Year ended December 31, 2021Commercial and IndustrialCommercial Real EstateResidential MortgagesHome Improvement and Home EquityReal Estate Construction DevelopmentAgriculturalInstallment
and Student Loans		Total
Beginning balance$— $— $365 $— $2,452 $609 $— $3,426 
Defaults— — — — — — — — 
Additions— — — — — — — — 
Principal reductions— — (219)— (246)(367)— (832)
Charge-offs— — — — — — — — 
Ending balance$— $— $146 $— $2,206 $242 $— $2,594 
Allowance for loan loss$— $— $3 $— $— $127 $— $130 

Year ended December 31, 2020Commercial and IndustrialCommercial Real EstateResidential MortgagesHome Improvement and Home EquityReal Estate Construction DevelopmentAgriculturalInstallment
and Student Loans		Total
Beginning balance$9 $898 $1,060 $— $2,654 $566 $— $5,187 
Defaults— — — — — — — — 
Principal reductions(9)(898)(695)— (202)(136)— (1,940)
Charge-offs— — — — — — — 
Ending balance$— $— $365 $— $2,452 $609 $— $3,426 
Allowance for loan loss$— $— $13 $— $— $196 $— $209 

The Company makes various types of concessions when structuring TDRs including rate reductions, payment extensions, and forbearance. At December 31, 2021, the Company had 5 restructured loans totaling $2.6 million, as compared to 7 restructured loans totaling $3.4 million at December 31, 2020. The Company had no unfunded commitments outstanding for TDRs at December 31, 2021 and December 31, 2020.

 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:

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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.
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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, 2021 and 2020. The Company did not carry any loans graded as loss at December 31, 2021 or December 31, 2020:

 Commercial and IndustrialCommercial Real EstateReal Estate Construction and DevelopmentAgriculturalTotal
December 31, 2021
(In thousands)
Grades 1 and 2$3,447 $— $— $— $3,447 
Grade 3— 92 — — 92 
Grades 4 and 5 – pass42,054 301,866 143,044 46,739 533,703 
Grade 6 – special mention— 29,092 — 11,197 40,289 
Grade 7 – substandard3 — 11,226 2,303 13,532 
Grade 8 – doubtful— — — — — 
Total$45,504 $331,050 $154,270 $60,239 $591,063 
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 Commercial and IndustrialCommercial Real EstateReal Estate Construction and DevelopmentAgriculturalTotal
December 31, 2020
(In thousands)
Grades 1 and 2$9,811 $— $— $30 $9,841 
Grade 3— 519 — — 519 
Grades 4 and 5 – pass35,919 267,215 163,959 49,006 516,099 
Grade 6 – special mention1,307 14,343 — 1,434 17,084 
Grade 7 – substandard477 874 11,057 609 13,017 
Grade 8 – doubtful— — — — — 
Total$47,514 $282,951 $175,016 $51,079 $556,560 
 
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, 2021 and 2020 (in thousands):

 December 31, 2021December 31, 2020
 Residential MortgagesHome
Improvement and Home Equity		Installment and Student LoansTotalResidential MortgagesHome
Improvement and Home Equity		Installment and Student LoansTotal
Not graded$211,622 $68 $50,421 $262,111 $27,484 $92 $60,414 $87,990 
Pass15,304 12 371 15,687 9,752 15 570 10,337 
Special Mention— — — — — — 11 11 
Substandard— — 453 453 — — 513 513 
Doubtful— — — — — — — — 
Total$226,926 $80 $51,245 $278,251 $37,236 $107 $61,508 $98,851 
 
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.
 
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Home improvement and home equity loans – Because of their junior lien position, these loans have an inherently higher risk level.
 
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 – The Company has engaged in more frequent communication with borrowers to better understand their situation and the challenges faced as a result of COVID-19 and its variants. Outside of the student loan portfolio, the Company has not experienced any direct charge-offs related to COVID-19. The allowance for credit loss calculation, and the resulting provision for credit losses, are impacted by changes in economic conditions. Although economic conditions have improved since the pandemic was declared in March 2020, the credit risk in the loan portfolio remains heightened.
 
The following summarizes the activity in the allowance for credit losses by loan category for the years ended December 31, 2021 and 2020 (in thousands).
December 31, 2021Commercial and IndustrialReal Estate MortgageReal Estate Construction Development AgriculturalInstallment & Student LoansUnallocatedTotal
Beginning balance$625 $575 $3,722 $711 $2,614 $275 $8,522 
(Recovery of provision) provision for credit losses(119)581 (882)522 1,511 494 2,107 
Charge-offs— — — — (1,543)— (1,543)
Recoveries91 18 — — 138 — 247 
Net recoveries (charge-offs)91 18 — — (1,405)— (1,296)
Ending balance$597 $1,174 $2,840 $1,233 $2,720 $769 $9,333 
Period-end amount allocated to:     
Loans individually evaluated for impairment— 3 — 127 — — 130 
Loans collectively evaluated for impairment597 1,171 2,840 1,106 2,720 769 9,203 
Ending balance$597 $1,174 $2,840 $1,233 $2,720 $769 $9,333 
 
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December 31, 2020Commercial and IndustrialReal Estate MortgageReal Estate Construction and Development AgriculturalInstallmentUnallocatedTotal
Beginning balance$1,322 $712 $2,808 $761 $2,132 $173 $7,908 
Provision (recovery of provision) for credit losses(726)(227)1,235 (50)2,435 102 2,769 
Charge-offs— (1)(358)— (1,961)— (2,320)
Recoveries29 91 37 08 — 165 
Net recoveries (charge-offs)29 90 (321)0 (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 impairment625 562 3,722 515 2,614 275 8,313 
Ending balance$625 $575 $3,722 $711 $2,614 $275 $8,522 
 
The following summarizes information with respect to the loan balances at December 31, 2021 and 2020.
 December 31, 2021
Loans
Individually
Evaluated for Impairment		Loans
Collectively
Evaluated for Impairment		Total Loans
(In thousands)
Commercial and business loans$— $42,194 $42,194 
Government program loans— 3,310 3,310 
Total commercial and industrial— 45,504 45,504 
Commercial real estate loans— 331,050 331,050 
Residential mortgage loans146 226,780 226,926 
Home improvement and home equity loans— 80 80 
Total real estate mortgage146 557,910 558,056 
Real estate construction and development loans11,226 143,044 154,270 
Agricultural loans662 59,577 60,239 
Installment and student loans— 51,245 51,245 
Total loans$12,034 $857,280 $869,314 
 
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 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 loans215 9,950 10,165 
Total commercial and industrial466 47,048 47,514 
Commercial real estate loans878 282,073 282,951 
Residential mortgage loans366 36,870 37,236 
Home improvement and home equity loans— 107 107 
Total real estate mortgage1,244 319,050 320,294 
Real estate construction and development loans11,057 163,959 175,016 
Agricultural loans609 50,470 51,079 
Installment and student loans— 61,508 61,508 
Total loans$13,376 $642,035 $655,411 

4.Student Loans

Included in installment loans are $48.5 million and $57.4 million in student loans at December 31, 2021 and 2020 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 $2.0 million at December 31, 2021 and $3.2 million at December 31, 2020. At December 31, 2021 there were 901 loans within repayment, deferment, and forbearance which represented $23.8 million, $9.0 million, and $8.2 million, respectively. At December 31, 2020, there were 944 loans within repayment, deferment, and forbearance which represented $28.9 million, $7.4 million and $7.2 million, respectively. No new student loans were originated during the years ended December 31, 2021 and 2020.
As of December 31, 2021 and December 31, 2020, the reserve against the student loan portfolio was $2.6 million and $2.5 million, respectively. There were no TDRs within the portfolio as of December 31, 2021 or December 31, 2020. At December 31, 2021 and December 31, 2020, student loans totaling $453,000 and $513,000 were included in the substandard category, respectively.

ZuntaFi is the third-party servicer for the student loan portfolio. ZuntaFi's services include application administration, processing, approval, documenting, funding, and collection of current and charged off balances. They also provide file custodial responsibilities. Except in cases where applicants/loans do not meet program requirements, or extreme delinquency, ZuntaFi provides complete program management. ZuntaFi is paid a monthly servicing fee based on the principal balance outstanding. This servicing fee is presented as part of professional fees within noninterest expense.

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The following tables summarize the credit quality indicators for outstanding student loans as of December 31, 2021 and December 31, 2020 (in 000's, except for number of loans):
 December 31, 2021December 31, 2020
 Number of LoansAmountAccrued InterestNumber of LoansAmountAccrued Interest
School185 $6,555 $2,021 319 $12,905 $3,201 
Grace28 912 317 34 988 719 
Repayment500 23,834 715 623 28,906 292 
Deferment224 8,984 508 187 7,407 209 
Forbearance177 8,172 1,077 134 7,179 553 
Total1,114 $48,457 $4,638 1,297 $57,385 $4,974 

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. However, additional risk is associated with this designation.

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, 2021, $122,000 in accrued interest receivable was reversed due to charge-offs of $1.4 million within the student loan portfolio. For the year ended December 31, 2020, $125,000 in accrued interest receivable was reversed due to charge-offs of $1.9 million within the student loan portfolio.

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The following tables summarize the student loan aging for loans in repayment and forbearance as of December 31, 2021 and December 31, 2020 (in 000's, except for number of borrowers):
 December 31, 2021December 31, 2020
 Number of BorrowersAmountNumber of BorrowersAmount
Current or less than 31 days272 $29,596 304 $34,188 
31 - 60 days10 1,628 4 510 
61 - 90 days3 328 10 875 
Greater than 90 days5 453 5 512 
Total290 $32,005 323 $36,085 

5.Premises and Equipment

The components of premises and equipment are as follows:
(In thousands)December 31, 2021December 31, 2020
Land$968 $968 
Buildings and improvements16,391 16,111 
Furniture and equipment10,068 9,921 
 27,427 27,000 
Less accumulated depreciation(18,477)(17,890)
Total premises and equipment$8,950 $9,110 

The depreciation expense on Company premises and equipment totaled $1,408,000 and $1,411,000, for the years ended December 31, 2021 and 2020, respectively, and is included in occupancy expense in the accompanying consolidated statements of operations. 

6.Investment in Limited Partnership

The Bank owns a 2.22% 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, 2021 and December 31, 2020, the total investment in this limited partnership was $2,480,000, and $2,322,000, respectively. The investment is accounted for under the cost method. During the year ended December 31, 2021, $303,000 in income related to the limited partnership was recognized and is reflected in other non-interest income on the Consolidated Statement of Income. No income was recognized for the year ended December 31, 2020. Remaining unfunded commitments as of December 31, 2021 and 2020 totaled $1,879,000 and $2,239,000, respectively.

7.Deposits

Deposits include the following:
(In thousands)December 31, 2021December 31, 2020
Noninterest-bearing deposits$476,749 $391,897 
Interest-bearing deposits:  
NOW and money market accounts529,841 402,566 
Savings accounts113,930 96,669 
Time deposits:  
Under $250,00046,631 40,302 
$250,000 and over20,955 21,217 
Total interest-bearing deposits711,357 560,754 
Total deposits$1,188,106 $952,651 

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At December 31, 2021, the scheduled maturities of all certificates of deposit and other time deposits are as follows:
(In thousands)December 31, 2021December 31, 2020
One year or less$58,685 $49,253 
More than one year, but less than or equal to two years7,335 10,577 
More than two years, but less than or equal to three years573 1,021 
More than three years, but less than or equal to four years390 184 
More than four years, but less than or equal to five years603 385 
Greater than five years— 100 
 $67,586 $61,520 
 
Deposit balances representing overdrafts reclassified as loan balances totaled $102,000 and $506,000 as of December 31, 2021 and 2020, respectively.

Deposits of directors, officers and other related parties to the Bank totaled $18.4 million and $11.2 million at December 31, 2021 and 2020, 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, 2021, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling $320.6 million, as well as Federal Home Loan Bank (FHLB) lines of credit totaling $3.1 million. At December 31, 2021, the Company had uncollateralized lines of credit with PNC of $40 million, Pacific Coast Bankers Bank (PCBB) totaling $50 million, $20 million with Zions First National Bank, and $10 million with Union 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, 2021, $3.4 million in investment securities at FHLB were pledged as collateral for FHLB advances. Additionally, $490.5 million in real-estate secured loans were pledged at December 31, 2021 as collateral for used and unused borrowing lines with the Federal Reserve Bank. At December 31, 2021, the Company had no outstanding borrowing balances.

The Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling $336.8 million, as well as Federal Home Loan Bank (FHLB) lines of credit totaling $4.9 million at December 31, 2020. At December 31, 2020, the Company had uncollateralized lines of credit with Pacific Coast Bankers Bank (PCBB) and Union Bank totaling $10 million each and a Fed Funds line of $20 million 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, $5.3 million in investment securities at FHLB were pledged as collateral for FHLB advances. Additionally, $517.5 million 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, 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 2032. 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, 2021, the Company had 13 operating leases and no financing leases.

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The components of lease expense were as follows:
Year EndedYear Ended
(in 000's)December 31, 2021December 31, 2020
Operating lease expense $704 $764 
Short-term lease expense — — 
Variable lease expense283 249 
Sublease income— — 
Total$987 $1,013 

Supplemental balance sheet information related to leases was as follows:
(in 000's)December 31, 2021December 31, 2020
Operating cash flows used in operating leases (years ended)$691 $764 
ROU assets obtained in exchange for new operating lease liabilities$285 $104 
Weighted-average remaining lease terms in years for operating leases5.065.85
Weighted-average discount rate for operating leases5.13 %5.16 %

Maturities of lease liabilities were as follows:
Year Ended
(in 000's)December 31, 2021
2021$739 
2022738 
2023580 
2024402 
2025183 
Thereafter432 
Total undiscounted cash flows3,074 
Less: present value discount(369)
Present value of net future minimum lease payments$2,705 

Year Ended
(in 000's)December 31, 2020
2020$665 
2021675 
2022674 
2023513 
2024333 
Thereafter580 
Total undiscounted cash flows3,440 
Less: present value discount(473)
Present value of net future minimum lease payments$2,967 

10.Junior Subordinated Debt/Trust Preferred Securities

The contractual principal balance of the Company's debentures relating to its trust preferred securities is $12 million as of December 31, 2021. The Company may redeem the junior subordinated debentures at any time at par.

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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, 2021, 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, 2021, 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 remaining 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 3.90% discount rate used represents what a market participant would consider under the circumstances based on current market assumptions. At December 31, 2021, the total cumulative gain recorded on the debt was $1.3 million.

The net fair value calculation performed as of December 31, 2021 resulted in a pretax loss adjustment of $268,000 for the year ended December 31, 2021, compared to a pretax loss adjustment of $174,000 for the year ended December 31, 2020.

For the year ended December 31, 2021, the $268,000 fair value loss adjustment was separately presented as a $660,000 loss recognized on the consolidated statements of income, and a $392,000 gain associated with the instrument-specific credit risk recognized in other comprehensive income. 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. The Company calculated the change in the discounted cash flows based on updated market credit spreads for the periods ended.

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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)20212020
Deferred tax assets:  
Credit losses not currently deductible$2,173 $2,906 
Deferred compensation1,230 1,506 
Depreciation311 256 
Accrued reserves75 109 
Write-down on other real estate owned291 291 
Unrealized gain on retirement obligation265 325 
Unrealized gain on TRUPs131 246 
Unrealized gain (loss) on available for sale securities99 (265)
Interest on nonaccrual loans653 443 
Lease liability798 875 
Other1,528 467 
Total deferred tax assets7,554 7,159 
Deferred tax liabilities:  
State Tax(243)(211)
FHLB dividend(46)(46)
Loss on limited partnership investment(524)(1,353)
Deferred gain ASC 825 – fair value option(561)(771)
Fair value adjustments for purchase accounting(98)(98)
Deferred loan costs(1,553)(689)
Prepaid expenses(149)(239)
Right-of-use asset(765)(845)
Total deferred tax liabilities(3,939)(4,252)
Net deferred tax assets$3,615 $2,907 
 
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, 2021 or December 31, 2020.

Income tax expense for the years ended December 31, consist of the following:
(In thousands)   
2021FederalStateTotal
Current$2,407 $1,330 $3,737 
Deferred(370)(151)(521)
$2,037 $1,179 $3,216 
2020   
Current$1,871 $1,256 $3,127 
Deferred399 (75)324 
 $2,270 $1,181 $3,451 
 
A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
 
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 Year Ended December 31,
 20212020
Statutory federal income tax rate21.0 %21.0 %
State franchise tax, net of federal income tax benefit7.1 8.2 
Other(3.9)(1.4)
 24.2 %27.8 %

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, 2021 and 2020, 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 2018 and 2017 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, 2021 and December 31, 2020 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.

12.Stock Based Compensation

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, 2021, 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, subject to time based vesting. 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 zero nonqualified stock options) as of December 31, 2021 and 2020. No options were granted under this plan during the year ended December 31, 2021 and 2020.

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Under the 2015 Plan, 87,949 granted stock instruments are outstanding as of December 31, 2021, of which 48,000 are exercisable. Of the 87,949 granted stock instruments, 27,949 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:
SharesWeighted Average Exercise Price
Options outstanding December 31, 202094,601 $7.87 
Granted during the year— — 
Exercised during the year— — 
Forfeited during the year— — 
Options outstanding December 31, 202194,601 $7.87 

A summary of the status of the Company's restricted stock and changes during the year are presented below:
SharesWeighted Average Grant-Date Fair Value
Non-vested units at December 31, 202011,924 $10.85 
Granted during the year35,739 7.53 
Vested during the year19,714 8.24 
Forfeited during the year— — 
Non-vested units at December 31, 202127,949 $8.45 
 
Included in total outstanding options at December 31, 2021, are 82,601 exercisable shares at a weighted average price of $7.54, a weighted average remaining contract term of 4.03 years and intrinsic value of $145,031.
 
Included in salaries and employee benefits for the years ended December 31, 2021 and 2020 is $238,000 and $425,000 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, 2021 and 2020 there was $61,000 and $147,000, 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 0.97 years.

A summary of the status of the Company's stock option values and activity is presented below:
December 31, 2021December 31, 2020
Weighted average grant-date fair value per share of stock options granted$— $— 
Weighted average fair value of stock options vested$86,000 $86,000 
Total intrinsic value of stock options exercised$— $— 

As of December 31, 2021 and 2020 there was $218,000 and $106,000, respectively, of total unrecognized compensation expense related to restricted stock. This cost is expected to be recognized over a weighted-average period of approximately 2.00 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
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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 separate service period 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 $262,000 and $250,000 to the 401(k) Plan for the years ended December 31, 2021 and 2020, 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, 2021, the Company maintains a total of twelve 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, 2021 and 2020, $4,753,000 and $4,731,000, respectively, had been accrued to date, based on a discounted cash flow using an average discount rate of 1.91% and 1.36%, respectively, and is included in other liabilities on the consolidated balance sheets. Salary continuation expense is included in salaries and benefits expense, and totaled $430,000 and $284,000 for the years ended December 31, 2021 and 2020, respectively.

Included within the twelve total Salary Continuation agreements, the Company has four separate agreements with officers of the Bank and accrues for this salary continuation liability based on anticipated years of service and vesting schedules provided under the individual agreements. The four policies are considered individual contracts, and the Company applies guidance contained in ASC Topic 710. Additionally, the Company purchased company owned life insurance (COLI) and bank owned life insurance policies (BOLI) on the life of the officers in connection with the salary continuation agreements. The COLI policy premiums are paid over a seven year period and the BOLI policy premiums were paid in whole upon purchase of the policies. Life insurance premium expense totaled $42,000 and $30,000 for the years ended December 31, 2021 and 2020.
 
For the other 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, 2021 and 2020, the Company had approximately $627,000 and $770,000, 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
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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, 2021 and 2020.
 
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 above, with a portion of the post-retirement benefit 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 $22.3 million and $20.7 million at December 31, 2021 and 2020, 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 $513,000 and $474,000 for the years ended December 31, 2021 and 2020, respectively. Although the Salary Continuation 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)20212020
Commitments to extend credit$239,095 $216,799 
Standby letters of credit1,719 3,668 
 
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, 2021, the maximum potential amount of future undiscounted payments the Company could be required to make under outstanding standby letters of credit totaled $1.7 million.

During the fourth quarter of 2021, the Company entered into a firm commitment to purchase $15.8 million in 30 year residential mortgage loans with an expected close of first quarter of 2022. The credit metrics for the pool is consistent with pools purchased by the Company during 2021.

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.
 
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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, 2021
(In thousands)Carrying AmountEstimated Fair ValueQuoted Prices In Active Markets for Identical Assets Level 1Significant Other Observable Inputs Level 2Significant Unobservable Inputs Level 3
Financial Assets:     
Investment securities$182,646 $182,645 $3,744 $178,901 $— 
Loans862,200 854,697 — — 854,697 
Accrued interest receivable7,530 7,530 — 7,530 — 
Financial Liabilities:     
Deposits:     
Noninterest-bearing476,749 476,749 476,749 — — 
NOW and money market529,841 529,841 529,841 — — 
Savings113,930 113,930 113,930 — — 
Time deposits67,586 67,922 — — 67,922 
Total deposits1,188,106 1,188,442 1,120,520 — 67,922 
Junior subordinated debt11,189 11,189 — — 11,189 
Accrued interest payable— — — — — 
 
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December 31, 2020
(In thousands)Carrying AmountEstimated Fair ValueQuoted Prices In Active Markets for Identical Assets Level 1Significant Other Observable Inputs Level 2Significant Unobservable Inputs Level 3
Financial Assets:     
Investment securities$86,192 $86,192 $3,851 $82,341 $— 
Loans645,825 636,470 — — 636,470 
Accrued interest receivable8,164 8,164 — 8,164 — 
Financial Liabilities:     
Deposits:     
Noninterest-bearing391,897 430,210 430,210 — — 
NOW and money market402,566 406,707 406,707 — — 
Savings96,669 94,467 94,467 — — 
Time deposits61,519 61,806 — — 61,806 
Total deposits952,651 993,190 931,384 — 61,806 
Junior subordinated debt10,924 10,924 — — 10,924 
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 investment securities and junior subordinated debt are performed on a recurring basis, while others, such as impairment of 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, corporate debt instruments, 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 assets include certain impaired loans, other real estate owned, and goodwill 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, 2021.

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.
 
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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, 2021 and 2020:
December 31, 2021December 31, 2020
Financial InstrumentValuation TechniqueUnobservable InputWeighted AverageFinancial InstrumentValuation TechniqueUnobservable InputWeighted Average
Junior Subordinated DebtDiscounted cash flowMarket credit risk adjusted spreads3.90%Junior Subordinated DebtDiscounted cash flowMarket credit risk adjusted spreads3.57%

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. 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).
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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, 2021 (in 000’s):
Description of AssetsDecember 31, 2021Quoted 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$33,376 $— $33,376 $— 
U.S Govt collateralized mortgage obligations64,735 — 64,735 — 
Asset-backed securities4,130 — 4,130 — 
Municipal bonds50,052 — 50,052 — 
Treasury securities15,187 — 15,187 — 
Corporate bonds11,422 — 11,422 — 
Total AFS securities178,902 — 178,902 — 
Marketable equity securities (2)3,744 3,744 — — 
Total$182,646 $3,744 $178,902 $— 
Description of LiabilitiesDecember 31, 2021Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Junior subordinated debt (2)$11,189 $— $— $11,189 
Total$11,189 $— $— $11,189 
  
(1)Nonrecurring
(2)Recurring

There were no non-recurring fair value adjustments at December 31, 2021.

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):
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Description of Assets December 31, 2020Quoted 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 obligations38,445 — 38,445 — 
Total AFS securities72,155 — 72,155 — 
Marketable equity securities (2)3,851 3,851 — 
Impaired Loans (1):    
Commercial and industrial— — — — 
Real estate mortgage3,364 — — 3,364 
Total impaired loans3,364 — — 3,364 
Other real estate owned (1)5,004 — — 5,004 
Total$84,374 $3,851 $72,155 $8,368 
Description of LiabilitiesDecember 31, 2020Quoted 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 InstrumentFair ValueValuation TechniqueUnobservable InputAdjustment Percentage
Impaired Loans:
Real estate mortgage$3,364Fair Value of Collateral Method for Collateral Dependent LoansAdjustment for difference between appraised value and net realizable value6.00%
Other real estate owned$5,004Fair Value of Collateral Method for Collateral Dependent LoansAdjustment for difference between appraised value and net realizable value13.69%

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The following tables provide a reconciliation of liabilities at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended (in 000’s):
 December 31, 2021December 31, 2020
Reconciliation of Liabilities:Junior
Subordinated
Debt		Junior
Subordinated
Debt
Beginning balance$10,924 $10,808 
Total losses (gains) included in earnings 660 (970)
Total (gains) losses included in OCI(392)1,144 
Capitalized interest(3)(58)
Ending balance$11,189 $10,924 
The amount of total losses (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$660 $(970)

16.Supplemental Cash Flow Disclosures
 
 Year Ended December 31,
    (In thousands)
20212020
Cash paid during the period for:  
Interest$2,083 $2,316 
Income Taxes3,030 3,443 
Noncash activities:  
Unrealized losses on junior subordinated debentures392 (1,144)
Unrealized gains on available for sale securities(1,229)1,143 
Unrealized losses on unrecognized post-retirement costs203 (135)
Cash dividend declared1,872 1,870 
 
17.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)
20212020
Net income available to common shareholders$10,098 $8,961 
Weighted average shares outstanding17,011,379 16,976,704 
Add: dilutive effect of stock options19,495 21,881 
Weighted average shares outstanding adjusted for potential dilution17,030,874 16,998,585 
Basic earnings per share$0.59 $0.53 
Diluted earnings per share$0.59 $0.53 
Anti-dilutive shares excluded from earnings per share calculation67,000 72,000 

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.

18.Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, included in shareholders’ equity, are as follows:
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Year ended December 31, 2021Year ended December 31, 2020
(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$630 $(770)$(588)$(175)$(675)$218 
Current period comprehensive (loss) income, net of tax(866)143 277 805 (95)(806)
Ending balance$(236)$(627)$(311)$630 $(770)$(588)
Accumulated other comprehensive loss$(1,174)$(728)

19.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 cash contributions. 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, 2021, the Bank's investment in York Monterey Properties Inc. totaled $5.2 million. York Monterey Properties Inc. is included within the consolidated financial statements of the Company, with $4.6 million of the total investment recognized within the balance of other real estate owned on the consolidated balance sheets.

As of December 31, 2020, the Bank's investment in York Monterey Properties Inc. totaled $4.7 million. York Monterey Properties Inc. is included within the consolidated financial statements of the Company, with $4.6 million of the total investment recognized within the balance of other real estate owned on the consolidated balance sheets.

20. 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:
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United Security Bancshares – (parent only)  
Balance Sheets  - December 31, 2021 and 2020
  
(In thousands)20212020
Assets  
Cash and equivalents$2,813 $2,810 
Investment in bank subsidiary129,042 126,459 
Other assets1,413 1,332 
Total assets133,268 130,601 
Liabilities & Shareholders' Equity 
Liabilities: 
Junior subordinated debt securities (at fair value) 11,189 10,924 
Accrued interest payable— — 
Dividends declared1,872 1,870 
Other liabilities— — 
Total liabilities13,061 12,794 
Shareholders' Equity: 
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 17,028,239 at December 31, 2021 and 17,009,883 at December 31, 2020
59,636 59,397 
Retained earnings61,745 59,138 
Accumulated other comprehensive (loss) income(1,174)(728)
Total shareholders' equity120,207 117,807 
Total liabilities and shareholders' equity$133,268 $130,601 
 
United Security Bancshares – (parent only)Year ended December 31,
Income Statements
(In thousands)20212020
Income  
Gain (loss) on fair value of junior subordinated debentures$(660)$970 
Gain on redemption of JR subordinated debentures— — 
Dividends from subsidiary7,889 8,025 
Total income7,229 8,995 
Expense 
Interest expense179 276 
Other expense217 305 
Total expense396 581 
Income before taxes and equity in undistributed income of subsidiary6,833 8,414 
Income tax expense(199)115 
Equity in undistributed income of subsidiary3,066 662 
Net Income $10,098 $8,961 
 
97
United Security Bancshares – (parent only)Year ended December 31,
Statement of Cash Flows
(In thousands)20212020
Cash Flows From Operating Activities  
Net income$10,098 $8,961 
 Adjustments to reconcile net income to cash provided by operating activities:
Equity in undistributed income of subsidiary(3,066)(662)
Provision for deferred income taxes80 54 
(Gain) loss on fair value of junior subordinated debentures660 (970)
Decrease in income tax receivable15 51 
Net change in other assets(295)185 
Net cash provided by operating activities7,492 7,619 
Cash Flows From Financing Activities 
Dividends paid(7,489)(7,468)
Net cash used in by financing activities(7,489)(7,468)
Net increase in cash and cash equivalents3 151 
Cash and cash equivalents at beginning of year2,810 2,659 
Cash and cash equivalents at end of year$2,813 $2,810 


21. 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 Company and the Bank meet the qualifying criteria
98
and adopted the community bank leverage ratio framework in the third quarter 2020. The CARES Act reduced the required community bank leverage ratio to 8% until December 31, 2020 and 8.5% through December 31, 2021. As of December 31, 2021, 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, 2021 and 2020 as compared to the applicable capital adequacy guidelines:
ActualMinimum requirement for Community Bank Leverage Ratio (1) (2)
AmountRatioAmountRatio
As of December 31, 2021 (Company):
Tier 1 Leverage (to Average Assets)$127,6189.79%$110,7488.50%
As of December 31, 2021 (Bank):
Tier 1 Leverage (to Average Assets)125,4169.64%$110,6248.50%
As of December 31, 2020 (Company):
Tier 1 Leverage (to Average Assets)124,50711.37%$87,5778.00%
As of December 31, 2020 (Bank):
Tier 1 Leverage (to Average Assets)122,11211.17%$87,4918.00%
(1) The minimum required Community Bank Leverage Ratio is 9.00%, but the CARES Act temporarily lowers this to 8.0% through December 31, 2020 and 8.5% through December 31, 2021.
(2) 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, 2021, the Holding Company paid $7,486,000 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, 2021, the Bank paid cash dividends of $7,889,000 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.

99
22. 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.

Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES

The Company’s management, with the participation of the President and Chief Executive Officer and the Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2021 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this evaluation, the Company’s management has determined that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits is accumulated and communicated to management, including the President and Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a‑15(f). The Company’s management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as of December 31, 2021. Based on this evaluation, the Company’s management concluded that the Company’s internal control over financial reporting is effective as of December 31, 2021.
There were no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

  None.

PART III

Item 10 - Directors, Executive Officers, and Corporate Governance

Pursuant to Instruction G, the information required by this item is hereby incorporated herein by reference from the captions entitled "Election of Directors and Executive Officers" and “Corporate Governance Principles and Board Matters” set forth in the Company's definitive Proxy Statement for its 2022 Annual Meeting of Shareholders ("Proxy Statement").

Item 11 - Executive Compensation
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Pursuant to General Instruction G, the information required by this item is hereby incorporated herein by reference from the captions entitled "Executive Compensation" and “Director Compensation” set forth in the Company's definitive Proxy Statement.
 
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Pursuant to General Instruction G, the information required by this item is hereby incorporated herein by reference from the caption entitled "Shareholdings of Certain Beneficial Owners and Management" set forth in the Company's definitive Proxy Statement.

Item 13 - Certain Relationships and Related Transactions, and Director Independence

Pursuant to General Instruction G, the information required by this item is hereby incorporated herein by reference from the captions entitled "Certain Transactions" and “Corporate Governance Principles” set forth in the Company's definitive Proxy Statement.

Item 14 - Principal Accounting Fees and Services

Pursuant to General Instruction G, the information required by this item is hereby incorporated herein by reference from the caption entitled "Independent Accountant Fees and Services" set forth in the Company's definitive Proxy Statement.
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PART IV

Item 15 - Exhibits and Financial Statement Schedules

(a)(1)           Financial Statements

The following Consolidated Financial Statements are set forth in “Item 8. Financial Statements and Supplementary Data” of this Report.

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets - December 31, 2021 and 2020

Consolidated Statements of Income - Years Ended December 31, 2021 and 2020

Consolidated Statements of Comprehensive Income - Years Ended December 31, 2021 and 2020

Consolidated Statements of Changes in Shareholders' Equity - Years Ended December 31, 2021 and 2020

Consolidated Statements of Cash Flows - Years Ended December 31, 2021 and 2020

Notes to Consolidated Financial Statements

(a)(2)           Financial Statement Schedules

All financial statement schedules are omitted because they are not applicable or not required or because the information is included in the financial statements or notes thereto or is not material.

(a)(3)           Exhibits
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Articles of Incorporation of Registrant (1)
  
Bylaws of Registrant (1)
  
Specimen common stock certificate of United Security Bancshares (1)
  
Amended and Restated Executive Salary Continuation Agreement for Dennis Woods (2)
  
Amended and Restated Employment Agreement for Dennis R. Woods (5)
  
Amended and Restated Executive Salary Continuation Agreement for David Eytcheson (2)
  
Amended and Restated Change in Control Agreement for David Eytcheson (5)
  
USB 2005 Stock Option Plan (3)
  
United Security Bancshares 2015 Equity Incentive Award Plan (4)
Executive Salary Continuation Agreement for Bhavneet Gill (5)
Change in Control Agreement for Bhavneet Gill (5)
Executive Salary Continuation Agreement for William Yarbenet (5)
Change in Control Agreement for William Yarbenet (5)
Employment Agreement for William Yarbenet (5)
Change in Control Agreement for Robert Oberg (6)
Executive Salary Continuation Agreement for Robert Oberg (filed herewith)
Computation of earnings per share
 
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 See Note 19 to Consolidated Financial Statements set forth in “Item 8. Financial Statements and Supplementary Data” of this Report.
  
Subsidiaries of the Company (filed herewith)
  
Consent of Moss Adams LLP, Independent Registered Public Accounting Firm (filed herewith)
  
Certification of the Chief Executive Officer of United Security Bancshares pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
  
Certification of the Chief Financial Officer of United Security Bancshares pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
  
Certification of the Chief Executive Officer of United Security Bancshares pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
  
Certification of the Chief Financial Officer of United Security Bancshares pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
101Interactive data files pursuant to Rule 405 of Regulation S‑T: (i) the Consolidated Balance Sheets as of December 31, 2021 and 2020, (ii) the Consolidated Statements of Income for the years ended December 31, 2021 and 2020, (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2021 and 2020, (iv) the Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2021 and 2020, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020, and (vi) the Notes to Consolidated Financial Statements. (Pursuant to Rule 406T of Regulation S‑T, this information is deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.) (Filed herewith).
 
(1) Previously filed on April 4, 2001 as an exhibit to the Company’s filing on Form S-4 (file number 333-58256).
(2) Previously filed on March 17, 2008 as an exhibit to the Company’s filing on Form 10-K for the year ended December 31, 2007 (file number 000-32897).
(3) Previously filed on April 18, 2005 as Exhibit B to the Company's 2005 Schedule 14A Definitive Proxy (file number 000-32897).
(4) Previously filed on April 13, 2015 as Appendix A to the Company's 2015 Schedule 14A Definitive Proxy (file number 000-32897).
(5) Previously filed on March 2, 2018 as an exhibit to the Company’s filing on Form 10-K for the year ended December 31, 2017 (file number 000-32897).
(6) Previously filed on March 1, 2019 as an exhibit to the Company’s filing on Form 10-K for the year ended December 31, 2018 (file number 000-32897).

(b)           Exhibits filed:

See Exhibit Index under Item 15(a)(3) above for the list of exhibits required to be filed by Item 601 of Regulation S-K with this Report.

(c)           Financial statement schedules filed:
 
See Item 15(a)(2) above.

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Signatures
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
United Security Bancshares
 
March 9, 2022/S/  Dennis R. Woods
 Dennis R. Woods
President and Chief Executive Officer
 
March 9, 2022/S/ Bhavneet Gill
 Bhavneet Gill
Senior Vice President and Chief Financial Officer
 


POWERS OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennis R. Woods and Bhavneet Gill, and each of them severally, his or her true and lawful attorney‑in‑fact with power of substitution and resubstitution to sign in his or her name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with this Annual Report on Form 10‑K and any and all amendments hereto, as fully for all intents and purposes as he or she might or could do in person, and hereby ratifies and confirms all said attorneys‑in‑fact and agents, each acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities on the date indicated:

 
 Date:March 9, 2022 /s/ Stanley J. Cavalla 
    Director 
      
 Date:March 9, 2022 /s/ Tom Ellithorpe 
    Director 
      
 Date:March 9, 2022 /s/ Heather Hammack 
    Director 
      
 Date:March 9, 2022 /s/ Benjamin Mackovak 
    Director 
     
 Date:March 9, 2022 /s/ Nabeel Mahmood 
    Director 
     
 Date:March 9, 2022 /s/ Kenneth D. Newby 
    Director 
Date:March 9, 2022/s/ Sue Quigley
Director
Date:March 9, 2022/s/ Brian Tkacz
Director
Date:March 4, 2022/s/ Dora Westerlund
Director
Date:March 4, 2022/s/ Mike Woolf
Director
 
 
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Exhibit 10.13


EXECUTIVE SALARY CONTINUATION AGREEMENT

This Executive Salary Continuation Agreement (this "Agreement") is entered into by and between United Security Bank, a California banking corporation (the "Employer") and Robert Oberg, an individual residing in the State of California (the "Officer") as of October 27, 2020, with reference to the following:

RECITALS

WHEREAS, the Employer recognizes the valuable services the Officer has performed for the Employer and wishes to encourage the Executive's continued employment and to provide the Officer with additional incentive to achieve corporate objectives;

WHEREAS, the Employer wishes to provide the terms and conditions upon which the Employer shall pay additional retirement benefits to the Officer;

WHEREAS, the Employer and the Officer intend this Agreement shall at all times be administered and interpreted in compliance with Code section 409A; and

WHEREAS, the Employer intends this Agreement shall at all times be administered and interpreted in such a manner as to constitute an unfunded nonqualified deferred compensation arrangement, maintained primarily to provide supplemental retirement benefits for the Officer, a member of a select group of management or highly compensated employees of the Employer;

NOW, THEREFORE, in consideration of the services to be performed in the future, as well as the mutual promises and covenants contained herein, the Officer and the Employer agree as follows:

AGREEMENT

1.Terms and Definitions.

1.1     Accrued Liability. The term "Accrued Liability" means, as of any particular date, the actuarial then net present value of the projected lifetime monthly benefit payments remaining payable pursuant to Section 3.1 or Section 3.2, calculated using a 4.75% discount rate.

1.2    Administrator. The Employer shall be the "Administrator" and, solely for the purposes of ERISA, the "fiduciary" of this Agreement where a fiduciary is required by ERISA.

1.3    Annual Benefit. The term "Annual Benefit" means an annual sum of seventy thousand dollars ($70,000) multiplied by the Applicable Percentage (defined below) and then reduced to the extent required: (i) under the other provisions of this Agreement; (ii) by reason of the lawful order of any regulatory agency or body having jurisdiction over the Employer; or (iii) in order for the Employer to properly comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI).




1.4     Applicable Percentage. The term "Applicable Percentage" means that percentage listed on Schedule "A" attached hereto which is adjacent to the number of complete years (with a "year" being the performance of personal services for or on behalf of the Employer as an employee for a period of 365 days) which have elapsed starting from the Effective Date and ending on the date the Officer's employment is terminated for purposes of this Agreement. In the event the Officer's employment with the Employer is terminated other than by reason of death, disability, termination for cause or Retirement on the part of the Officer, the Officer shall be deemed for purposes of determining the number of complete years to have completed a year of service in its entirety for any partial year of service after the last anniversary date of the Effective Date during which the Officer's employment is terminated, provided that in no event shall the Officer be deemed to have completed a year of service for the partial year that occurs prior to the first anniversary date of this Agreement.

1.5    Beneficiary. The terms "Beneficiary" and "Designated Beneficiary" mean the person or persons whom the Officer shall designate in a valid beneficiary designation (the "Beneficiary Designation"), a copy of which is attached hereto as Exhibit "B," to receive the benefits provided hereunder. A Beneficiary Designation shall be valid only if it is in the form attached hereto and made a part hereof and is received by the Administrator prior to the Officer's death. The Officer's Beneficiary Designation shall be deemed automatically revoked if the Beneficiary predeceases the Officer or if the Officer names a spouse as Beneficiary and the marriage is subsequently dissolved. Upon the acceptance by the Administrator of a new Beneficiary Designation form, all Beneficiary Designations previously filed shall be cancelled. The Administrator shall be entitled to rely on the last Beneficiary Designation form filed by the Officer and accepted by the Administrator prior to the Officer's death.

1.6    The Code. The "Code" means the Internal Revenue Code of 1986, as amended.

1.7     Disability/Disabled. The terms "Disability" and "Disabled" mean disabled within the meaning of Code section 409A and regulations promulgated thereunder.

1.8    Effective Date. The term "Effective Date" means the date first above written.

1.9    ERISA. The term "ERISA" means the Employee Retirement Income Security Act of 1974, as amended.

1.10    Plan Year. The term "Plan Year" means the Employer's calendar year.

1.11    Retirement. The terms "Retirement" and "Retires" refer to the date on which the Officer: (i) attains the age of at least sixty-nine (69); and (ii) terminates full-time salaried employment with the Employer for any reason other than Termination for Cause and such termination constitutes a Separation from Service.

1.12    Separation from Service. The term "Separation from Service" means the Officer's service as an employee and/or independent contractor to the Employer and any member of a controlled group that includes Employer, as defined in Code section 414, terminates for any reason, other than because of a leave of absence approved by the Employer, Disability or the Officer's death. Whether a Separation from Service takes place is determined based on: (i) the facts and circumstances surrounding the termination of the Officer's employment; (ii) whether the Employer and the Officer intended for the Officer


to provide significant services for the Employer following such termination; and (iii) the application of facts and circumstances in view of the presumptions contained in the regulations to Code section 409A. For purposes of this Agreement, if there is a dispute about the employment status of the Officer or the date of the Officer's Separation from Service, the Employer shall have the sole and absolute right to decide the dispute.

1.13    Surviving Spouse. The term "Surviving Spouse" means the person, if any, who shall be legally married to the Officer on the date of the Officer's death.

1.14    Termination for Cause. The term "Termination for Cause" means the termination of the Officer by the Employer upon the occurrence of any of the following events:

i.the Officer is convicted of illegal activity by a court of competent jurisdiction or pleads guilty to or nolo contendere to illegal activity, which activity materially adversely affects the Employer's reputation in the community or which evidences the lack of the Officer's fitness or ability to perform the Officer's duty as determined by the Board of Directors in good faith;

ii.     the Officer has committed any illegal or dishonest act which would cause termination of coverage under the Employer's Bankers' Blanket Bond as to the Officer, as distinguished from termination of coverage as to the Employer as a whole;

iii.    the Officer materially fails to perform, or habitually neglects, the Officer's duties or commits a material act of malfeasance or misfeasance in connection therewith; or

iv. an action is commenced by any bank regulatory agency having jurisdiction, to remove or suspend the Officer from office, or a cease and desist order under 12 U.S.C. 181S(b) or any similar Federal or state statute is issued against the Officer or the Employer which calls for the Officer's suspension or removal from office.

2. Scope, Purpose and Effect.

2.1     Contract of Employment. Although this Agreement is intended to provide the Officer with an additional incentive to remain in the employ of the Employer, this Agreement shall not be deemed to constitute a contract of employment between the Officer and the Employer nor shall any provision of this Agreement restrict or expand the right of the Employer to terminate the Officer's employment. This Agreement shall have no impact or effect upon any separate written employment agreement which the Officer may have with the Employer, it being the parties' intention and agreement that unless this Agreement is specifically referenced in said employment agreement (or any modification thereto), this Agreement (and the Employer's obligations hereunder) shall stand separate and apart and shall have no effect upon, nor be affected by, the terms and provisions of said employment agreement.

2.2    Fringe Benefit. The benefits provided by this Agreement are granted by the Employer as a fringe benefit to the Officer and are not a part of any salary reduction plan


or any arrangement deferring a bonus or a salary increase. The Officer has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement.


3. Payments Upon or After Retirement.

3.1    Payments Upon Retirement at Age 69. If the Officer remains in the continuous employment of the Employer until Retirement and Retires on or within one (1) year of attaining age 69, then the Officer shall be entitled to be paid the Annual Benefit, with the Applicable Percent equal to 100%, for life, in equal monthly installments, with each installment to be paid on the first day of each month, beginning with the month following the month in which the Officer Retires, except that if the Officer is a "specified employee" as defined in Section 11.14, then the payment provided in this Section 3.1 shall be deferred as provided in Section 11.14.

3.2    Payments Upon Retirement After Age 69. If the Officer remains in the continuous employment of the Employer until Retirement and Retires on or after attaining age 70, then the Officer shall be entitled to be paid the Annual Benefit, as hereinafter adjusted, with the Applicable Percent equal to 100%, for life, in equal monthly installments, with each installment to be paid on the first day of each month, beginning with the month following the month in which the Officer Retires, except that if the Officer is a "specified employee" as defined in Section 11.14, then the payment provided in this Section 3.2 shall be deferred as provided in Section 11.14. For purposes of this Section 3.2, the Annual Benefit shall be adjusted depending on the year in which the Officer first Retires by increasing the Annual Benefit by two percent (2%), compounded, for each full year the Officer remains in the employment of the Employer after attaining age 69. Once the Officer Retires, the Annual Benefit shall be fixed at the then calculated amount and shall not thereafter be adjusted.

3.3    Payments in the Event of Death After Retirement. The Employer agrees that if the Officer Retires and is entitled to payments pursuant to either Section 3.1 or 3.2, but shall die before attaining age 86, then the Employer will pay the Accrued Liability in a lump sum to the Officer's designated beneficiary. If a valid Beneficiary Designation is not in effect, then the Accrued Liability shall be paid to the Officer's Surviving Spouse. If the Officer leaves no Surviving Spouse, the Accrued Liability shall be paid to the duly qualified personal representative, executor or administrator of the Officer's estate.

4. Payments in the Event Death or Disability Occurs Prior to Retirement.

4.1    Payments in the Event of Death Prior to Retirement. In the event the Officer should die while actively employed by the Employer at any time after the Effective Date, but prior to Retirement, the Employer agrees to pay the Accrued Liability to the Officer's Designated Beneficiary in a lump sum on the first day of the second month following the month of death. If a valid Beneficiary Designation is not in effect, then the amount due pursuant to this Section 4.1 shall be paid to the Officer's Surviving Spouse. If the Officer leaves no Surviving Spouse, the amount due pursuant to this Section 4.1 shall be paid to the duly qualified personal representative, executor or administrator of the Officer's estate.

4.2    Payments in the Event of Disability Prior to Retirement. In the event the Officer becomes Disabled while actively employed by the Employer at any time after the date of


this Agreement but prior to Retirement, the Officer shall continue to be treated during such period of Disability as being actively and gainfully employed by the Employer but shall not add applicable years of service for the purpose of determining the Annual Benefit, and, subject to any applicable deferral period as set forth in Section 11.14 herein, the Officer shall be entitled to either of the following:

i.a lump sum payment equal to the Accrued Liability, payable on the first day of the month following the month in which the Officer is deemed permanently Disabled; or

ii. the Annual Benefit, with the Applicable Percentage as set forth in Schedule A and as determined by the applicable years of service at the time of Disability, for life, in equal monthly installments, with each installment to be paid on the first day of each month, beginning with the month following the month in which the Officer is deemed permanently Disabled.

The Officer or his duly authorized representative may make an election of which benefit to receive at any time prior to or upon being deemed permanently Disabled. Absent a timely election, the Officer shall be paid the benefit pursuant to clause (i) above.

Notwithstanding the foregoing, in the event the Officer should die while actively or gainfully employed by the Employer at any time after the Effective Date and prior to (i) Retirement and (ii) the commencement of any payments under this Section 4.2, the payments provided in Section 4.1 herein shall be paid in lieu of the payments provided in this Section 4.2.

5. Payments in the Event Employment is Terminated Other Than by Death, Disability, Termination for Cause or Retirement.

As indicated in Section 2 above, the Employer reserves the right to terminate the Officer's employment with or without cause but subject to any written employment agreement which may then exist, at any time prior to the Officer's Retirement. In the event that the employment of the Officer shall be terminated for any reason, including voluntary termination by the Officer, but other than by reason of (i) Disability, (ii) death, (iii) Termination for Cause, or (iv) Retirement, the Officer or his legal representative shall be entitled to be paid the Annual Benefit, with the Applicable Percentage as set forth in Schedule A and as determined by the applicable years of service at the time of termination of employment with the Employer, for life, in equal monthly installments, with each installment to be paid on the first day of each month, beginning with the month following the month in which the Officer attains Retirement age, except that if Officer is a "specified employee" as defined in Section 11.14, then the payment provided in this Section 5 shall be deferred as provided in Section 11.14.

In addition, in the event the Officer dies after such termination as set forth in the second sentence of this Section 5, but prior to Retirement age, then the Officer's Designated Beneficiary shall be paid the Accrued Liability in a lump sum. If a valid Beneficiary Designation is not in effect, then such benefits due the Officer under this paragraph shall be paid to the Officer's Surviving Spouse, and if the Officer leaves no Surviving Spouse, then such benefits shall be paid to the duly qualified personal representative, executor or administrator of the Officer's estate for the benefit of the Officer's estate.

The Officer agrees that the payment of benefits pursuant to this Section 5 to the extent Officer is entitled to such benefits is in lieu of any other benefits under this Agreement.



6. Termination for Cause.

Notwithstanding anything to the contrary, in the event the termination of employment of the Officer is Termination for Cause, as defined in Section 1.14, the Officer shall not be entitledto any benefits pursuant to this Agreement.

7. No Ownership Rights to the Employer's Assets.

The Employer reserves the right to determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Officer, the Officer's spouse or the Officer's Designated Beneficiary under the terms of this Agreement (the "Benefits"). The rights of the Officer or any beneficiary of the Officer under this Agreement shall be solely those of an unsecured creditor of the Employer.

In the event that the Employer, in its sole and absolute discretion, elects to acquire an insurance policy, an annuity or any other asset to recoup the costs or any portion thereof of the Benefits, then such insurance policy, annuity or other asset shall not be deemed to be held under any trust for the benefit of the Officer or his beneficiaries or to be security for the performance of the obligations of the Employer under this Agreement, but shall be, and remain, a general unpledged, unrestricted asset of the Employer. The Officer and his beneficiaries shall have no rights whatsoever with respect to, or any claim against, any such insurance policy, annuity or other asset. In connection with the Employer electing to acquire any such insurance policy or annuity, the Officer agrees to cooperate to facilitate such acquisition, and pursuant thereto shall execute such documents and undergo such medical examinations or tests as the Employer may reasonably request.

8. Claims Procedure.

The Employer shall, but only to the extent necessary to comply with ERISA, be designated as the named fiduciary under this Agreement and shall have authority to control and manage the operation and administration of this Agreement. Consistent therewith, the Employer shall make all determinations as to the rights to benefits under this Agreement. Any decision by the Employer denying a claim by the Officer, the Officer's spouse, or the Officer's beneficiary for Benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Officer, the Officer's spouse or the Officer's beneficiary, as the case may be. Such decision shall set forth the specific reasons for the denial of a claim. In addition, the Employer shall provide the Officer, the Officer's spouse or the Officer's beneficiary with a reasonable opportunity for a full and fair review of the decision denying such claim.

9. Status of an Unsecured General Creditor.

Notwithstanding anything contained herein to the contrary: (i) neither the Officer, the Officer's spouse nor the Officer's beneficiary shall have any legal or equitable rights, interests or claims in or to any specific property or assets of the Employer; (ii) none of the Employer's assets shall be held in or under any trust for the benefit of the Officer, the Officer's spouse or the Officer's beneficiary or held in any way as security for the fulfillment of the obligations of the Employer under this Agreement; (iii) all of the Employer's assets shall be and remain the general unpledged and unrestricted assets of the Employer; (iv) the Employer's obligation under this Agreement shall be that of an unfunded and unsecured promise by the Employer to pay money in the future;


and (v) the Officer, the Officer's spouse and the Officer's beneficiary shall be unsecured general creditors with respect to any benefits which may be payable under the terms of this Agreement.

10. Covenant Not to Interfere.

The Officer agrees not to take any action which prevents the Employer from collecting the proceeds of any life insurance policy which the Employer may happen to own at the time of the Officer's death and of which the Employer is the designated beneficiary.

11. Miscellaneous.

11.1     Opportunity to Consult with Independent Counsel. The Officer acknowledges that he has been afforded the opportunity to consult with independent counsel of his choosing regarding both the benefits granted to him under the terms of this Agreement and the terms and conditions which may affect the Officer's right to these benefits. The Officer further acknowledges that he has read, understands and consents to all of the terms and conditions of this Agreement, and that he enters into this Agreement with a full understanding of its terms and conditions.

11.2    Arbitration of Disputes. All claims, disputes and other matters in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Employer in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), located in Fresno, California. In the event JAMS is unable or unwilling to conduct the arbitration provided for under the terms of this Section 11.2, or has discontinued its business, the parties agree that a representative member, selected by the mutual agreement of the parties, of the American Arbitration Association ("AAA"), located in or nearest to Fresno, California, shall conduct the binding arbitration referred to in this Section 11.2. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS (or AAA, if necessary). In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of procedure used or established by JAMS, or if there are none, the rules of procedure used or established by AAA. Any award rendered by JAMS or AAA shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. The obligation of the parties to arbitrate pursuant to this clause shall be specifically enforceable in accordance with, and shall be conducted consistently with, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure. Any arbitration hereunder shall be conducted in Fresno, California, unless otherwise agreed to by the parties.

11.3    Attorneys' Fees. In the event of any arbitration or litigation concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, the prevailing party shall be entitled to recover from the losing party reasonable expenses, attorneys' fees and costs incurred in connection therewith or in the enforcement or collection of any judgment or award rendered therein. The "prevailing party" means the party determined by the arbitrator(s) or court, as the case may be, to have most nearly prevailed, even if such


party did not prevail in all matters, not necessarily the one in whose favor a judgment is rendered.

11.4    Notice. Any notice required or permitted of either the Officer or the Employer under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representative; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party.

If to the Employer:
United Security Bank
2126 Inyo Street
Fresno, California 93721 Attention: Dennis R. Woods Chairman of the Board

If to the Officer:
Robert Oberg

, California 9

11.5    Assignment. Neither the Officer, the Officer's spouse, nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of any such beneficiary, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Officer, the Officer's spouse, or any designated beneficiary; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void and shall terminate this Agreement, and the Employer shall thereupon have no further liability hereunder.

11.6    Binding Effect/Merger or Reorganization. This Agreement shall be binding upon and inure to the benefit of the Officer and the Employer and, as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns. Accordingly, the Employer shall not merge or consolidate into or with another corporation, or reorganize or sell substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Employer under this Agreement. Upon the occurrence of such event, the term "Employer" as used in this Agreement shall be deemed to refer to such surviving or successor firm, person, entity or corporation.

11.7    Nonwaiver. The failure of either party to enforce at any time or for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement.



11.8    Partial Invalidity. If any term, provision, covenant or condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity.

11.9    Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect thereto. Each party to this Agreement acknowledges that no other representations, inducements, promises or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement or promise not contained in this Agreement shall be valid or binding on either party.

11.10    Modifications. Any modification of this Agreement shall be effective only if it is in writing and signed by each party's or such party's authorized representative.

11.11    Section Head.in gs. The section headings used in this Agreement are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement.

11.12    No Strict Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person.

11.13    Governing Law. The laws of the State of California, other than those laws denominated choice of law rules, and, where applicable, the rules and regulations of the Federal Deposit Insurance Corporation or any other regulatory agency or governmental authority having jurisdiction over the Employer, shall govern the validity, interpretation, construction and effect of this Agreement.

11.14    Delayed Payments for Specified Employees. Notwithstanding anything to the contrary, in the event that Code section 409A applies to any compensation with respect to a Separation from Service, payment of that compensation shall be delayed if the Officer is a "specified employee," as defined in Code section 409A(a)(2)(B)(i), and such delayed payment is required by Code section 409A. Such delay shall last six months from the date of Separation from Service. On the day following the end of the six-month period, the Employer shall make a catch up payment to the Officer equal to the total amount of such payments that would have been made during the six-month period but for this Section 11.14.

11.15    Compliance with Code Section 409A. This Agreement shall at all times be administered in compliance with the requirements of Code section 409A and any and all regulations thereunder, including such regulations as may be promulgated after the effective date of this Agreement.




11.16    Unfunded Agreement for ERISA Purposes. This Agreement shall be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended from time to time.

11.17    FDIC Open-Bank Assistance. All obligations under this Agreement shall terminate, except to the extent determined that continuation of the contract is necessary for the continued operation of the Employer, when the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the Employer under the authority contained in Federal Deposit Insurance Act, section 13(c), 12 U.S.C. § 1823(c). Rights of the parties that have already vested shall not be affected by such action, however.

11.18    FDIC Troubled Condition Designation. In the event that the Employer is deemed by the Federal Deposit Insurance Corporation to be in "troubled condition," as defined in 12 C.F.R. section 303.l0l(c), any payment to be paid to the Officer pursuant to this Agreement will be made only as permitted by applicable federal regulations.

11.19    Suicide or Misstatement. No benefit shall be distributed hereunder if the Officer commits suicide within two (2) years after the Effective Date, or if an insurance company which issued a life insurance policy covering the Officer and owned by the Employer denies coverage (i) for material misstatements of fact made by the Officer on an application for life insurance, or (ii) for any other reason.

[Signatures Appear on following page]





























IN WITNESS WHEREOF, the Employer and the Officer have executed this Agreement on the date first above-written in the City of Fresno, Fresno County, California.

UNITED SECURITY BANK
“Employer” “Officer”



____________________________ __________________________________
Dennis R. Woods Robert Oberg
Chairman of the Board


































Schedule A
Number of Complete Years of ServiceApplicable
Percentage
1
11.111%
2
22.222%
3
33.333%
4
44.444%
5
55.556%
6
66.667%
7
77.778%
8
88.889%
9
100.000%



SCHEDULE B

BENEFICIARY DESIGNATION


TO: The Administrator of United Security Bank’s Executive Salary Continuation Agreement

Pursuant to the provisions of my Executive Salary Continuation Agreement (the “Agreement”) with United Security Bank, permitting the designation of a beneficiary or beneficiaries by a participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under the Agreement payable by reason of my death:

[NOTE: To name a trust as beneficiary, please provide the name of the trustee and the exact date of the trust agreement. In the event the primary beneficiary is not the spouse of the Officer, the spouse of the Officer will need to sign the Spousal Consent to this designation and such signature must be notarized.]

Primary Beneficiary:


Name Address Relationship

Secondary (Contingent) Beneficiary:


Name Address Relationship


Name Address Relationship

THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED. ANY PRIOR DESIGNATION OF PRIMARY BENEFICIARIES AND SECONDARY BENEFICIARIES IS HEREBY REVOKED.

The Administrator shall pay all sums payable under the Agreement by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Administrator shall pay all amounts in accordance with the terms of the Agreement. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement then and in that event, the remaining unpaid benefit payable according to the terms of the Agreement shall be payable to the personal representatives of the estate of said beneficiary who survived me but died prior to receiving the total benefit provided by the Agreement.

ROBERT OBERG
“Officer”


Dated:__________ ___________________________________________




CONSENT OF THE OFFICER'S SPOUSE

[required if the primary beneficiary is not the Officer’s spouse]




TO THE ABOVE BENEFICIARY DESIGNATION:


I, _____________, being the spouse of Robert Oberg, after being afforded the opportunity to consult with independent counsel of my choosing, do hereby acknowledge that I have read, agree and consent to the foregoing Beneficiary Designation which relates to the Executive Salary Continuation Agreement entered into by my spouse on ______________, 2020. I understand that the above Beneficiary Designation adversely affects my community property interest in the benefits provided for under the terms of the Executive Salary Continuation Agreement. I understand that I have been advised to consult with an attorney of my choice prior to executing this consent, so that such attorney can explain the effects of this consent.

Dated: _____________, 2020 ____________________________________
______________, Spouse

[Notarization of the spousal consent is required if the primary beneficiary is not the spouse of the Officer.]

Exhibit 21.1 – Subsidiaries of the Company (United Security Bancshares)



1) United Security Bank – incorporated in the State of California

Exhibit 23.1


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors
United Security Bancshares and Subsidiary


We consent to the incorporation by reference in Registration Statements on Form S-8 (No. 333-89362, No. 333-10078, No. 333-134125, and No. 333-203397) of United Security Bancshares and Subsidiary (United Security Bancshares) of our report dated March 9, 2022, with respect to the consolidated balance sheets of United Security Bancshares as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the years then ended, appearing in this annual report on Form 10-K of United Security Bancshares for the year ended December 31, 2021.


/s/ Moss Adams LLP

San Francisco, California
March 9, 2022

EXHIBIT 31.1
 
CERTIFICATION UNDER SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
 
I, Dennis R. Woods, certify that:

1. I have reviewed this report on Form 10-K of United Security Bancshares;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a) - 15(e) and 15d - 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:   

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;    

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;   

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and    

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):    

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and    

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date: March 9, 2022
 
/S/ Dennis R. Woods
Dennis R. Woods
President and Chief Executive Officer
A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to United Security Bancshares and will be retained by United Security Bancshares and furnished to the SEC or its staff upon request

EXHIBIT 31.2
 
CERTIFICATION UNDER SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
 
I, Bhavneet Gill, certify that:

1. I have reviewed this report on Form 10-K of United Security Bancshares;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a) - 15(e) and 15d - 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:   

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;    

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;   

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and    

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):    

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and    

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 9, 2022
 
/S/ Bhavneet Gill
Bhavneet Gill
Senior Vice President and Chief Financial Officer
A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to United Security Bancshares and will be retained by United Security Bancshares and furnished to the SEC or its staff upon request

EXHIBIT 32.1

SECTION 906 CERTIFICATION
 
The certification set forth below is being submitted to the Securities and Exchange Commission solely for the purpose of complying with Section 1350 of Chapter 63 of Title 18 of the United States Code.

March 9, 2022

Dennis R. Woods, the Chief Executive Officer of United Security Bancshares certifies:

1. that this annual report on Form 10-K for the year ended December 31, 2021 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. that information contained in this annual report on Form 10-K for the year ended December 31, 2021 fairly presents, in all material respects, the financial condition and results of operations of United Security Bancshares.

/s/ Dennis R. Woods
Dennis R. Woods
President and Chief Executive Officer

EXHIBIT 32.2

SECTION 906 CERTIFICATION
 
The certification set forth below is being submitted to the Securities and Exchange Commission solely for the purpose of complying with Section 1350 of Chapter 63 of Title 18 of the United States Code.

March 9, 2022

Bhavneet Gill, the Chief Financial Officer of United Security Bancshares certifies:

1. that this annual report on Form 10-K for the year ended December 31, 2021 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. that information contained in this annual report on Form 10-K for the year ended December 31, 2021 fairly presents, in all material respects, the financial condition and results of operations of United Security Bancshares.

/s/ Bhavneet Gill
Bhavneet Gill
Senior Vice President and Chief Financial Officer