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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

☒

QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
March 31, 2023

 

 

☐

TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ___________

 

COMMISSION FILE NUMBER: 000-49883

 

PLUMAS BANCORP

(Exact Name of Registrant as Specified in Its Charter)

 

California

75-2987096

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

 

 

5525 Kietzke Lane, Suite 100, Reno, Nevada

89511

(Address of Principal Executive Offices)

(Zip Code)

 

 

Registrant’s Telephone Number, Including Area Code (775) 786-0907

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act:

 

Large Accelerated Filer ☐    Accelerated Filer ☐     Non-Accelerated Filer ☐     Smaller Reporting Company ☒    Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐  No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class:

Trading Symbol

Name of Each Exchange on which Registered:

Common Stock, no par value

PLBC

The NASDAQ Stock Market LLC

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 1, 2023: 5,863,748 shares.

 

 
 

 

 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

  

March 31,

  

December 31,

 
  

2023

  

2022

 
         

Assets

        

Cash and cash equivalents

 $105,676  $183,426 

Investment securities available for sale

  484,416   444,703 

Loans held for sale

  -   2,301 

Loans, less allowance for credit losses of $12,330 at March 31, 2023 and $10,717 at December 31, 2022

  906,022   903,968 

Other real estate owned

  83   - 

Premises and equipment, net

  18,730   18,100 

Bank owned life insurance

  15,797   16,020 

Goodwill

  5,502   5,502 

Accrued interest receivable and other assets

  42,256   47,024 

Total assets

 $1,578,482  $1,621,044 
         

Liabilities and Shareholders’ Equity

        
         

Deposits:

        

Non-interest bearing

 $741,754  $766,549 

Interest bearing

  664,991   691,260 

Total deposits

  1,406,745   1,457,809 

Repurchase agreements

  16,914   18,624 

Accrued interest payable and other liabilities

  16,000   15,297 

Other borrowings

  10,000   - 

Junior subordinated deferrable interest debentures

  -   10,310 

Total liabilities

  1,449,659   1,502,040 
         

Commitments and contingencies (Note 5)

          
         

Shareholders’ equity:

        

Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 5,862,148 shares at March 31, 2023 and 5,850,216 at December 31, 2022

  27,608   27,372 

Retained earnings

  133,997   128,388 

Accumulated other comprehensive loss, net

  (32,782)  (36,756)

Total shareholders’ equity

  128,823   119,004 

Total liabilities and shareholders’ equity

 $1,578,482  $1,621,044 

 

See notes to unaudited condensed consolidated financial statements.

 

 

1
 
 

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

 

   

For the Three Months Ended

  
   

March 31,

  
   

2023

    

2022

  

Interest Income:

                

Interest and fees on loans

   $ 12,653     $ 10,311  

Interest and fees on loans held for sale

     41       305  

Interest on investment securities

     3,728       1,531  

Other

     1,365       168  

Total interest income

     17,787       12,315  

Interest Expense:

                

Interest on deposits

     466       194  

Interest on junior subordinated deferrable interest debentures

     141       88  

Other

     31       18  

Total interest expense

     638       300  

Net interest income before provision for credit losses

     17,149       12,015  

Provision for Credit Losses

     1,525       300  

Net interest income after provision for credit losses

     15,624       11,715  

Non-Interest Income:

                

Gain on termination of swaps

     1,707       -  

Interchange revenue

     718       762  

Service charges

     617       566  

Gain on sale of loans

     230       1,701  

Other

     653       621  

Total non-interest income

     3,925       3,650  

Non-Interest Expenses:

                

Salaries and employee benefits

     5,067       4,082  

Occupancy and equipment

     1,340       1,137  

Other

     2,817       2,454  

Total non-interest expenses

     9,224       7,673  

Income before provision for income taxes

     10,325       7,692  

Provision for Income Taxes

     2,699       1,974  

Net income

   $ 7,626     $ 5,718  
                 

Basic earnings per share

   $ 1.30     $ 0.98  

Diluted earnings per share

   $ 1.28     $ 0.97  

 

See notes to unaudited condensed consolidated financial statements.

 

2
 
 

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

   

For the Three Months Ended

  
   

March 31,

  
   

2023

    

2022

  
                 

Net income

   $ 7,626     $ 5,718  

Other comprehensive income (loss):

                

Change in net unrealized loss on securities

     7,645       (23,349 )

Change in unrealized gain on cash flow hedge

     (295 )     656  

Less: reclassification adjustments for net gain included in net income

     (1,707 )     -  

Net unrealized holding loss

     5,643       (22,693 )

Related tax effect:

                

Change in net unrealized loss on securities

     (2,261 )     6,902  

Change in unrealized gain on cash flow hedge

     87       (193 )

Reclassification of gain included in net income

     505       -  

Income tax effect

     (1,669 )     6,709  

Other comprehensive income (loss)

     3,974       (15,984 )

Total comprehensive income (loss)

   $ 11,600     $ (10,266 )

 

See notes to unaudited condensed consolidated financial statements.

 

3
 
 

 

PLUMAS BANCORP AND SUBSIDIARY 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 

(in thousands, except shares)

 

   

Common Stock

    

Retained

    

Accumulated Other Comprehensive Income (loss)

    

Total Shareholders’

  
   

Shares

    

Amount

    

Earnings

    

(Net of Taxes)

    

Equity

  
                                         

Balance, December 31, 2021

     5,816,991     $ 26,801     $ 105,681     $ 1,600     $ 134,082  

Net Income

                   5,718             5,718  

Other comprehensive loss

                         (15,984 )     (15,984 )

Cash dividends on common stock

                   (932 )           (932 )

Exercise of stock options and tax effect

     19,775       131                   131  

Stock-based compensation expense

             58                   58  

Balance, March 31, 2022

     5,836,766     $ 26,990     $ 110,467     $ (14,384 )   $ 123,073  
                                         

Balance, December 31, 2022

     5,850,216     $ 27,372     $ 128,388     $ (36,756 )   $ 119,004  

Cumulative change from adoption of ASU 2016-13

                   (554 )           (554 )

Net Income

                   7,626             7,626  

Other comprehensive income

                         3,974       3,974  

Cash dividends on common stock

                   (1,463 )           (1,463 )

Exercise of stock options and tax effect

     11,932       137                   137  

Stock-based compensation expense

             99                   99  

Balance, March 31, 2023

     5,862,148     $ 27,608     $ 133,997     $ (32,782 )   $ 128,823  

 

See notes to unaudited condensed consolidated financial statements.  

  

 

4
 
 

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   

For the Three Months Ended

  
   

March 31,

  
   

2023

    

2022

  

Cash Flows from Operating Activities:

                

Net income

   $ 7,626     $ 5,718  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Provision for credit losses

     1,525       300  

Change in deferred loan origination costs/fees, net

     (93 )     (1,064 )

Depreciation and amortization

     386       458  

Stock-based compensation expense

     99       58  

Amortization of investment security premiums

     324       260  

Accretion of investment security discounts

     (201 )     (21 )

Loss on sale of other vehicles

     -       27  

Gain on sale of loans held for sale

     (230 )     (1,701 )

Loans originated for sale

     (736 )     (9,182 )

Proceeds from loan sales

     4,627       26,618  

Earnings on bank-owned life insurance

     (104 )     (93 )

Decrease in accrued interest receivable and other assets

     1,445       3,524  

Increase (decrease) in accrued interest payable and other liabilities

     170       (2,045 )

Net cash provided by operating activities

     14,838       22,857  
                 

Cash Flows from Investing Activities:

                

Proceeds from principal repayments from available-for-sale mortgage-backed securities

     7,011       7,780  

Proceeds from matured and called available-for-sale securities

     1,135       255  

Purchases of available-for-sale securities

     (40,338 )     (41,897 )

Purchase of FRB stock

     (2 )     (2 )

Net (increase) decrease in loans

     (5,494 )     1,021  

Proceeds from sale of other vehicles

     139       126  

Proceeds from bank owned life insurance

     327       -  

Purchase of premises and equipment

     (956 )     (2,133 )

Net cash used in investing activities

     (38,178 )     (34,850 )

 

Continued on next page.

 

5
 

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

(Continued)

 

   

For the Three Months Ended

  
   

March 31,

  
   

2023

    

2022

  

Cash Flows from Financing Activities:

                

Net (decrease) increase in demand, interest bearing and savings deposits

   $ (50,888 )   $ 29,210  

Net decrease in time deposits

     (176 )     (552 )

Net decrease in securities sold under agreements to repurchase

     (1,710 )     (7,425 )

Cash dividends paid on common stock

     (1,463 )     (932 )

Redemption of Trust Preferred Securities

     (10,310 )     -  

Increase in other borrowings

     10,000       -  

Proceeds from exercise of stock options

     137       131  

Net cash (used in) provided by financing activities

     (54,410 )     20,432  

(Decrease) increase in cash and cash equivalents

     (77,750 )     8,439  

Cash and Cash Equivalents at Beginning of Year

     183,426       380,584  

Cash and Cash Equivalents at End of Period

   $ 105,676     $ 389,023  
                 

Supplemental Disclosure of Cash Flow Information:

                

Cash paid during the period for:

                

Interest expense

   $ 632     $ 299  

Income taxes

   $ -     $ 10  
                 

Non-Cash Investing Activities:

                

Real estate and vehicles acquired through foreclosure

   $ 303     $ 129  
                 

Non-Cash Financing Activities:

                

Common stock retired in connection with the exercise of stock options

   $ 154     $ 84  

 

See notes to unaudited condensed consolidated financial statements.  

 

6
 

 

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. THE BUSINESS OF PLUMAS BANCORP

 

During 2002, Plumas Bancorp (the "Company") was incorporated as a bank holding company for the purpose of acquiring Plumas Bank (the "Bank") in a one bank holding company reorganization. This corporate structure gives the Company and the Bank greater flexibility in terms of operation, expansion and diversification. The Company formed Plumas Statutory Trust I ("Trust I") for the sole purpose of issuing trust preferred securities on September 26, 2002. The Company formed Plumas Statutory Trust II ("Trust II") for the sole purpose of issuing trust preferred securities on September 28, 2005. In March 2023 the Trusts were dissolved. Plumas Bancorp's Principal Executive Office is located in Reno, Nevada.

 

The Bank operates thirteen branches in California, including branches in Alturas, Chester, Chico, Fall River Mills, Greenville, Kings Beach, Portola, Quincy, Redding, Susanville, Tahoe City,  Truckee and Yuba City. The Bank's newest branch was opened in April 2023 and is located in Chico, California. The Bank’s administrative headquarters are in Quincy, California. In December 2015 the Bank opened a branch in Reno, Nevada, its first branch outside of California, and in 2018 the Bank purchased a branch located in Carson City, Nevada. In addition, the Bank operates a lending office specializing in government-guaranteed lending in Auburn, California, and commercial/agricultural lending offices in Chico, California and Klamath Falls, Oregon. The Bank's primary source of revenue is generated from providing loans to customers who are predominately small and middle market businesses and individuals residing in the surrounding areas.

 
 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Consolidation and Basis of Presentation

 

The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, Plumas Bank. All significant intercompany balances and transactions have been eliminated.

 

Plumas Statutory Trust I and Trust II are not consolidated into the Company's consolidated financial statements and, accordingly, are accounted for under the equity method. The Company's investment in Trust I of $374,000 and Trust II of $188,000 are included in accrued interest receivable and other assets on the consolidated balance sheet at December 31, 2022. The junior subordinated deferrable interest debentures issued and guaranteed by the Company and held by Trust I and Trust II are reflected as debt on the consolidated balance sheet at December 31, 2022.  In March 2023 the Company redeemed the debentures and the Trusts were dissolved.

 

The accounting and reporting policies of Plumas Bancorp and subsidiary conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at  March 31, 2023 and the results of its operations and its cash flows for the three-month periods. Our condensed consolidated balance sheet at  December 31, 2022 is derived from audited financial statements.

 

The unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2022 Annual Report to Shareholders on Form 10-K. The results of operations for the three periods ended March 31, 2023 may not necessarily be indicative of future operating results. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods reported. Actual results could differ significantly from those estimates.

 

Segment Information

 

Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank.

 

7
 
 

Allowance for Credit Losses - Loans

 

The allowance for credit losses (ACL) is a valuation account that is deducted from the loan's amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the recorded loan balance is confirmed as uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Regardless of the determination that a charge-off is appropriate for financial accounting purposes, the Company manages its loan portfolio by continually monitoring, where possible, a borrower's ability to pay through the collection of financial information, delinquency status, borrower discussion and the encouragement to repay in accordance with the original contract or modified terms, if appropriate.

 

Management estimates the allowance balance using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Company identified and accumulated loan cohort historical loss data beginning with the first quarter of 2004 and through the current period. In situations where the Company's actual loss history was not statistically relevant, the loss history of peers, defined as financial institutions with assets greater than seven hundred and fifty million and less than three billion, were utilized to create a minimum loss rate. Adjustments to historical loss information are made for differences in relevant current loan-specific risk characteristics, such as historical timing of losses relative to the loan origination. In its loss forecasting framework, the Company incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. These macroeconomic scenarios incorporate variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to changes in environmental conditions, such as California unemployment rates, California Housing Prices, California gross domestic product, California Retail Trade Earnings and Wall Street Journal Prime Rate.

 

A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. The ACL on collateral dependent loans is measured using the fair value of the underlying collateral, adjusted for costs to sell when applicable, less the amortized cost basis of the financial asset.  If the value of underlying collateral is determined to be less than the recorded amount of the loan, a specific reserve for that loan is recorded. If the Company determines that the loss represented by the specific reserve is uncollectable it records a charge-off for the uncollectable portion.

 

The Company has identified the following portfolio segments to evaluate and measure the allowance for credit loss:

 

Commercial: Primarily based on the cash flow of the borrower, and secondarily on the underlying collateral provided by the borrower. A borrower's cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Most often, collateral includes accounts receivable, inventory, or equipment. Collateral securing these loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. Actual and forecast changes in California gross domestic product paired with California unemployment are believed to be corollary to losses associated with these credits.

 

Agricultural: Loans secured by farmland represent unique risks that are associated with the operation of an agricultural business. The valuation of farmland can vary greatly over time based on the property's access to resources including but not limited to water, crop prices, foreign exchange rates, government regulation or restrictions, and the nature of ongoing capital investment needed to maintain the quality of the property. Loans secured by crop production, and livestock are especially vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.

 

Real estate - residential: The most significant drivers of potential loss within the Company's residential real estate portfolio relate general, regional, or individual changes in economic conditions and their effect on employment and borrowers cash flow. Risk in this portfolio is best measured by changes in borrower credit score and loan-to-value. Loss estimates are based on economic outlook and its effects on employment and the value of homes and the Bank’s historical loss experience adjusted to reflect the economic outlook and the unemployment rate.

 

Real estate - commercial: These credits are primarily susceptible to changes in the financial condition of the business operated by the property owner. This may be driven by changes in, among other things, industry challenges, factors unique to the operating geography of the borrower, change in the individual fortunes of the business owner, general economic conditions and changes in business cycles. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven more by general economic conditions, the underlying collateral may have devalued more and thus result in larger losses in the event of default. The terms on these loans at origination typically have maturities from ten to twenty-five years with amortization periods from five to thirty years.

 

Construction: While secured by real estate, construction loans represent a greater level of risk than term real estate loans due to the nature of the additional risks associated with the not only the completion of construction within an estimated time period and budget, but also the need to either sell the building or reach a level of stabilized occupancy sufficient to generate the cash flows necessary to support debt service and operating costs. The Company seeks to mitigate the additional risks associated with construction lending by requiring borrowers to comply with lower loan to value ratios and additional covenants as well as strong tertiary support of guarantors. The loss forecasting model applies the historical rate of loss for similar loans over the expected construction life of the asset as adjusted for macroeconomic factors.

 

Home equity lines of credit (HELOC): Similar to residential real estate term loans, HELOC performance is also primarily driven by borrower cash flows based on employment status. However, HELOCs carry additional risks associated with the fact that most of these loans are secured by a deed of trust in a position that is junior to the primary lien holder. Furthermore, the risk that as the borrower's financial strength deteriorates, the outstanding balance on these credit lines may increase as they may only be canceled by the Company if certain limited criteria are met. In addition to the allowance for credit losses maintained as a percent of the outstanding loan balance, the Company maintains additional reserves for the unfunded portion of the HELOC.

 

Automobile: Automobile loans are susceptible to three primary risks; non-payment due to income loss, over-extension of credit and, when the borrower is unable to pay, shortfall in collateral value, if any. Typically non-payment is due to loss of job and will follow general economic trends in the marketplace driven primarily by rises in the unemployment rate. Loss of collateral value can be due to market demand shifts, damage to collateral itself or a combination of those factors.

 

Other: Other loans primarily consist of consumer loans and are similar in nature to automobile loans.

 

Unfunded commitments: The estimated credit losses associated with these unfunded lending commitments is calculated using the same models and methodologies noted above and incorporate utilization assumptions at time of default. The reserve for unfunded commitments is maintained on the balance sheet in other liabilities.

 

8
 
 

Reclassification

 

Some items in the prior year consolidated financial statements were reclassified to conform to the current presentation.  Reclassifications had no effect on prior year net income or shareholders' equity.

 

Accounting Standards Adopted in 2023

 

On January 1, 2023, the Company adopted ASU 2016-03 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology. This is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized costs, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases. In addition, ASC 326 made changes to the accounting for available for sale debt securities. 

 

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (PCD) that were previously classified as purchase credit impaired (PCI) and accounted for under ASC 310-30. In accordance with the Standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining noncredit discount (based on the adjusted amortized costs basis) will be accreted into interest income at the effective interest rate as of adoption. The Company recognized an increase in the ACL for loans totaling $529,000, as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings, net of $156,000 in taxes.  Additionally, the Company recognized an increase in the reserve for unfunded commitments of $257,000, as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings, net of $76,000 in taxes.

 

On January 1, 2023, the Company adopted ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.  The ASU provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.” The ASU 2022-06 deferred the sunset date of ASU 2020-04 to December 2024. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The adoption of the ASU provisions did not have a significant impact on the Company’s consolidated financial statements as the Company has an insignificant number of financial instruments applicable to this ASU.

 

On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the recognition and measurement guidance for troubled debt restructurings and requires enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. This ASU also requires enhanced disclosure for loans that have been charged off.  The adoption of the ASU provisions did not have a significant impact on the Company’s consolidated financial statements

 

 

9
 
 
 

3.   INVESTMENT SECURITIES AVAILABLE FOR SALE

 

The amortized cost and estimated fair value of investment securities at March 31, 2023 and December 31, 2022 consisted of the following, in thousands:

 

Available-for-Sale

 

March 31, 2023

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

Debt securities:

                

U.S. Treasury securities

 $9,957  $-  $(187) $9,770 

U.S. Government-sponsored agencies collateralized by mortgage obligations - residential

  257,668   432   (21,375)  236,725 

U.S. Government-agencies collateralized by mortgage obligations - commercial

  122,003   618   (11,960)  110,661 

Obligations of states and political subdivisions

  141,328   635   (14,703)  127,260 
  $530,956  $1,685  $(48,225) $484,416 

 

Unrealized losses on available-for-sale investment securities totaling $46,540,000 were recorded, net of $13,758,000 in tax benefit, as accumulated other comprehensive loss within shareholders' equity at March 31, 2023.  No securities were sold during the three months ended March 31, 2023.

 

Available-for-Sale

 

December 31, 2022

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

Debt securities:

                

U.S. Treasury securities

 $9,950  $-  $(243) $9,707 

U.S. Government-sponsored agencies collateralized by mortgage obligations - residential

  238,253   214   (24,059)  214,408 

U.S. Government-agencies collateralized by mortgage obligations - commercial

  112,142   143   (12,704)  99,581 

Obligations of states and political subdivisions

  138,541   243   (17,777)  121,007 
  $498,886  $600  $(54,783) $444,703 

 

Unrealized losses on available-for-sale investment securities totaling $54,183,000 were recorded, net of $16,017,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at December 31, 2022. No securities were sold during the three months ended March 31, 2022.

 

There were no transfers of available-for-sale investment securities during the three months ended March 31, 2023 and twelve months ended December 31, 2022. There were no securities classified as held-to-maturity at March 31, 2023 or December 31, 2022.

 

10
 
 

Investment securities with unrealized losses at March 31, 2023 and December 31, 2022 are summarized and classified according to the duration of the loss period as follows, in thousands:

 

March 31, 2023

 

Less than 12 Months

  

12 Months or More

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 

Debt securities:

                        

U.S. Treasury securities

 $9,770  $187  $-  $-  $9,770  $187 

U.S. Government-sponsored agencies collateralized by mortgage obligations - residential

  78,713   2,504   115,974   18,871   194,687   21,375 

U.S. Government-agencies collateralized by mortgage obligations - commercial

  35,350   1,172   49,192   10,788   84,542   11,960 

Obligations of states and political subdivisions

  34,431   645   62,053   14,058   96,484   14,703 
  $158,264  $4,508  $227,219  $43,717  $385,483  $48,225 

 

December 31, 2022

 

Less than 12 Months

  

12 Months or More

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 

Debt securities:

                        

U.S. Treasury securities

 $9,707  $243  $-  $-  $9,707  $243 

U.S. Government-sponsored agencies collateralized by mortgage obligations - residential

  140,117   12,070   54,017   11,989   194,134   24,059 

U.S. Government-agencies collateralized by mortgage obligations - commercial

  42,799   2,845   42,363   9,859   85,162   12,704 

Obligations of states and political subdivisions

  89,092   11,421   16,768   6,356   105,860   17,777 
  $281,715  $26,579  $113,148  $28,204  $394,863  $54,783 

 

At March 31, 2023, the Company held 411 securities of which 121 were in a loss position for less than twelve months and 221 were in a loss position for  twelve months or more. Of the 411 securities 3 are U.S. Treasury securities, 123 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations, 45 were U.S. Government agencies collateralized by commercial mortgage obligations and 240 were obligations of states and political subdivisions. The unrealized losses relate principally to market rate conditions. All of the securities continue to pay as scheduled. For available-for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized costs basis.  If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income.  At March 31, 2023 neither of the criteria regarding intent or requirement to sell was met for any of securities in an unrealized loss position.

 

The amortized cost and estimated fair value of investment in debt securities at March 31, 2023 by contractual maturity are shown below, in thousands.

 

  

Amortized Cost

  

Estimated Fair Value

 

Within one year

 $3,930  $3,886 

After one year through five years

  13,675   13,521 

After five years through ten years

  11,063   10,918 

After ten years

  122,617   108,705 

Investment securities not due at a single maturity date:

        

Government- agencies commercial mortgage-backed securities

  122,003   110,661 

Government-sponsored agencies residential mortgage-backed securities

  257,668   236,725 
  $530,956  $484,416 

 

Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

Investment securities with amortized costs totaling $186,491,000 and $189,358,000 and estimated fair values totaling $165,855,000 and $166,728,000 at March 31, 2023 and December 31, 2022, respectively, were pledged to secure deposits, repurchase agreements and Federal Reserve Bank borrowings. 

  

11
 
 
 

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 

 

 

 

12
 
 

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.  

 

 

 

13
 
 

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  $