| Loans and Allowance for Credit Losses | Note 10 – Loans and Allowance for Credit Losses The ACL on the loan portfolio is a valuation allowance deducted from the recorded balance in loans. Under CECL the ACL represents principal which is not expected to be collected over the contractual life of the loans, adjusted for expected prepayment. 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 $7.7 million and $5.6 million at September 30, 2024, and December 31, 2023, respectively is included in other assets on the Company’s balance sheet. 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) September 30, 2024 December 31, 2023 Real estate: Residential real estate $ 388,169 $ 412,063 Commercial real estate 1,338,794 1,328,224 Other construction/land 5,611 6,256 Farmland 80,589 67,276 Total real estate 1,813,163 1,813,819 Other commercial 168,236 156,272 Mortgage warehouse lines 335,777 116,000 Consumer loans 3,453 3,984 Subtotal 2,320,629 2,090,075 Net deferred loan fees and costs 396 309 Loans, amortized cost basis 2,321,025 2,090,384 Allowance for credit losses (22,710) (23,500) Net Loans $ 2,298,315 $ 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. Nonaccrual Loans (dollars in thousands, unaudited) September 30, 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 $ 42 $ — $ 42 $ — Commercial real estate — 2,655 2,655 — Farmland 7,528 — 7,528 — Total real estate 7,570 2,655 10,225 — Other commercial — 123 123 — Total $ 7,570 $ 2,778 $ 10,348 $ — 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 — Total real estate 414 7,457 7,871 — Other commercial 114 — 114 14 Total $ 528 $ 7,457 $ 7,985 $ 14 The Company did not recognize any interest on nonaccrual loans during the three or nine months ended September 30, 2024, and would have recognized an additional $0.1 million in interest income on nonaccrual loans during the third quarter and $0.4 million during the first nine months of 2024 had those loans not been designated as nonaccrual. Due to loans being placed on nonaccrual status, during the third quarter and first nine months of 2024, $0.1 million and $0.2 million respectively, 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 September 30, 2024, and December 31, 2023: Collateral-Dependent Loans (dollars in thousands, unaudited) September 30, 2024 December 31, 2023 Amortized Cost Individual Reserves Amortized Cost Individual Reserves Real estate: Residential real estate $ 42 $ — $ 414 $ — Commercial real estate 2,655 400 7,457 1,600 Farmland 7,528 — — — Total real estate 10,225 400 7,871 1,600 Other commercial — — 114 — Total Loans $ 10,225 $ 400 $ 7,985 $ 1,600 During the first nine months of 2024 the amortized cost balance of collateral-dependent loans increased by $2.2 million due primarily to an agriculture real estate secured loan and a commercial real estate loan, offset by the foreclosure and subsequent sale of an office real estate loan. The weighted average loan-to-value ratio of collateral-dependent loans was 97% at September 30, 2024. There were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of September 30, 2024. Past Due Loans (dollars in thousands, unaudited) September 30, 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 $ — $ — $ — $ — $ 389,293 $ 389,294 Commercial real estate — 79 2,655 2,734 1,333,533 1,336,266 Other construction/land — — — — 5,628 5,629 Farmland 101 — 7,032 7,133 73,620 80,753 Total real estate 101 79 9,687 9,867 1,802,074 1,811,942 Other commercial 130 108 — 238 169,532 169,770 Mortgage warehouse lines — — — — 335,777 335,776 Consumer loans 2 — — 2 3,535 3,537 Total Loans $ 233 $ 187 $ 9,687 $ 10,107 $ 2,310,918 $ 2,321,025 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 certain cases, the Company provides multiple types of 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 tables present the amortized cost basis of loans at September 30, 2024, that were both experiencing financial difficulty and modified during the three and nine months ended September 30, 2024, by class and by type of modification. There were no modifications of loans to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023. 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, unaudited): Three months ended September 30, 2024 Principal Forgiveness Payment Delay Term Extension Combination Term Extension Interest Rate Reduction Total Class of Financing Receivable Real estate: Farmland — — 299 — 0.37% Total $ — $ — $ 299 $ — 0.01% Nine months ended September 30, 2024 Principal Forgiveness Payment Delay Term Extension Combination Term Extension Interest Rate Reduction Total Class of Financing Receivable Real estate: Other construction/land — — 224 — 3.98% Farmland — — 299 — 0.37% Total real estate — — 523 — 0.03% Other commercial — — 153 — 0.09% Total $ — $ — $ 676 $ — 0.03% The following tables present the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three and nine months ended September 30, 2024 (dollars in thousands, unaudited): Three months ended September 30, 2024 Principal Forgiveness Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (years) Real estate: Farmland $ — — 10.00 Nine months ended September 30, 2024 Principal Forgiveness Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (years) Real estate: Other construction/land $ — — 3.00 Farmland $ — — 10.00 Other commercial $ — — 3.99 There were no payment defaults on loans previously modified in the preceding 12 months for either of the periods ending September 30, 2024, and 2023. For the purpose of this disclosure the Company defines a payment default as 90 days past due. The Company had $0.1 million in additional funds committed on loans which have been modified to borrowers experiencing financial difficulty as of September 30, 2024 and none as of September 30, 2023. 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. Loan Credit Quality by Vintage (dollars in thousands, unaudited) September 30, 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 $ — $ — $ 97,489 $ 221,091 $ 7,457 $ 49,099 $ 10,336 $ 3,289 $ 388,762 Special mention — — — — — 261 — 24 285 Substandard — — — — — 70 18 159 247 Subtotal — — 97,489 221,091 7,457 49,430 10,354 3,472 389,294 Commercial real estate Pass 85,955 100,706 216,755 45,170 435,589 368,807 26,548 — 1,279,529 Special mention — 143 — — 24,360 10,023 1,441 — 35,967 Substandard — — — — 14,170 6,600 — — 20,770 Subtotal 85,955 100,849 216,755 45,170 474,119 385,430 27,989 — 1,336,266 Other construction/land Pass 224 350 — — 3,451 1,603 — — 5,629 Special mention — — — — — — — — — Substandard — — — — — — — — — Subtotal 224 350 — — 3,451 1,603 — — 5,629 Farmland Pass 12,218 5,348 9,176 11,194 1,887 13,883 7,736 672 62,114 Special mention — 1,778 — — 824 8,070 — — 10,672 Substandard — — — 396 702 6,768 101 — 7,967 Subtotal 12,218 7,126 9,176 11,590 3,413 28,721 7,837 672 80,753 Other commercial Pass 4,656 18,059 5,037 1,088 6,315 11,616 102,227 997 149,995 Special mention 15 — — 12 185 8 15,776 3,620 19,616 Substandard — 70 — 38 — 36 15 — 159 Subtotal 4,671 18,129 5,037 1,138 6,500 11,660 118,018 4,617 169,770 Mortgage warehouse lines Pass — — — — — — 335,777 — 335,776 Subtotal — — — — — — 335,777 — 335,776 Consumer loans Pass 848 463 135 60 56 184 1,774 — 3,520 Special mention — 11 — — — — 2 — 13 Substandard 4 — — — — — — — 4 Subtotal 852 474 135 60 56 184 1,776 — 3,537 Total $ 103,920 $ 126,928 $ 328,592 $ 279,049 $ 494,996 $ 477,028 $ 501,750 $ 8,761 $ 2,321,025 Gross charge-offs $ 1,173 $ 25 $ 6 $ 3 - $ 2,438 $ 413 $ 281 $ — $ 4,339 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 Purchased credit deteriorated (“PCD”) loans are loans acquired or purchased, which as of acquisition, had evidence of more than insignificant credit deterioration since origination. As of September 30, 2024, the Company had no loans categorized as PCD. The model used for calculating the Company’s ACL is refreshed periodically, most recently in the third quarter of 2024. As a result of this refresh process the Company changed to a Multi-factor Regression Model from a Single Factor Regression Model which was used in previous periods. Additionally, legacy peer groups were expanded to include California banks with an asset size between $1.5 billion to $10 billion. The Company’s ACL is calculated quarterly, with any difference in the calculated ACL and the recorded ACL adjusted 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 periodically, 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 multiple factor regression models utilized as of September 30, 2024, for Residential Real Estate loans relied upon reasonable and supportable forecasts of the National Unemployment Rate and House Price Index (HPI). The call code multiple factor regression models utilized as of September 30, 2024, for Commercial Real Estate and Other Construction loans relied upon reasonable and supportable forecasts of the National Unemployment Rate and Gross Domestic Product (GDP). Management selected the National Unemployment Rate, HPI, and GDP as the drivers of quantitative portion of collectively evaluated 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 Federal Open Market Committee (“FOMC”) forecast and given the widespread familiarity of stakeholders with these economic metrics. The quantitative reserves for Farmland, Agricultural Production and Consumer loans are calculated using a Remaining Life methodology where average historical 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 peer 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 Company’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 judgment. 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 ● 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 September 30, 2024 and 2023, 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 September 30, 2024, and 2023: Allowance for Credit Losses (dollars in thousands, unaudited) Residential Real Estate Commercial Real Estate Farmland & Agricultural Production Commercial & Industrial Mortgage Warehouse Consumer Total Allowance for credit losses: Balance, June 30, 2024 $ 2,522 $ 16,666 $ 637 $ 814 $ 685 $ 316 $ 21,640 Charge-offs — 31 — (39) — (389) (397) Recoveries — — — 16 — 211 227 (Benefit) provision for credit losses (885) 1,445 174 485 (218) 239 1,240 Balance, September 30, 2024 $ 1,637 $ 18,142 $ 811 $ 1,276 $ 467 $ 377 $ 22,710 Residential Real Estate Commercial Real Estate Farmland & Agricultural Production Commercial & Industrial Mortgage Warehouse Consumer Total Allowance for credit losses: Balance, June 30, 2023 $ 3,037 $ 17,373 $ 497 $ 1,676 $ 144 $ 283 $ 23,010 Charge-offs — — — (116) — (425) (541) Recoveries — — 54 170 — 250 474 (Benefit) provision for credit losses (115) 501 40 (481) (36) 208 117 Balance, September 30, 2023 $ 2,922 $ 17,874 $ 591 $ 1,249 $ 108 $ 316 $ 23,060 The following tables present the activity in the allowance for credit losses by portfolio segment for the nine months ended September 30, 2024 and 2023: 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 — (2,438) (410) (365) — (1,126) (4,339) Recoveries 60 — — 559 — 672 1,291 (Benefit) provision for credit losses (1,150) 2,026 635 (66) 293 520 2,258 Balance, September 30, 2024 $ 1,637 $ 18,142 $ 811 $ 1,276 $ 467 $ 377 $ 22,710 Residential Real Estate Commercial Real Estate Farmland & Agricultural Production Commercial & Industrial Mortgage Warehouse Consumer Total Allowance for credit losses: Balance, December 31, 2022 $ 3,251 $ 17,732 $ 458 $ 1,233 $ 72 $ 314 $ 23,060 Charge-offs — — (1,277) ( |
