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3. LOANS
 6 Months Ended
Jun. 30, 2014
LOANS  
LOANS

The Company originates loans for business, consumer and real estate activities and for equipment purchases. Such loans are concentrated in Yolo, Placer, Sonoma, Shasta, Humboldt, Mendocino, Trinity and Del Norte Counties and neighboring communities. Substantially all loans are collateralized. Generally, real estate loans are secured by real property. Commercial and other loans are secured by bank deposits, real estate or business or personal assets. Leases are generally secured by equipment. The Company’s policy for requiring collateral reflects the Company’s analysis of the borrower, the borrower’s industry and the economic environment in which the loan would be granted. The loans are expected to be repaid from cash flows or proceeds from the sale of selected assets of the borrower.

 

Major classifications of loans as of the dates indicated were as follows (in thousands):

 

    June 30,     December 31,  
    2014     2013  
Commercial   $ 44,096     $ 47,526  
Real estate - commercial     330,446       326,631  
Real estate - construction     26,294       27,472  
Real estate - mortgage     61,410       63,120  
Installment     4,535       5,376  
Other     40,166       39,311  
  Gross loans     506,947       509,436  
Deferred loan fees costs, net     (344 )     (192 )
Allowance for loan losses     (9,012 )     (9,301 )
  Loans, net   $ 497,591     $ 499,943  

 

Salaries and employee benefits totaling $189,000 and $298,000 have been deferred as loan origination costs for the three month periods ended June 30, 2014 and 2013, respectively. Salaries and employee benefits totaling $346,000 and $573,000 have been deferred as loan origination costs for the six month periods ended June 30, 2014 and 2013, respectively.

 

Certain real estate loans receivable are pledged as collateral for available borrowings with the FHLB. Pledged loans totaled $143,057,000 and $101,239,000 at June 30, 2014 and 2013, respectively.

 

The following table presents impaired loans and the related allowance for loan losses as of the dates indicated (in thousands):

 

    As of June 30, 2014     As of December 31, 2013  
          Unpaid                 Unpaid        
    Recorded     Principal     Related     Recorded     Principal     Related  
    Investment     Balance     Allowance     Investment     Balance     Allowance  
With no allocated allowance                                                
Commercial   $ 94     $ 97     $ —     $ 458     $ 481     $ —  
Real estate - commercial     2,835       3,005       —       4,193       4,284       —  
Real estate - construction     315       315       —       435       449       —  
Real estate - mortgage     2,132       2,199       —       919       948       —  
Installment     74       95       —       96       115       —  
Other     293       314       —       374       397       —  
    Subtotal     5,743       6,025       —       6,475       6,674       —  
                                                 
With allocated allowance                                                
Commercial     228       237       228       240       240       150  
Real estate - commercial     112       112       4       113       113       28  
Real estate - mortgage     376       379       80       416       416       50  
    Subtotal     716       728       312       769       769       228  
Total Impaired Loans   $ 6,459     $ 6,753     $ 312     $ 7,244     $ 7,443     $ 228  

 

The following table presents the average balance related to impaired loans for the periods indicated (in thousands):

 

    Three Months ended June 30,  
    2014     2013  
    Average Book     Interest Income     Average Book     Interest Income  
    Balance     Recognized     Balance     Recognized  
                         
Commercial   $ 359     $ —     $ 438     $ —  
Real estate - commercial     3,466       19       5,357       21  
Real estate - construction     317       5       874       6  
Real estate - mortgage     2,611       13       1,371       10  
Installment     114       —       144       1  
Other     315       —       407       —  
    Total   $ 7,182     $ 37     $ 8,591     $ 38  
                         
    Six Months ended June 30,  
    2014     2013  
    Average Book     Interest Income     Average Book     Interest Income  
    Balance     Recognized     Balance     Recognized  
                         
Commercial   $ 425     $ —     $ 455     $ —  
Real estate - commercial     3,480       38       5,370       41  
Real estate - construction     319       10       877       13  
Real estate - mortgage     2,608       25       1,379       20  
Installment     114       —       145       2  
Other     317       —       408       —  
    Total   $ 7,263     $ 73     $ 8,634     $ 76  

 

Nonperforming loans include all such loans that are either on nonaccrual status or are 90 days past due as to principal or interest but still accrue interest because such loans are well-secured and in the process of collection. Nonperforming loans are summarized as of the periods indicated as follows (in thousands):

 

                Loans Past Due Over  
    Nonaccrual     89 Days Still Accruing  
    June 30,     December 31,     June 30,     December 31,  
    2014     2013     2014     2013  
Commercial   $ 321     $ 698     $ —     $ —  
Real estate - commercial     2,086       3,425       —       —  
Real estate - construction     —       110       —       —  
Real estate - mortgage     1,599       417       —       —  
Installment     57       69       —       —  
Other     293       374       —       —  
  Total   $ 4,356     $ 5,093     $ —     $ —  

 

If interest on nonaccrual loans had been accrued, such income would have approximated $3,000 and $50,000 for the three month periods ended June 30, 2014 and 2013. If interest on nonaccrual loans had been accrued, such income would have approximated $13,000 and $135,000 for the six month periods ended June 30, 2014 and 2013.

 

At June 30, 2014 there were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual.

The following table shows an aging analysis of the loan portfolio by the amount of time past due (in thousands):

 

    As of June 30, 2014  
    Accruing Interest              
          Greater than              
          30-89 Days     89 Days              
    Current     Past Due     Past Due     Nonaccrual     Total  
                               
Commercial   $ 43,743     $ 32     $ —     $ 321     $ 44,096  
Real estate - commercial     328,360       —       —       2,086       330,446  
Real estate - construction     25,404       890       —       —       26,294  
Real estate - mortgage     59,751       60       —       1,599       61,410  
Installment     4,477       1       —       57       4,535  
Other     39,819       54       —       293       40,166  
   Total   $ 501,554     $ 1,037     $ —     $ 4,356     $ 506,947  
                               
    As of December 31, 2013  
    Accruing Interest              
          Greater than              
          30-89 Days     89 Days              
    Current     Past Due     Past Due     Nonaccrual     Total  
                               
Commercial   $ 46,587     $ 241     $ —     $ 698     $ 47,526  
Real estate - commercial     322,773       433       —       3,425       326,631  
Real estate - construction     27,362       —       —       110       27,472  
Real estate - mortgage     62,178       525       —       417       63,120  
Installment     5,273       34       —       69       5,376  
Other     38,594       343       —       374       39,311  
   Total   $ 502,767     $ 1,576     $ —     $ 5,093     $ 509,436  

 

A troubled debt restructuring (“TDRs”) is a formal modification of the terms of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

 

At June 30, 2014, accruing TDRs were $2,102,000 and nonaccrual TDRs were $780,000 compared to accruing TDRs of $2,151,000 and nonaccrual TDRs of $905,000 at December 31, 2013. At June 30, 2014, there were $232,000 in specific reserves allocated to customers whose loan terms were modified in troubled debt restructurings. At December 31, 2013, there were $78,000 in specific reserves allocated to customers whose loan terms were modified in troubled debt restructurings. There were no commitments to lend additional amounts at June 30, 2014 and December 31, 2013 to customers with outstanding loans classified as troubled debt restructurings. There were no TDRs that subsequently defaulted during the periods ended June 30, 2014 and 2013 for which there was a modification in the preceding twelve months.

The following table presents loans that were modified and recorded as TDRs during the periods indicated below (dollars in thousands):

 

    For the three months ended June 30, 2014  
    Accruing TDRs     Nonaccrual TDRs  
          Pre-Modification     Post-Modification           Pre-Modification     Post-Modification  
    Number     Outstanding     Outstanding     Number     Outstanding     Outstanding  
    of     Recorded     Recorded     of     Recorded     Recorded  
    Contracts     Investment     Investment     Contracts     Investment     Investment  
Commercial     —     $ —     $ —       1     $ 144     $ 144  
                                     
    For the three months ended June 30, 2013  
    Accruing TDRs     Nonaccrual TDRs  
          Pre-Modification     Post-Modification           Pre-Modification     Post-Modification  
    Number     Outstanding     Outstanding     Number     Outstanding     Outstanding  
    of     Recorded     Recorded     of     Recorded     Recorded  
    Contracts     Investment     Investment     Contracts     Investment     Investment  
Real estate - mortgage     —     $ —     $ —       1     $ 201     $ 201  
Other     —     $ —     $ —       1     $ 48     $ 48  
                                     
    For the six months ended June 30, 2014  
    Accruing TDRs     Nonaccrual TDRs  
          Pre-Modification     Post-Modification           Pre-Modification     Post-Modification  
    Number     Outstanding     Outstanding     Number     Outstanding     Outstanding  
    of     Recorded     Recorded     of     Recorded     Recorded  
    Contracts     Investment     Investment     Contracts     Investment     Investment  
Commercial     —     $ —     $ —       2     $ 228     $ 228  
Real estate - mortgage     —     $ —     $ —       1     $ 95     $ 95  
Other     —     $ —     $ —       1     $ 44     $ 44  
                                     
    For the six months ended June 30, 2013  
    Accruing TDRs     Nonaccrual TDRs  
          Pre-Modification     Post-Modification           Pre-Modification     Post-Modification  
    Number     Outstanding     Outstanding     Number     Outstanding     Outstanding  
    of     Recorded     Recorded     of     Recorded     Recorded  
    Contracts     Investment     Investment     Contracts     Investment     Investment  
Commercial     —     $ —     $ —       1     $ 45     $ 45  
Real estate - commercial     —     $ —     $ —       1     $ 290     $ 290  
Real estate - construction     1     $ 77     $ 77       —     $ —     $ —  
Real estate - mortgage     —     $ —     $ —       1     $ 201     $ 201  
Other     —     $ —     $ —       1     $ 48     $ 48  

 

The following table presents a summary of TDRs by type of concession and by type of loan as of the periods indicated below (dollars in thousands):

 

June 30, 2014   Accruing TDRs  
                      Rate        
                      Reduction        
    Number                 and        
    of     Rate     Maturity     Maturity        
    Contracts     Reduction     Extension     Extension     Total  
Real estate - commercial     5     $ —     $ 191     $ 669     $ 860  
Real estate-construction     1       —       315       —       315  
Real estate - mortgage     3       —       290       620       910  
Installment     1       —       —       17       17  
      10     $ —     $ 796     $ 1,306     $ 2,102  
                               
    Nonaccrual TDRs  
                      Rate        
                      Reduction        
    Number                 and        
    of     Rate     Maturity     Maturity        
    Contracts     Reduction     Extension     Extension     Total  
Commercial     3     $ —     $ 228     $ 27     $ 255  
Real estate - mortgage     2       95       —       107       202  
Installment     2       —       —       57       57  
Other     5       144       56       66       266  
      12     $ 239     $ 284     $ 257     $ 780  
                               
December 31, 2013   Accruing TDRs  
                      Rate        
                      Reduction        
    Number                 and        
    of     Rate     Maturity     Maturity        
    Contracts     Reduction     Extension     Extension     Total  
Real estate - commercial     5     $ —     $ 195     $ 686     $ 881  
Real estate-construction     1       —       325       —       325  
Real estate - mortgage     3       —       293       625       918  
Installment     1       —       —       27       27  
      10     $ —     $ 813     $ 1,338     $ 2,151  
                               
    Nonaccrual TDRs  
                      Rate        
                      Reduction        
    Number                 and        
    of     Rate     Maturity     Maturity        
    Contracts     Reduction     Extension     Extension     Total  
Commercial     2     $ —     $ —     $ 391     $ 391  
Real estate-construction     1       —       110       —       110  
Real estate - mortgage     1       —       —       113       113  
Installment     2       —       —       59       59  
Other     4       104       60       68       232  
      10     $ 104     $ 170     $ 631     $ 905  

 

Allowance for Loan Losses

 

The following table presents the activity in the allowance for loan losses by portfolio segment (in thousands):

 

    For the three months ended June 30, 2014  
          Real Estate     Real Estate     Real Estate                          
    Commercial     Commercial     Construction     Mortgage     Installment     Other     Unallocated     Total  
                                                 
Allowance for Loan Losses                                                                
Balance March 31, 2014   $ 794     $ 5,144     $ 581     $ 859     $ 120     $ 798     $ 762     $ 9,058  
Charge-offs     —       —       (16 )     (28 )     (30 )     (2 )             (76 )
Recoveries     17       —       —       2       11       —               30  
Provisions for loan losses     (13 )     (46 )     (28 )     39       19       (7 )     36       —  
Balance June 30, 2014   $ 798     $ 5,098     $ 537     $ 872     $ 120     $ 789     $ 798     $ 9,012  
                                                 
    For the three months ended June 30, 2013  
          Real Estate     Real Estate     Real Estate                          
    Commercial     Commercial     Construction     Mortgage     Installment     Other     Unallocated     Total  
                                                 
Allowance for Loan Losses                                                                
Balance March 31, 2013   $ 1,170     $ 5,720     $ 595     $ 938     $ 87     $ 676     $ 465     $ 9,651  
Charge-offs     (26 )     (3 )     —       (46 )     (17 )     (55 )             (147 )
Recoveries     16       —       1       2       4       —               23  
Provisions for loan losses     (313 )     (230 )     (157 )     26       93       299       282       —  
Balance June 30, 2013   $ 847     $ 5,487     $ 439     $ 920     $ 167     $ 920     $ 747     $ 9,527  
                                                 
    For the six months ended June 30, 2014  
          Real Estate     Real Estate     Real Estate                          
    Commercial     Commercial     Construction     Mortgage     Installment     Other     Unallocated     Total  
                                                 
Allowance for Loan Losses                                                                
Balance December 31, 2013   $ 876     $ 5,196     $ 610     $ 842     $ 131     $ 832     $ 814     $ 9,301  
Charge-offs     —       (13 )     (16 )     (280 )     (63 )     (2 )             (374 )
Recoveries     67       —       —       2       15       1               85  
Provisions for loan losses     (145 )     (85 )     (57 )     308       37       (42 )     (16 )     —  
Balance June 30, 2014   $ 798     $ 5,098     $ 537     $ 872     $ 120     $ 789     $ 798     $ 9,012  
                                                 
    For the six months ended June 30, 2013  
          Real Estate     Real Estate     Real Estate                          
    Commercial     Commercial     Construction     Mortgage     Installment     Other     Unallocated     Total  
                                                 
Allowance for Loan Losses                                                                
Balance December 31, 2012   $ 843     $ 6,295     $ 690     $ 982     $ 98     $ 721     $ 829     $ 10,458  
Charge-offs     (109 )     (440 )     (369 )     (202 )     (28 )     (55 )             (1,203 )
Recoveries     258       —       3       2       9       —               272  
Provisions for loan losses     (145 )     (368 )     115       138       88       254       (82 )     —  
Balance June 30, 2013   $ 847     $ 5,487     $ 439     $ 920     $ 167     $ 920     $ 747     $ 9,527  

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method (in thousands):

 

          Real Estate     Real Estate     Real Estate                          
June 30, 2014   Commercial     Commercial     Construction     Mortgage     Installment     Other     Unallocated     Total  
Allowance for loan losses:                                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ 228     $ 4     $ —     $ 80     $ —     $ —     $ —     $ 312  
Collectively evaluated for impairment     570       5,094       537       792       120       789       798       8,700  
Total ending allowance balance   $ 798     $ 5,098     $ 537     $ 872     $ 120     $ 789     $ 798     $ 9,012  
                                                                 
Loans:                                                                
Loans individually evaluated for impairment   $ 322     $ 2,947     $ 315     $ 2,508     $ 74     $ 293             $ 6,459  
Loans collectively evaluated for impairment     43,774       327,499       25,979       58,902       4,461       39,873               500,488  
Total ending loans balance   $ 44,096     $ 330,446     $ 26,294     $ 61,410     $ 4,535     $ 40,166             $ 506,947  
                                                 
          Real Estate     Real Estate     Real Estate                          
December 31, 2013   Commercial     Commercial     Construction     Mortgage     Installment     Other     Unallocated     Total  
Allowance for loan losses:                                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ 150     $ 28     $ —     $ 50     $ —     $ —     $ —     $ 228  
Collectively evaluated for impairment     726       5,168       610       792       131       832       814       9,073  
Total ending allowance balance   $ 876     $ 5,196     $ 610     $ 842     $ 131     $ 832     $ 814     $ 9,301  
                                                                 
Loans:                                                                
Loans individually evaluated for impairment   $ 698     $ 4,306     $ 435     $ 1,335     $ 96     $ 374             $ 7,244  
Loans collectively evaluated for impairment     46,828       322,325       27,037       61,785       5,280       38,937               502,192  
Total ending loans balance   $ 47,526     $ 326,631     $ 27,472     $ 63,120     $ 5,376     $ 39,311             $ 509,436  

 

The following table shows the loan portfolio allocated by management’s internal risk ratings (in thousands):

 

    As of June 30, 2014  
    Pass     Special Mention     Substandard     Total  
Commercial   $ 40,234     $ 3,378     $ 484     $ 44,096  
Real estate - commercial     323,917       513       6,016       330,446  
Real estate - construction     26,294       —       —       26,294  
Real estate - mortgage     59,224       —       2,186       61,410  
Installment     4,459       —       76       4,535  
Other     39,644       —       522       40,166  
   Total   $ 493,772     $ 3,891     $ 9,284     $ 506,947  
                         
    As of December 31, 2013  
    Pass     Special Mention     Substandard     Total  
Commercial   $ 45,446     $ 1,107     $ 973     $ 47,526  
Real estate - commercial     309,828       6,213       10,590       326,631  
Real estate - construction     27,101       261       110       27,472  
Real estate - mortgage     61,200       —       1,920       63,120  
Installment     5,278       —       98       5,376  
Other     38,611       —       700       39,311  
   Total   $ 487,464     $ 7,581     $ 14,391     $ 509,436  

 

The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the probable incurred losses in the loan portfolio. In determining levels of risk, management considers a variety of factors, including, but not limited to, asset classifications, economic trends, industry experience and trends, geographic concentrations, estimated collateral values, historical loan loss experience, and the Company’s underwriting policies. The Bank’s method of calculating the historical loss factors applied to loans identified as “homogenous segments” of the loan portfolio incorporates losses from the past twelve quarters and is applied to loan pools based on a “Migration Analysis” method. The method calculates Net Charge Offs (charge offs less corresponding recoveries) and measures them against average balances in loan pools based on the risk grade in effect on charged-off loans four quarters prior to the actual charge off date. The logic behind this four quarter “look back” is to account for management’s estimate of the typical time lapse between the recognition of the problem loan and the recognition of some or all of the loan as uncollectable. In addition, the loss ratios are calculated using “factored” logic which systematically reduces the Net Charge Off value so that charge offs occurring in older periods do not have as much weight as more recent charge offs. Management of the Company believes that the decreases in the overall level of the allowance for loan losses over the past several quarters is directionally consistent with the improving credit quality trends of the loan portfolio. The allowance for loan losses is maintained at an amount management considers adequate to cover the probable incurred losses in loans receivable. While management uses the best information available to make these estimates, future adjustments to allowances may be necessary due to economic, operating, regulatory, and other conditions that may be beyond the Company’s control. The Company also engages a third party credit review consultant to analyze the Company’s loan loss adequacy periodically. In addition, the regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on judgments different from those of management.

 

The allowance for loan losses is comprised of several components including the specific, formula and unallocated allowance relating to loans in the loan portfolio. Our methodology for determining the allowance for loan losses consists of several key elements, which include:

 

  · Specific Allowances. A specific allowance is established when management has identified unique or particular risks that were related to a specific loan that demonstrated risk characteristics consistent with impairment. Specific allowances are established when management can estimate the amount of an impairment of a loan.

 

  · Formula Allowance. The formula allowance is calculated by applying loss factors through the assignment of loss factors to homogenous pools of loans. Changes in risk grades of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based on our historical loss experience and such other data as management believes to be pertinent. Management, also, considers a variety of subjective factors, including regional economic and business conditions that impact important segments of our portfolio, loan growth rates, the depth and skill of lending staff, the interest rate environment, and the results of bank regulatory examinations and findings of our internal credit examiners to establish the formula allowance.

 

  · Unallocated Allowance. The unallocated loan loss allowance represents an amount for imprecision or uncertainty that is inherent in estimates used to determine the allowance.

 

The Company also maintains a separate allowance for off-balance-sheet commitments. A reserve for unfunded commitments is maintained at a level that, in the opinion of management, is adequate to absorb probable losses associated with commitments to lend funds under existing agreements, for example, the Bank’s commitment to fund advances under lines of credit. The reserve amount for unfunded commitments is determined based on our methodologies described above with respect to the formula allowance. The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet and was $146,000, as of June 30, 2014 and December 31, 2013.