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Allowance for Loan and Lease Losses
6 Months Ended
Jun. 30, 2020
Provision for Loan and Lease Losses [Abstract]  
Allowance for Loan and Lease Losses

Note 11 – Allowance for Loan and Lease Losses

The Company’s allowance for loan and lease losses, a contra-asset, is established through a provision for loan and lease losses. The allowance is maintained at a level that is considered adequate to absorb probable losses on certain specifically identified impaired loans, as well as probable incurred losses inherent in the remaining loan portfolio. Specifically identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only when cash payments are received subsequent to the charge off. We employ a systematic methodology, consistent with FASB guidelines on loss contingencies and impaired loans, for determining the appropriate level of the allowance for loan and lease losses and adjusting it to that level at least quarterly. Pursuant to our methodology, impaired loans and leases are individually analyzed and a criticized asset action plan is completed specifying the financial status of the borrower and, if applicable, the characteristics and condition of collateral and any associated liquidation plan. A specific loss allowance is created for each impaired loan, if necessary.

The following tables disclose the unpaid principal balance, recorded investment, average recorded investment, and interest income recognized for impaired loans on our books as of the dates indicated. Balances are shown by loan type, and are further broken out by those that required an allowance and those that did not, with the associated allowance disclosed for those that required such. Included in the valuation allowance for impaired loans shown in the tables below are specific reserves allocated to TDRs, totaling $0.7 million at June 30, 2020 and $0.6 million at December 31, 2019.

Impaired Loans

(dollars in thousands, unaudited)

June 30, 2020

    

Unpaid Principal
Balance
(1)

    

Recorded
Investment
(2)

    

Related
Allowance

    

Average
Recorded
Investment

    

Interest Income
Recognized
(3)

With an allowance recorded

Real estate:

Other construction/land

$

690

571

173

586

21

1-4 family - closed-end

3,379

3,379

71

3,406

58

Equity lines

3,909

3,856

317

3,971

69

Multi-family residential

344

344

18

347

12

Commercial real estate- owner occupied

757

757

11

763

18

Commercial real estate- non-owner occupied

Farmland

237

237

3

237

Total real estate

9,316

9,144

593

9,310

178

Agricultural

2

2

4

Commercial and industrial

1,282

1,262

671

1,297

9

Consumer loans

382

344

95

361

15

Subtotal

10,982

10,752

1,359

10,972

202

With no related allowance recorded

Real estate:

Other construction/land

1

1-4 family - closed-end

826

826

845

Equity lines

300

300

304

2

Commercial real estate- owner occupied

2,029

1,910

1,937

Commercial real estate- non-owner occupied

627

627

634

Farmland

465

465

467

Total real estate

4,247

4,128

4,187

3

Agricultural

Commercial and industrial

142

121

206

Consumer loans

9

1

Subtotal

4,398

4,249

4,394

3

Total

$

15,380

$

15,001

$

1,359

$

15,366

$

205

(1)Contractual principal balance due from customer.
(2)Principal balance on Company’s books, less any direct charge offs.
(3)Interest income is recognized on performing balances on a regular accrual basis.

Impaired Loans

(dollars in thousands, unaudited)

December 31, 2019

    

Unpaid Principal
Balance
(1)

    

Recorded
Investment
(2)

    

Related
Allowance

    

Average
Recorded
Investment

    

Interest Income
Recognized
(3)

With an allowance recorded

Real estate:

Other construction/land

$

656

$

537

$

157

$

563

$

32

1-4 family - closed-end

2,298

2,298

58

2,365

146

Equity lines

4,173

4,120

252

4,185

200

Multi-family residential

353

353

17

361

23

Commercial real estate- owner occupied

593

593

6

606

38

Commercial real estate- non-owner occupied

Farmland

237

237

3

256

Total real estate

8,310

8,138

493

8,336

439

Agricultural

5

5

1

6

Commercial and industrial

915

896

219

1,140

29

Consumer loans

464

425

114

469

35

Subtotal

9,694

9,464

827

9,951

503

With no related allowance recorded

Real estate:

1-4 family - closed-end

$

755

$

722

$

$

726

$

Equity lines

326

301

310

5

Multi-family residential

Commercial real estate- owner occupied

1,560

1,440

1,477

Commercial real estate- non-owner occupied

3,295

2,105

3,267

Farmland

22

22

25

Total real estate

6,010

4,607

6,382

9

Agricultural

Commercial and industrial

102

81

162

Consumer loans

9

140

15

Subtotal

6,121

4,688

6,684

24

Total

$

15,815

$

14,152

$

827

$

16,635

$

527

(1)Contractual principal balance due from customer.
(2)Principal balance on Company’s books, less any direct charge offs.
(3)Interest income is recognized on performing balances on a regular accrual basis.

The specific loss allowance for an impaired loan generally represents the difference between the book value of the loan and either the fair value of underlying collateral less estimated disposition costs, or the loan’s net present value as determined by a discounted cash flow analysis. The discounted cash flow approach is typically used to measure impairment on loans for which it is anticipated that repayment will be provided from cash flows other than those generated solely by the disposition or operation of underlying collateral. However, historical loss rates may be used by the Company to determine a specific loss allowance if those rates indicate a higher potential reserve need than the discounted cash flow analysis. Any change in impairment attributable to the passage of time is accommodated by adjusting the loss allowance accordingly.

For loans where repayment is expected to be provided by the disposition or operation of the underlying collateral, impairment is measured using the fair value of the collateral. If the collateral value, net of the expected costs of disposition, is less than the loan balance, then a specific loss reserve is established for the shortfall in collateral coverage. If the discounted collateral value is greater than or equal to the loan balance, no specific loss reserve is required. At the time a collateral-dependent loan is designated as nonperforming, a new appraisal is ordered and typically received within

30 to 60 days if a recent appraisal is not already available. We generally use external appraisals to determine the fair value of the underlying collateral for nonperforming real estate loans, although the Company’s licensed staff appraisers may update older appraisals based on current market conditions and property value trends. Until an updated appraisal is received, the Company uses the existing appraisal to determine the amount of the specific loss allowance that may be required. The specific loss allowance is adjusted, as necessary, once a new appraisal is received. Updated appraisals are generally ordered at least annually for collateral-dependent loans that remain impaired, and current appraisals were available or in process for 59% of the Company’s impaired real estate loan balances at June 30, 2020. Furthermore, the Company analyzes collateral-dependent loans on at least a quarterly basis, to determine if any portion of the recorded investment in such loans can be identified as uncollectible and would therefore constitute a confirmed loss. All amounts deemed to be uncollectible are promptly charged off against the Company’s allowance for loan and lease losses, with the loan then carried at the fair value of the collateral, as appraised, less estimated costs of disposition if applicable. Once a charge-off or write-down is recorded, it will not be restored to the loan balance on the Company’s accounting books.

Our methodology also provides for the establishment of a “general” allowance for probable incurred losses inherent in loans and leases that are not impaired. Unimpaired loan balances are segregated by credit quality, and are then evaluated in pools with common characteristics. At the present time, pools are based on the same segmentation of loan types presented in our regulatory filings. While this methodology utilizes historical loss data and other measurable information, the credit classification of loans and the establishment of the allowance for loan and lease losses are both to some extent based on Management’s judgment and experience. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that Management believes is appropriate at each reporting date. Quantitative information includes our historical loss experience, delinquency and charge-off trends, and current collateral values. Qualitative factors include the general economic environment in our markets and, in particular, the condition of the agricultural industry and other key industries. Lending policies and procedures (including underwriting standards), the experience and abilities of lending staff, the quality of loan review, credit concentrations (by geography, loan type, industry and collateral type), the rate of loan portfolio growth, and changes in legal or regulatory requirements are additional factors that are considered. The total general reserve established for probable incurred losses on unimpaired loans was $12.2 million at June 30, 2020.

There were no material changes to the methodology used to determine our allowance for loan and lease losses during the three months ended June 30, 2020, although as outlined in Note 3 to the consolidated financial statements we will substantially update our methodology upon the implementation of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update ASU 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326) when the earlier of the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. Moreover, we will continue to enhance our methodology as needed in order to comply with regulatory and accounting requirements, keep pace with the size and complexity of our loan and lease portfolio, and respond to pressures created by external forces. We engage outside firms on a regular basis to assess our methodology and perform independent credit reviews of our loan and lease portfolio. In addition, the FDIC and the California Department of Business Oversight (DBO) review the allowance for loan and lease losses as an integral part of their audit and examination processes. Management believes deferring the implementation of “CECL” and continuing with the current incurred loss methodology is appropriate given the impact of the economic uncertainty surrounding COVID-19 and related governmental and regulatory actions taken in response thereto, such as the stimulus provisions of the CARES Act.

The tables that follow detail the activity in the allowance for loan and lease losses for the periods noted:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)

Three months ended June 30, 2020

Real Estate

Agricultural
Products

Commercial and
Industrial
(1)

Consumer

Unallocated

Total

Allowance for credit losses:

Beginning balance

$

7,315

$

235

$

2,754

$

1,137

$

12

$

11,453

Charge-offs

(67)

(286)

(353)

Recoveries

3

20

237

260

Provision

1,532

(3)

908

(239)

2

2,200

Ending balance

$

8,850

$

232

$

3,615

$

849

$

14

$

13,560

Six months ended June 30, 2020

    

Real Estate

    

Agricultural
Products

    

Commercial and
Industrial
(1)

    

Consumer

    

Unallocated

    

Total

Allowance for credit losses:

Beginning balance

    

$

5,635

    

$

193

    

$

2,685

    

$

1,278

    

$

132

    

$

9,923

Charge-offs

(92)

(903)

(995)

Recoveries

74

48

510

632

Provision

3,141

39

974

(36)

(118)

4,000

Ending balance

$

8,850

$

232

$

3,615

$

849

$

14

$

13,560

Reserves:

Specific

$

593

$

$

671

$

95

$

$

1,359

General

8,257

232

2,944

754

14

12,201

Ending balance

$

8,850

$

232

$

3,615

$

849

$

14

$

13,560

Loans evaluated for impairment:

Individually

$

13,272

$

2

$

1,383

$

344

$

$

15,001

Collectively

1,584,417

48,514

558,243

5,922

2,197,096

Ending balance

$

1,597,689

$

48,516

$

559,626

$

6,266

$

$

2,212,097

Year ended December 31, 2019

    

Real Estate

    

Agricultural
Products

    

Commercial and
Industrial
(1)

    

Consumer

    

Unallocated

    

Total

Allowance for credit losses:

Beginning balance

$

5,831

$

256

$

2,394

$

1,239

$

30

$

9,750

Charge-offs

(1,190)

(1,274)

(2,409)

(4,873)

Recoveries

647

690

1,159

2,496

Provision

347

(63)

875

1,289

102

2,550

Ending balance

$

5,635

$

193

$

2,685

$

1,278

$

132

$

9,923

Reserves:

Specific

$

493

$

1

$

219

$

114

$

$

827

General

5,142

192

2,466

1,164

132

9,096

Ending balance

$

5,635

$

193

$

2,685

$

1,278

$

132

$

9,923

Loans evaluated for impairment:

Individually

$

12,746

$

5

$

977

$

425

$

$

14,153

Collectively

1,389,368

48,031

303,658

7,355

1,748,412

Ending balance

$

1,402,114

$

48,036

$

304,635

$

7,780

$

$

1,762,565

(1)Includes mortgage warehouse lines.

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)

Three months ended June 30, 2019

    

Real Estate

    

Agricultural
Products

    

Commercial and
Industrial
(1)

    

Consumer

    

Unallocated

    

Total

Allowance for credit losses:

Beginning balance

$

6,094

$

219

$

1,914

$

1,129

$

82

$

9,438

Charge-offs

(254)

(562)

(816)

Recoveries

153

431

277

861

Provision

(278)

(18)

478

288

(70)

400

Ending balance

$

5,969

$

201

$

2,569

$

1,132

$

12

$

9,883

Six months ended June 30, 2019

    

Real Estate

    

Agricultural
Products

    

Commercial and
Industrial
(1)

    

Consumer

    

Unallocated

    

Total

Allowance for credit losses:

Beginning balance

$

5,831

$

256

$

2,394

$

1,239

$

30

$

9,750

Charge-offs

(832)

(1,114)

(1,946)

Recoveries

329

472

578

1,379

Provision

(191)

(55)

535

429

(18)

700

Ending balance

$

5,969

$

201

$

2,569

$

1,132

$

12

$

9,883

Reserves:

Specific

$

881

$

1

$

303

$

137

$

$

1,322

General

5,088

200

2,266

995

12

8,561

Ending balance

$

5,969

$

201

$

2,569

$

1,132

$

12

$

9,883

Loans evaluated for impairment:

Individually

$

11,751

$

6

$

837

$

772

$

$

13,366

Collectively

1,426,425

51,503

279,091

7,514

1,764,533

Ending balance

$

1,438,176

$

51,509

$

279,928

$

8,286

$

$

1,777,899

(1)Includes mortgage warehouse lines.