Commitments and Contingencies

12 Months Ended

Dec. 31, 2022

Commitments and Contingencies Disclosure [Abstract]

Financial Instruments with Off-Balance Sheet Risk

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Substantially all of these commitments are at variable interest rates, based on an index, and have fixed expiration dates.

Off-balance sheet risk to loan loss exists up to the face amount of these instruments, although material losses are not anticipated. The Company uses the same credit policies in making commitments to originate loans and lines of credit as it

does for on-balance sheet instruments, including obtaining collateral at exercise of the commitment. The contractual amounts of unfunded loan commitments and standby letters of credit not reflected in the consolidated balance sheets were as follows:


(in thousands)	2022		2021
Commercial lines of credit	$	147,021	$	137,354
Undisbursed construction loans	80,726		46,584
Undisbursed commercial real estate loans	88,066		47,793
Agricultural lines of credit	10,399		9,955
Undisbursed agricultural real estate loans	1,068		3,427
Other	1,868		3,764
Total commitments and standby letters of credit	$	329,148	$	248,877

The Company records an allowance for loan losses on unfunded loan commitments at the consolidated balance sheet date based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience of the different types of commitments and historical loss rates determined for pooled funded loans. The allowance for loan losses on unfunded commitments totaled $125,000 and $100,000 as of December 31, 2022 and 2021, respectively, which is recorded in interest payable and other liabilities in the consolidated balance sheets.

Concentrations of credit risk: The Company grants real estate mortgage, real estate construction, commercial, and consumer loans to customers primarily in Northern California. Although the Company has a diversified loan portfolio, a substantial portion is secured by commercial and residential real estate.

In management’s judgment, a concentration of loans exists in real estate related loans, which represented approximately 91.84% of the Company’s loan portfolio at December 31, 2022 and 89.31% of the Company’s loan portfolio at December 31, 2021. Although management believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, or a decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on the collectability of these loans. Personal and business incomes represent the primary source of repayment for the majority of these loans.

Deposit concentrations: At December 31, 2022, the Company had 90 deposit relationships that exceeded $5,000,000 each, totaling $1,804,400,000, or approximately 64.86% of total deposits. The Company’s largest single deposit relationship at December 31, 2022 totaled $180,000,000, or approximately 6.47% of total deposits. Management maintains the Company’s liquidity position and lines of credit with correspondent banks to mitigate the risk of large withdrawals by the Company’s large depositors.

Correspondent banking agreements: The Company maintains funds on deposit with other FDIC-insured financial institutions under correspondent banking agreements. Uninsured deposits through these agreements totaled $16,163,000 and $147,219,000 at December 31, 2022 and 2021, respectively.

Leases

The Company leases office space for its banking operations under non-cancelable operating leases of various terms. The leases expire at dates through 2032 and provide for renewal options from less than one to five years. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties. One of the leases provides for increases in future minimum annual rental payments based on defined increases in the Consumer Price Index, while the remaining leases include predefined rental increases over the term of the lease.

The Company has a sublease agreement for space adjacent to the Redding location. The sublease has renewal terms extended to December 31, 2023.

The Company leases its Sacramento loan production office from a partnership comprised of certain shareholders and members of the Company's board of directors. The Sacramento loan production office lease extends through April 2023. Additionally, the Company leased its Natomas branch from the same partnership of related parties until July 13, 2021, at which time ownership of the property was transferred to an unrelated third-party landlord. Rent expense paid to the partnership was $30,000 and $140,000 for the years ended December 31, 2022 and 2021, respectively, under these leases.

The Company adopted ASU 2016-02, Leases (Topic 842) as of January 1, 2022, which requires the Company to record an ROUA on the consolidated balance sheets for those leases that convey rights to control use of identified assets for a period of time in exchange for consideration. The Company is also required to record a lease liability on the consolidated balance sheets for the present value of future payment commitments. All of the Company’s leases are comprised of operating leases in which the Company is the lessee of real estate property for branches and operations. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less) within the ROUA and lease liability. Known or determinable adjustments to the required minimum future lease payments were included in the calculation of the Company’s ROUA and lease liability. Adjustments to the required minimum future lease payments that are variable and will not be determinable until a future period, if any, such as changes in the Consumer Price Index, are included as variable lease costs. Additionally, expected variable payments for common area maintenance, taxes, and insurance were unknown and not determinable at lease commencement and, therefore, were not included in the determination of the Company’s ROUA and lease liability.

The value of the ROUA and lease liability is impacted by the amount of the periodic payment required, length of the lease term, and the discount rate used to calculate the present value of the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROUA and lease liability. ASC 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2022, the rate for the remaining lease term as of January 1, 2022 was used. The lease liability is reduced based on the discounted present value of remaining payments as of each reporting period. The ROUA value is measured using the lease liability as adjusted for prepaid or accrued lease payments and remaining lease incentives, unamortized direct costs, and impairment, if any.

As of December 31, 2022, the Company's ROUA and lease liability were $3,981,000 and $4,243,000, respectively.

The following table presents the components of lease expense for the year ended December 31, 2022:


(in thousands)	Twelve months ended December 31, 2022
Operating lease expense	$	1,129


Sublease income	(21)
Total lease expense	$	1,108

Prior to the adoption of ASU 2016-02, rent expense under operating leases was $1,064,000 for the year ended December 31, 2021, partially offset by rent income of $21,000 during the same period.

The following table presents the weighted average operating lease term and discount rate at December 31, 2022:


	December 31, 2022
Weighted average remaining lease term (in years)	5.38 years
Weighted average discount rate	2.18	%

The following table shows the future minimum lease payments under the Company’s operating lease arrangements as of December 31, 2022.


(in thousands)	December 31, 2022
2023	$	1,009
2024	984
2025	767
2026	665
2027	324
Thereafter	784
Total expected operating lease payments	4,533
Discount for present value of expected cash flows	(290)
Lease liability at December 31, 2022	$	4,243

Prior to the adoption of ASC 842, the Company accounted for operating leases under ASC 840. For comparability purposes in the year of adoption, undiscounted future minimum lease payments under the predecessor standard of ASC 840 as of December 31, 2021 are provided below.


(in thousands)	December 31, 2021
2022	$	1,025
2023	978
2024	951
2025	733
2026	604
Thereafter	1,094
Total minimum lease payments	$	5,385

Litigation Matters

The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or results of operations of the Company.