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Allowance for Loan and Lease Losses
 6 Months Ended
Jun. 30, 2016
Provision for Loan and Lease Losses [Abstract]  
Allowance for Loan and Lease Losses
Note 12 – Allowance for Loan and Lease Losses
 
The Company’s allowance for loan and lease losses, a contra-asset, is established through a provision for loan and lease losses. The allowance is maintained at a level that is considered adequate to absorb probable losses on certain specifically identified loans, as well as probable incurred losses inherent in the remaining loan portfolio. Specifically identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only when cash payments are received subsequent to the charge off. We employ a systematic methodology, consistent with FASB guidelines on loss contingencies and impaired loans, for determining the appropriate level of the allowance for loan and lease losses and adjusting it at least quarterly. Pursuant to that methodology, impaired loans and leases are individually analyzed and a criticized asset action plan is completed specifying the financial status of the borrower and, if applicable, the characteristics and condition of collateral and any associated liquidation plan. A specific loss allowance is created for each impaired loan, if necessary.
   
The following tables disclose the unpaid principal balance, recorded investment, average recorded investment, and interest income recognized for impaired loans on our books as of the dates indicated. Balances are shown by loan type, and are further broken out by those that required an allowance and those that did not, with the associated allowance disclosed for those that required such. Included in the valuation allowance for impaired loans shown in the tables below are specific reserves allocated to TDRs, totaling $1.619 million at June 30, 2016 and $1.486 million at December 31, 2015.
 
Impaired Loans
(dollars in thousands, unaudited)
 
 
 
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
Unpaid Principal
 
Recorded
 
Related
 
Recorded
 
Interest Income
 
 
 
Balance(1)
 
Investment(2)
 
Allowance
 
Investment
 
Recognized(3)
 
With an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other construction/land
 
$
558
 
$
521
 
$
42
 
$
581
 
$
15
 
1-4 Family - closed-end
 
 
7,989
 
 
6,042
 
 
325
 
 
8,118
 
 
233
 
Equity lines
 
 
3,337
 
 
3,284
 
 
164
 
 
3,426
 
 
32
 
Multi-family residential
 
 
417
 
 
417
 
 
7
 
 
421
 
 
27
 
Commercial real estate- owner occupied
 
 
1,375
 
 
1,352
 
 
537
 
 
1,431
 
 
125
 
Commercial real estate- non-owner occupied
 
 
5,096
 
 
4,940
 
 
1,359
 
 
5,185
 
 
173
 
Farmland
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
Total real estate
 
 
18,772
 
 
16,556
 
 
2,434
 
 
19,162
 
 
605
 
Agriculture
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
Commercial and industrial
 
 
2,254
 
 
2,254
 
 
591
 
 
2,435
 
 
48
 
Consumer loans
 
 
1,931
 
 
1,927
 
 
302
 
 
2,084
 
 
57
 
 
 
 
22,957
 
 
20,737
 
 
3,327
 
 
23,681
 
 
710
 
With no related allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other construction/land
 
 
567
 
 
448
 
 
-
 
 
599
 
 
12
 
1-4 family - closed-end
 
 
321
 
 
70
 
 
-
 
 
667
 
 
1
 
Equity lines
 
 
522
 
 
493
 
 
-
 
 
537
 
 
-
 
Multi-family residential
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
Commercial real estate- owner occupied
 
 
2,036
 
 
1,950
 
 
-
 
 
2,340
 
 
-
 
Commercial real estate- non-owner occupied
 
 
163
 
 
163
 
 
-
 
 
194
 
 
-
 
Farmland
 
 
43
 
 
43
 
 
-
 
 
50
 
 
-
 
Total real estate
 
 
3,652
 
 
3,167
 
 
-
 
 
4,387
 
 
13
 
Agriculture
 
 
65
 
 
65
 
 
-
 
 
66
 
 
-
 
Commercial and industrial
 
 
107
 
 
39
 
 
-
 
 
292
 
 
1
 
Consumer loans
 
 
196
 
 
35
 
 
-
 
 
304
 
 
-
 
 
 
 
4,020
 
 
3,306
 
 
-
 
 
5,049
 
 
14
 
Total
 
$
26,977
 
$
24,043
 
$
3,327
 
$
28,730
 
$
724
 
 
(1)Contractual principal balance due from customer.
(2)Principal balance on Company's books, less any direct charge offs, including interest applied to principal and unaccreted discount or premium.
(3)Interest income is recognized on performing balances on a regular accrual basis.
    
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
Unpaid Principal
 
Recorded
 
Related
 
Recorded
 
Interest Income
 
 
 
Balance(1)
 
Investment(2)
 
Allowance
 
Investment
 
Recognized(3)
 
With an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other construction/land
 
$
919
 
$
769
 
$
83
 
$
967
 
$
42
 
1-4 family - closed-end
 
 
8,085
 
 
6,137
 
 
290
 
 
6,157
 
 
255
 
Equity lines
 
 
2,339
 
 
2,269
 
 
214
 
 
2,374
 
 
17
 
Multifamily residential
 
 
414
 
 
414
 
 
1
 
 
417
 
 
5
 
Commercial real estate- owner occupied
 
 
1,272
 
 
1,272
 
 
589
 
 
1,405
 
 
139
 
Commercial real estate- non-owner occupied
 
 
3,350
 
 
3,350
 
 
1,712
 
 
3,390
 
 
164
 
Farmland
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
Total real estate
 
 
16,379
 
 
14,211
 
 
2,889
 
 
14,710
 
 
622
 
Commercial and industrial
 
 
2,572
 
 
2,559
 
 
683
 
 
2,857
 
 
97
 
Consumer loans
 
 
2,023
 
 
2,022
 
 
343
 
 
2,298
 
 
112
 
 
 
 
20,974
 
 
18,792
 
 
3,915
 
 
19,865
 
 
831
 
With no related allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other construction/land
 
 
554
 
 
554
 
 
-
 
 
566
 
 
34
 
1-4 family - closed-end
 
 
585
 
 
362
 
 
-
 
 
602
 
 
-
 
Equity lines
 
 
843
 
 
842
 
 
-
 
 
840
 
 
-
 
Multifamily residential
 
 
630
 
 
630
 
 
-
 
 
633
 
 
-
 
Commercial real estate- owner occupied
 
 
1,828
 
 
1,828
 
 
-
 
 
2,251
 
 
-
 
Commercial real estate- non-owner occupied
 
 
2,006
 
 
1,859
 
 
-
 
 
2,102
 
 
118
 
Farmland
 
 
610
 
 
610
 
 
-
 
 
629
 
 
-
 
Total real estate
 
 
7,056
 
 
6,685
 
 
-
 
 
7,623
 
 
152
 
Commercial and industrial
 
 
45
 
 
29
 
 
-
 
 
77
 
 
-
 
Consumer loans
 
 
160
 
 
15
 
 
-
 
 
256
 
 
-
 
 
 
 
7,261
 
 
6,729
 
 
-
 
 
7,956
 
 
152
 
Total
 
$
28,235
 
$
25,521
 
$
3,915
 
$
27,821
 
$
983
 
 
(1)Contractual principal balance due from customer.
(2)Principal balance on Company's books, less any direct charge offs, including interest applied to principal and unaccreted discount or premium.
(3)Interest income is recognized on performing balances on a regular accrual basis.
 
The specific loss allowance for an impaired loan generally represents the difference between the book value of the loan and either the fair value of underlying collateral less estimated disposition costs, or the loan’s net present value as determined by a discounted cash flow analysis. The discounted cash flow approach is typically used to measure impairment on loans for which it is anticipated that repayment will be provided from cash flows other than those generated solely by the disposition or operation of underlying collateral. However, historical loss rates may be used to determine a specific loss allowance if they indicate a higher potential reserve need than the discounted cash flow analysis. Any change in impairment attributable to the passage of time is accommodated by adjusting the loss allowance accordingly.
 
For loans where repayment is expected to be provided by the disposition or operation of the underlying collateral, impairment is measured using the fair value of the collateral. If the collateral value, net of the expected costs of disposition where applicable, is less than the loan balance, then a specific loss reserve is established for the shortfall in collateral coverage. If the discounted collateral value is greater than or equal to the loan balance, no specific loss reserve is required. At the time a collateral-dependent loan is designated as nonperforming, a new appraisal is ordered and typically received within 30 to 60 days if a recent appraisal is not already available. We generally use external appraisals to determine the fair value of the underlying collateral for nonperforming real estate loans, although the Company’s licensed staff appraisers may update older appraisals based on current market conditions and property value trends. Until an updated appraisal is received, the Company uses the existing appraisal to determine the amount of the specific loss allowance that may be required. The specific loss allowance is adjusted, as necessary, once a new appraisal is received. Updated appraisals are generally ordered at least annually for collateral-dependent loans that remain impaired. Current appraisals were available or in process for 96% of the Company’s impaired real estate loan balances at June 30, 2016. Furthermore, the Company analyzes collateral-dependent loans on at least a quarterly basis, to determine if any portion of the recorded investment in such loans can be identified as uncollectible and would therefore constitute a confirmed loss. All amounts deemed to be uncollectible are promptly charged off against the Company’s allowance for loan and lease losses, with the loan then carried at the fair value of the collateral, as appraised, less estimated costs of disposition if applicable. Once a charge-off or write-down is recorded, it will not be restored to the loan balance on the Company’s accounting books.
   
Our methodology also provides for the establishment of a “general” allowance for probable incurred losses inherent in loans and leases that are not impaired. Unimpaired loan balances are segregated by credit quality, and are then evaluated in pools with common characteristics. At the present time, pools are based on the same segmentation of loan types presented in our regulatory filings. While this methodology utilizes historical loss data and other measurable information, the classification of loans and the establishment of the allowance for loan and lease losses are both to some extent based on Management’s judgment and experience. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that Management believes is appropriate at each reporting date. Quantitative information includes our historical loss experience, delinquency and charge-off trends, and current collateral values. Qualitative factors include the general economic environment in our markets and, in particular, the condition of the agricultural industry and other key industries. Lending policies and procedures (including underwriting standards), the experience and abilities of lending staff, the quality of loan review, credit concentrations (by geography, loan type, industry and collateral type), the rate of loan portfolio growth, and changes in legal or regulatory requirements are additional factors that are considered. The total general reserve established for probable incurred losses on unimpaired loans was $6.715 million at June 30, 2016.
 
There were no material changes to the methodology used to determine our allowance for loan and lease losses during the three months ended June 30, 2016. We continue to consider the estimated impact of drought conditions and lower oil prices on credit quality, in evaluating the adequacy of our allowance. As we add new products and expand our geographic coverage, and as the economic environment changes, we expect to enhance our methodology to keep pace with the size and complexity of the loan and lease portfolio and respond to pressures created by external forces. We engage outside firms on a regular basis to assess our methodology and perform independent credit reviews of our loan and lease portfolio. In addition, the Company’s external auditors, the FDIC, and the California DBO review the allowance for loan and lease losses as an integral part of their audit and examination processes. Management believes that the current methodology is appropriate given our size and level of complexity.
   
The tables that follow detail the activity in the allowance for loan and lease losses for the periods noted:
 
Allowance for Credit Losses and Recorded Investment in Financing Receivables
(dollars in thousands, unaudited)
 
 
 
Three months ended June 30, 2016
 
 
 
Real Estate
 
Agricultural
Production
 
Commercial and
Industrial
 
Consumer
 
Unallocated
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for credit losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
4,713
 
$
567
 
$
2,503
 
$
1,119
 
$
1,128
 
$
10,030
 
Charge-offs
 
 
(71)
 
 
-
 
 
(66)
 
 
(494)
 
 
-
 
 
(631)
 
Recoveries
 
 
336
 
 
2
 
 
39
 
 
266
 
 
-
 
 
643
 
Provision
 
 
(496)
 
 
(153)
 
 
1,265
 
 
353
 
 
(969)
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
 
$
4,482
 
$
416
 
$
3,741
 
$
1,244
 
$
159
 
$
10,042
 
 
 
 
Six months ended June 30, 2016
 
 
 
Real Estate
 
Agricultural
Production
 
Commercial and
Industrial
 
Consumer
 
Unallocated
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for credit losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
4,783
 
$
722
 
$
2,533
 
$
1,263
 
$
1,122
 
$
10,423
 
Charge-offs
 
 
(280)
 
 
-
 
 
(174)
 
 
(985)
 
 
-
 
 
(1,439)
 
Recoveries
 
 
397
 
 
4
 
 
160
 
 
497
 
 
-
 
 
1,058
 
Provision
 
 
(418)
 
 
(310)
 
 
1,222
 
 
469
 
 
(963)
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
 
$
4,482
 
$
416
 
$
3,741
 
$
1,244
 
$
159
 
$
10,042
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserves:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Specific
 
$
2,434
 
$
-
 
$
591
 
$
302
 
$
-
 
$
3,327
 
General
 
 
2,048
 
 
416
 
 
3,150
 
 
942
 
 
159
 
 
6,715
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
 
$
4,482
 
$
416
 
$
3,741
 
$
1,244
 
$
159
 
$
10,042
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually
 
$
19,723
 
$
65
 
$
2,293
 
$
1,962
 
$
-
 
$
24,043
 
Collectively
 
 
762,437
 
 
49,958
 
 
307,168
 
 
11,656
 
 
-
 
 
1,131,219
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
 
$
782,160
 
$
50,023
 
$
309,461
 
$
13,618
 
$
-
 
$
1,155,262
 
  
 
 
Year ended December 31, 2015
 
 
 
Real Estate
 
Agricultural
Production
 
Commercial and
Industrial
 
Consumer
 
Unallocated
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for credit losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
6,243
 
$
986
 
$
1,944
 
$
1,765
 
$
310
 
$
11,248
 
Charge-offs
 
 
(706)
 
 
-
 
 
(395)
 
 
(1,739)
 
 
-
 
 
(2,840)
 
Recoveries
 
 
751
 
 
81
 
 
225
 
 
958
 
 
-
 
 
2,015
 
Provision
 
 
(1,505)
 
 
(345)
 
 
759
 
 
279
 
 
812
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
 
$
4,783
 
$
722
 
$
2,533
 
$
1,263
 
$
1,122
 
$
10,423
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserves:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Specific
 
$
2,889
 
$
-
 
$
683
 
$
343
 
$
-
 
$
3,915
 
General
 
 
1,894
 
 
722
 
 
1,850
 
 
920
 
 
1,122
 
 
6,508
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
 
$
4,783
 
$
722
 
$
2,533
 
$
1,263
 
$
1,122
 
$
10,423
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually
 
$
20,896
 
$
-
 
$
2,588
 
$
2,037
 
$
-
 
$
25,521
 
Collectively
 
 
757,212
 
 
46,237
 
 
290,974
 
 
12,912
 
 
-
 
 
1,107,335
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
 
$
778,108
 
$
46,237
 
$
293,562
 
$
14,949
 
$
-
 
$
1,132,856