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Loans and Allowance for Credit Losses

3 Months Ended

Mar. 31, 2024

Note 10 – Loans and Allowance for Credit Losses

We adopted the new current expected credit loss accounting guidance, CECL, and all related amendments as of January 1, 2022. Similar to practice under legacy GAAP, the ACL on the loan portfolio is a valuation allowance deducted from the recorded balance in loans. However, under CECL the ACL represents principal which is not expected to be collected over the contractual life of the loans, adjusted for expected prepayment, whereas under legacy GAAP the allowance represented only losses already incurred as of the balance sheet date. The ACL is increased by a provision for credit losses charged to expense, and by principal recovered on charged-off balances. It is reduced by principal charge-offs. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, using information from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Adjustments are also made for changes in risk profile, credit concentrations, historical trends, and other economic conditions.

The Company elected the practical expedient available under CECL to exclude accrued interest receivable from the amortized cost basis of all categorizations of loans, and as a result did not estimate reserves on accrued interest receivable balances, as any past due interest income is reversed on a timely basis. Accrued interest receivable on loans of $6.8 million and $5.6 million at March 31, 2024, and December 31, 2023, respectively is included in other assets on the Company’s balance sheet.

The following table presents loans by class as of March 31, 2024, and December 31, 2023. The majority of the disclosures in this footnote are prepared at the class level which is equivalent to the call report or call code classification. The final table in this section separates a roll forward of the Allowance for Credit Losses at the portfolio segment level.


Loan Distribution
(dollars in thousands, unaudited)
	March 31, 2024		December 31, 2023
Real estate:
Residential real estate	$	406,443	$	412,063
Commercial real estate		1,327,482		1,328,224
Other construction/land		6,115		6,256
Farmland		66,133		67,276
Total real estate		1,806,173		1,813,819
Other commercial		143,448		156,272
Mortgage warehouse lines		203,561		116,000
Consumer loans		3,682		3,984
Subtotal		2,156,864		2,090,075
Net deferred loan fees and costs		214		309
Loans, amortized cost basis		2,157,078		2,090,384
Allowance for credit losses		(23,140)		(23,500)
Net Loans	$	2,133,938	$	2,066,884

The Company places loans on nonaccrual status when management has determined that the full repayment of principal and collection of contractually agreed upon interest is unlikely or when the loan in question has become delinquent more than 90 days. The Company may decide that it is appropriate to continue to accrue interest on certain loans more than 90 days delinquent if they are well-secured by collateral and collection is in process. When a loan is placed on nonaccrual status, any accrued but uncollected interest for the loan is reversed out of interest income in the period in which the loan’s status changed. For loans with an interest reserve, i.e., where loan proceeds are advanced to the borrower to make interest payments, all interest recognized from the inception of the loan is reversed when the loan is placed on nonaccrual. Once a loan is on nonaccrual status subsequent payments received from the customer are applied to principal, and no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as contractually required. Generally, loans are not restored to accrual status until the obligation is brought current and has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

The following tables present the amortized cost basis of nonaccrual loans, according to loan class, with and without individually evaluated reserves as of March 31, 2024, and December 31, 2023:


Nonaccrual Loans
(dollars in thousands, unaudited)
	March 31, 2024
	Nonaccrual Loans
	With no allowance for credit loss		With an allowance for credit loss		Total		Loans Past Due 90+ Accruing
Real estate:
Residential real estate	$	95	$	—	$	95	$	—
Commercial real estate		—		7,437		7,437		—
Farmland		6,503		—		6,503		—
Total real estate		6,598		7,437		14,035		—
Other commercial		153		—		153		—
Consumer loans		—		—		—		—
Total	$	6,751	$	7,437	$	14,188	$	—


	December 31, 2023
	Nonaccrual Loans
	With no allowance for credit loss		With an allowance for credit loss		Total		Loans Past Due 90+ Accruing
Real estate:
Residential real estate	$	414	$	—	$	414	$	—
Commercial real estate		—		7,457		7,457		—
Farmland		—		—		—		—
Total real estate		414		7,457		7,871		—
Other commercial		114		—		114		14
Consumer loans		—		—		—		—
Total	$	528	$	7,457	$	7,985	$	14

The Company did not recognize any interest on nonaccrual loans during the three months ended March 31, 2024, and would have recognized an additional $0.003 million in interest income on nonaccrual loans had those loans not been designated as nonaccrual. Due to loans being placed on nonaccrual status, during the three months ended March 31, 2023, $0.04 million of interest receivable on loans was reversed against interest income.

The following table presents the amortized cost basis of collateral-dependent loans by class as of March 31, 2024, and December 31, 2023:


Collateral Dependent Loans
(dollars in thousands, unaudited)
	March 31, 2024				December 31, 2023
	Amortized Cost		Individual Reserves		Amortized Cost		Individual Reserves
Real estate:
Residential real estate	$	95	$	—	$	414	$	—
Commercial real estate		7,437		1,548		7,457		1,600
Farmland		6,503		—		—		—
Total real estate		14,035		1,548		7,871		1,600
Other commercial		153		—		114		—
Total Loans	$	14,188	$	1,548	$	7,985	$	1,600

During the first three months of 2024 the amortized cost balance of collateral-dependent loans increased by $6.2 million due primarily to a single agriculture real estate secured loan, offset by declines resulting from upgrades and payoffs. The weighted average loan-to-value ratio of collateral dependent loans was 100% at March 31, 2024. There were no collateral dependent loans in the process of foreclosure as of March 31, 2024.

The following tables presents the aging of the amortized cost basis in past-due loans, according to class, as of March 31, 2024, and December 31, 2023:


Past Due Loans
(dollars in thousands, unaudited)
	March 31, 2024
	30-59 Days Past Due		60-89 Days Past Due		Loans Past Due 90+ Days		Total Past Due		Loans not Past Due		Total Loans
Real estate:
Residential real estate	$	868	$	—	$	20	$	888	$	406,727	$	407,615
Commercial real estate		507		—		7,437		7,944		1,316,821		1,324,765
Other construction/land		—		—		—		—		6,139		6,139
Farmland		—		6,503		—		6,503		59,844		66,347
Total real estate		1,375		6,503		7,457		15,335		1,789,531		1,804,866
Other commercial		184		1		103		288		144,586		144,874
Mortgage warehouse lines		—		—		—		—		203,561		203,561
Consumer loans		3		—		—		3		3,774		3,777
Total Loans	$	1,562	$	6,504	$	7,560	$	15,626	$	2,141,452	$	2,157,078


	December 31, 2023
	30-59 Days Past Due		60-89 Days Past Due		Loans Past Due 90+ Days		Total Past Due		Loans not Past Due		Total Loans
Real estate:
Residential real estate	$	1,768	$	—	$	—	$	1,768	$	411,494	$	413,262
Commercial real estate		—		—		—		—		1,325,494		1,325,494
Other construction/land		—		—		—		—		6,268		6,268
Farmland		—		—		—		—		67,510		67,510
Total real estate		1,768		—		—		1,768		1,810,766		1,812,534
Other commercial		158		171		14		343		157,417		157,760
Mortgage warehouse lines		—		—		—		—		116,000		116,000
Consumer loans		47		—		—		47		4,043		4,090
Total Loans	$	1,973	$	171	$	14	$	2,158	$	2,088,226	$	2,090,384

Loan Modifications

Occasionally, the Company modifies loans to borrowers experiencing financial difficulty by providing principal forgiveness, rate reductions, payment deferral, or term extension. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.

In some cases, the Company provides multiple types on concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For the loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period. The combination is at least two of the following: principal forgiveness, rate reduction, payment deferral, and/or term extension.

The following table presents the amortized cost basis of loans at March 31, 2024 that were both experiencing financial difficulty and modified during the quarter ended March 31, 2024, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below (dollars in thousands):


Loans to Borrowers Experiencing Financial Difficulty
(dollars in thousands, unaudited)
		March 31, 2024
	Principal Forgiveness		Term Extension		Combination Term Extension Interest Rate Reduction		Total Class of Financing Receivable
Real estate:
Residential real estate	$	—	$	—	$	—		—
Commercial real estate		—		—		—		0.00%
Other construction/land		—		240		—		3.91%
Farmland		—		—		—		—
Total real estate		—		240		—		0.01%
Other commercial		—		170		—		0.12%
Consumer loans		—		—		—		—
Total	$	—	$	410	$	—		0.02%

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the year ended March 31, 2024:


Borrower Experiencing Financial Difficulty - Financial Effect
(dollars in thousands, unaudited)
		March 31, 2024
		Principal Forgiveness	Weighted-Average Interest Rate Reduction	Weighted-Average Term Extension (years)
Real estate:
Residential real estate	$	—	—	—
Commercial real estate	$	—	—	—
Other construction/land	$	—	—	3.00
Farmland	$	—	—	—
Other commercial	$	—	—	3.94
Mortgage warehouse lines	$	—	—	—
Consumer loans	$	—	—	—

There were no payment defaults on loans previously modified in the preceding 12 months for either of the quarters ending March 31, 2024, and 2023. For the purpose of this disclosure the Company defines a payment default as 90 days past due.

The Company had no additional funds committed on loans which have been modified to borrowers experiencing financial difficulty.

The Company monitors the credit quality of loans on a continuous basis using the regulatory and accounting classifications of pass, special mention and substandard to characterize and qualify the associated credit risk. Loans classified as “loss” are immediately charged-off. The Company uses the following definitions of risk classifications:

Pass – Loans listed as pass include larger non-homogeneous loans not meeting the risk rating definitions below and smaller, homogeneous loans not assessed on an individual basis.

Special Mention – Loans classified as special mention have the 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 – Loans classified as substandard are those loans with clear and well-defined weaknesses such as a highly leveraged position, unfavorable financial operating results and/or trends, or uncertain repayment sources or poor financial condition, which may jeopardize ultimate recoverability of the debt.

The following tables present the amortized cost of loans by credit quality classification in addition to loan vintage as of March 31, 2024, and December 31, 2023:

Loan Credit Quality by Vintage

(dollars in thousands, unaudited)


	March 31, 2024
	Term Loans Amortized Cost Basis by Origination Year
	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost		Revolving Loans Converted to Term Loans		Total Loans
Residential real estate
Pass	$	—	$	—	$	101,467	$	226,926	$	7,559	$	51,864	$	14,070	$	2,262	$	404,148
Special mention		—		—		—		—		—		2,714		—		279		2,993
Substandard		—		—		—		—		—		240		20		214		474
Subtotal		—		—		101,467		226,926		7,559		54,818		14,090		2,755		407,615
Commercial real estate
Pass		17,809		109,867		273,653		57,509		469,266		292,669		26,133		—		1,246,906
Special mention		—		146		—		—		37,501		12,260		1,500		—		51,407
Substandard		—		—		—		—		21,770		4,682		—		—		26,452
Subtotal		17,809		110,013		273,653		57,509		528,537		309,611		27,633		—		1,324,765
Other construction/land
Pass		240		351		—		—		3,596		1,952		—		—		6,139
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Subtotal		240		351		—		—		3,596		1,952		—		—		6,139
Farmland
Pass		950		6,788		11,535		11,734		2,623		13,554		2,782		387		50,353
Special mention		—		—		—		—		835		8,206		—		—		9,041
Substandard		—		—		—		—		—		6,953		—		—		6,953
Subtotal		950		6,788		11,535		11,734		3,458		28,713		2,782		387		66,347
Other commercial
Pass		891		18,501		6,135		2,476		6,341		12,725		89,409		1,142		137,620
Special mention		16		75		—		250		2,724		21		252		3,743		7,081
Substandard		1		—		—		50		—		103		—		19		173
Subtotal		908		18,576		6,135		2,776		9,065		12,849		89,661		4,904		144,874
Mortgage warehouse lines
Pass		—		—		—		—		—		—		203,561		—		203,561
Subtotal		—		—		—		—		—		—		203,561		—		203,561
Consumer loans
Pass		576		633		195		82		77		250		1,899		—		3,712
Special mention		—		—		—		—		14		3		—		—		17
Substandard		2		46		—		—		—		—		—		—		48
Subtotal		578		679		195		82		91		253		1,899		—		3,777
Total	$	20,485	$	136,407	$	392,985	$	299,027	$	552,306	$	408,196	$	339,625	$	8,046	$	2,157,078
Gross charge-offs	$	392	$	24	$	5	$	3	$	20	$	410	$	274	$		$	1,128

Loan Credit Quality by Vintage

(dollars in thousands, unaudited)


			December 31, 2023
		Term Loans Amortized Cost Basis by Origination Year
	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost		Revolving Loans Converted to Term Loans		Total Loans
Residential real estate
Pass	$	—	$	104,141	$	228,849	$	7,611	$	1,979	$	50,295	$	12,797	$	2,302	$	407,974
Special mention		—		—		1,241		—		—		2,942		20		284		4,487
Substandard		—		—		—		—		—		494		115		192		801
Subtotal		—		104,141		230,090		7,611		1,979		53,731		12,932		2,778		413,262
Commercial real estate
Pass		112,254		275,626		58,310		475,353		51,100		251,163		22,929		—		1,246,735
Special mention		148		—		—		39,654		3,010		8,489		—		—		51,301
Substandard		—		—		—		21,872		—		5,586		—		—		27,458
Subtotal		112,402		275,626		58,310		536,879		54,110		265,238		22,929		—		1,325,494
Other construction/land
Pass		352		—		—		3,646		638		1,632		—		—		6,268
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Subtotal		352		—		—		3,646		638		1,632		—		—		6,268
Farmland
Pass		6,731		11,645		11,793		2,650		1,652		11,608		2,750		394		49,223
Special mention		—		—		—		840		—		10,471		—		—		11,311
Substandard		—		—		—		—		—		6,976		—		—		6,976
Subtotal		6,731		11,645		11,793		3,490		1,652		29,055		2,750		394		67,510
Other commercial
Pass		18,319		6,501		2,666		6,622		4,534		9,354		101,163		1,171		150,330
Special mention		—		—		273		2,783		—		128		143		3,748		7,075
Substandard		—		—		55		—		—		—		208		92		355
Subtotal		18,319		6,501		2,994		9,405		4,534		9,482		101,514		5,011		157,760
Mortgage warehouse lines
Pass		—		—		—		—		—		—		116,000		—		116,000
Subtotal		—		—		—		—		—		—		116,000		—		116,000
Consumer loans
Pass		1,366		229		102		82		67		177		1,949		—		3,972
Special mention		—		—		—		15		—		35		13		—		63
Substandard		55		—		—		—		—		—		—		—		55
Subtotal		1,421		229		102		97		67		212		1,962		—		4,090
Total	$	139,225	$	398,142	$	303,289	$	561,128	$	62,980	$	359,350	$	258,087	$	8,183	$	2,090,384
Gross charge-offs	$	2,145	$	45	$	250	$	2,266	$	81	$	1,345	$	489	$		$	6,621

CECL replaces the legacy accounting for loans designated as purchased credit impaired (“PCI”) with loans designated as purchased credit deteriorated (“PCD”). PCD loans are loans acquired or purchased, which as of acquisition, had evidence of more than insignificant credit deterioration since origination. Due to the immaterial balance in the Company’s PCI loans as of December 31, 2021, management elected not to transition these loans into the PCD designation. As of March 31, 2024, the Company had no loans categorized as PCD.

As noted in footnote 3, on January 1, 2022, the Company implemented CECL and increased our ACL, previously the allowance for loan losses, with a $9.5 million cumulative adjustment. The Company’s ACL is calculated quarterly, with any difference in the calculated ACL and the recorded ACL trued-up through an entry to the provision for credit losses. 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.

Management calculates the quantitative portion of collectively evaluated reserves for all loan categories, with the exception of Farmland, Agricultural Production and Consumer loans, using a discounted cash flow (“DCF”) methodology. For purposes of calculating the quantitative portion of collectively evaluated reserves on Farmland, Agricultural Production, and Consumer categories a Remaining Life methodology is utilized.

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. Economic forecasts are considered over a four-quarter forecast period, with reversion to mean occurring on a straight-line basis over four quarters. The call code regression models utilized upon implementation of CECL on January 1, 2022, and as of March 31, 2024, were identical, and relied upon reasonable and supportable forecasts of the National Unemployment Rate. Management selected the National Unemployment Rate as the driver 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.

The quantitative reserves for Farmland, Agricultural Production and Consumer loans are calculated using a Remaining Life methodology where average historical bank specific and peer loss rates are applied to expected loan balances over an estimated remaining life of loans in calculation of the quantitative portion of collectively evaluated loans in these classes. The estimated remaining life is calculated using historical bank-specific loan attrition data. For the Farmland, Agricultural Production and Consumer classes of loans, reasonable and supportable forecasts of the National Unemployment rate, real GDP and the housing price index are considered through estimation of qualitative reserves.

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 Housing Price Index, Real GDP and the National Unemployment Rate (Farmland & Agricultural Production and Consumer segments only)

●

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, nonaccruals loans, and adversely classified loans, as reflected in changes of the relative level of loans classified as substandard and special mention

●

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 influence of peer data on estimated quantitative reserves, residual COVID-19 related risk, expected impact of current and expected inflationary environment, reliance on the National Unemployment rate as opposed to the California unemployment rate in the calculation of quantitative reserves, the expected impact of current and expected geo-political conditions

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 historical peer, life-of-loan-equivalent, loss rate ranges and the relative weighting of Q-factors according to management’s judgement.

Although collectively evaluated reserves are generally calculated separately at the call code or loan class level, management has grouped loan classes with similar risk characteristics into the following portfolio segments: Residential Real Estate, Commercial Real Estate, Farmland & Agricultural Production, Commercial & Industrial, Mortgage Warehouse and Consumer loans. Loans secured by Residential Real Estate have a different profile from loans secured by Commercial Real Estate. Generally, the borrowers for Residential Real Estate loans are consumers whereas borrowers for Commercial Real Estate are often businesses. The COVID-19 pandemic illustrated how these different categories of real estate loans were subject to different risks, which was exacerbated by the widespread work-from-home model adopted by many companies during and since the pandemic. Farmland and Agricultural Production loans are included in a single segment as these loans are often times to the same borrowers, facing the same risks relating to commodity prices, water supply and drought conditions in addition to other environmental concerns. Commercial & Industrial loans are separated into a unique segment given the uniqueness of these loans, which are often revolving and secured by other business assets as opposed to real estate. Mortgage warehouse loans are also unique in the Company’s portfolio and warrant separate presentation as an individual portfolio segment, given the specific nature of these constantly revolving lines to mortgage originators and also attributable to a very limited loss history, even after consideration of peer data. Finally, the Company splits out Consumer loans as a separate segment as a result of the small balance, homogeneous terms that characterize these loans.

Management individually evaluates loans that do not share risk characteristics with other loans when estimating reserves. As of March 31, 2024, the only loans that Management considered to have different risk characteristics from other loans sharing the same Federal Call Report code were loans designated nonaccrual.

The following tables present the activity in the allowance for credit losses by portfolio segment for the quarters ended March 31, 2024, and 2023:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)


	Residential Real Estate		Commercial Real Estate		Farmland & Agricultural Production		Commercial & Industrial		Mortgage Warehouse		Consumer		Total
Allowance for credit losses:
Balance, December 31, 2023	$	2,727	$	18,554	$	586	$	1,148	$	174	$	311	$	23,500
Charge-offs		—		(20)		(410)		(287)		—		(411)		(1,128)
Recoveries		—		—		—		440		—		231		671
(Benefit) provision for credit losses		(184)		117		379		(456)		131		110		97
Ending allowance balance:	$	2,543	$	18,651	$	555	$	845	$	305	$	241	$	23,140


	Residential Real Estate		Commercial Real Estate		Farmland & Agricultural Production		Commercial & Industrial		Mortgage Warehouse		Consumer		Total
Allowance for credit losses:
Balance, December 31, 2022	$	3,593	$	17,319	$	376	$	1,133	$	41	$	340	$	22,802
Charge-offs		—		—		—		(85)		—		(371)		(456)
Recoveries		—		—		—		36		—		196		232
(Benefit) provision for credit losses		(262)		249		1,034		67		6		118		1,212
Ending allowance balance:	$	3,331	$	17,568	$	1,410	$	1,151	$	47	$	283	$	23,790

There were no significant changes in the Company’s loan portfolio ACL in the first quarter of 2024.