Note 4 - Loans

6 Months Ended

Jun. 30, 2024

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 4 – LOANS

The Company’s customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. As of June 30, 2024, approximately 86% of the Company’s loans are commercial real estate loans, which include construction loans. Approximately 7% of the Company’s loans are for general commercial uses including professional, retail, and small business. Additionally, 3% of the Company’s loans are for residential real estate and other consumer loans. The remaining 4% are agriculture loans. As of June 30, 2024, accrued interest receivable on loans was $3,294,000 and is not included in the tables within this footnote. Loan totals were as follows:

(in thousands)	June 30, 2024			December 31, 2023
Commercial real estate:
Construction & land	$	46,080		$	63,060
Multi-family		57,371			54,045
Owner occupied		221,790			210,407
Non-owner occupied		504,954			470,052
Farmland		94,712			96,188
Commercial and industrial		74,868			65,218
Consumer		33,229			31,687
Agriculture		37,033			25,922
Total loans		1,070,037			1,016,579
Less:
Deferred loan fees and costs, net		(1,318	)		(1,406	)
Allowance for credit losses		(11,121	)		(10,896	)
Net loans	$	1,057,598		$	1,004,277

Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. As of June 30, 2024 and December 31, 2023, approximately 35% of the outstanding principal balance of the Company’s commercial real estate loans were secured by owner-occupied properties.

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success.

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Significant events can affect the construction industry, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Consumer loans are originated utilizing a computer-based credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans follow bank policy, which include, but are not limited to, a maximum loan-to-value percentage of 80%, a maximum housing and total debt ratio of 36% and 42%, respectively and other specified credit and documentation requirements.

Agricultural loans largely consist of real estate loans, development loans, and operating facilities to support crop production, livestock, dairy, and other agricultural interests.   Agricultural loans are especially vulnerable to two risk factors that are largely outside the control of the Company and borrowers: commodity prices and weather conditions.  Other environmental factors such as the availability of water will also affect the production of crops.   Underwriting practices include estimating future repayment sources based on information taken from the customer, peer reports, or appraisals.  With the cyclicality of agricultural operations, increased focus is placed on access to liquidity and equity to support the operations when faced with unfavorable industry trends as well as the sponsor’s industry experience. 

The Company maintains an independent loan review function that validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

No loans were on non-accrual status as of June 30, 2024, December 31, 2023, and June 30, 2023.

The following table analyzes past due loans including any past due non-accrual loans, segregated by class of loans, as of June 30, 2024 (in thousands):

June 30, 2024	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total		90 Days or More Past Due and Still Accruing
Commercial real estate:
Construction & land	$	0	$	0	$	0	$	0	$	46,080	$	46,080	$	0
Multi-family		0		0		0		0		57,371		57,371		0
Owner occupied		0		0		0		0		221,790		221,790		0
Non-owner occupied		0		0		0		0		504,954		504,954		0
Farmland		0		0		0		0		94,712		94,712		0
Commercial and industrial		0		0		0		0		74,868		74,868		0
Consumer		0		0		0		0		33,229		33,229		0
Agriculture		0		0		0		0		37,033		37,033		0
Total	$	0	$	0	$	0	$	0	$	1,070,037	$	1,070,037	$	0

The following table analyzes past due loans including any past due non-accrual loans, segregated by class of loans, as of December 31, 2023 (in thousands):

December 31, 2023	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total		90 Days or More Past Due and Still Accruing
Commercial real estate:
Construction & land	$	0	$	0	$	0	$	0	$	63,060	$	63,060	$	0
Multi-family		0		0		0		0		54,045		54,045		0
Owner occupied		0		0		0		0		210,407		210,407		0
Non-owner occupied		0		0		0		0		470,052		470,052		0
Farmland		0		0		0		0		96,188		96,188		0
Commercial and industrial		0		0		0		0		65,218		65,218		0
Consumer		0		0		0		0		31,687		31,687		0
Agriculture		0		0		0		0		25,922		25,922		0
Total	$	0	$	0	$	0	$	0	$	1,016,579	$	1,016,579	$	0

Collateral Dependent Loans. Management’s evaluation as to the ultimate collectability of loans includes estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers. Under CECL, loans can be determined to be collateral dependent if foreclosure of the loan’s underlying collateral is probable or as a practical expedient if the borrower is experiencing financial difficulties and the repayment is expected to be provided substantially through the operation or sale of the collateral. Loans are written down to the lower of cost or fair value of underlying collateral, less estimated costs to sell. The Company had no collateral dependent loans as of June 30, 2024 and December 31, 2023.

Loan Modification Disclosures Pursuant to ASU 2022-02 - The Company may agree to different types of concessions when modifying a loan. There were no loan modifications to borrowers experiencing financial difficulty, including principal forgiveness, rate reductions, payment deferral or term extension, during the three and six-months ended June 30, 2024 and 2023.

Loan Risk Grades– Quality ratings (Risk Grades) are assigned to all commitments and stand-alone notes. Risk grades define the basic characteristics of commitments or stand-alone note in relation to their risk. All loans are graded using a system that maximizes the loan quality information contained in loan review grades, while ensuring that the system is compatible with the grades used by bank examiners.

The Company grades loans using the following letter system:

1 Exceptional Loan

2 Quality Loan

3A Better Than Acceptable Loan

3B Acceptable Loan

3C Marginally Acceptable Loan

4 (W) Watch Acceptable Loan

5 Special Mention Loan

6 Substandard Loan

7 Doubtful Loan

8 Loss

1. Exceptional Loan - Loans with A+ credits that contain very little, if any, risk. Grade 1 loans are considered Pass. To qualify for this rating, the following characteristics must be present:

● A high level of liquidity and whose debt-servicing capacity exceeds expected obligations by a substantial margin.

● Where leverage is below average for the industry and earnings are consistent or growing without severe vulnerability to economic cycles.

● Also included in this rating (but not mandatory unless one or more of the preceding characteristics are missing) are loans that are fully secured and properly margined by our own time instruments or U.S. blue chip securities. To be properly margined, cash collateral must be equal to, or greater than, 110% of the loan amount.

2. Quality Loan - Loans with excellent sources of repayment that conform in all respects to bank policy and regulatory requirements. These are also loans for which little repayment risk has been identified. No credit or collateral exceptions. Grade 2 loans are considered Pass. Other factors include:

● Unquestionable debt-servicing capacity to cover all obligations in the ordinary course of business from well-defined primary and secondary sources.

● Consistent strong earnings.

● A solid equity base.

3A. Better than Acceptable Loan - In the interest of better delineating the loan portfolio’s true credit risk for reserve allocation, further granularity has been sought by splitting the grade 3 category into three classifications. The distinction between the three are bank-defined guidelines and represent a further refinement of the regulatory definition of a pass, or grade 3 loan. Grade 3A is characterized by:

● Strong earnings with no loss in last three years and ample cash flow to service all debt well above policy guidelines.

● Long term experienced management with depth and defined management succession.

● The loan has no exceptions to policy.

● Loan-to-value on real estate secured transactions is 10% to 20% less than policy guidelines.

● Very liquid balance sheet that may have cash available to pay off our loan completely.

● Little to no debt on balance sheet.

3B. Acceptable Loan - 3B loans are simply defined as all loans that are less qualified than 3A loans and are stronger than 3C loans. These loans are characterized by acceptable sources of repayment that conform to bank policy and regulatory requirements. Repayment risks are acceptable for these loans. Credit or collateral exceptions are minimal, are in the process of correction, and do not represent repayment risk. These loans:

● Are those where the borrower has average financial strengths, a history of profitable operations and experienced management.

● Are those where the borrower can be expected to handle normal credit needs in a satisfactory manner.

3C. Marginally Acceptable Loan - 3C loans have similar characteristics as that of 3Bs with the following additional characteristics:

● Requires collateral.

● A credit facility where the borrower has average financial strengths, but usually lacks reliable secondary sources of repayment other than the subject collateral.

● Other common characteristics can include some or all of the following: minimal background experience of management, lacking continuity of management, a start-up operation, erratic historical profitability (acceptable reasons-well identified), lack of or marginal sponsorship of guarantor, and government guaranteed loans.

4(W). Watch Acceptable Loan - Watch grade will be assigned to any credit that is adequately secured and performing but monitored for a number of indicators. These characteristics may include:

● Any unexpected short-term adverse financial performance from budgeted projections or a prior period’s results (i.e., declining profits, sales, margins, cash flow, or increased reliance on leverage, including adverse balance sheet ratios, trade debt issues, etc.).

● Any managerial or personal problems with company management, decline in the entire industry or local economic conditions, or failure to provide financial information or other documentation as requested.

● Issues regarding delinquency, overdrafts, or renewals.

● Any other issues that cause concern for the company.

● Loans to individuals or loans supported by guarantors with marginal net worth and/or marginal collateral.

● Weaknesses that are identified are short-term in nature.

● Loans in this category are usually accounts the Bank would want to retain providing a positive turnaround can be expected within a reasonable time frame. Grade 4(W) loans are considered Pass.

5. Special Mention Loan - A special mention extension of credit is defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date result in the deterioration of the repayment prospects for the credit or the institution’s credit position. Extensions of credit that might be detailed in this category include the following:

● The lending officer may be unable to properly supervise the credit because of an inadequate loan or credit agreement.

● Questions exist regarding the condition of and/or control over collateral.

● Economic or market conditions may unfavorably affect the obligor in the future.

● A declining trend in the obligor’s operations or an imbalanced position in the balance sheet exists, but not to the point that repayment is jeopardized.

6. Substandard Loan - A “substandard” extension of credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified as substandard.

7. Doubtful Loan - An extension of credit classified as “doubtful” has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral or refinancing plans. The entire loan need not be classified as doubtful when collection of a specific portion appears highly probable.

8. Loss - Extensions of credit classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off, even though partial recovery may be affected in the future. It should not be the Company’s practice to attempt long-term recoveries while the credit remains on the books. Losses should be taken in the period in which they surface as uncollectible.

As of June 30, 2024 and December 31, 2023, there are no loans that are classified with risk grades of 8- Loss.

The risk grades are reviewed every month, at a minimum and on an as-needed basis depending on the specific circumstances of the loan.

The following table summarizes loan risk grade totals by class and year of origination as of June 30, 2024. Risk grades 1 through 4(W) have been aggregated in the “Pass” line.

	As of June 30, 2024
(in thousands)	Term Loans Amortized Cost Basis by Origination Year
Risk Grade Ratings	2024		2023		2022		2021		2020		Prior		Revolving Loans		Total
Commercial real estate - construction & land
Pass	$	3,960	$	16,357	$	22,031	$	923	$	0	$	2,809	$	0	$	46,080
Total commercial real estate - construction & land		3,960		16,357		22,031		923		0		2,809		0		46,080
Commercial real estate - multi-family
Pass		3,904		4,746		6,907		7,738		3,413		30,663		0		57,371
Total commercial real estate - multi-family		3,904		4,746		6,907		7,738		3,413		30,663		0		57,371
Commercial real estate - owner occupied
Pass		16,836		9,913		43,013		47,255		24,678		67,645		63		209,403
Special mention		0		0		0		7,541		0		284		0		7,825
Substandard		0		0		0		0		0		4,562		0		4,562
Total commercial real estate - owner occupied		16,836		9,913		43,013		54,796		24,678		72,491		63		221,790
Commercial real estate - non-owner occupied
Pass		19,539		88,887		87,073		79,806		40,724		184,261		2,261		502,551
Special mention		0		0		0		0		0		2,403		0		2,403
Total commercial real estate - non-owner occupied		19,539		88,887		87,073		79,806		40,724		186,664		2,261		504,954
Commercial real estate - Farmland
Pass		4,935		13,474		10,212		16,740		14,769		28,494		0		88,624
Special mention		0		0		0		0		0		6,088		0		6,088
Total commercial real estate - farmland		4,935		13,474		10,212		16,740		14,769		34,582		0		94,712
Commercial and Industrial
Pass		10,151		12,071		10,554		7,874		4,764		5,078		24,304		74,796
Special mention		0		0		0		0		0		3		0		3
Substandard		0		0		0		0		0		69		0		69
Total commercial and industrial		10,151		12,071		10,554		7,874		4,764		5,150		24,304		74,868
Consumer
Pass		2,524		1,119		4,914		3,660		2,152		9,260		9,555		33,184
Substandard		1		0		0		0		0		44		0		45
Total consumer		2,525		1,119		4,914		3,660		2,152		9,304		9,555		33,229
Agriculture
Pass		28		1,907		1,225		1,290		0		577		25,851		30,878
Special mention		0		1,585		0		0		0		0		4,570		6,155
Total agriculture		28		3,492		1,225		1,290		0		577		30,421		37,033
Total by Risk Category
Pass		61,877		148,474		185,929		165,286		90,500		328,787		62,034		1,042,887
Special mention		0		1,585		0		7,541		0		8,778		4,570		22,474
Substandard		1		0		0		0		0		4,675		0		4,676
Total	$	61,878	$	150,059	$	185,929	$	172,827	$	90,500	$	342,240	$	66,604	$	1,070,037

The following table summarizes loan risk grade totals by class and year of origination as of December 31, 2023. Risk grades 1 through 4(W) have been aggregated in the “Pass” line.

	As of December 31, 2023
(in thousands)	Term Loans Amortized Cost Basis by Origination Year
Risk Grade Ratings	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
Commercial real estate - Construction & land
Pass	$	16,237	$	42,670	$	1,259	$	0	$	1,244	$	1,650	$	0	$	63,060
Total commercial real estate - construction & land		16,237		42,670		1,259		0		1,244		1,650		0		63,060
Commercial real estate - Multi-family
Pass		3,803		6,976		8,711		3,473		6,780		24,302		0		54,045
Total commercial real estate - multi-family		3,803		6,976		8,711		3,473		6,780		24,302		0		54,045
Commercial real estate - Owner occupied
Pass		10,031		40,666		48,377		25,642		14,341		57,971		251		197,279
Special mention		0		0		7,683		0		0		289		530		8,502
Substandard		0		0		0		0		4,626		0		0		4,626
Total commercial real estate - owner occupied		10,031		40,666		56,060		25,642		18,967		58,260		781		210,407
Commercial real estate - Non-owner occupied
Pass		78,417		71,236		81,386		43,531		44,413		145,073		1,879		465,935
Special mention		0		0		0		0		0		4,117		0		4,117
Total commercial real estate - non-owner occupied		78,417		71,236		81,386		43,531		44,413		149,190		1,879		470,052
Commercial real estate - Farmland
Pass		14,377		10,393		1,667		15,392		6,551		31,610		15,717		95,707
Special mention		0		0		0		0		0		481		0		481
Total commercial real estate - farmland		14,377		10,393		1,667		15,392		6,551		32,091		15,717		96,188
Commercial and Industrial
Pass		10,967		11,268		9,608		6,018		4,384		2,239		20,502		64,986
Special mention		0		0		0		139		0		6		0		145
Substandard		0		0		0		0		0		87		0		87
Total commercial and industrial		10,967		11,268		9,608		6,157		4,384		2,332		20,502		65,218
Consumer
Pass		1,234		5,042		4,104		2,213		2,074		7,555		8,529		30,751
Special mention		0		0		0		0		0		0		890		890
Substandard		0		0		0		0		0		46		0		46
Total consumer		1,234		5,042		4,104		2,213		2,074		7,601		9,419		31,687
Agriculture
Pass		3,032		1,707		1,309		0		214		488		18,984		25,734
Special mention		0		0		0		0		0		0		188		188
Total agriculture		3,032		1,707		1,309		0		214		488		19,172		25,922
Total by Risk Category
Pass		138,098		189,958		156,421		96,269		80,001		270,888		65,862		997,497
Special mention		0		0		7,683		139		0		4,893		1,608		14,323
Substandard		0		0		0		0		4,626		133		0		4,759
Total	$	138,098	$	189,958	$	164,104	$	96,408	$	84,627	$	275,914	$	67,470	$	1,016,579

Allowance for Credit Losses (“ACL”). As noted in Note 2, as required by ASU 2016-13, on January 1, 2023 the Company implemented CECL and increased our ACL, previously the allowance for loan losses, with a $346,000 cumulative adjustment. Under ASU 2016-13, the allowance for credit losses is a valuation account that is deducted from the related loan’s amortized cost basis to present the net amount expected to be collected on the loans. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company’s ACL is calculated monthly, with any difference in the calculated ACL and the recorded ACL trued-up through an entry to the provision for credit losses. Management calculates the quantitative portion of collectively evaluated reserves for all loan categories, using a discounted cash flow (“DCF”) methodology. For purposes of estimating the Company’s ACL, management generally evaluates collectively evaluated loans by Federal Call code in order to group loans with similar risk characteristics together, however management has grouped loans in selected call codes together in determining portfolio segments, due to similar risk characteristics and reserve methodologies used for certain call code classifications.

The DCF quantitative reserve methodology incorporates the consideration of probability of default (“PD”) and loss given default (“LGD”) estimates to estimate periodic losses. The PD estimates are derived through the application of reasonable and supportable economic forecasts to call code specific regression models, derived from the consideration of historical bank-specific and peer loss-rate data. The loss rate data has been regressed against benchmark economic indicators, for which reasonable and supportable forecasts exist, in the development of the call-code specific regression models. Regression models are generally refreshed on an annual basis, in order to pull in more recent loss rate data. Reasonable and supportable forecasts of the selected economic metric are then input into the regression model to calculate an expected default rate. The expected default rates are then applied to expected monthly loan balances estimated through the consideration of contractual repayment terms and expected prepayments. The Company utilizes a four-quarter forecast period, after which the expected default rates revert to the historical average for each call code, over a four-quarter reversion period, on a straight-line basis. The prepayment assumptions applied to expected cash flow over the contractual life of the loans are estimated based on historical, bank-specific experience, peer data and the consideration of current and expected conditions and circumstances including the level of interest rates. The prepayment assumptions may be updated by Management in the event that changing conditions impact Management’s estimate or additional historical data gathered has resulted in the need for a reevaluation. LGD utilized in the DCF is derived from the application of the Frye-Jacobs theory which relates LGD to PD based on historical peer data, as calculated by a third-party. The call code regression models utilized upon implementation of CECL on January 1, 2023, and as of June 30, 2024, were identical, and relied upon reasonable and supportable forecasts of the National Unemployment Rate. Some of the call code regression models also use the Real Gross Domestic Product. Management selected the National Unemployment Rate and the Real Gross Domestic Product as the drivers of quantitative portion of collectively reserves on loan classes reliant upon the DCF methodology, primarily as a result of high correlation coefficients identified in regression modeling, the availability of forecasts including the quarterly FOMC forecast, and given the widespread familiarity of stakeholders with this economic metric.

Management recognizes that there are additional factors impacting risk of loss in the loan portfolio beyond what is captured in the quantitative portion of reserves on collectively evaluated loans. As current and expected conditions, may vary compared with conditions over the historical lookback period, which is utilized in the calculation of quantitative reserves, management considers whether additional or reduced reserve levels on collectively evaluated loans may be warranted given the consideration of a variety of qualitative factors. Several of the following qualitative factors (“Q-factors”) considered by management reflect the legacy regulatory guidance on Q-factors, whereas several others represent factors unique to the Company or unique to the current time period.

●         Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices

●         Changes in international, regional and local economic and business conditions, and developments that affect the collectability of the portfolio, as reflected in forecasts of the California unemployment rate

●         Changes in the nature and volume of the loan portfolio

●         Changes in the experience, ability, and depth of lending management and other relevant staff

●         Changes in the volume and severity of past due, watch loans and classified loans

●         Changes in the quality of the Bank’s loan review processes

●         Changes in the value of underlying collateral for loans not identified as collateral dependent

●         Changes in loan categorization concentrations

●         Other external factors, which include, the regulatory risk ratings.

The qualitative portion of the Company’s reserves on collectively evaluated loans are calculated using a combination of numeric frameworks and management judgement, to determine risk categorizations in each of the Q-factors presented above. The amount of qualitative reserves is also contingent upon the relative weighting of Q-factors according to management’s judgement.

Loans identified as losses by management, internal loan review and/or bank examiners are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.

Accrued interest receivable for loans is included in the “Interest receivable and other assets” line item on the Company’s Consolidated Balance Sheet.  The Company elected not to measure an allowance for accrued interest receivable and instead elected to reverse accrued interest income on loans that are placed on nonaccrual status.  The Company believes this policy results in the timely reversal of uncollectible interest.

The following table details activity in the ACL by portfolio segment for the three and six-month periods ended June 30, 2024 and 2023. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Allowance for Credit Losses
For the Three and Six Months Ended June 30, 2024 and 2023
(in thousands)
Three Months Ended June 30, 2024	CRE Construction & Land			CRE Multi- family			CRE Owner occupied			CRE Non- owner occupied			CRE Farmland			Commercial and Industrial			Consumer			Agriculture			Total
Beginning balance	$	1,059		$	634		$	1,809		$	4,620		$	1,462		$	1,022		$	235		$	81		$	10,922
Charge-offs		0			0			0			0			0			0			(10	)		0			(10	)
Recoveries		206			0			0			0			0			0			3			0			209
Provision for (reversal of) credit losses		(356	)		32			47			144			(53	)		155			11			20			0
Ending balance	$	909		$	666		$	1,856		$	4,764		$	1,409		$	1,177		$	239		$	101		$	11,121
Six Months Ended June 30, 2024
Beginning balance	$	1,227		$	667		$	1,805		$	4,805		$	1,468		$	650		$	227		$	47		$	10,896
Charge-offs		0			0			0			0			0			0			(25	)		0			(25	)
Recoveries		242			0			0			0			0			0			8			0			250
Provision for (reversal of) credit losses		(560	)		(1	)		51			(41	)		(59	)		527			29			54			0
Ending balance	$	909		$	666		$	1,856		$	4,764		$	1,409		$	1,177		$	239		$	101		$	11,121
Three Months Ended June 30, 2023
Beginning balance	$	757		$	509		$	1,955		$	4,344		$	902		$	679		$	203		$	34		$	9,383
CECL Day-One Adjustments		0			0			0			0			0			0			0			0			0
Charge-offs		0			0			0			0			0			0			(9	)		0			(9	)
Recoveries		34			0			0			0			0			0			3			0			37
Provision for (reversal of) credit losses		(213	)		5			(11	)		284			(1	)		(79	)		10			5			0
Ending balance	$	578		$	514		$	1,944		$	4,628		$	901		$	600		$	207		$	39		$	9,411
Six Months Ended June 30, 2023
Beginning balance	$	1,055		$	479		$	1,798		$	4,211		$	830		$	612		$	311		$	172		$	9,468
CECL Day-One Adjustments		338			23			103			25			12			102			(120	)		(137	)		346
Charge-offs		0			0			0			0			0			(12	)		(17	)		0			(29	)
Recoveries		68			0			0			0			0			12			6			0			86
Provision for (reversal of) credit losses		(883	)		12			43			392			59			(114	)		27			4			(460	)
Ending balance	$	578		$	514		$	1,944		$	4,628		$	901		$	600		$	207		$	39		$	9,411

The following table details the ACL and ending gross loan balances as of June 30, 2024 and December 31, 2023, summarized by collective and individual evaluation methods of impairment.

(in thousands)
June 30, 2024	CRE Construction & Land		CRE Multi- family		CRE Owner occupied		CRE Non- owner occupied		CRE Farmland		Commercial and Industrial		Consumer		Agriculture		Total
Allowance for credit losses for loans:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Collectively evaluated for impairment		909		666		1,856		4,764		1,409		1,177		239		101		11,121
	$	909	$	666	$	1,856	$	4,764	$	1,409	$	1,177	$	239	$	101	$	11,121
Ending gross loan balances:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Collectively evaluated for impairment		46,080		57,371		221,790		504,954		94,712		74,868		33,229		37,033		1,070,037
	$	46,080	$	57,371	$	221,790	$	504,954	$	94,712	$	74,868	$	33,229	$	37,033	$	1,070,037
December 31, 2023
Allowance for credit losses for loans:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Collectively evaluated for impairment		1,227		667		1,805		4,805		1,468		650		227		47		10,896
	$	1,227	$	667	$	1,805	$	4,805	$	1,468	$	650	$	227	$	47	$	10,896
Ending gross loan balances:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Collectively evaluated for impairment		63,060		54,045		210,407		470,052		96,188		65,218		31,687		25,922		1,016,579
	$	63,060	$	54,045	$	210,407	$	470,052	$	96,188	$	65,218	$	31,687	$	25,922	$	1,016,579

The following tables present gross charge-offs for the three and six-months ended June 30, 2024 by portfolio class and origination year:

	Three Months Ended June 30, 2024
(in thousands)	Term Loans Charged-off by Origination Year
Chargeoffs	2024		2023		2022		2021		2020		Prior		Revolving Loans		Total
Commercial real estate:
Construction & land	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Multi-family		0		0		0		0		0		0		0		0
Owner occupied		0		0		0		0		0		0		0		0
Non-owner occupied		0		0		0		0		0		0		0		0
Farmland		0		0		0		0		0		0		0		0
Commercial and industrial		0		0		0		0		0		0		0		0
Consumer		0		0		0		0		0		0		10		10
Agriculture		0		0		0		0		0		0		0		0
Total	$	0	$	0	$	0	$	0	$	0	$	0	$	10	$	10

	Six Months Ended June 30, 2024
(in thousands)	Term Loans Charged-off by Origination Year
Chargeoffs	2024		2023		2022		2021		2020		Prior		Revolving Loans		Total
Commercial real estate:
Construction & land	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Multi-family		0		0		0		0		0		0		0		0
Owner occupied		0		0		0		0		0		0		0		0
Non-owner occupied		0		0		0		0		0		0		0		0
Farmland		0		0		0		0		0		0		0		0
Commercial and industrial		0		0		0		0		0		0		0		0
Consumer		0		0		0		0		0		0		25		25
Agriculture		0		0		0		0		0		0		0		0
Total	$	0	$	0	$	0	$	0	$	0	$	0	$	25	$	25

Changes in the reserve for off-balance-sheet commitments for the three and six-months ended June 30, 2024 were as follows:

(in thousands)	THREE MONTHS ENDED JUNE 30,					SIX MONTHS ENDED JUNE 30,
	2024		2023			2024			2023
Balance, beginning of period	$	531	$	741		$	609		$	546
CECL day-one adjustment		0		0			0			547
(Reversal of) Provision to Operations for Off Balance Sheet Commitments		0		(70	)		(78	)		(422	)
Balance, end of period	$	531	$	671		$	531		$	671

The method for calculating the reserve for off-balance-sheet loan commitments is based on a historical funding rate applied to the undisbursed loan amount to estimate an average outstanding amount during the life of the loan commitment.  Then, a historic loss rate as computed by our CECL model is applied to the estimated average outstanding balance to calculate the off-balance-sheet reserve amount. The funding rates, historic loss rates and resulting reserve amount for off-balance-sheet commitments are evaluated by management periodically as part of the CECL procedures. Reserves for off-balance-sheet commitments are recorded in interest payable and other liabilities on the condensed consolidated balance sheets.

At June 30, 2024 and December 31, 2023, loans carried at $1,070,036,000 and $1,016,579,000, respectively, were pledged as collateral on advances from the Federal Home Loan Bank.