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Note 4 - Loans and the Allowance for Credit Losses
 3 Months Ended
Mar. 31, 2023
Notes to Financial Statements  
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

4. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

 

Outstanding loans are summarized below, in thousands:

 

  

March 31,

  

December 31,

 
  

2023

  

2022

 
         

Commercial

 $76,738  $76,680 

Agricultural

  118,089   122,873 

Real estate – residential

  14,734   15,324 

Real estate – commercial

  521,884   516,107 

Real estate – construction and land development

  42,726   43,420 

Equity lines of credit

  35,805   35,891 

Auto

  100,670   96,750 

Other

  4,958   4,904 

Total loans

  915,604   911,949 

Deferred loan costs, net

  2,748   2,736 

Loans, amortized cost basis

  918,352   914,685 

Allowance for credit losses

  (12,330)  (10,717)

Total net loans

 $906,022  $903,968 

 

To estimate expected losses the Company generally utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. Individual loan credit quality indicators including loan grade and borrower repayment performance have been statistically correlated with historical credit losses and various econometrics, including California unemployment rates, California Housing Prices, California gross domestic product, California Retail Trade Earnings and Wall Street Journal Prime Rate. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and back-testing of model performance to actual realized results. At both January 1, 2023, the adoption and implementation date of ASC Topic 326, and March 31, 2023, the Company utilized a reasonable and supportable forecast period of approximately four quarters and obtained the forecast data from publicly available sources. The Company also considered the impact of portfolio concentrations, changes in underwriting practices, imprecision in its economic forecasts, and other risk factors that might influence its loss estimation process. Management believes that the allowance for credit losses at March 31, 2023 appropriately reflected expected credit losses inherent in the loan portfolio at that date.

 

In determining the allowance for credit losses, accruing loans with similar risk characteristics are generally evaluated collectively. The Company's policy is that loans designated as nonaccrual no longer share risk characteristics similar to other loans evaluated collectively and as such, all nonaccrual loans are individually evaluated for reserves. As of March 31, 2023 the Bank's nonaccrual loans comprised the entire population of loans individually evaluated.  The Company's policy is that nonaccrual loans also represent the subset of loans where borrowers are experiencing financial difficulty where an evaluation of the source of repayment is required to determine if the nonaccrual loans should be categorized as collateral dependent. 

 

The implementation of CECL also impacted the Company's ACL on unfunded loan commitments, as the ACL now represents expected credit losses over the contractual life of commitments not identified as unconditionally cancellable by the Company.  The Reserve for Unfunded Commitments is estimated using the same reserve or coverage rates calculated on collectively evaluated loans following the application of a funding rate to the amount of the unfunded commitment.  The funding rate represents management's estimate of the amount of the current unfunded commitment that will be funded over the remaining contractual life of of the commitment and is based on historical data. Under CECL the ACL on unfunded loan commitments remains in Other Liabilities while any related provision expense is included in the provision for credit loss expense.

 

 

Changes in the allowance for credit losses, in thousands, were as follows:

 

  

March 31,

  

December 31,

 
  

2023

  

2022

 
         

Balance, beginning of period

 $10,717  $10,352 

Cumulative change from adoption of ASU 2016-13

  529   - 

Provision charged to operations - loans

  1,250   1,300 

Losses charged to allowance

  (308)  (1,461)

Recoveries

  142   526 

Balance, end of period

 $12,330  $10,717 

 

 

 

Salaries and employee benefits totaling $562,000 and $1,062,000 have been deferred as loan origination costs during the three months ended March 31, 2023 and 2022, respectively. 

 

The Company assigns a risk rating to all loans and periodically, but not less than annually, performs detailed reviews of all criticized and classified loans over $100,000 to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan.

 

The risk ratings can be grouped into three major categories, defined as follows:

 

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard – A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

 

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass-rated loans.

 

For other loans, which are primarily consumer loans, and automobile loans the Company evaluates credit quality based on the aging status of the loan and by payment activity.  

 

 

 

The following table shows the loan portfolio allocated by management's internal risk ratings or payment activity at the dates indicated, in thousands:

 

  

Term Loans

             
  

Amortized Cost Basis by Origination Year and Risk Grades - As of March 31, 2023

             

(in thousands)

 

2023

  

2022

  

2021

  

2020

  

2019

  

Prior

  

Revolving Loans Book Amortized Cost Basis

  

Revolving Loans Converted to Term Amortized Cost Basis

  

Total - Amortized Cost Basis

 

Commercial

                                    

Pass

 $2,330  $24,191  $12,080  $5,316  $5,344  $6,418  $14,352  $-  $70,031 

Special Mention

  -   349   427   322   -   24   1,565   -   2,687 

Substandard

  -   2,204   239   49   4   -   2,000   -   4,496 

Total Commercial loans

 $2,330  $26,744  $12,746  $5,687  $5,348  $6,442  $17,917  $-  $77,214 

Current period gross charge-offs

 $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                     

Agricultural

                                    

Pass

 $1,236  $20,577  $14,542  $15,684  $12,609  $22,899  $13,263  $-  $100,810 

Special Mention

  807   3,497   97   1,038   214   796   704   -   7,153 

Substandard

  -   4,988   4,496   -   768   251   -   -   10,503 

Total Agricultural

 $2,043  $29,062  $19,135  $16,722  $13,591  $23,946  $13,967  $-  $118,466 

Current period gross charge-offs

 $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                     

Real Estate - Residential

                                    

Pass

 $534  $1,086  $2,299  $2,510  $578  $6,801  $515  $-  $14,323 

Special Mention

  -   -   -   -   68   -   -   -   68 

Substandard

  -   -   -   -   -   384   -   -   384 

Total Real Estate - Residential

 $534  $1,086  $2,299  $2,510  $646  $7,185  $515  $-  $14,775 

Current period gross charge-offs

 $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                     

Real Estate -Commercial

                                    

Pass

 $6,468  $112,033  $88,280  $107,565  $42,282  $152,951  $5,957  $-  $515,536 

Special Mention

  -   -   -   -   374   2,729   -   -   3,103 

Substandard

  -   14   -   -   -   3,017   -   -   3,031 

Total Real Estate -Commercial

 $6,468  $112,047  $88,280  $107,565  $42,656  $158,697  $5,957  $-  $521,670 

Current period gross charge-offs

 $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                     

Real Estate -Construction

                                    

Pass

 $1,653  $19,522  $17,160  $2,672  $632  $703  $-  $-  $42,342 

Special Mention

  -   -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   -   -   - 

Total Real Estate -Construction

 $1,653  $19,522  $17,160  $2,672  $632  $703  $-  $-  $42,342 

Current period gross charge-offs

 $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                     

Equity LOC

                                    

Pass

 $-  $-  $-  $-  $-     $34,909  $1,056  $35,965 

Substandard

  -   -   -   -   -      254   394   648 

Total Equity LOC

 $-  $-  $-  $-  $-  $-  $35,163  $1,450  $36,613 

Current period gross charge-offs

 $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                     

Total

                                    

Pass

 $12,221  $177,409  $134,361  $133,747  $61,445  $189,772  $68,996  $1,056  $779,007 

Special Mention

  807   3,846   524   1,360   656   3,549   2,269   -   13,011 

Substandard

  -   7,206   4,735   49   772   3,652   2,254   394   19,062 

Total

 $13,028  $188,461  $139,620  $135,156  $62,873  $196,973  $73,519  $1,450  $811,080 

Current period gross charge-offs

 $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                     

Auto

                                    

Performing

 $10,564  $40,193  $21,409  $11,996  $9,928  $7,319  $-  $-  $101,409 

Non-performing

  -   28   348   218   208   61      -   863 

Total Auto

 $10,564  $40,221  $21,757  $12,214  $10,136  $7,380  $-  $-  $102,272 

Current period gross charge-offs

 $-  $15  $116  $17  $82  $63  $-  $-  $293 
                                     

Other

                                    

Performing

 $655  $2,232  $1,174  $490  $218  $37  $173  $-  $4,979 

Non-performing

  -   -   21   -   -   -   -   -   21 

Total Other

 $655  $2,232  $1,195  $490  $218  $37  $173  $-  $5,000 

Current period gross charge-offs

 $-  $-  $8  $4  $1  $-  $2  $-  $15 
                                     

Total

                                    

Performing

 $11,219  $42,425  $22,583  $12,486  $10,146  $7,356  $173  $-  $106,388 

Non-performing

  -   28   369   218   208   61   -   -   884 

Total

 $11,219  $42,453  $22,952  $12,704  $10,354  $7,417  $173  $-  $107,272 

Current period gross charge-offs

 $-  $15  $124  $21  $83  $63  $2  $-  $308 

 

December 31, 2022

 

Commercial Credit Exposure

 
  

Credit Risk Profile by Internally Assigned Grade

 

Grade:

 

Commercial

  

Agricultural

  

Real Estate-Residential

  

Real Estate-Commercial

  

Real Estate-Construction

  

Equity LOC

  

Total

 

Pass

 $68,577  $111,276  $14,932  $510,504  $43,337  $35,475  $784,101 

Special Mention

  8,047   10,651   161   3,934   -   -   22,793 

Substandard

  56   946   231   1,669   83   416   3,401 

Doubtful

  -   -   -   -   -   -   - 

Total

 $76,680  $122,873  $15,324  $516,107  $43,420  $35,891  $810,295 

 

  

Consumer Credit Exposure

 
  

Credit Risk Profile Based on Payment Activity

 
  

December 31, 2022

 
  

Auto

  

Other

  

Total

 

Grade:

            

Performing

 $96,298  $4,904  $101,202 

Non-performing

  452   -   452 

Total

 $96,750  $4,904  $101,654 

 

The following table show information related to impaired loans at December 31, 2022, in thousands.

 

      

Unpaid

      

Average

  

Interest

 
  

Recorded

  

Principal

  

Related

  

Recorded

  

Income

 

As of December 31, 2022:

 

Investment

  

Balance

  

Allowance

  

Investment

  

Recognized

 
                     

With no related allowance recorded:

                    

Commercial

 $-  $-  $-  $-  $- 

Agricultural

  232   232   -   235   17 

Real estate – residential

  509   541   -   514   29 

Real estate – commercial

  -   -   -   -   - 

Real estate – construction & land

  94   94   -   98   6 

Equity Lines of Credit

  244   301   -   254   - 

Auto

  -   -   -   -   - 

Other

  -   -   -   -   - 

With an allowance recorded:

                    

Commercial

 $-  $-  $-  $-  $- 

Agricultural

  -   -   -   -   - 

Real estate – residential

  169   169   20   170   7 

Real estate – commercial

  -   -   -   -   - 

Real estate – construction & land

  -   -   -   -   - 

Equity Lines of Credit

  -   -   -   -   - 

Auto

  -   -   -   -   - 

Other

  -   -   -   -   - 

Total:

                    

Commercial

 $-  $-  $-  $-  $- 

Agricultural

  232   232   -   235   17 

Real estate – residential

  678   710   20   684   36 

Real estate – commercial

  -   -   -   -   - 

Real estate – construction & land

  94   94   -   98   6 

Equity Lines of Credit

  244   301   -   254   - 

Auto

  -   -   -   -   - 

Other

  -   -   -   -   - 

Total

 $1,248  $1,337  $20  $1,271  $59 

 

The following table shows the ending balance of nonaccrual loans by loan category as of the date indicated:

 

  

Non Performing Loans

 
  

March 31, 2023

  

December 31, 2022

 

(in thousands)

 

Nonaccrual with no allowance for credit losses

  

Total nonaccrual

  

Past due 90 days or more and still accruing

  

Nonaccrual with no allowance for credit losses

  

Total nonaccrual

  

Past due 90 days or more and still accruing

 
                         

Commercial

 $58  $58  $-  $-  $-  $- 

Agricultural

  -   847   214   -   -   - 

Real estate – residential

  201   201   -   211   211   - 

Real estate – commercial

  965   965   154   9   9   - 

Real estate – construction & land development

  -   -   -   83   83   - 

Equity lines of credit

  648   648   -   417   417   - 

Auto

  863   863   -   452   452   - 

Other

  21   21   -   -   -   - 

Total Gross Loans

 $2,756  $3,603  $368  $1,172  $1,172  $- 

 

At March 31, 2023 there was one nonaccrual loan with an amortized cost of $847,000 that had an allowance for credit losses of $271,000.  This allowance was required related to a significant decline in value of the borrower's nut crops. 

 

The following tables show the allocation of the allowance for credit losses at the dates indicated, in thousands:

 

Three Months Ended March 31, 2023:

 

Commercial

  

Agricultural

  

Real Estate-Residential

  

Real Estate-Commercial

  

Real Estate-Construction

  

Equity LOC

  

Auto

  

Other

  

Total

 

Allowance for credit losses

                                    

Beginning balance

 $892  $1,086  $138  $4,980  $1,500  $687  $1,289  $145  $10,717 

Impact of CECL Adoption

  354   148   2   1,488   (951)  (421)  9   (100)  529 

Charge-offs

  -   -   -   -   -   -   (293)  (15)  (308)

Recoveries

  6   -   1   1   -   -   131   3   142 

Provision

  223   73   21   271   214   64   368   16   1,250 

Ending balance

 $1,475  $1,307  $162  $6,740  $763  $330  $1,504  $49  $12,330 

Three Months Ended March 31, 2022:

                                    

Allowance for credit losses

                                    

Beginning balance

 $1,074  $791  $168  $4,549  $1,325  $426  $1,911  $108  $10,352 

Charge-offs

  -   -   -   (19)  -   -   (335)  (19)  (373)

Recoveries

  6   -   -   -   -   -   114   3   123 

Provision

  (187)  156   (36)  (208)  220   128   190   37   300 

Ending balance

 $893  $947  $132  $4,322  $1,545  $554  $1,880  $129  $10,402 

March 31, 2022

                                    

Allowance for credit losses

                                    

Ending balance: individually evaluated for impairment

 $-  $-  $23  $-  $-  $-  $-  $-  $23 

Ending balance: collectively evaluated for impairment

  893   947   109   4,322   1,545   554   1,880   129   10,379 

Ending balance

 $893  $947  $132  $4,322  $1,545  $554  $1,880  $129  $10,402 

Loans

                                    

Ending balance: individually evaluated for impairment

 $-  $237  $699  $3,276  $100  $362  $-  $-  $4,674 

Ending balance: collectively evaluated for impairment

  96,787   123,179   14,938   420,235   55,568   32,240   86,768   4,297   834,012 

Ending balance

 $96,787  $123,416  $15,637  $423,511  $55,668  $32,602  $86,768  $4,297  $838,686 

 

Year Ended December 31, 2022:

                                    

Allowance for credit losses

                                    

Beginning balance

 $1,074  $791  $168  $4,549  $1,325  $426  $1,911  $108  $10,352 

Charge-offs

  (207)  -   -   (19)  -   -   (1,195)  (40)  (1,461)

Recoveries

  27   -   3   2   -   -   482   12   526 

Provision

  (2)  295   (33)  448   175   261   91   65   1,300 

Ending balance

 $892  $1,086  $138  $4,980  $1,500  $687  $1,289  $145  $10,717 
                                     

Allowance for credit losses

                                    

Ending balance: individually evaluated for impairment

 $-  $-  $20  $-  $-  $-  $-  $-  $20 

Ending balance: collectively evaluated for impairment

  892   1,086   118   4,980   1,500   687   1,289   145   10,697 

Ending balance

 $892  $1,086  $138  $4,980  $1,500  $687  $1,289  $145  $10,717 

Loans

                                    

Ending balance: individually evaluated for impairment

 $-  $232  $678  $-  $94  $244  $-  $-  $1,248 

Ending balance: collectively evaluated for impairment

  76,680   122,641   14,646   516,107   43,326   35,647   96,750   4,904   910,701 

Ending balance

 $76,680  $122,873  $15,324  $516,107  $43,420  $35,891  $96,750  $4,904  $911,949 
                                     

 

The following table shows an aging analysis of the loan portfolio by the time past due, in thousands:

 

                  

Total

         

March 31, 2023

         

90 Days

      

Past Due

         
   30-59 Days   60-89 Days   and Still       and         
  

Past Due

  

Past Due

  

Accruing

  

Nonaccrual

  

Nonaccrual

  

Current

  

Total

 
                             

Commercial

 $1,667  $2,261  $-  $58  $3,986  $73,228  $77,214 

Agricultural

  373   -   214   847   1,434   117,032   118,466 

Real estate – residential

  -   -   -   201   201   14,574   14,775 

Real estate – commercial

  1,888   -   154   965   3,007   518,663   521,670 

Real estate - construction & land

  938   -   -   -   938   41,404   42,342 

Equity Lines of Credit

  64   134   -   648   846   35,767   36,613 

Auto

  1,426   452   0   863   2,741   99,531   102,272 

Other

  75   -   0   21   96   4,904   5,000 

Total

 $6,431  $2,847  $368  $3,603  $13,249  $905,103  $918,352 

 

                  

Total

         

December 31, 2022

         

90 Days

      

Past Due

         
   30-89 Days   60-89 Days   and Still       and         
  

Past Due

  

Past Due

  

Accruing

  

Nonaccrual

  

Nonaccrual

  

Current

  

Total

 
                             

Commercial

 $750  $195  $-  $-  $945  $75,735  $76,680 

Agricultural

  877   -   -   -   877   121,996   122,873 

Real estate – residential

  437   -   -   211   648   14,676   15,324 

Real estate - commercial

  3,255   -   -   9   3,264   512,843   516,107 

Real estate - construction & land

  -   -   -   83   83   43,337   43,420 

Equity Lines of Credit

  665   53   -   417   1,135   34,756   35,891 

Auto

  1,862   693   -   452   3,007   93,743   96,750 

Other

  1   14   -   -   15   4,889   4,904 

Total

 $7,847  $955  $-  $1,172  $9,974  $901,975  $911,949 

 

The following tables present the amortized cost basis of collateral dependent loans by class of loans at  March 31, 2023, in thousands:

 

March 31, 2023

                            
                             
          

SFR-1st

  

SFR-2nd

  

Auto

  

Auto

     
  

Office

  

Crops

  

Deed

  

Deed

  

New

  

Used

  

Total

 
                             

Commercial

 $-  $-  $57  $-  $-  $-  $57 

Agricultural

  -   847   -   -   -   -   847 

Real estate – residential

  -   -   201   -   -   -   201 

Real estate – commercial

  951   -   -   14   -   -   965 

Real estate - construction & land

  -   -   -   -   -   -   - 

Equity Lines of Credit

  -   -   296   352   -   -   648 

Auto

  -   -   -   -   608   255   863 

Other

  -   -   -   -   -   -   - 

Total

 $951  $847  $554  $366  $608  $255  $3,581 

 

There were no modifications of loans to debtors experiencing financial difficulty during the three months ended March 31, 2023. There were no new troubled debt restructurings during the twelve months ending December 31, 2022.There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the twelve months ended December 31, 2022.