| Loans and Leases and Allowance for Credit Losses | Note 10 – Loans and Leases 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. Certain prior period credit quality disclosures related to impaired loans and individually and collectively evaluated loans were superseded with the current guidance and have not been included below as of March 31, 2022. Under CECL, disclosures are required on the amortized cost basis, whereas legacy GAAP required presentation on the recorded investment basis, with the primary difference being net deferred fees and costs. Unless specifically noted otherwise, March 31, 2022 disclosures are prepared on the amortized cost basis and December 31, 2021 disclosures present information according to the recorded investment basis. The following table presents loans by class as of March 31, 2022 and December 31, 2021. Accrued interest receivable on loans of $6.7 million and $6.8 million at March 31, 2022 and December 31, 2021 respectively is not included in the loans included in the table below but is included in other assets on the Company’s balance sheet. The March 31, 2022, balance in 1-4 family closed end loans reflects first quarter 2022 purchase of $125.2 million. The majority of the disclosures in this footnote are prepared at the class level which is equivalent to the call report classification or call code classification. The final table in this section separates a rollforward of the Allowance for Credit Losses at the portfolio segment level. Loan And Lease Distribution (dollars in thousands, unaudited) March 31, 2022 December 31, 2021 Real estate: 1-4 family residential construction $ 8,800 $ 21,369 Other construction/land 24,633 25,299 1-4 family - closed-end 398,871 289,457 Equity lines 23,389 26,588 Multi-family residential 59,711 53,458 Commercial real estate - owner occupied 331,764 334,446 Commercial real estate - non-owner occupied 857,051 882,888 Farmland 98,865 106,706 Total real estate 1,803,084 1,740,211 Agricultural 31,663 33,990 Commercial and industrial 87,173 109,791 Mortgage warehouse lines 57,178 101,184 Consumer loans 4,233 4,550 Subtotal 1,983,331 1,989,726 Less net deferred loan fees and costs (1,200) (1,865) Loans and leases, amortized cost basis 1,982,131 1,987,861 Allowance for credit losses (22,530) (14,256) Net loans and leases $ 1,959,601 $ 1,973,605 The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without individually evaluated reserves as of March 31, 2022: Nonaccrual Loans and Leases (dollars in thousands, unaudited) March 31, 2022 Nonaccrual Loans With no allowance for credit loss With an allowance for credit loss Total Loans Past Due 90+ Accruing Real estate: 1-4 family residential construction $ — $ — $ — $ — Other construction/land — — — — 1-4 family - closed-end 1,713 — 1,713 — Equity lines 845 — 845 — Multi-family residential — — — — Commercial real estate - owner occupied 399 — 399 — Commercial real estate - non-owner occupied — — — — Farmland 18,449 — 18,449 — Total real estate 21,406 — 21,406 — Agricultural 7,868 242 8,110 — Commercial and industrial 627 285 912 19 Mortgage warehouse lines — — — — Consumer loans 18 — 18 — Total $ 29,919 $ 527 $ 30,446 $ 19 The following table presents the impaired loans as of December 31, 2021, according to loan class, with and without an individually evaluated reserve according to the recorded investment basis. Impaired loans as of December 31, 2021 included both nonaccrual loans and performing TDRs. A separate breakout of nonaccrual loans by class as of December 31, 2021 is included in the past due loans table as of December 31, 2021, later in this footnote. December 31, 2021 Unpaid Principal Recorded Average Recorded Interest Income Balance (1) Investment (2) Related Allowance Investment Recognized (3) With an Allowance Recorded Real estate: Other construction/land $ 341 $ 341 $ 64 $ 352 $ 55 1-4 family - closed-end 1,048 1,048 37 1,096 104 Equity lines 2,005 1,993 182 2,056 138 Commercial real estate - owner occupied 1,249 1,248 19 1,278 144 Commercial real estate - non-owner occupied 367 367 126 393 32 Total real estate 5,010 4,997 428 5,175 473 Agricultural 244 244 244 246 — Commercial and industrial 757 757 127 873 41 Consumer loans 164 164 19 180 28 6,175 6,162 818 6,474 542 With no Related Allowance Recorded Real estate: 1-4 family - closed-end 788 788 — 869 — Equity lines 648 648 — 690 6 Commercial real estate - owner occupied 1,353 1,234 — 1,282 — Total real estate 2,789 2,670 — 2,841 6 Agricultural 134 134 — 186 — Commercial and industrial 466 466 — 550 — 3,389 3,270 — 3,577 6 Total $ 9,564 $ 9,432 $ 818 $ 10,051 $ 548 (1) Contractual principal balance due from customer. (2) Principal balance on Company’s books, less any direct charge offs. (3) Interest income is recognized on performing balances on a regular accrual basis. The Company recognized $0 in interest on nonaccrual loans during the first quarter 2022 and would have recognized an additional $0.1 million on nonaccrual loans had those loans not been designated as nonaccrual. The following table presents the amortized cost basis of collateral-dependent loans by class as of March 31, 2022: Collateral Dependent Loans (dollars in thousands, unaudited) March 31, 2022 Amortized Cost Individual Reserves Real estate: 1-4 family residential construction $ — $ — Other construction/land — — 1-4 family - closed-end 1,487 — Equity lines 712 — Multi-family residential — — Commercial real estate - owner occupied 562 — Commercial real estate - non-owner occupied — — Farmland 18,449 — Total real estate 21,210 — Agricultural 7,868 — Commercial and industrial 613 — Mortgage warehouse lines — — Consumer loans — — Total loans and leases $ 29,691 $ — Absent the significant deterioration of the collateral value of Farmland securing several loans to a single borrower, which were downgraded to non-accrual and collateral dependent during the first quarter of 2022 there were no significant changes in the population of collateral dependent loans, or in the valuations of the related collateral. All of the Company’s collateral dependent loans had appraised collateral values which exceed the amortized cost basis of the related loan as of March 31, 2022, which the company has applied discounts against. The weighted-average loan to value of the Company’s collateral-dependent loans as of March 31, 2022, was 18%. No collateral-dependent loans were in the process of foreclosure as of March 31, 2022. The following table presents the aging of the amortized cost basis in past-due loans, according to class, as of March 31, 2022: Past Due Loans and Leases (dollars in thousands, unaudited) March 31, 2022 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: 1-4 family residential construction $ — $ — $ — $ — $ 8,800 $ 8,800 Other construction/land — — — — 24,532 24,532 1-4 family - closed-end 179 — — 179 399,673 399,852 Equity lines — — — — 23,690 23,690 Multi-family residential — — — — 59,632 59,632 Commercial real estate - owner occupied 2,543 — — 2,543 329,257 331,800 Commercial real estate - non-owner occupied 189 — — 189 854,315 854,504 Farmland 44 — — 44 98,881 98,925 Total real estate 2,955 — — 2,955 1,798,780 1,801,735 Agricultural — — 259 259 31,502 31,761 Commercial and industrial 10 14 320 344 86,788 87,132 Mortgage warehouse lines — — — — 57,178 57,178 Consumer loans 12 5 — 17 4,308 4,325 Total loans and leases $ 2,977 $ 19 $ 579 $ 3,575 $ 1,978,556 $ 1,982,131 The following table presents the aging of the recorded investment in past-due and nonaccrual loans, according to class, as of December 31, 2021: December 31, 2021 30-59 Days 60-89 Days 90 Days Or More Past Total Financing Non-Accrual Past Due Past Due Due (2) Total Past Due Current Receivables Loans (1) Real Estate: 1-4 family residential construction $ — $ — $ — $ — $ 21,369 $ 21,369 $ — Other construction/land — — — — 25,299 25,299 — 1-4 family - closed-end 1,532 132 — 1,664 287,793 289,457 1,023 Equity lines 30 — — 30 26,558 26,588 892 Multi-family residential — — — — 53,458 53,458 — Commercial real estate owner occupied 124 — 698 822 333,624 334,446 1,234 Commercial real estate non-owner occupied — — — — 882,888 882,888 — Farmland — — — — 106,706 106,706 — Total real estate loans 1,686 132 698 2,516 1,737,695 1,740,211 3,149 Agricultural — — 284 284 33,706 33,990 378 Commercial and industrial 473 — 283 756 109,035 109,791 973 Mortgage warehouse lines — — — — 101,184 101,184 — Consumer loans 6 3 — 9 4,541 4,550 22 Total gross loans and leases $ 2,165 $ 135 $ 1,265 $ 3,565 $ 1,986,161 $ 1,989,726 $ 4,522 (1) Included in Total Financing Receivables (2) As of December 31, 2021 there were no loans over 90 days past due and still accruing. Troubled Debt Restructurings A loan that is modified for a borrower who is experiencing financial difficulty is classified as a troubled debt restructuring (TDR) if the modification constitutes a concession. At March 31, 2022, the Company had a total of $5.6 million in TDRs, including $1.0 million in TDRs that were on non-accrual status. Generally, a non-accrual loan that has been modified as a TDR remains on non-accrual status for a period of at least six months to demonstrate the borrower’s ability to comply with the modified terms. However, performance prior to the modification, or significant events that coincide with the modification, could result in a loan’s return to accrual status after a shorter performance period or even at the time of loan modification. Regardless of the period of time that has elapsed, if the borrower’s ability to meet the revised payment schedule is uncertain, then the loan will be kept on non-accrual status. The Company may agree to different types of concessions when modifying a loan or lease. The tables below summarize TDRs which were modified during the noted periods, by type of concession: Troubled Debt Restructurings, by Type of Loan Modification (dollars in thousands, unaudited) Three months ended March 31, 2022 Rate Modification Term Modification Interest Only Modification Rate & Term Modification Term & Interest Modification Total Real estate: Other construction/land $ — $ — $ — $ — $ — $ — 1-4 family - closed-end — — — — — — Equity lines — — — — — — Multi-family residential — — — — — — Commercial real estate - owner occupied — — — — — — Farmland — — — — — — Total real estate loans — — — — — — Agricultural — — — — — — Commercial and industrial — — — — — — Consumer loans — — — — — — Total $ — $ — $ — $ — $ — $ — Three months ended March 31, 2021 Rate Modification Term Modification Interest Only Modification Rate & Term Modification Term & Interest Modification Total Real estate: Other construction/land $ — $ — $ — $ — $ — $ — 1-4 family - closed-end — — — — — — Equity lines — — — 83 — 83 Multi-family residential — — — — — — Commercial real estate - owner occupied — — — — — — Farmland — — — — — — Total real estate loans — — — 83 — 83 Agricultural — 118 — — — 118 Commercial and industrial — 185 — — — 185 Consumer loans — 41 — — — 41 Total $ — $ 344 $ — $ 83 $ — $ 427 Troubled Debt Restructurings (dollars in thousands, unaudited) Three months ended March 31, 2022 Pre- Modification Post- Modification Number of Loans Outstanding Recorded Investment Outstanding Recorded Investment Reserve Difference ⁽ ¹ ⁾ Reserve Real estate: Other construction/land 0 $ — $ — $ — $ — 1-4 family - closed-end 0 — — — — Equity lines 0 — — — — Multi-family residential 0 — — — — Commercial real estate - owner occupied 0 — — — — Farmland 0 — — — — Total real estate loans — — — — Agricultural 0 — — — — Commercial and industrial 0 — — — — Consumer loans 0 — — — — Total $ — $ — $ — $ — (1) This represents the change in the ACL reserve for these credits measured as the difference between the specific post-modification impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology. Three months ended March 31, 2021 Pre- Modification Post- Modification Number of Loans Outstanding Recorded Investment Outstanding Recorded Investment Reserve Difference ⁽ ¹ ⁾ Reserve Real estate: Other construction/land 0 $ — $ — $ — $ — 1-4 family - closed-end 0 — — — — Equity lines 1 83 83 — 1 Multi-family residential 0 — — — — Commercial real estate - owner occupied 0 — — — — Farmland 0 — — — — Total real estate loans 83 83 — 1 Agricultural 1 118 118 116 111 Commercial and industrial 1 185 185 (1) 48 Consumer loans 1 41 41 — — Total $ 427 $ 427 $ 115 $ 160 (1) This represents the change in the ACL reserve for these credits measured as the difference between the specific post-modification impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology. The Company had no finance receivables modified as TDRs within the previous twelve months that defaulted or were charged off during the three-month period ending March 31, 2022 and 2021. 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 and leases by credit quality classification in addition to loan and lease vintage as of March 31, 2022: Loan and Lease Credit Quality by Vintage (dollars in thousands, unaudited) Term Loans and Loans Amortized Cost Basis by Origination Year 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Total Loans 1-4 family construction Pass $ $ — $ — $ — $ — $ — $ 8,800 $ 8,800 Special Mention — — — — — — — — Substandard — — — — — — — — Subtotal — — — — — — 8,800 8,800 Other construction/land Pass — 3,617 4,395 798 1,087 1,306 13,253 24,456 Special Mention — — — — — — — — Substandard — — 76 — — — — 76 Subtotal — 3,617 4,471 798 1,087 1,306 13,253 24,532 1-4 family - closed-end Pass 66,654 253,394 8,104 2,112 12,057 52,248 — 394,569 Special Mention — — — — 1,022 2,116 — 3,138 Substandard — 869 — — 33 1,243 — 2,145 Subtotal 66,654 254,263 8,104 2,112 13,112 55,607 — 399,852 Equity lines Pass — 91 587 376 81 — 20,990 22,125 Special Mention — — — — — — 468 468 Substandard — 122 — — — — 975 1,097 Subtotal — 213 587 376 81 — 22,433 23,690 Multi-family residential Pass 6,589 525 12,099 5,014 13,297 12,919 5,754 56,197 Special Mention — — — — — 3,435 — 3,435 Substandard — — — — — — — — Subtotal 6,589 525 12,099 5,014 13,297 16,354 5,754 59,632 Commercial real estate - OO Pass 5,305 26,484 75,109 38,895 39,813 128,482 8,230 322,318 Special Mention — — — 2,057 — 2,790 — 4,847 Substandard 343 — — — 80 3,450 762 4,635 Subtotal 5,648 26,484 75,109 40,952 39,893 134,722 8,992 331,800 Commercial real estate - NOO Pass 9,456 19,831 488,558 27,003 58,415 173,452 33,369 810,084 Special Mention — — 16,432 — 7,277 3,652 2,710 30,071 Substandard — — — — 852 13,175 322 14,349 Subtotal 9,456 19,831 504,990 27,003 66,544 190,279 36,401 854,504 Farmland Pass — 1,386 5,042 2,060 8,318 31,618 17,364 65,788 Special Mention — — — — 7,150 3,857 548 11,555 Substandard — — — — 4,722 16,860 — 21,582 Subtotal — 1,386 5,042 2,060 20,190 52,335 17,912 98,925 Agricultural Pass 273 3,180 481 34 1,092 6,990 9,585 21,635 Special Mention — — — — — — 939 939 Substandard — 8,607 — — — 16 564 9,187 Subtotal 273 11,787 481 34 1,092 7,006 11,088 31,761 Commercial and industrial Pass 1,414 18,261 8,686 7,372 6,129 11,558 23,261 76,681 Special Mention — 242 3,245 142 — 1,760 3,952 9,341 Substandard — — 48 161 102 721 78 1,110 Subtotal 1,414 18,503 11,979 7,675 6,231 14,039 27,291 87,132 Mortgage warehouse lines Pass — — — — — — 57,178 57,178 Subtotal — — — — — — 57,178 57,178 Consumer loans Pass 604 340 212 337 26 491 2,250 4,260 Special Mention — 9 26 — 2 2 8 47 Substandard — — 17 — — 1 — 18 Subtotal 604 349 255 337 28 494 2,258 4,325 Total $ 90,638 $ 336,958 $ 623,117 $ 86,361 $ 161,555 $ 472,142 $ 211,360 $ 1,982,131 The following table presents the Company’s loan portfolio on the recorded investment basis, according to loan class and credit grade as of December 31, 2021: Pass Special Mention Substandard Impaired Total Real estate: 1-4 family residential construction $ 19,669 $ 1,700 $ — $ — $ 21,369 Other construction/land 24,958 — — 341 25,299 1-4 family - closed-end 282,717 4,703 201 1,836 289,457 Equity lines 23,277 615 55 2,641 26,588 Multi-family residential 49,986 3,472 — — 53,458 Commercial real estate owner occupied 321,996 6,108 3,860 2,482 334,446 Commercial real estate non-owner occupied 841,728 26,364 14,429 367 882,888 Farmland 92,479 10,266 3,961 — 106,706 Total real estate 1,656,810 53,228 22,506 7,667 1,740,211 Agricultural 32,513 — 1,099 378 33,990 Commercial and industrial 98,367 9,989 212 1,223 109,791 Mortgage warehouse lines 101,184 — — — 101,184 Consumer loans 4,349 31 6 164 4,550 Total gross loans and leases $ 1,893,223 $ 63,248 $ 23,823 $ 9,432 $ 1,989,726 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, 2022 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 and lease 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. 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. 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 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 flows over the contractual life of the loans, are based on Bank specific prepayment history, specific to each call code, and subject to update on an annual basis. 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, 2022, 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, non-accruals 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, impact of government stimulus, reliance on the National Unemployment rate as opposed to the California unemployment rate in the calculation of quantitative reserves, the expected impact of fluctuations in interest rate levels on the life of the Company’s loans 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: 1-4 Family Real Estate, Commercial Real Estate, Farmland & Agricultural Production, Commercial & Industrial, Mortgage Warehouse and Consumer loans. Loans secured by 1-4 family residences have a different profile from loans secured by Commercial Real Estate. Generally, the borrowers for 1-4 Family 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 |
