LOANS AND ALLOWANCE FOR CREDIT LOSSES

9 Months Ended

Sep. 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 September 30, 2023 and December 31, 2022 was as follows:

($ in thousands)	September 30, 2023			December 31, 2022
Commercial	$	93,753		$	106,771
Commercial Real Estate		718,847			645,166
Agriculture		109,942			114,040
Residential Mortgage		101,755			92,669
Residential Construction		14,021			10,167
Consumer		14,826			15,287
		1,053,144			984,100
Allowance for credit losses		(16,149	)		(14,792	)
Deferred origination fees and costs, net		71			830
Loans, net	$	1,037,066		$	970,138

At September 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

For the periods indicated, the following tables summarize the activity in the allowance for credit losses on loans which is recorded as a contra asset, and the reserve for unfunded commitments which is recorded on the balance sheet within other liabilities:

	Allowance for credit losses – Three months ended September 30, 2023
($ in thousands)	Beginning balance		Charge-offs			Recoveries		Provision (recovery)			Ending Balance
Commercial	$	1,775	$	(91	)	$	20	$	32		$	1,736
Commercial Real Estate		10,050		—			—		526			10,576
Agriculture		939		—			—		80			1,019
Residential Mortgage		1,824		—			—		79			1,903
Residential Construction		487		—			—		(155	)		332
Consumer		367		(9	)		—		4			362
Unallocated		137		—			—		84			221
Allowance for credit losses on loans		15,579		(100	)		20		650			16,149
Reserve for unfunded commitments		1,200		—			—		(150	)		1,050
Total	$	16,779	$	(100	)	$	20	$	500		$	17,199

	Allowance for credit losses – Nine months ended September 30, 2023
($ in thousands)	Beginning balance		Adoption of CECL			Charge-offs			Recoveries		Provision (recovery)			Ending Balance
Commercial	$	1,463	$	623		$	(269	)	$	155	$	(236	)	$	1,736
Commercial Real Estate		10,073		(464	)		—			—		967			10,576
Agriculture		1,757		(671	)		(2,567	)		—		2,500			1,019
Residential Mortgage		880		834			(3	)		—		192			1,903
Residential Construction		178		200			—			—		(46	)		332
Consumer		173		201			(10	)		1		(3	)		362
Unallocated		268		77			—			—		(124	)		221
Allowance for credit losses on loans		14,792		800			(2,849	)		156		3,250			16,149
Reserve for unfunded commitments		700		500			—			—		(150	)		1,050
Total	$	15,492	$	1,300		$	(2,849	)	$	156	$	3,100		$	17,199

During the quarter ended September 30, 2023, the levels of forecasted California unemployment remained relatively unchanged and forecasted gross domestic product decreased from the prior quarter. During the nine months ended September 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 allowance for credit losses (ACL). Loan growth was the primary driver for provision expense of $500,000 recognized for the three months ended September 30, 2023. The reduction in the ACL resulting from the charge-off coupled with our loan growth were the primary drivers for provision expense of $3,100,000 recognized for the nine months ended September 30, 2023. Management believes that the allowance for credit losses at September 30, 2023 appropriately reflected expected credit losses in the loan portfolio at that date.

The following tables summarize the activity in the allowance for loan losses by loan class for the three and nine months ended September 30, 2022:

Three Months Ended September 30, 2022
($ in thousands)	Commercial			Commercial Real Estate		Agriculture		Residential Mortgage		Residential Construction			Consumer			Unallocated			Total
Balance as of June 30, 2022	$	1,650		$	9,571	$	1,694	$	802	$	151		$	179		$	228		$	14,275
Provision for (reversal of) loan losses		(385	)		566		128		45		(21	)		26			(59	)		300
Charge-offs		—			—		—		—		—			(30	)		—			(30	)
Recoveries		225			—		—		—		—			1			—			226
Net (charge-offs)/recoveries		225			—		—		—		—			(29	)		—			196
Balance as of September 30, 2022	$	1,490		$	10,137	$	1,822	$	847	$	130		$	176		$	169		$	14,771

Nine Months Ended September 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		(66	)		1,329		340		105		56		42			(906	)		900
Charge-offs		(297	)		—		—		—		—		(39	)		—			(336	)
Recoveries		249			—		—		—		—		6			—			255
Net (charge-offs)/recoveries		(48	)		—		—		—		—		(33	)		—			(81	)
Balance as of September 30, 2022	$	1,490		$	10,137	$	1,822	$	847	$	130	$	176		$	169		$	14,771

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 September 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 September 30, 2023 and December 31, 2022:

September 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		—		—		—		—		—		1,008		4,012		5,020
Residential Mortgage		400		—		—		—		—		—		—		400
Residential Construction		—		—		—		—		—		—		—		—
Consumer		—		372		327		—		—		—		—		699
Total	$	400	$	372	$	327	$	—	$	—	$	1,008	$	4,012	$	6,119

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 September 30, 2023 and December 31, 2022.

Non-accrual and Past Due Loans

The Company’s loans by delinquency and non-accrual status, as of September 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
September 30, 2023
Commercial	$	7	$	47	$	—	$	—	$	54	$	93,699	$	93,753	$	—
Commercial Real Estate		1,910		1,956		—		—		3,866		714,981		718,847		—
Agriculture		—		—		—		5,020		5,020		104,922		109,942		5,020
Residential Mortgage		636		—		—		400		1,036		100,719		101,755		400
Residential Construction		3,420		—		—		—		3,420		10,601		14,021		—
Consumer		45		—		—		699		744		14,082		14,826		699
Total	$	6,018	$	2,003	$	—	$	6,119	$	14,140	$	1,039,004	$	1,053,144	$	6,119
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 $4,000 and $19,000 of interest income on nonaccrual loans during the three months ended September 30, 2023 and September 30, 2022, respectively. The Company recognized $1,289,000 and $46,000 of interest income on nonaccrual loans during the nine months ended September 30, 2023 and September 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 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 September 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		—		—		—
Agriculture		—		—		—
Residential Mortgage		—		—		—
Residential Construction		3,420		—		24.39	%
Consumer		—		—		—
Total	$	3,420	$	—		24.39	%

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

($ in thousands)	Term Extension		Combination Term Extension and Interest Rate Reduction		Total Class of Financing Receivable
Commercial	$	—	$	44		0.05	%
Commercial Real Estate		—		398		0.06	%
Agriculture		4,005		—		3.64	%
Residential Mortgage		—		—		—
Residential Construction		3,420		—		24.39	%
Consumer		—		—		—
Total	$	7,425	$	442		28.14	%

The Company had commitments to lend additional funds totaling $580,000 to borrowers whose loans were modified at September 30, 2023.

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

($ in thousands)	Weighted-Average Interest Rate Reduction		Weighted-Average Term Extension (in months)
Commercial		—	$	—
Commercial Real Estate		—		—
Agriculture		—		—
Residential Mortgage		—		—
Residential Construction		—		1
Consumer		—		—
Total		—	$	1

The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the nine-month period ended September 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		—			1
Consumer		—			—
Total		0.27	%	$	4

There were no loans modified within the previous twelve months and for which there was a payment default during the three months ended September 30, 2023. 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 nine months ended September 30, 2023. The Company recorded charge-offs on these two agricultural loans totaling $2,567,000 during the nine months ended September 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 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 September 30, 2022.

Loans modified as TDRs during the nine months ended September 30, 2022 were as follows:

($ in thousands)	Nine months ended September 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 nine month periods ended September 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 September 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 $80,000 as of September 30, 2023.

(in thousands)
	Term Loans Amortized Cost Basis by Origination Year - As of September 30, 2023
	2023			2022			2021			2020		2019			Prior		Revolving Loans Amortized Cost Basis			Total
Commercial
Pass	$	7,398		$	18,546		$	22,473		$	5,829	$	7,999		$	6,764	$	20,995		$	90,004
Special Mention		—			—			—			258		326			—		945			1,529
Substandard		44			—			1,576			553		—			—		47			2,220
Doubtful/Loss		—			—			—			—		—			—		—			—
Total Commercial loans	$	7,442		$	18,546		$	24,049		$	6,640	$	8,325		$	6,764	$	21,987		$	93,753
Year-to-date Period Charge-offs		—			(146	)		(36	)		—		(87	)		—		—			(269	)
Year-to-date Recoveries		—			—			—			—		87			68		—			155
Year-to-date Net Charge-offs		—			(146	)		(36	)		—		—			68		—			(114	)
Commercial Real Estate
Pass	$	98,815		$	171,601		$	197,873		$	50,758	$	52,652		$	121,005	$	6,953		$	699,657
Special Mention		—			—			2,219			846		2,898			1,291		—			7,254
Substandard		398			—			1,728			2,117		6,671			1,022		—			11,936
Doubtful/Loss		—			—			—			—		—			—		—			—
Total Commercial Real Estate loans	$	99,213		$	171,601		$	201,820		$	53,721	$	62,221		$	123,318	$	6,953		$	718,847
Year-to-date Charge-offs		—			—			—			—		—			—		—			—
Year-to-date Recoveries		—			—			—			—		—			—		—			—
Year-to-date Net Charge-offs		—			—			—			—		—			—		—			—
Agriculture
Pass	$	6,836		$	21,080		$	23,854		$	8,868	$	4,459			11,712	$	27,050		$	103,859
Special Mention		—			—			—			—		—			1,064		—			1,064
Substandard		—			—			1,525			—		—			—		3,494			5,019
Doubtful/Loss		—			—			—			—		—			—		—			—
Total Agriculture loans	$	6,836		$	21,080		$	25,379		$	8,868	$	4,459		$	12,776	$	30,544		$	109,942
Year-to-date Charge-offs		(1,825	)		—			—			—		—			—		(742	)		(2,567	)
Year-to-date Recoveries		—			—			—			—		—			—		—			—
Year-to-date Net Charge-offs		(1,825	)		—			—			—		—			—		(742	)		(2,567	)

(in thousands)
	Term Loans Amortized Cost Basis by Origination Year - As of September 30, 2023
	2023			2022			2021			2020		2019			Prior			Revolving Loans Amortized Cost Basis			Total
Residential Mortgage
Pass	$	14,581		$	23,310		$	26,725		$	15,053	$	6,073		$	15,574		$	—		$	101,316
Special Mention		—			—			—			—		—			—			—			—
Substandard		—			—			39			—		—			400			—			439
Doubtful/Loss		—			—			—			—		—			—			—			—
Total Residential Mortgage loans	$	14,581		$	23,310		$	26,764		$	15,053	$	6,073		$	15,974		$	—		$	101,755
Year-to-date Charge-offs		—			—			—			—		—			(3	)		—			(3	)
Year-to-date Recoveries		—			—			—			—		—			—			—			—
Year-to-date Net Charge-offs		—			—			—			—		—			(3	)		—			(3	)
Residential Construction
Pass	$	3,086		$	4,521		$	2,994		$	—	$	—		$	—		$	—		$	10,601
Special Mention		—			—			—			—		—			—			—			—
Substandard		—			3,420			—			—		—			—			—			3,420
Doubtful/Loss		—			—			—			—		—			—			—			—
Total Residential Construction loans	$	3,086		$	7,941		$	2,994		$	—	$	—		$	—		$	—		$	14,021
Year-to-date Charge-offs		—			—			—			—		—			—			—			—
Year-to-date Recoveries		—			—			—			—		—			—			—			—
Year-to-date Net Charge-offs		—			—			—			—		—			—			—			—
Consumer
Pass	$	357		$	801		$	138		$	172	$	64		$	433		$	12,162		$	14,127
Special Mention		—			—			—			—		—			—			—			—
Substandard		—			—			—			—		—			—			699			699
Doubtful/Loss		—			—			—			—		—			—			—			—
Total Consumer loans	$	357		$	801		$	138		$	172	$	64		$	433		$	12,861		$	14,826
Year-to-date Charge-offs		(10	)		—			—			—		—			—			—			(10	)
Year-to-date Recoveries		—			—			—			—		—			1			—			1
Year-to-date Net Charge-offs		(10	)		—			—			—		—			1			—			(9	)
Total Loans
Pass	$	131,073		$	239,859		$	274,057		$	80,680	$	71,247		$	155,488		$	67,160		$	1,019,564
Special Mention		—			—			2,219			1,104		3,224			2,355			945			9,847
Substandard		442			3,420			4,868			2,670		6,671			1,422			4,240			23,733
Doubtful/Loss		—			—			—			—		—			—			—			—
Total Loans	$	131,515		$	243,279		$	281,144		$	84,454	$	81,142		$	159,265		$	72,345		$	1,053,144
Year-to-date Charge-offs	$	(1,835	)	$	(146	)	$	(36	)	$	—	$	(87	)	$	(3	)	$	(742	)	$	(2,849	)
Year-to-date Recoveries	$	—		$	—		$	—		$	—	$	87		$	69		$	—		$	156
Year-to-date Net Charge-offs	$	(1,835	)	$	(146	)	$	(36	)	$	—	$	—		$	66		$	(742	)	$	(2,693	)

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