10-Q 1 ovly20240331_10q.htm FORM 10-Q ovly20240331_10q.htm
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Table of Contents


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

 

OR

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to        

 

 

Commission file number: 001-34142

 

OAK VALLEY BANCORP

(Exact name of registrant as specified in its charter)

 

California

26-2326676

State or other jurisdiction of

I.R.S. Employer

incorporation or organization

Identification No.

 

125 N. Third Ave., Oakdale, CA  95361

(Address of principal executive offices, zip code)

 

(209) 848-2265

Registrant’s telephone number, including area code

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

OVLY

The Nasdaq Stock Market, LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities

Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),

and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒  No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☒  No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company 

 

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,359,556 shares of common stock outstanding as of May 3, 2024.  


 

 

 

Oak Valley Bancorp

March 31, 2024

 

Table of Contents

 

   

Page

PART I  FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements

1
     

Condensed Consolidated Balance Sheets at March 31, 2024 (Unaudited) and December 31, 2023

1
     

Condensed Consolidated Statements of Income for the three-month periods ended March 31, 2024 and March 31, 2023 (Unaudited)

2
   

Condensed Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2024 and March 31, 2023 (Unaudited)

3
     

Condensed Consolidated Statements of Changes in Shareholders Equity for the three-month periods ended March 31, 2024 and March 31, 2023 (Unaudited)

4
     

Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2024 and March 31, 2023 (Unaudited)

5
     

Notes to Condensed Consolidated Financial Statements (Unaudited)

6
     

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

23
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37
     

Item 4.

Controls and Procedures

37
     

PART II  OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

38
     

Item 1A.

Risk Factors

38
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39
     

Item 3.

Defaults Upon Senior Securities

39
     

Item 4.

Mine Safety Disclosures

39
     

Item 5.

Other Information

39
     

Item 6.

Exhibits

40

 

 

PART I FINANCIAL STATEMENTS

 

Item 1. Financial Statements

 

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

(dollars in thousands)

 

March 31,

   

December 31,

 
   

2024

   

2023

 

ASSETS

               

Cash and due from banks

  $ 144,049     $ 180,068  

Federal funds sold

    25,680       36,500  

Cash and cash equivalents

    169,729       216,568  
                 

Securities - available for sale

    505,091       518,078  

Securities - equity investments

    3,102       3,132  
Loans, net of allowance for credit losses of $10,922 and $10,896 at March 31, 2024 and December 31, 2023, respectively     1,027,323       1,004,277  

Cash surrender value of life insurance

    31,728       31,506  

Bank premises and equipment, net

    15,673       15,865  

Goodwill and other intangible assets, net

    3,452       3,473  

Deferred tax asset

    14,579       13,247  

Interest receivable and other assets

    35,062       36,276  
    $ 1,805,739     $ 1,842,422  
                 

LIABILITIES AND SHAREHOLDERS EQUITY

               
                 

Deposits

  $ 1,612,400     $ 1,650,534  

Interest payable and other liabilities

    26,423       25,796  

Total liabilities

    1,638,823       1,676,330  
                 

Commitments and contingent liabilities

               
                 

Shareholders’ equity

               
Common stock, no par value; 50,000,000 shares authorized, 8,359,556 and 8,293,168 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively     25,435       25,435  

Additional paid-in capital

    5,647       5,512  

Retained earnings

    158,162       154,301  

Accumulated other comprehensive loss, net of tax

    (22,328 )     (19,156 )

Total shareholders’ equity

    166,916       166,092  
                 
    $ 1,805,739     $ 1,842,422  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

(dollars in thousands, except per share amounts)

 

THREE MONTHS ENDED

MARCH 31,

 
   

2024

   

2023

 

INTEREST INCOME

               

Interest and fees on loans

  $ 12,600     $ 10,471  

Interest on securities

    5,082       5,125  

Interest on federal funds sold

    331       288  

Interest on deposits with banks

    1,979       4,112  

Total interest income

    19,992       19,996  
                 

INTEREST EXPENSE

               

Deposits

    2,751       452  

Federal funds purchased

    0       1  

Total interest expense

    2,751       453  
                 

Net interest income

    17,241       19,543  

Provision for (reversal of) credit losses

    0       (460 )

Net interest income after provision for (reversal of) credit losses

    17,241       20,003  
                 

NON-INTEREST INCOME

               

Service charges on deposits

    406       416  

Debit card transaction fee income

    423       405  

Earnings on cash surrender value of life insurance

    222       189  

Mortgage commissions

    9       9  

Gains on sales and calls of available-for-sale securities

    80       143  

Other

    379       493  

Total non-interest income

    1,519       1,655  
                 

NON-INTEREST EXPENSE

               

Salaries and employee benefits

    7,322       6,439  

Occupancy expenses

    1,164       1,187  

Data processing fees

    700       612  

Regulatory assessments (FDIC & DFPI)

    290       195  

Other operating expenses

    2,053       1,324  

Total non-interest expense

    11,529       9,757  
                 

Net income before provision for income taxes

    7,231       11,901  
                 

Total provision for income taxes

    1,504       2,676  

Net Income

  $ 5,727     $ 9,225  
                 

Net income per share

  $ 0.70     $ 1.13  
                 

Net income per diluted share

  $ 0.69     $ 1.12  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

   

THREE MONTHS ENDED

MARCH 31,

 
                 

(dollars in thousands)

 

2024

   

2023

 
                 

Net income

  $ 5,727     $ 9,225  

Other comprehensive income (loss):

         

Unrealized holding (loss) gain arising during the period

    (4,423 )     10,933  

Less: reclassification for net gains included in net income

    (80 )     (143 )

Other comprehensive (loss) income, before tax

    (4,503 )     10,790  

Tax benefit (expense) related to items of other comprehensive income

    1,331       (3,190 )

Total other comprehensive (loss) income

    (3,172 )     7,600  

Comprehensive income

  $ 2,555     $ 16,825  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED)

 

   

THREE MONTHS ENDED MARCH 31, 2024 AND 2023

 
                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Retained

   

Comprehensive

   

Shareholders'

 

(dollars in thousands)

 

Shares

   

Amount

   

Capital

   

Earnings

   

Income (Loss)

   

Equity

 
                                                 

Balances, January 1, 2024

    8,293,168     $ 25,435     $ 5,512     $ 154,301     $ (19,156 )   $ 166,092  

Restricted stock issued

    70,769       0       0       0       0       0  

Restricted stock surrendered for tax withholding

    (4,381 )     0       (107 )     0       0       (107 )

Cash dividends declared $0.225 per share of common stock

    0       0       0       (1,866 )     0       (1,866 )

Stock based compensation

    0       0       242       0       0       242  

Other comprehensive loss

    0       0       0       0       (3,172 )     (3,172 )

Net income

    0       0       0       5,727       0       5,727  

Balances, March 31, 2024

    8,359,556     $ 25,435     $ 5,647     $ 158,162     $ (22,328 )   $ 166,916  
                                                 

Balances, January 1, 2023

    8,257,894     $ 25,435     $ 5,190     $ 126,728     $ (30,727 )   $ 126,626  

Restricted stock issued

    30,196       0       0       0       0       0  

Restricted stock surrendered for tax withholding

    (6,429 )     0       (176 )     0       0       (176 )

Cash dividends declared $0.16 per share of common stock

    0       0       0       (1,321 )     0       (1,321 )

Stock based compensation

    0       0       145       0       0       145  

Other comprehensive gain

    0       0       0       0       7,600       7,600  

CECL adoption adjustments

    0       0       0       (629 )     0       (629 )

Net income

    0       0       0       9,225       0       9,225  

Balances, March 31,2023

    8,281,661     $ 25,435     $ 5,159     $ 134,003     $ (23,127 )   $ 141,470  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

   

THREE MONTHS ENDED

MARCH 31,

 

(dollars in thousands)

 

2024

   

2023

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 5,727     $ 9,225  

Adjustments to reconcile net income to net cash provided by operating activities:

         

Provision for (reversal of) credit losses

    0       (460 )

Increase (decrease) in deferred fees/costs, net

    143       (26 )

Depreciation

    330       340  

Amortization of investment securities, net

    226       288  

Unrealized loss (gain) loss on equity securities

    57       (51 )

Amortization of operating lease right-of-use asset

    (56 )     (59 )

Stock based compensation

    242       145  

Gain on sales and calls of available-for-sale securities

    (80 )     (143 )

Earnings on cash surrender value of life insurance

    (222 )     (189 )

Decrease in deferred tax asset

    (1,332 )     (2,926 )

Increase in interest payable and other liabilities

    627       1,614  

Decrease in interest receivable

    691       702  

Decrease in other assets

    1,931       3,562  

Net cash from operating activities

    8,284       12,022  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Purchases of available-for-sale securities

    (4,980 )     (40,660 )

Purchases of equity securities

    (27 )     (24 )

Proceeds from the sale of available-for-sale securities

    8,149       42,934  

Proceeds from maturities, calls, and principal paydowns of available-for-sale securities

    5,169       3,259  

Net increase in loans

    (23,189 )     (10,981 )

Purchases of premises and equipment

    (138 )     (162 )

Net cash used in investing activities

    (15,016 )     (5,634 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Shareholder cash dividends paid

    (1,866 )     (1,321 )

Net decrease in demand deposits and savings accounts

    (50,464 )     (41,154 )

Net increase (decrease) in time deposits

    12,330       (3,967 )

Tax withholding payments on vested restricted shares surrendered

    (107 )     (176 )

Net cash used in financing activities

    (40,107 )     (46,618 )
                 

NET DECREASE IN CASH AND CASH EQUIVALENTS

    (46,839 )     (40,230 )
                 

CASH AND CASH EQUIVALENTS, beginning of period

    216,568       429,633  
                 

CASH AND CASH EQUIVALENTS, end of period

  $ 169,729     $ 389,403  
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

               

Cash paid during the period for:

               

Interest

  $ 2,708     $ 448  

Operating leases

  $ 342     $ 386  

Income taxes

  $ 11     $ 0  
                 

NON-CASH INVESTING ACTIVITIES:

               

Change in unrealized (loss) gain on securities

  $ (4,503 )   $ 10,790  

Right-of-use asset obtained in exchange for new operating lease liability

  $ -     $ (444 )

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

OAK VALLEY BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

NOTE 1 BASIS OF PRESENTATION

 

Oak Valley Bancorp (“the Company”, “us”, “our”) is the parent holding company for Oak Valley Community Bank (the “Bank”), a California state-chartered bank.  The consolidated financial statements include the accounts of the parent company and its wholly-owned bank subsidiary. Unless otherwise stated, the “Company” refers to the consolidated entity, Oak Valley Bancorp, while the “Bank” refers to Oak Valley Community Bank. All material intercompany transactions have been eliminated. The interim consolidated financial statements included in this Quarterly Report on Form 10-Q are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three-month period ended March 31, 2024 are not necessarily indicative of the results of a full year’s operations. Certain prior period amounts have been reclassified to conform to the current period presentation. There was no effect on net income or shareholders’ equity as previously reported as a result of reclassifications. For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2023.

 

The Company was incorporated under the laws of the State of California on May 31, 1990, and began operations in Oakdale, California on May 28, 1991. The Company operates branches in Oakdale, Sonora, Bridgeport, Bishop, Mammoth Lakes, Modesto, Manteca, Patterson, Turlock, Ripon, Stockton, Escalon, and Sacramento, California. The Bridgeport, Mammoth Lakes, and Bishop branches operate as a separate division, Eastern Sierra Community Bank. The Company’s primary source of revenue is providing loans to customers who are predominantly middle-market businesses.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates reflected in the Company’s consolidated financial statements include the allowance for credit losses and fair value measurements. The estimates and assumptions may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results may differ from these estimates due to the uncertainty of various qualitative factors. Descriptions of our significant accounting policies are included in Note 1. Summary of Accounting Policies in the Notes to Consolidated Financial Statements in the 2023 Annual Report on Form 10-K.

 

 

 

 

NOTE 2 RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments Credit Losses (Topic 326). This update revises the methodology used by financial institutions under GAAP to recognize credit losses in the financial statements.  Previously, GAAP required the use of an “incurred loss” model, whereby financial institutions recognize in current period earnings, incurred credit losses and those inherent in the financial statements, as of the date of the balance sheet.  The “incurred loss” methodology for recognizing credit losses delayed recognition until it is probable that a loss has been incurred. ASU 2016-13 replaces such incurred loss impairment model with a new methodology that requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. This ASU guidance results in a new model for estimating the allowance for credit losses, commonly referred to as the Current Expected Credit Loss (“CECL”) model.  Under the CECL model, financial institutions are required to estimate future credit losses and recognize those losses in current period earnings.  The amendments within the update were initially effective for fiscal years and all interim periods beginning after December 15, 2019.  In October 2019, FASB approved an amendment that delayed the adoption of this ASU for three years for certain entities including the Company since we are classified as a Smaller Reporting Company. The Company adopted these standards as required on January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. There was no cumulative effect adjustment related to our available-for-sale investment portfolio upon adoption and the Company had no securities designated as held-to-maturity as of January 1, 2023.

 

Results for reporting periods beginning after January 1, 2023 are presented under CECL.  The transition adjustment of the CECL adoption included an increase in the allowance for credit losses of $346,000, an increase of $547,000 to the reserve for unfunded commitments, a $629,000 decrease to retained earnings, and a $264,000 tax benefit recorded as part of the deferred tax asset in the Company’s Consolidated Balance Sheet.

 

 

In March 2020, FASB issued ASU 2020-04 - Reference Rate Reform (Subtopic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU was effective for all entities as of March 12, 2020 through December 31, 2022. In December 2022, FASB Issued ASU 2022-06 to defer the sunset date from December 31, 2022 to December 31, 2024. The ASU did not have a material impact on our consolidated financial statements. As a result of the phase out of LIBOR immediately after June 30, 2023, our loans that were indexed to LIBOR have transitioned to CME Term SOFR, as of March 31, 2024.

 

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings in Accounting Standards Codification (“ASC”) Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, ASU 2022-02 requires entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. ASU 2022-02 became effective on January 1, 2023. The adoption of ASU 2022-02 did not have a significant impact on our consolidated financial statements.

 

In March 2023, the FASB issued ASU No. 2023-02, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force). The amendments in this update permit reporting entities to elect to account for their tax equity investments, regardless of the program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. A reporting entity may make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. Previously, only Low-Income Housing Tax Credit investments were eligible to apply the proportional amortization method. This ASU became effective on January 1, 2024. The adoption of this ASU did not have a material impact on the consolidated financial statements.

 

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07). The update requires enhanced disclosures about significant segment expenses, enhanced interim disclosure requirements, clarification for when multiple segment measures of profit or loss can be disclosed and other requirements intended to improve overall reportable segment disclosures in annual and interim periods. ASU 2023-07 is effective for the Company in the annual period beginning on January 1, 2024 and interim periods beginning on January 1, 2025 with retrospective application to all prior periods presented. Early adoption is permitted. The Company does not expect ASU 2023-07 to have a significant impact on its disclosures as the Company operates as a single segment and reporting unit.

 

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09). ASU 2023-09 requires additional annual disclosures including further disaggregation of information in the rate reconciliation, additional information for reconciling items meeting a quantitative threshold, further disaggregation of income taxes paid and other required disclosures. ASU 2023-09 is effective for the Company in the annual period beginning on January 1, 2025 and applied on a prospective basis with both early adoption and retrospective application permitted. The Company is evaluating the impact of ASU 2023-09 on its income tax disclosures.

 

 

 

 

NOTE 3 SECURITIES

 

Equity Securities

 

The Company held equity securities with fair values of $3,102,000 and $3,132,000 as of March 31, 2024 and December 31, 2023, respectively. There were no sales of equity securities during the three-month periods ended March 31, 2024 and 2023. Consistent with ASC 321, Equity Securities, these securities are carried at fair value with the changes in fair value recognized in the condensed consolidated statements of income. Accordingly, the Company recognized a loss of $57,000 during the three-month period ended March 31, 2024, as compared to a gain of $51,000 during the same period of 2023.

 

 

Debt Securities

 

Debt securities have been classified in the financial statements as available for sale. The amortized cost and estimated fair values of debt securities as of March 31, 2024 are as follows:

 

(dollars in thousands)

 

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair Value

 
                                 

Available-for-sale securities:

                               

U.S. agencies

  $ 89,333     $ 9     $ (5,199 )   $ 84,143  

Collateralized mortgage obligations

    8,866       0       (516 )     8,350  

Municipalities

    341,587       1,550       (23,351 )     319,786  

SBA pools

    1,172       2       (2 )     1,172  

Corporate debt

    45,500       21       (3,382 )     42,139  

Asset backed securities

    50,332       153       (984 )     49,501  
    $ 536,790     $ 1,735     $ (33,434 )   $ 505,091  

 

 

The following table details the gross unrealized losses and fair values of debt securities aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2024.

 

(dollars in thousands)

        Less than 12 months     12 months or more     Total  

Description of Securities

 

Number of

Securities

   

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

 

U.S. agencies

    52     $ 4,954     $ (101 )   $ 77,663     $ (5,098 )   $ 82,617     $ (5,199 )

Collateralized mortgage obligations

    6       4,630       (71 )     3,719       (445 )     8,349       (516 )

Municipalities

    119       51,064       (661 )     208,604       (22,690 )     259,668       (23,351 )

SBA pools

    3       113       0       314       (2 )     427       (2 )

Corporate debt

    11       0       0       38,118       (3,382 )     38,118       (3,382 )

Asset backed securities

    17       688       (3 )     30,348       (981 )     31,036       (984 )

Total temporarily impaired securities

    208     $ 61,449     $ (836 )   $ 358,766     $ (32,598 )   $ 420,215     $ (33,434 )

 

 

For available-for-sale debt securities in an unrealized loss position, management evaluates whether the decline in fair value is a reflection of credit deterioration or other factors. In performing this evaluation, management considers the extent which fair value has fallen below amortized cost, changes in ratings by rating agencies, and other information indicating a deterioration in repayment capacity of either the underlying issuer or the borrowers providing repayment capacity in a securitization. If management’s evaluation indicates that a credit loss exists then a present value of the expected cash flows is calculated and compared to the amortized cost basis of the security in question and to the degree that the amortized cost basis exceeds the present value an allowance for credit loss (“ACL”) is established, with the caveat that the maximum amount of the reserve on any individual security is the difference between the fair value and amortized cost balance of the security in question. Any unrealized loss that has not been recorded through an ACL is recognized in other comprehensive income. As of March 31, 2024, accrued interest receivable on available-for-sale securities was $4,478,000 and is not included in the tables within this footnote.

 

The unrealized losses are due primarily to rising market yields and not due to credit deterioration. As such, no ACL on available-for-sale securities has been established as of March 31, 2024. The Company does not intend to sell the securities and it is not likely that the Company will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.

 

 

The amortized cost and estimated fair value of debt securities as of March 31, 2024, segregated by contractual maturity or call date, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(dollars in thousands)

 

Amortized

   

Fair

 
   

Cost

   

Value

 

Available-for-sale securities:

               

Due in one year or less

  $ 99,324     $ 94,652  

Due after one year through five years

    145,025       141,716  

Due after five years through ten years

    218,432       199,851  

Due after ten years

    74,009       68,872  
    $ 536,790     $ 505,091  

 

 

The amortized cost and estimated fair values of debt securities as of December 31, 2023 are as follows:

 

(dollars in thousands)

 

Amortized Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair Value

 
                                 

Available-for-sale securities:

                               

U.S. agencies

  $ 84,678     $ 11     $ (4,430 )   $ 80,259  

Collateralized mortgage obligations

    9,108       0       (444 )     8,664  

Municipalities

    345,981       2,792       (19,865 )     328,908  

SBA pools

    1,394       3       (2 )     1,395  

Corporate debt

    47,500       9       (3,992 )     43,517  

Asset backed securities

    56,613       133       (1,411 )     55,335  
    $ 545,274     $ 2,948     $ (30,144 )   $ 518,078  

 

 

The following tables detail the gross unrealized losses and fair values aggregated of debt securities by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2023.

 

(dollars in thousands)

         

Less than 12 months

   

12 months or more

   

Total

 

Description of Securities

 

Number

of

Securities

   

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

 

U.S. agencies

    51     $ 190     $ (3 )   $ 79,556     $ (4,427 )   $ 79,746     $ (4,430 )

Collateralized mortgage obligations

    6       4,791       (1 )     3,873       (443 )     8,664       (444 )

Municipalities

    106       44,859       (453 )     178,812       (19,412 )     223,671       (19,865 )

SBA pools

    4       116       0       472       (2 )     588       (2 )

Corporate debt

    13       0       0       41,508       (3,992 )     41,508       (3,992 )

Asset backed securities

    19       2,123       (8 )     32,535       (1,403 )     34,658       (1,411 )

Total temporarily impaired securities

    199     $ 52,079     $ (465 )   $ 336,756     $ (29,679 )   $ 388,835     $ (30,144 )

 

 

The Company recognized losses of $1,000 on called securities during the three-month period ended March 31, 2024, as compared to no gains or losses during the comparable 2023 period. The Company sold one available-for-sale security during the three-months ended March 31, 2024 with a book value of $1,958,000, resulting in gross gains of $81,000, as compared to 24 securities sold with a book value of $42,791,000, resulting in gross losses of $72,000 and gross gains of $215,000, for a net gain of $143,000 during the three-months ended March 31, 2023.

 

Debt securities carried at $292,234,000 and $288,199,000 as of March 31, 2024 and December 31, 2023, respectively, were pledged to secure deposits of public funds.

 

 

 

NOTE 4 LOANS

 

The Company’s customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. As of March 31, 2024, approximately 87% of the Company’s loans are commercial real estate loans, which include construction loans. Approximately 7% of the Company’s loans are for general commercial uses including professional, retail, and small business. Additionally, 3% of the Company’s loans are for residential real estate and other consumer loans. The remaining 3% are agriculture loans. As of March 31, 2024, accrued interest receivable on loans was $2,987,000 and is not included in the tables within this footnote. Loan totals were as follows:

 

(in thousands)

 

March 31, 2024

   

December 31, 2023

 

Commercial real estate:

               

Construction & land

  $ 69,098     $ 63,060  

Multi-family

    53,707       54,045  

Owner occupied

    215,789       210,407  

Non-owner occupied

    475,328       470,052  

Farmland

    95,491       96,188  

Commercial and industrial

    69,151       65,218  

Consumer

    31,857       31,687  

Agriculture

    29,088       25,922  

Total loans

    1,039,509       1,016,579  
                 

Less:

               

Deferred loan fees and costs, net

    (1,264 )     (1,406 )

Allowance for credit losses

    (10,922 )     (10,896 )

Net loans

  $ 1,027,323     $ 1,004,277  

 

 

Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

 

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

 

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. As of March 31, 2024 and December 31, 2023, respectively, approximately 35% of the outstanding principal balance of the Company’s commercial real estate loans were secured by owner-occupied properties.

 

 

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success.

 

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Significant events can affect the construction industry, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

 

Consumer loans are originated utilizing a computer-based credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans follow bank policy, which include, but are not limited to, a maximum loan-to-value percentage of 80%, a maximum housing and total debt ratio of 36% and 42%, respectively and other specified credit and documentation requirements.

 

Agricultural loans largely consist of real estate loans, development loans, and operating facilities to support crop production, livestock, dairy, and other agricultural interests. Agricultural loans are especially vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions. Other environmental factors such as the availability of water will also affect the production of crops. Underwriting practices include estimating future repayment sources based on information taken from the customer, peer reports, or appraisals. With the cyclicality of agricultural operations, increased focus is placed on access to liquidity and equity to support the operations when faced with unfavorable industry trends as well as the sponsor’s industry experience.

 

The Company maintains an independent loan review function that validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

 

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

No loans were on non-accrual status as of March 31, 2024, December 31, 2023, and March 31, 2023.

 

 

The following table analyzes past due loans including any past due non-accrual loans, segregated by class of loans, as of March 31, 2024 (in thousands):

 

March 31, 2024

 

30-59

Days

Past Due

   

60-89

Days

Past Due

   

90 Days

or More

Past Due

   

Total

Past Due

   

Current

   

Total

   

90 Days

or More

Past Due

and Still

Accruing

 

Commercial real estate:

                                                       

Construction & land

  $ 0     $ 0     $ 0     $ 0     $ 69,098     $ 69,098     $ 0  

Multi-family

    0       0       0       0       53,707       53,707       0  

Owner occupied

    0       0       0       0       215,789       215,789       0  

Non-owner occupied

    0       0       0       0       475,328       475,328       0  

Farmland

    0       0       0       0       95,491       95,491       0  

Commercial and industrial

    0       0       0       0       69,151       69,151       0  

Consumer

    11       0       0       11       31,846       31,857       0  

Agriculture

    0       0       0       0       29,088       29,088       0  

Total

  $ 11     $ 0     $ 0     $ 11     $ 1,039,498     $ 1,039,509     $ 0  

 

 

The following table analyzes past due loans including any past due non-accrual loans, segregated by class of loans, as of December 31, 2023 (in thousands):

 

December 31, 2023

 

30-59
Days
Past Due

   

60-89
Days
Past Due

   

90 Days
or More
Past Due

   

Total
Past Due

   

Current

   

Total

   

90 Days
or More
Past Due
and Still
Accruing

 

Commercial real estate:

                                                       

Construction & land

  $ 0     $ 0     $ 0     $ 0     $ 63,060     $ 63,060     $ 0  

Multi-family

    0       0       0       0       54,045       54,045       0  

Owner occupied

    0       0       0       0       210,407       210,407       0  

Non-owner occupied

    0       0       0       0       470,052       470,052       0  

Farmland

    0       0       0       0       96,188       96,188       0  

Commercial and industrial

    0       0       0       0       65,218       65,218       0  

Consumer

    0       0       0       0       31,687       31,687       0  

Agriculture

    0       0       0       0       25,922       25,922       0  

Total

  $ 0     $ 0     $ 0     $ 0     $ 1,016,579     $ 1,016,579     $ 0  

 

 

Collateral Dependent Loans. Management’s evaluation as to the ultimate collectability of loans includes estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers. Under CECL, loans can be determined to be collateral dependent if foreclosure of the loan’s underlying collateral is probable or as a practical expedient if the borrower is experiencing financial difficulties and the repayment is expected to be provided substantially through the operation or sale of the collateral. Loans are written down to the lower of cost or fair value of underlying collateral, less estimated costs to sell. The Company had no collateral dependent loans as of March 31, 2024 and December 31, 2023.

 

Loan Modification Disclosures Pursuant to ASU 2022-02 - The Company may agree to different types of concessions when modifying a loan. There were no loan modifications to borrowers experiencing financial difficulty, including principal forgiveness, rate reductions, payment deferral or term extension, during the three-months ended March 31, 2024 and 2023.

 

Loan Risk Grades– Quality ratings (Risk Grades) are assigned to all commitments and stand-alone notes. Risk grades define the basic characteristics of commitments or stand-alone note in relation to their risk. All loans are graded using a system that maximizes the loan quality information contained in loan review grades, while ensuring that the system is compatible with the grades used by bank examiners.

 

 

The Company grades loans using the following letter system:

 

1 Exceptional Loan

2 Quality Loan

3A Better Than Acceptable Loan

3B Acceptable Loan

3C Marginally Acceptable Loan

4 (W) Watch Acceptable Loan

5 Special Mention Loan

6 Substandard Loan

7 Doubtful Loan

8 Loss

 

1. Exceptional Loan - Loans with A+ credits that contain very little, if any, risk. Grade 1 loans are considered Pass. To qualify for this rating, the following characteristics must be present:

 

A high level of liquidity and whose debt-servicing capacity exceeds expected obligations by a substantial margin.

 

Where leverage is below average for the industry and earnings are consistent or growing without severe vulnerability to economic cycles.

 

Also included in this rating (but not mandatory unless one or more of the preceding characteristics are missing) are loans that are fully secured and properly margined by our own time instruments or U.S. blue chip securities. To be properly margined, cash collateral must be equal to, or greater than, 110% of the loan amount.

 

2. Quality Loan - Loans with excellent sources of repayment that conform in all respects to bank policy and regulatory requirements. These are also loans for which little repayment risk has been identified. No credit or collateral exceptions. Grade 2 loans are considered Pass. Other factors include: