LOANS AND ALLOWANCE FOR CREDIT LOSSES

6 Months Ended

Jun. 30, 2023

LOANS AND ALLOWANCE FOR CREDIT LOSSES [Abstract]

LOANS AND ALLOWANCE FOR CREDIT LOSSES

4.  LOANS AND ALLOWANCE FOR CREDIT LOSSES

The composition of the Company’s loan portfolio, by loan class, as of June 30, 2023 and December 31, 2022 was as follows:

($ in thousands)	June 30, 2023			December 31, 2022
Commercial	$	100,849		$	106,771
Commercial Real Estate		702,410			645,166
Agriculture		103,772			114,040
Residential Mortgage		98,521			92,669
Residential Construction		12,407			10,167
Consumer		15,064			15,287
		1,033,023			984,100
Allowance for credit losses		(15,579	)		(14,792	)
Net deferred origination fees and costs		277			830
Loans, net	$	1,017,721		$	970,138

At June 30, 2023 and December 31, 2022, all loans were pledged under a blanket collateral lien to secure actual or potential borrowings from the Federal Home Loan Bank (“FHLB”).

Allowance for Credit Losses (ACL)

The following table summarizes the activity in the ACL on loans by loan class for the three and six months ended June 30, 2023.

Three Months Ended June 30, 2023
($ in thousands)	Commercial			Commercial Real Estate		Agriculture			Residential Mortgage		Residential Construction		Consumer		Unallocated			Total
Balance as of March 31, 2023	$	1,750		$	9,155	$	873		$	1,678	$	417	$	365	$	1,246		$	15,484
Provision for credit losses		(36	)		895		2,633			146		70		1		(1,109	)		2,600
Charge-offs		(51	)		—		(2,567	)		—		—		—		—			(2,618	)
Recoveries		112			—		—			—		—		1		—			113
Net charge-offs		61			—		(2,567	)		—		—		1		—			(2,505	)
Balance as of June 30, 2023	$	1,775		$	10,050	$	939		$	1,824	$	487	$	367	$	137		$	15,579

Six Months Ended June 30, 2023
($ in thousands)	Commercial			Commercial Real Estate			Agriculture			Residential Mortgage			Residential Construction		Consumer			Unallocated			Total
Balance as of December 31, 2022 prior to adoption of ASC 326	$	1,463		$	10,073		$	1,757		$	880		$	178	$	173		$	268		$	14,792
Impact of adopting ASC 326		623			(464	)		(671	)		834			200		201			77			800
Balance as of January 1, 2023, post adoption of ASC 326		2,086			9,609			1,086			1,714			378		374			345			15,592
Provision for credit losses		(268	)		441			2,420			113			109		(7	)		(208	)		2,600
Charge-offs		(178	)		—			(2,567	)		(3	)		—		(1	)		—			(2,749	)
Recoveries		135			—			—			—			—		1			—			136
Net charge-offs		(43	)		—			(2,567	)		(3	)		—		—			—			(2,613	)
Balance as of June 30, 2023	$	1,775		$	10,050		$	939		$	1,824		$	487	$	367		$	137		$	15,579

During the quarter ended June 30, 2023, the levels of forecasted California unemployment increased and forecasted gross domestic product remained relatively unchanged from the prior quarter. During the quarter ended June 30, 2023, the Company experienced a credit event related to suspected customer fraud on a single agricultural relationship that required a charge-off of $2,567,000 against the ACL. The reduction in the ACL resulting from the charge-off, when coupled with our quarterly loan growth and increased forecast of California unemployment, were the primary drivers for provision expense of $2,600,000 recognized for the three and six months ended June 30, 2023. Management believes that the allowance for credit losses at June 30, 2023 appropriately reflected expected credit losses in the loan portfolio at that date.

The following table summarizes the activity in the allowance for loan losses by loan class for the three and six months ended June 30, 2022:

Three Months Ended June 30, 2022
($ in thousands)	Commercial			Commercial Real Estate		Agriculture		Residential Mortgage		Residential Construction		Consumer			Unallocated			Total
Balance as of March 31, 2022	$	1,747		$	9,380	$	1,607	$	754	$	135	$	191		$	444		$	14,258
Provision for (reversal of) loan losses		183			191		87		48		16		(9	)		(216	)		300
Charge-offs		(297	)		—		—		—		—		(5	)		—			(302	)
Recoveries		17			—		—		—		—		2			—			19
Net (charge-offs)/recoveries		(280	)		—		—		—		—		(3	)		—			(283	)
Balance as of June 30, 2022	$	1,650		$	9,571	$	1,694	$	802	$	151	$	179		$	228		$	14,275

Six Months Ended June 30, 2022
($ in thousands)	Commercial			Commercial Real Estate		Agriculture		Residential Mortgage		Residential Construction		Consumer			Unallocated			Total
Balance as of December 31, 2021	$	1,604		$	8,808	$	1,482	$	742	$	74	$	167		$	1,075		$	13,952
Provision for (reversal of) loan losses		319			763		212		60		77		16			(847	)		600
Charge-offs		(297	)		—		—		—		—		(9	)		—			(306	)
Recoveries		24			—		—		—		—		5			—			29
Net (charge-offs)/recoveries		(273	)		—		—		—		—		(4	)		—			(277	)
Balance as of June 30, 2022	$	1,650		$	9,571	$	1,694	$	802	$	151	$	179		$	228		$	14,275

Collateral-Dependent Loans

In accordance with ASC 326, a loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. All loans individually analyzed were collateral-dependent loans as of June 30, 2023 and December 31, 2022.  The following table presents the amortized cost basis of collateral-dependent loans by class, which are individually evaluated to determine expected credit losses as of June 30, 2023 and December 31, 2022:

June 30, 2023
($ in thousands)	Secured by 1-4 Family Residential Properties-1st lien		Secured by 1-4 Family Residential Properties-junior lien		Secured by 1-4 Family Residential Properties- revolving		Commercial		Construction and land development		Secured by farmland		Agriculture production loans		Total
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate		—		—		—		—		—		—		—		—
Agriculture		—		—		—		—		—		1,054		4,109		5,163
Residential Mortgage		412		—		—		—		—		—		—		412
Residential Construction		—		—		—		—		—		—		—		—
Consumer		—		388		205		—		—		—		—		593
Total	$	412	$	388	$	205	$	—	$	—	$	1,054	$	4,109	$	6,168

December 31, 2022
($ in thousands)	Secured by 1-4 Family Residential Properties-1st lien		Secured by 1-4 Family Residential Properties-junior lien		Secured by 1-4 Family Residential Properties- revolving		Commercial		Construction and land development		Secured by farmland		Agriculture production loans		Total
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate		—		—		—		—		—		—		—		—
Agriculture		—		—		—		—		—		1,148		6,268		7,416
Residential Mortgage		123		—		—		—		—		—		—		123
Residential Construction		—		—		—		—		—		—		—		—
Consumer		—		—		637		—		—		—		—		637
Total	$	123	$	—	$	637	$	—	$	—	$	1,148	$	6,268	$	8,176

Foreclosure Proceedings

The Company had no residential real estate property in the process of foreclosure at June 30, 2023 and December 31, 2022.

Non-accrual and Past Due Loans

The Company’s loans by delinquency and non-accrual status, as of June 30, 2023 and December 31, 2022, was as follows:

($ in thousands)	30-59 days Past Due & Accruing		60-89 days Past Due & Accruing		90 days or More Past Due & Accruing		Nonaccrual Loans		Total Past Due & Nonaccrual Loans		Current & Accruing Loans		Total Loans		Nonaccrual loans with No ACL
June 30, 2023
Commercial	$	—	$	—	$	403	$	—	$	403	$	100,446	$	100,849	$	—
Commercial Real Estate		—		—		—		—		—		702,410		702,410		—
Agriculture		—		—		—		5,163		5,163		98,609		103,772		5,163
Residential Mortgage		339		—		—		412		751		97,770		98,521		412
Residential Construction		—		—		—		—		—		12,407		12,407		—
Consumer		200		84		—		593		877		14,187		15,064		593
Total	$	539	$	84	$	403	$	6,168	$	7,194	$	1,025,829	$	1,033,023	$	6,168
December 31, 2022
Commercial	$	41	$	—	$	403	$	—	$	444	$	106,327	$	106,771	$	—
Commercial Real Estate		—		—		—		—		—		645,166		645,166		—
Agriculture		—		—		—		7,416		7,416		106,624		114,040		7,416
Residential Mortgage		—		—		—		123		123		92,546		92,669		123
Residential Construction		—		—		—		—		—		10,167		10,167		—
Consumer		—		—		—		637		637		14,650		15,287		637
Total	$	41	$	—	$	403	$	8,176	$	8,620	$	975,480	$	984,100	$	8,176

The Company recognized $1,285,000 and $13,000 of interest income on nonaccrual loans during the three months ended June 30, 2023 and June 30, 2022, respectively. The Company recognized $1,285,000 and $28,000 of interest income on nonaccrual loans during the six months ended June 30, 2023 and June 30, 2022, respectively.

Loan Modifications

On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.  These amendments eliminate the troubled debt restructuring (TDR) recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan.

Occasionally, the Company modifies loans to borrowers in financial difficulty by providing principal forgiveness, term extension, payment delays or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL.

In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For the loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period. The combination is at least two of the following: a term extension, principal forgiveness, an other-than-insignificant payment delay and/or an interest rate reduction.

The following tables present the amortized cost basis of loans that were experiencing both financial difficulty and modification during the periods indicated, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below.

The amortized cost basis of loans that were experiencing both financial difficulty and modification during the three months ended June 30, 2023 were as follows:

($ in thousands)	Term Extension		Combination Term Extension and Interest Rate Reduction		Total Class of Financing Receivable
Commercial	$	—	$	—		—
Commercial Real Estate		—		400		0.06	%
Agriculture		4,005		—		3.86	%
Residential Mortgage		—		—		—
Residential Construction		—		—		—
Consumer		—		—		—
Total	$	4,005	$	400		3.92	%

The amortized cost basis of loans that were experiencing both financial difficulty and modification during the six months ended June 30, 2023 were as follows:

($ in thousands)	Term Extension		Combination Term Extension and Interest Rate Reduction		Total Class of Financing Receivable
Commercial	$	—	$	50		0.05	%
Commercial Real Estate		—		400		0.06	%
Agriculture		4,005		—		3.86	%
Residential Mortgage		—		—		—
Residential Construction		—		—		—
Consumer		—		—		—
Total	$	4,005	$	450		3.97	%

The Company had no commitments to lend additional funds to borrowers whose loans were modified at June 30, 2023.

The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the three-month period ended June 30, 2023:

($ in thousands)	Weighted-Average Interest Rate Reduction			Weighted-Average Term Extension (in months)
Commercial		—		$	—
Commercial Real Estate		0.25	%		26
Agriculture		—			4
Residential Mortgage		—			—
Residential Construction		—			—
Consumer		—			—
Total		0.25	%	$	6

The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the six-month period ended June 30, 2023:

($ in thousands)	Weighted-Average Interest Rate Reduction			Weighted-Average Term Extension (in months)
Commercial		0.50	%	$	38
Commercial Real Estate		0.25	%		26
Agriculture		—			4
Residential Mortgage		—			—
Residential Construction		—			—
Consumer		—			—
Total		0.28	%	$	6

There were two agricultural loans totaling $4,005,000 that were modified within the previous twelve months and for which there was a payment default during the three and six months ended June 30, 2023. The Company recorded charge-offs on these two agricultural loans totaling $2,567,000 during the three and six months ended June 30, 2023.

Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently become uncollectible, the loan (or a portion of the loan) is written off.  Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the ACL is adjusted by the same amount.

Troubled Debt Restructurings Prior to the Adoption of ASU 2022-02

Prior to the adoption of ASU 2022-02, the Company accounted for a modification to the contractual terms of a loan that resulted in granting a concession to a borrower experiencing financial difficulties as a troubled debt restructuring (TDR).  The Company had $8,399,000 in TDR loans as of December 31, 2022. Specific reserves for TDR loans totaled $77,000 as of December 31, 2022.  TDR loans performing in compliance with modified terms totaled $8,399,000 as of December 31, 2022.

There were no loans modified as TDRs during the three months ended June 30, 2022.

Loans modified as TDRs during the six months ended June 30, 2022 were as follows:

($ in thousands)	Six months ended June 30, 2022
	Number of Contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment
Consumer		1	$	75	$	75
Total		1	$	75	$	75

There were no loans modified as a TDR within the previous twelve months that subsequently defaulted during the three and six month periods ended June 30, 2022.

Credit Quality Indicators

All loans are rated using the credit risk ratings and criteria adopted by the Company.  Risk ratings are adjusted as future circumstances warrant.  All credits risk rated 1, 2, 3 or 4 equate to a Pass as indicated by Federal and State bank regulatory agencies; a 5 equates to a Special Mention; a 6 equates to Substandard; a 7 equates to Doubtful; and an 8 equates to a Loss.  For the definitions of each risk rating, see Note 4 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.

The following tables present the loan portfolio by loan class, origination year, and internal risk rating as of June 30, 2023. Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to permanent loans, are presented by year of origination. Revolving loans converted to term loans totaled $358,000 during the six months ended June 30, 2023.

(in thousands)
	Term Loans Amortized Cost Basis by Origination Year - As of June 30, 2023
	2023			2022			2021		2020		2019			Prior		Revolving Loans Amortized Cost Basis			Total
Commercial
Pass	$	5,567		$	20,674		$	24,445	$	6,750	$	8,928		$	9,593	$	22,281		$	98,238
Special Mention		—			—			—		—		—			—		—			—
Substandard		47			—			1,996		568		—			—		—			2,611
Doubtful/Loss		—			—			—		—		—			—		—			—
Total Commercial loans	$	5,614		$	20,674		$	26,441	$	7,318	$	8,928		$	9,593	$	22,281		$	100,849
Year-to-date Period Write-offs		—			(91	)		—		—		(87	)		—		—			(178	)
Year-to-date Recoveries		—			—			—		—		86			49		—			135
Year-to-date Net Write-offs		—			(91	)		—		—		(1	)		49		—			(43	)
Commercial Real Estate
Pass	$	74,538		$	173,787		$	201,926	$	45,638	$	58,982		$	126,251	$	7,035		$	688,157
Special Mention		—			—			—		855		2,927			—		—			3,782
Substandard		400			—			171		2,136		6,736			1,028		—			10,471
Doubtful/Loss		—			—			—		—		—			—		—			—
Total Commercial Real Estate loans	$	74,938		$	173,787		$	202,097	$	48,629	$	68,645		$	127,279	$	7,035		$	702,410
Year-to-date Write-offs		—			—			—		—		—			—		—			—
Year-to-date Recoveries		—			—			—		—		—			—		—			—
Year-to-date Net Write-offs		—			—			—		—		—			—		—			—
Agriculture
Pass	$	6,235		$	21,015		$	23,921	$	9,038	$	4,470			11,857	$	21,009		$	97,545
Special Mention		—			—			—		—		—			1,064		—			1,064
Substandard		—			—			1,572		—		—			—		3,591			5,163
Doubtful/Loss		—			—			—		—		—			—		—			—
Total Agriculture loans	$	6,235		$	21,015		$	25,493	$	9,038	$	4,470		$	12,921	$	24,600		$	103,772
Year-to-date Write-offs		(1,825	)		—			—		—		—			—		(742	)		(2,567	)
Year-to-date Recoveries		—			—			—		—		—			—		—			—
Year-to-date Net Write-offs		(1,825	)		—			—		—		—			—		(742	)		(2,567	)

(in thousands)
	Term Loans Amortized Cost Basis by Origination Year - As of June 30, 2023
	2023			2022			2021		2020		2019			Prior			Revolving Loans Amortized Cost Basis			Total
Residential Mortgage
Pass	$	10,396		$	23,601		$	27,060	$	14,931	$	6,134		$	15,948		$	—		$	98,070
Special Mention		—			—			—		—		—			—			—			—
Substandard		—			—			39		—		—			412			—			451
Doubtful/Loss		—			—			—		—		—			—			—			—
Total Residential Mortgage loans	$	10,396		$	23,601		$	27,099	$	14,931	$	6,134		$	16,360		$	—		$	98,521
Year-to-date Write-offs		—			—			—		—		—			(3	)		—			(3	)
Year-to-date Recoveries		—			—			—		—		—			—			—			—
Year-to-date Net Write-offs		—			—			—		—		—			(3	)		—			(3	)
Residential Construction
Pass	$	2,536		$	6,160		$	3,711	$	—	$	—		$	—		$	—		$	12,407
Special Mention		—			—			—		—		—			—			—			—
Substandard		—			—			—		—		—			—			—			—
Doubtful/Loss		—			—			—		—		—			—			—			—
Total Residential Construction loans	$	2,536		$	6,160		$	3,711	$	—	$	—		$	—		$	—		$	12,407
Year-to-date Write-offs		—			—			—		—		—			—			—			—
Year-to-date Recoveries		—			—			—		—		—			—			—			—
Year-to-date Net Write-offs		—			—			—		—		—			—			—			—
Consumer
Pass	$	314		$	822		$	144	$	197	$	68		$	447		$	12,479		$	14,471
Special Mention		—			—			—		—		—			—			—			—
Substandard		—			—			—		—		—			—			593			593
Doubtful/Loss		—			—			—		—		—			—			—			—
Total Consumer loans	$	314		$	822		$	144	$	197	$	68		$	447		$	13,072		$	15,064
Year-to-date Write-offs		(1	)		—			—		—		—			—			—			(1	)
Year-to-date Recoveries		—			—			—		—		—			1			—			1
Year-to-date Net Write-offs		(1	)		—			—		—		—			1			—			—
Total Loans
Pass	$	99,586		$	246,059		$	281,207	$	76,554	$	78,582		$	164,096		$	62,804		$	1,008,888
Special Mention		—			—			—		855		2,927			1,064			—			4,846
Substandard		447			—			3,778		2,704		6,736			1,440			4,184			19,289
Doubtful/Loss		—			—			—		—		—			—			—			—
Total Loans	$	100,033		$	246,059		$	284,985	$	80,113	$	88,245		$	166,600		$	66,988		$	1,033,023
Year-to-date Write-offs	$	(1,826	)	$	(91	)	$	—	$	—	$	(87	)	$	(3	)	$	(742	)	$	(2,749	)
Year-to-date Recoveries	$	—		$	—		$	—	$	—	$	86		$	50		$	—		$	136
Year-to-date Net Write-offs	$	(1,826	)	$	(91	)	$	—	$	—	$	(1	)	$	47		$	(742	)	$	(2,613	)

The following table presents the risk ratings by loan class as of December 31, 2022.

	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2022
Commercial	$	106,643	$	—	$	128	$	—	$	—	$	106,771
Commercial Real Estate		631,693		6,748		6,725		—		—		645,166
Agriculture		105,560		1,064		7,416		—		—		114,040
Residential Mortgage		92,299		207		163		—		—		92,669
Residential Construction		10,167		—		—		—		—		10,167
Consumer		14,650		—		637		—		—		15,287
Total	$	961,012	$	8,019	$	15,069	$	—	$	—	$	984,100