| Loans | Loans Loans, net of deferred loan fees are comprised of the following: (In thousands) June 30, 2023 December 31, 2022 Commercial and industrial: Commercial and business loans $ 52,800 $ 57,770 Government program loans 127 132 Total commercial and industrial 52,927 57,902 Real estate mortgage: Commercial real estate 403,216 398,115 Residential mortgages 265,858 273,357 Home improvement and home equity loans 43 49 Total real estate mortgage 669,117 671,521 Real estate construction and development 135,300 153,374 Agricultural 57,666 52,722 Installment and student loans 45,111 44,659 Total loans $ 960,121 $ 980,178 The Company’s directly-originated loans are predominantly in the San Joaquin Valley and the greater Oakhurst/East Madera County area, as well as the Campbell area of Santa Clara County. The Company’s participation loans with other financial institutions are primarily in the state of California. Commercial and industrial loans, representing 5.5% of total loans at June 30, 2023 and 5.9% at December 31, 2022, are generally made to support the ongoing operations of small- to medium-sized commercial businesses. Commercial and industrial loans have a high degree of industry diversification and provide working capital, financing for the purchase of manufacturing plants and equipment, or funding for growth and general expansion of businesses. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases, or other collateral including real estate; the remainder are unsecured. Extensions of credit are predicated upon the financial capacity of the borrower and repayment is generally from the cash flow of the borrower. Real estate mortgage loans, representing 69.7% of total loans at June 30, 2023 and 68.5% at December 31, 2022, are typically secured by either trust deeds on commercial property or single family residences. Repayment of real estate mortgage loans generally comes from the cash flow of the borrower and or guarantor(s). • Commercial real estate mortgage loans comprise the largest segment of this loan category and are available for both income-producing and non-income-producing commercial properties, including: office buildings, shopping centers, apartments and motels, owner occupied buildings, manufacturing facilities, and more. Commercial real estate mortgage loans can also be used to refinance existing debt. These loans are typically repaid from the borrower’s business operations, rental income associated with the real property, or personal assets. • Residential mortgage loans are provided to individuals to finance or refinance single-family residences. Residential mortgages are not a primary business line offered by the Company, and a majority are conventional mortgages that were purchased as a pool. • Home improvement and home equity loans comprise a relatively small portion of total real estate mortgage loans. Home equity loans are generally secured by junior trust deeds, but may be secured by 1 st trust deeds. Real estate construction and development loans, representing 14.1% of total loans at June 30, 2023 and 15.5% at December 31, 2022, consist of loans for residential and commercial construction projects, as well as land acquisition and development, and land held for future development. Loans in this category are secured by real estate, including improved- and unimproved-land, as well as single-family residential, multi-family residential, and commercial properties in various stages of completion. All real estate loans have established equity requirements. Repayment on construction loans generally comes from long-term mortgages with other lending institutions obtained at completion of the project or from the sale of the constructed homes to individuals. Agricultural loans, representing 6.0% of total loans at June 30, 2023 and 5.4% at December 31, 2022, are generally secured by land, equipment, inventory, and receivables. Repayment is from the cash flow of the borrower. Installment loans, which represented 4.7% of total loans at June 30, 2023 and 4.6% at December 31, 2022, generally consist of student loans; loans to individuals for household, family and other personal expenditures; automobiles; or other consumer items. See Note 4 - Student Loans for specific information on the student loan portfolio. In the normal course of business, the Company is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. At June 30, 2023 and December 31, 2022, these financial instruments include commitments to extend credit of $224.4 million and $190.2 million, respectively, and standby letters of credit of $1.2 million and $1.6 million for the same period ends, respectively. These instruments involve elements of credit risk in excess of the amount recognized on the consolidated balance sheet. The contract amounts of these instruments reflect the extent of the involvement the Company has in off-balance sheet financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the counterparty to these financial instruments is represented by the contractual amounts of those instruments. The Company applies the same credit policies used for on-balance sheet instruments. Commitments to extend credit continue as long as there is no violation of any condition established in the customer’s contract. Substantially all of these commitments are at floating interest rates based on the prime rate and generally have fixed expiration dates. The Company evaluates each customer’s creditworthiness on a case-by-case basis and collateral may be required in some cases. Collateral held varies but includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate, and income-producing properties. Standby letters of credit are generally unsecured and are issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Past Due Loans The Company monitors delinquency and potential problem loans on an ongoing basis through weekly reports to the loan committee and monthly reports to the Board of Directors. The following is a summary of the amortized cost of delinquent loans at June 30, 2023: (In thousands) Loans Loans Loans Total Past Due Loans Current Loans Total Loans Accruing Loans 90 or More Days Past Due Commercial and business loans $ — $ — $ — $ — $ 52,800 $ 52,800 $ — Government program loans — — — — 127 127 — Total commercial and industrial — — — — 52,927 52,927 — Commercial real estate loans — — — — 403,216 403,216 — Residential mortgages 573 — — 573 265,285 265,858 — Home improvement and home equity loans 6 — — 6 37 43 — Total real estate mortgage 579 — — 579 668,538 669,117 — Real estate construction and development loans — — 11,390 11,390 123,910 135,300 — Agricultural loans — — 73 73 57,593 57,666 — Installment and student loans 984 215 171 1,370 43,530 44,900 171 Overdraft protection lines — — — — 12 12 — Overdrafts — — — — 199 199 — Total installment and student loans 984 215 171 1,370 43,741 45,111 171 Total loans $ 1,563 $ 215 $ 11,634 $ 13,412 $ 946,709 $ 960,121 $ 171 The following is a summary of the amortized cost of delinquent loans at December 31, 2022: (In thousands) Loans Loans Loans Total Past Due Loans Current Loans Total Loans Accruing Loans 90 or More Days Past Due Commercial and business loans $ — $ — $ — $ — $ 57,770 $ 57,770 $ — Government program loans — — — — 132 132 — Total commercial and industrial — — — — 57,902 57,902 — Commercial real estate loans — — — — 398,115 398,115 — Residential mortgages — — — — 273,357 273,357 — Home improvement and home equity loans 8 — — 8 41 49 — Total real estate mortgage 8 — — 8 671,513 671,521 — Real estate construction and development loans — — 12,545 12,545 140,829 153,374 — Agricultural loans — — 108 108 52,614 52,722 — Installment and student loans 546 642 252 1,440 42,714 44,154 252 Overdraft protection lines — — — — 17 17 — Overdrafts — — — — 488 488 — Total installment and student loans 546 642 252 1,440 43,219 44,659 252 Total loans $ 554 $ 642 $ 12,905 $ 14,101 $ 966,077 $ 980,178 $ 252 Nonaccrual Loans Loans are placed on nonaccrual status under the following circumstances: - When there is doubt regarding the full repayment of interest and principal. - When principal and/or interest on the loan has been in default for a period of 90 days or more, unless the asset is both well secured and in the process of collection that will result in repayment in the near future. - When the loan is identified as having loss elements and/or is risk rated “8” Doubtful. Loans on nonaccrual status are usually returned to accrual status when all delinquent principal and/or interest has been brought current, when there is no identified element of loss, and when current and continued satisfactory performance is expected. Return to accrual is generally demonstrated through the timely receipt of at least six monthly payments on a loan with monthly amortization. There was no interest income recognized on nonaccrual loans for the six months ended June 30, 2023 and 2022. There were no remaining undisbursed commitments to extend credit on nonaccrual loans at June 30, 2023 or December 31, 2022. The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 89 days and still accruing: June 30, 2023 December 31, 2022 (In thousands) Nonaccrual Loans With No Allowance For Credit Losses Nonaccrual Loans Loans past due over 89 Days Still Accruing Nonaccrual Loans With No Allowance For Credit Losses Nonaccrual Loans Loans Past Due Over 89 Days Still Accruing Real estate construction and development loans $ 13,142 $ 13,142 $ — $ 14,436 $ 14,436 $ — Agricultural loans — 73 — 108 — Installment and student loans — — 171 252 Total $ 13,142 $ 13,215 $ 171 $ 14,436 $ 14,544 $ 252 Credit Quality Indicators As part of its credit monitoring program, the Company utilizes a risk rating system to quantify the risk the Company estimates it has assumed during the life of a loan. This system rates the strength of the borrower and the facility or transaction, and is designed to provide a program for risk management and early detection of problems. For each new credit approval, credit extension, renewal, or modification of existing credit facilities, the Company assigns risk ratings utilizing the rating scale identified in this policy. In addition, on an on-going basis, loans and credit facilities are reviewed for internal and external influences impacting the credit facility that would warrant a change in the risk rating. Each credit facility is given a risk rating that takes into account factors that materially affect credit quality. When assigning risk ratings, the Company evaluates two risk rating approaches, a facility rating and a borrower rating: Facility Rating: The facility rating is determined by the analysis of positive and negative factors that may indicate that the quality of a particular loan or credit arrangement requires a different risk rating than that assigned to the borrower. The Company assesses the risk impact of these factors: Collateral - The rating may be affected by the type and quality of the collateral, the degree of coverage, the economic life of the collateral, the liquidation value, and the Company's ability to dispose of the collateral. Guarantees - The value of third party support arrangements varies widely. Unconditional guaranties from persons with demonstrable ability to perform are more substantial than that of persons closely-related to the borrower who offer only modest support. Unusual Terms - Credit may be extended on terms that subject the Company to a higher level of risk than indicated in the rating of the borrower. Borrower Rating: The borrower rating is a measure of loss possibility based on the historical, current, and anticipated financial characteristics of the borrower in the current risk environment. To determine the rating, the Company considers the following factors: - Quality of management - Liquidity - Leverage/capitalization - Profit margins/earnings trend - Adequacy of financial records - Alternative funding sources - Geographic risk - Industry risk - Cash flow risk - Accounting practices - Asset protection - Extraordinary risks The Company assigns risk ratings to loans, other than consumer loans and other homogeneous loan pools, based on the following scale. The risk ratings are used when determining borrower ratings as well as facility ratings. The Company uses the following risk rating grades: Pass Ratings: - Grades 1 and 2 – These grades include loans to high quality borrowers with high credit quality and sound financial strength. Key financial ratios are generally above industry averages and the borrower has a strong earnings history or net worth. These may be secured by deposit accounts or high-grade investment securities. - Grade 3 – This grade includes loans to borrowers with solid credit quality and minimal risk. The borrower’s balance sheet and financial ratios are generally in line with industry averages, and the borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans assigned this risk rating must have characteristics which place them well above the minimum underwriting requirements for those departments. Asset-based borrowers assigned this rating must exhibit extremely favorable leverage and cash flow characteristics, and consistently demonstrate a high level of unused borrowing capacity. - Grades 4 and 5 – These include pass grade loans to borrowers of acceptable credit quality and risk. The borrower’s balance sheet and financial ratios may be below industry averages, but above the lowest industry quartile. Leverage is above and liquidity is below industry averages. Inadequacies evident in financial performance and/or management sufficiency are offset by readily available features of support, such as adequate collateral, or good guarantors having the liquid assets and/or cash flow capacity to repay the debt. Although, the borrower may have recognized a loss over three Special Mention Rating: - Grade 6 – This grade includes loans that are currently protected but potentially weak. This is generally an interim classification and these loans will typically be upgraded to an acceptable rating or downgraded to a substandard rating within a reasonable time period. Weaknesses in special mention loans may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. Special mention loans are often loans with weaknesses inherent in the loan origination and loan servicing, and may have some technical deficiencies. This designation indicates a distinct probability that the classification will deteriorate to a more adverse class if the noted deficiencies are not addressed by the loan officer or loan management. Substandard Rating: - Grade 7 – This grade includes substandard loans which are inadequately supported by the current sound net worth and paying capacity of the borrower or the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses, that may impair the regular liquidation of the debt. When a loan has been downgraded to substandard, there exists a distinct possibility that the Company will sustain a loss if the deficiencies are not corrected. Doubtful Ratings: - Grade 8 – This grade includes doubtful loans that exhibit the same characteristics as substandard loans. Loan weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high but, due to pending factors which may work toward the strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include a proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. - Grade 9 – This grade includes loans classified as loss which are considered uncollectible and of such little value that their continuance as bankable-assets is not warranted. This classification does not mean that the asset has no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset even though partial recovery may be achieved in the future. The following table presents loans by class, net of deferred fees, by risk rating and period indicated as of June 30, 2023: Term Loans Amortized Cost Basis by Origination Year - As of June 30, 2023 Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans (In thousands) 2023 2022 2021 2020 2019 Prior Total Commercial and business Pass $ 3,046 $ 4,856 $ 1,343 $ 958 $ 16 $ 1,132 $ 41,448 $ — $ 52,799 Special Mention — — — — — — 1 — 1 Substandard — — — — — — — — — Doubtful — — — — — — — — — 3,046 4,856 1,343 958 16 1,132 41,449 — 52,800 Government program Pass — — — 6 — 121 — — 127 Special Mention — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — — — — 6 — 121 — — 127 Commercial real estate Pass 26,005 102,723 36,314 59,724 53,770 110,099 1,797 — 390,432 Special Mention — — — 4,997 7,787 — — — 12,784 Substandard — — — — — — — — — Doubtful — — — — — — — — — 26,005 102,723 36,314 64,721 61,557 110,099 1,797 — 403,216 Residential mortgages Not graded — 25,074 210,862 2,335 — 10,300 — — 248,571 Pass 1,995 1,925 5,465 1,902 4,193 1,807 — — 17,287 Special Mention — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — 1,995 26,999 216,327 4,237 4,193 12,107 — — 265,858 Home improvement and home equity Not graded — — — — — 37 — — 37 Pass — — — — — 6 — — 6 Special Mention — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — — — — — — 43 — — 43 Real estate construction and development Pass 12,960 13,364 21,632 24,323 180 5,174 44,525 — 122,158 Special Mention — — — — — — — — — Substandard — — — 3,524 — 9,618 — — 13,142 Doubtful — — — — — — — — — 12,960 13,364 21,632 27,847 180 14,792 44,525 — 135,300 Agricultural Pass — 6,651 465 3,035 1,691 12,830 31,662 — 56,334 Special Mention — — — 513 — 356 — — 869 Substandard — — — — — 73 390 — 463 Doubtful — — — — — — — — — — 6,651 465 3,548 1,691 13,259 32,052 — 57,666 Installment and student loans Not graded 667 310 193 162 529 41,225 736 — 43,822 Pass 1,288 — — — — — — — 1,288 Special Mention — — — — — — — — — Substandard — — — — — — 1 — 1 Doubtful — — — — — — — — — 1,955 310 193 162 529 41,225 737 — 45,111 Total Loans $ 45,961 $ 154,903 $ 276,274 $ 101,479 $ 68,166 $ 192,778 $ 120,560 $ — $ 960,121 Allowance for Credit Losses on Loans The Company adopted ASU 2016-13, Financial Instrument-Credit Losses (Topic 326), effective January 1, 2023. This loss measurement, which uses the current expected credit loss (CECL) cohort methodology analysis, relies on segmenting the loan portfolio into pools with similar risks, tracking the performance of the pools over time, and using the data to determine pool loss experience. Management estimates the allowance for credit loss balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Company’s historical loss experience from 2006 to 2023. The Company expects that the markets in which it operates will experience a slight decline in economic conditions and an increase in unemployment rates and levels and trends of delinquencies over the next two years. Management has adjusted the historical loss experience for these expectations. The Company analyzes risk characteristics inherent in each loan portfolio segment as part of the quarterly review of the adequacy of the allowance for credit losses on loans. The following summarizes some of the key risk characteristics for the ten segments of the loan portfolio: Commercial and industrial loans – Commercial loans are subject to the effects of economic cycles and tend to exhibit increased risk as economic conditions deteriorate or economic downturn are prolonged. The Company considers this segment to be one of higher risk given the size of individual loans and the balances in the overall portfolio. Government program loans – This is a relatively small part of the Company’s loan portfolio, but has historically had a high percentage of loans that have migrated from pass to substandard given their vulnerability to economic cycles. Commercial real estate loans – This segment is considered to have more risk due to the vulnerability of commercial businesses to economic cycles as well as their exposure to fluctuations in real estate prices. Losses in this segment have been historically low because most loans are real estate-secured, and the Bank maintains appropriate loan-to-value ratios. Residential mortgages – This segment is considered to have low risk factors based on the past experienced of both the Company and peers. Loans in this category are secured by first deeds of trust. Home improvement and home equity loans – Because of their junior lien position, these loans have an inherently higher risk level. Real estate construction and development loans – This segment of loans is considered to have a higher risk profile due to construction issues and market value fluctuations in conjunction with normal credit risks. Agricultural loans – This segment is considered to have risks associated with weather, insects, marketing issues, and crop concentration. Additionally, California may experience severe droughts, which can significantly harm the business of customers and the credit quality of the loans to those customers. Water resources and related issues affecting customers are closely monitored. Signs of deterioration within this loan portfolio are closely monitored in an effort to manage credit quality and promote early efforts to work with borrowers in order to mitigate any potential losses. Installment, overdrafts, and overdraft protection lines – This segment is higher risk because most of the loans are unsecured. Additionally, in the case of student loans, there are increased risks associated with liquidity as there is a significant time lag between funding of a student loan and eventual repayment. The following summarizes the activity in the allowance for credit losses by loan category: Three Months Ended June 30, 2023 (In thousands) Commercial and Industrial Real Estate Mortgage Real Estate Construction Development Agricultural Installment and Student Loans Total Beginning balance $ 1,908 $ 3,705 $ 3,587 $ 1,256 $ 5,166 $ 15,622 Provision (recapture of provision) for credit losses (1) 98 (5) (74) 248 689 956 Charge-offs — — — — (518) (518) Recoveries 1 31 — — 18 50 Net recoveries (charge-offs) 1 31 — — (500) (468) Ending balance $ 2,007 $ 3,731 $ 3,513 $ 1,504 $ 5,355 $ 16,110 (1) Includes a $135,000 provision for unfunded loan commitments. Three Months Ended June 30, 2022 (In thousands) Commercial and Industrial Real Estate Mortgage Real Estate Construction Development Agricultural Installment and Student Loans Unallocated Total Beginning balance $ 559 $ 1,295 $ 2,897 $ 957 $ 2,632 $ 936 $ 9,276 Provision (recapture of provision) for credit losses 277 1 631 143 (1) (445) 606 Charge-offs — — — — (6) — (6) Recoveries — 2 — 20 9 — 31 Net (charge-offs) recoveries — 2 — 20 3 — 25 Ending balance $ 836 $ 1,298 $ 3,528 $ 1,120 $ 2,634 $ 491 $ 9,907 Six Months Ended June 30, 2023 (In thousands) Commercial and Industrial Real Estate Mortgage Real Estate Construction Development Agricultural Installment and Student Loans Total Beginning balance, prior to adoption of ASC 326 $ 955 $ 1,363 $ 3,409 $ 525 $ 3,930 $ 10,182 Impact of ASC 326 adoption 1,336 2,359 721 1,025 926 6,367 Provision (recapture of provision) for credit losses (1) (285) (42) (617) (46) 1,453 463 Charge-offs — — — — (995) (995) Recoveries 1 51 — — 41 93 Net recoveries (charge-offs) 1 51 — — (954) (902) Ending balance $ 2,007 $ 3,731 $ 3,513 $ 1,504 $ 5,355 $ 16,110 (1) Includes a $135,000 provision for unfunded loan commitments. Six Months Ended June 30, 2022 (In thousands) Commercial and Industrial Real Estate Mortgage Real Estate Construction Development Agricultural Installment and Student Loans Unallocated Total Beginning balance $ 597 $ 1,174 $ 2,840 $ 1,233 $ 2,720 $ 769 $ 9,333 Provision (recapture of provision) for credit losses (29) 118 688 (149) 261 (278) 611 Charge-offs — — — — (364) — (364) Recoveries 268 6 — 36 17 — 327 Net (charge-offs) recoveries 268 6 — 36 (347) — (37) Ending balance $ 836 $ 1,298 $ 3,528 $ 1,120 $ 2,634 $ 491 $ 9,907 Collateral-Dependent Loans A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the recorded investment in collateral-dependent loans by type of loan: June 30, 2023 December 31, 2022 (Dollars in thousands) Amount Number of Collateral-Dependent Loans Amount Number of Collateral-Dependent Loans Real estate construction and development loans $ 13,142 4 $ 14,436 4 Agricultural loans 390 1 108 2 Total $ 13,532 5 $ 14,544 6 Reserve for Unfunded Commitments The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit, and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet loan commitments in the same manner as it evaluates credit risk within the loan portfolio. The adoption of CECL as of January 1, 2023, required a cumulative adjustment of $273,000 to the reserve for unfunded loan commitments, increasing the liability balance to $805,000, post adoption. There was a $135,000 provision for unfunded loan commitments for the quarter ended June 30, 2023 increasing the liability balance to $940,000. There was no provision made during the first quarter. The reserve for the unfunded loan commitments is a liability on the Company’s consolidated financial statements and is included in other liabilities. Loan Modifications |
