PLUMAS BANCORP [PLBC] Filings

10-Q 1 plbc20230630_10q.htm FORM 10-Q plbc20230630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
☒	QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2023

☐	TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ___________

COMMISSION FILE NUMBER: 000-49883

PLUMAS BANCORP

(Exact Name of Registrant as Specified in Its Charter)

California	75-2987096
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

5525 Kietzke Lane, Suite 100, Reno, Nevada	89511
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code (775) 786-0907

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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-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 ☒

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

Title of Each Class:	Trading Symbol	Name of Each Exchange on which Registered:
Common Stock, no par value	PLBC	The NASDAQ Stock Market LLC

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 7, 2023: 5,866,048 shares.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

	*June 30,*			*December 31,*
	*2023*			*2022*

Assets
Cash and cash equivalents	$	91,765		$	183,426
Investment securities available for sale, net of allowance for credit losses of $0		468,920			444,703
Loans held for sale		384			2,301
Loans, less allowance for credit losses of $13,385 at June 30, 2023 and $10,717 at December 31, 2022		924,666			903,968
Other real estate owned		83			-
Premises and equipment, net		19,377			18,100
Bank owned life insurance		15,902			16,020
Goodwill		5,502			5,502
Accrued interest receivable and other assets		46,386			47,024
Total assets	$	1,572,985		$	1,621,044

Liabilities and Shareholders’ Equity

Deposits:
Non-interest bearing	$	716,438		$	766,549
Interest bearing		678,722			691,260
Total deposits		1,395,160			1,457,809
Repurchase agreements		20,464			18,624
Accrued interest payable and other liabilities		18,803			15,297
Other borrowings		10,000			-
Junior subordinated deferrable interest debentures		-			10,310
Total liabilities		1,444,427			1,502,040

Commitments and contingencies (Note 5)

Shareholders’ equity:
Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 5,864,448 shares at June 30, 2023 and 5,850,216 at December 31, 2022		27,739			27,372
Retained earnings		139,191			128,388
Accumulated other comprehensive loss, net		(38,372	)		(36,756	)
Total shareholders’ equity		128,558			119,004
Total liabilities and shareholders’ equity	$	1,572,985		$	1,621,044

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

	*For the Three Months Ended*					*For the Six Months Ended*
	*June 30,*					*June 30,*
	*2023*			*2022*		*2023*		*2022*
Interest Income:
Interest and fees on loans	$	13,388		$	10,992	$	26,041	$	21,302
Interest and fees on loans held for sale		5			123		46		429
Interest on investment securities		3,865			1,941		7,593		3,473
Other		965			661		2,330		829
Total interest income		18,223			13,717		36,010		26,033
Interest Expense:
Interest on deposits		864			183		1,331		377
Interest on junior subordinated deferrable interest debentures		-			90		141		179
Other		120			16		150		34
Total interest expense		984			289		1,622		590
Net interest income before provision for credit losses		17,239			13,428		34,388		25,443
Provision for Credit Losses		1,350			400		2,875		700
Net interest income after provision for credit losses		15,889			13,028		31,513		24,743
Non-Interest Income:
Interchange revenue		824			853		1,539		1,615
Service charges		694			604		1,313		1,170
(Loss) gain on sale of loans		(11	)		634		219		2,335
Gain on termination of swaps		-			-		1,707		-
Other		636			573		1,290		1,194
Total non-interest income		2,143			2,664		6,068		6,314
Non-Interest Expenses:
Salaries and employee benefits		4,866			4,238		9,933		8,320
Occupancy and equipment		1,253			1,111		2,593		2,248
Other		2,979			2,684		5,797		5,139
Total non-interest expenses		9,098			8,033		18,323		15,707
Income before provision for income taxes		8,934			7,659		19,258		15,350
Provision for Income Taxes		2,274			1,979		4,973		3,953
Net income	$	6,660		$	5,680	$	14,285	$	11,397

Basic earnings per share	$	1.14		$	0.97	$	2.44	$	1.95
Diluted earnings per share	$	1.12		$	0.96	$	2.41	$	1.93

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

	*For the Three Months Ended*						*For the Six Months Ended*
	*June 30,*						*June 30,*
	*2023*			*2022*			*2023*			*2022*

Net income	$	6,660		$	5,680		$	14,285		$	11,397
Other comprehensive loss:
Change in net unrealized loss on securities		(7,936	)		(17,117	)		(291	)		(40,466	)
Change in unrealized gain on cash flow hedge		-			361			(295	)		1,017
Less: reclassification adjustments for net gain included in net income		-			-			(1,707	)		-
Net unrealized holding loss		(7,936	)		(16,756	)		(2,293	)		(39,449	)
Related tax effect:
Change in net unrealized loss on securities		2,346			5,060			85			11,962
Change in unrealized gain on cash flow hedge		-			(107	)		87			(300	)
Reclassification of gain included in net income		-			-			505			-
Income tax effect		2,346			4,953			677			11,662
Other comprehensive loss		(5,590	)		(11,803	)		(1,616	)		(27,787	)
Total comprehensive income (loss)	$	1,070		$	(6,123	)	$	12,669		$	(16,390	)

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(in thousands, except shares)

	*Common Stock*				*Retained*			*Accumulated Other Comprehensive Income (loss)*			*Total Shareholders’*
	*Shares*		*Amount*		*Earnings*			*(Net of Taxes)*			*Equity*

Balance, December 31, 2021		5,816,991	$	26,801	$	105,681		$	1,600		$	134,082
Net Income						11,397						11,397
Other comprehensive loss									(27,787	)		(27,787	)
Cash dividends on common stock						(1,866	)					(1,866	)
Exercise of stock options and tax effect		27,575		215								215
Stock-based compensation expense				117								117
Balance, June 30, 2022		5,844,566	$	27,133	$	115,212		$	(26,187	)	$	116,158

Balance, December 31, 2022		5,850,216	$	27,372	$	128,388		$	(36,756	)	$	119,004
Cumulative change from adoption of ASU 2016-13						(554	)					(554	)
Net Income						14,285						14,285
Other comprehensive loss									(1,616	)		(1,616	)
Cash dividends on common stock						(2,928	)					(2,928	)
Exercise of stock options and tax effect		14,232		168								168
Stock-based compensation expense				199								199
Balance, June 30, 2023		5,864,448	$	27,739	$	139,191		$	(38,372	)	$	128,558

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	*For the Six Months Ended*
	*June 30,*
	*2023*			*2022*
Cash Flows from Operating Activities:
Net income	$	14,285		$	11,397
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		2,875			700
Change in deferred loan origination costs/fees, net		(249	)		(1,530	)
Depreciation and amortization		778			911
Stock-based compensation expense		199			117
Amortization of investment security premiums		639			548
Accretion of investment security discounts		(393	)		(65	)
(Gain) loss on sale of other vehicles		(10	)		39
Gain on sale of loans held for sale		(219	)		(2,335	)
Loans originated for sale		(1,361	)		(14,189	)
Proceeds from loan sales		5,338			42,152
Earnings on bank-owned life insurance		(204	)		(187	)
Decrease in accrued interest receivable and other assets		804			2,671
Increase (decrease) in accrued interest payable and other liabilities		2,923			(2,262	)
Net cash provided by operating activities		25,405			37,967

Cash Flows from Investing Activities:
Proceeds from principal repayments from available-for-sale mortgage-backed securities		15,514			15,504
Proceeds from matured and called available-for-sale securities		1,135			470
Purchases of available-for-sale securities		(41,403	)		(116,198	)
Purchase of FHLB stock		(1,270	)		(514	)
Purchase of FRB stock		(4	)		(4	)
Net increase in loans		(25,883	)		(23,237	)
Proceeds from sale of OREO		-			113
Proceeds from sale of other vehicles		337			346
Proceeds from bank owned life insurance		322			-
Purchase of premises and equipment		(1,935	)		(2,461	)
Net cash used in investing activities		(53,187	)		(125,981	)

Continued on next page.

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

(Continued)

	*For the Six Months Ended*
	*June 30,*
	*2023*			*2022*
Cash Flows from Financing Activities:
Net (decrease) increase in demand, interest bearing and savings deposits	$	(104,786	)	$	37,428
Net increase (decrease) in time deposits		42,137			(3,825	)
Net increase (decrease) in securities sold under agreements to repurchase		1,840			(6,865	)
Cash dividends paid on common stock		(2,928	)		(1,866	)
Redemption of Trust Preferred Securities		(10,310	)		-
Increase in other borrowings		10,000			-
Proceeds from exercise of stock options		168			215
Net cash (used in) provided by financing activities		(63,879	)		25,087
Decrease in cash and cash equivalents		(91,661	)		(62,927	)
Cash and Cash Equivalents at Beginning of Year		183,426			380,584
Cash and Cash Equivalents at End of Period	$	91,765		$	317,657

Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense	$	1,292		$	593
Income taxes	$	26		$	3,009

Non-Cash Investing Activities:
Real estate and vehicles acquired through foreclosure	$	410		$	378

Non-Cash Financing Activities:
Common stock retired in connection with the exercise of stock options	$	154		$	84

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. THE BUSINESS OF PLUMAS BANCORP

During 2002, Plumas Bancorp (the "Company") was incorporated as a bank holding company for the purpose of acquiring Plumas Bank (the "Bank") in a one bank holding company reorganization. This corporate structure gives the Company and the Bank greater flexibility in terms of operation, expansion and diversification. The Company formed Plumas Statutory Trust I ("Trust I") for the sole purpose of issuing trust preferred securities on September 26, 2002. The Company formed Plumas Statutory Trust II ("Trust II") for the sole purpose of issuing trust preferred securities on September 28, 2005. In March 2023 the Trusts were dissolved. Plumas Bancorp's Principal Executive Office is located in Reno, Nevada.

The Bank operates thirteen branches in California, including branches in Alturas, Chester, Chico, Fall River Mills, Greenville, Kings Beach, Portola, Quincy, Redding, Susanville, Tahoe City, Truckee and Yuba City. The Bank's newest branch was opened in April 2023 and is located in Chico, California. The Bank’s administrative headquarters are in Quincy, California. In December 2015 the Bank opened a branch in Reno, Nevada, its first branch outside of California, and in 2018 the Bank purchased a branch located in Carson City, Nevada. In addition, the Bank operates a lending office specializing in government-guaranteed lending in Auburn, California, and a commercial/agricultural lending office in Klamath Falls, Oregon. The Bank's primary source of revenue is generated from providing loans to customers who are predominately small and middle market businesses and individuals residing in the surrounding areas.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, Plumas Bank. All significant intercompany balances and transactions have been eliminated.

Plumas Statutory Trust I and Trust II are not consolidated into the Company's consolidated financial statements and, accordingly, are accounted for under the equity method. The Company's investment in Trust I of $374,000 and Trust II of $188,000 are included in accrued interest receivable and other assets on the consolidated balance sheet at December 31, 2022. The junior subordinated deferrable interest debentures issued and guaranteed by the Company and held by Trust I and Trust II are reflected as debt on the consolidated balance sheet at December 31, 2022. In March 2023 the Company redeemed the debentures and the Trusts were dissolved.

The accounting and reporting policies of Plumas Bancorp and subsidiary conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at June 30, 2023 and the results of its operations and its cash flows for the three and six-month periods. Our condensed consolidated balance sheet at December 31, 2022 is derived from audited financial statements.

The unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2022 Annual Report to Shareholders on Form 10-K. The results of operations for the three and six-month periods ended June 30, 2023, may not necessarily be indicative of future operating results. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods reported. Actual results could differ significantly from those estimates.

Segment Information

Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank.

Allowance for Credit Losses - Loans

The allowance for credit losses (ACL) is a valuation account that is deducted from the loan's amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the recorded loan balance is confirmed as uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Regardless of the determination that a charge-off is appropriate for financial accounting purposes, the Company manages its loan portfolio by continually monitoring, where possible, a borrower's ability to pay through the collection of financial information, delinquency status, borrower discussion and the encouragement to repay in accordance with the original contract or modified terms, if appropriate.

Management estimates the allowance balance using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Company identified and accumulated loan cohort historical loss data beginning with the first quarter of 2004 and through the current period. In situations where the Company's actual loss history was not statistically relevant, the loss history of peers, defined as financial institutions with assets greater than seven hundred and fifty million and less than three billion, were utilized to create a minimum loss rate. In its loss forecasting framework, the Company incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. These macroeconomic scenarios incorporate variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to changes in environmental conditions, such as California unemployment rates, California Housing Prices, California gross domestic product, California Retail Trade Earnings and Wall Street Journal Prime Rate.

A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. The ACL on collateral dependent loans is measured using the amortized cost basis of the financial asset less the fair value of the underlying collateral, adjusted for costs to sell when applicable. If the value of underlying collateral is determined to be less than the recorded amount of the loan, a specific reserve for that loan is recorded. If the Company determines that the loss represented by the specific reserve is uncollectable it records a charge-off for the uncollectable portion.

The Company has identified the following portfolio segments to evaluate and measure the allowance for credit loss:

Commercial: Primarily based on the cash flow of the borrower, and secondarily on the underlying collateral provided by the borrower. A borrower's cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Most often, collateral includes accounts receivable, inventory, or equipment. Collateral securing these loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. Actual and forecast changes in California gross domestic product paired with California unemployment are believed to be corollary to losses associated with these credits.

Agricultural: Loans secured by farmland represent unique risks that are associated with the operation of an agricultural business. The valuation of farmland can vary greatly over time based on the property's access to resources including but not limited to water, crop prices, foreign exchange rates, government regulation or restrictions, and the nature of ongoing capital investment needed to maintain the quality of the property. Loans secured by crop production, and livestock are especially vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.

Real estate - residential: The most significant drivers of potential loss within the Company's residential real estate portfolio relate to general, regional, or individual changes in economic conditions and their effect on employment and borrowers cash flow. Risk in this portfolio is best measured by changes in borrower credit score and loan-to-value. Loss estimates are based on economic outlook and its effects on employment and the value of homes and the Bank’s historical loss experience adjusted to reflect the economic outlook and the unemployment rate.

Real estate - commercial: These credits are primarily susceptible to changes in the financial condition of the business operated by the property owner. This may be driven by changes in, among other things, industry challenges, factors unique to the operating geography of the borrower, change in the individual fortunes of the business owner, general economic conditions and changes in business cycles. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven more by general economic conditions, the underlying collateral may have devalued more and thus result in larger losses in the event of default. The terms on these loans at origination typically have maturities from ten to twenty-five years with amortization periods from five to thirty years.

Construction: While secured by real estate, construction loans represent a greater level of risk than term real estate loans due to the nature of the additional risks associated with not only the completion of construction within an estimated time period and budget, but also the need to either sell the building or reach a level of stabilized occupancy sufficient to generate the cash flows necessary to support debt service and operating costs. The Company seeks to mitigate the additional risks associated with construction lending by requiring borrowers to comply with lower loan to value ratios and additional covenants as well as strong tertiary support of guarantors. The loss forecasting model applies the historical rate of loss for similar loans over the expected construction life of the asset as adjusted for macroeconomic factors.

Home equity lines of credit (HELOC): Similar to residential real estate term loans, HELOC performance is also primarily driven by borrower cash flows based on employment status. However, HELOCs carry additional risks associated with the fact that most of these loans are secured by a deed of trust in a position that is junior to the primary lien holder. Furthermore, the risk that as the borrower's financial strength deteriorates, the outstanding balance on these credit lines may increase as they may only be canceled by the Company if certain limited criteria are met. In addition to the allowance for credit losses maintained as a percent of the outstanding loan balance, the Company maintains additional reserves for the unfunded portion of the HELOC.

Automobile: Automobile loans are susceptible to three primary risks: non-payment due to income loss, over-extension of credit and, when the borrower is unable to pay, shortfall in collateral value, if any. Typically, non-payment is due to loss of job and will follow general economic trends in the marketplace driven primarily by rises in the unemployment rate. Loss of collateral value can be due to market demand shifts, damage to collateral itself or a combination of those factors.

Other: Other loans primarily consist of consumer loans which are similar in nature to automobile loans and overdrafts.

Unfunded commitments: The estimated credit losses associated with these unfunded lending commitments are calculated using the same models and methodologies noted above and incorporate utilization assumptions at time of default. The reserve for unfunded commitments is maintained on the balance sheet in other liabilities.

Reclassification

Some items in the prior year consolidated financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders' equity.

Accounting Standards Adopted in 2023

On January 1, 2023, the Company adopted ASU 2016-03 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology. This is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized costs, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases. In addition, ASC 326 made changes to the accounting for available for sale debt securities.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30. In accordance with the Standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining noncredit discount (based on the adjusted amortized costs basis) will be accreted into interest income at the effective interest rate as of adoption. The Company recognized an increase in the ACL for loans totaling $529,000, as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings, net of $156,000 in taxes. Additionally, the Company recognized an increase in the reserve for unfunded commitments of $257,000, as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings, net of $76,000 in taxes.

On January 1, 2023, the Company adopted ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The ASU 2022-06 deferred the sunset date of ASU 2020-04 to December 2024. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The adoption of the ASU provisions did not have a significant impact on the Company’s consolidated financial statements as the Company has an insignificant number of financial instruments applicable to this ASU.

On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the recognition and measurement guidance for troubled debt restructurings and requires enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. This ASU also requires enhanced disclosure for loans that have been charged off. The adoption of the ASU provisions did not have a significant impact on the Company’s consolidated financial statements.

3. INVESTMENT SECURITIES AVAILABLE FOR SALE

The amortized cost and estimated fair value of investment securities at June 30, 2023 and December 31, 2022 consisted of the following, in thousands:

Available-for-Sale	June 30, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Treasury securities	$	9,963	$	-	$	(229	)	$	9,734
U.S. Government-sponsored agencies collateralized by mortgage obligations - residential		251,566		72		(24,394	)		227,244
U.S. Government-agencies collateralized by mortgage obligations - commercial		120,733		158		(14,193	)		106,698
Obligations of states and political subdivisions		141,132		365		(16,253	)		125,244
	$	523,394	$	595	$	(55,069	)	$	468,920

Unrealized losses on available-for-sale investment securities totaling $54,474,000 were recorded, net of $16,102,000 in tax benefit, as accumulated other comprehensive loss within shareholders' equity at June 30, 2023. No securities were sold during the six months ended June 30, 2023.

Available-for-Sale	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Treasury securities	$	9,950	$	-	$	(243	)	$	9,707
U.S. Government-sponsored agencies collateralized by mortgage obligations - residential		238,253		214		(24,059	)		214,408
U.S. Government-agencies collateralized by mortgage obligations - commercial		112,142		143		(12,704	)		99,581
Obligations of states and political subdivisions		138,541		243		(17,777	)		121,007
	$	498,886	$	600	$	(54,783	)	$	444,703

Unrealized losses on available-for-sale investment securities totaling $54,183,000 were recorded, net of $16,017,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at December 31, 2022. No securities were sold during the six months ended June 30, 2022.

There were no transfers of available-for-sale investment securities during the six months ended June 30, 2023 and twelve months ended December 31, 2022. There were no securities classified as held-to-maturity at June 30, 2023 or December 31, 2022.

Investment securities with unrealized losses at June 30, 2023 and December 31, 2022 are summarized and classified according to the duration of the loss period as follows, in thousands:

June 30, 2023	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Debt securities:
U.S. Treasury securities	$	2,921	$	57	$	6,813	$	172	$	9,734	$	229
U.S. Government-sponsored agencies collateralized by mortgage obligations - residential		96,794		3,265		121,449		21,129		218,243		24,394
U.S. Government-agencies collateralized by mortgage obligations - commercial		43,834		1,866		49,050		12,327		92,884		14,193
Obligations of states and political subdivisions		33,708		665		71,975		15,588		105,683		16,253
	$	177,257	$	5,853	$	249,287	$	49,216	$	426,544	$	55,069

December 31, 2022	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Debt securities:
U.S. Treasury securities	$	9,707	$	243	$	-	$	-	$	9,707	$	243
U.S. Government-sponsored agencies collateralized by mortgage obligations - residential		140,117		12,070		54,017		11,989		194,134		24,059
U.S. Government-agencies collateralized by mortgage obligations - commercial		42,799		2,845		42,363		9,859		85,162		12,704
Obligations of states and political subdivisions		89,092		11,421		16,768		6,356		105,860		17,777
	$	281,715	$	26,579	$	113,148	$	28,204	$	394,863	$	54,783

At June 30, 2023, the Company held 412 securities of which 131 were in a loss position for less than twelve months and 249 were in a loss position for twelve months or more. Of the 412 securities 3 are U.S. Treasury securities, 124 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations, 45 were U.S. Government agencies collateralized by commercial mortgage obligations and 240 were obligations of states and political subdivisions. The unrealized losses relate principally to market rate conditions. All of the securities continue to pay as scheduled. For available-for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized costs basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. At June 30, 2023, neither of the criteria regarding intent or requirement to sell was met for any of securities in an unrealized loss position.

The amortized cost and estimated fair value of investment in debt securities at June 30, 2023 by contractual maturity are shown below, in thousands.

	Amortized Cost		Estimated Fair Value
Within one year	$	7,528	$	7,432
After one year through five years		10,075		9,838
After five years through ten years		11,053		10,671
After ten years		122,439		107,037
Investment securities not due at a single maturity date:
Government- agencies commercial mortgage-backed securities		120,733		106,698
Government-sponsored agencies residential mortgage-backed securities		251,566		227,244
	$	523,394	$	468,920

Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

Investment securities with amortized costs totaling $302,590,000 and $189,358,000 and estimated fair values totaling $267,514,000 and $166,728,000 at June 30, 2023 and December 31, 2022, respectively, were pledged to secure deposits, repurchase agreements and Federal Reserve Bank borrowings.

4. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

Outstanding loans are summarized below, in thousands:

	June 30,			December 31,
	2023			2022

Commercial	$	74,958		$	76,680
Agricultural		126,841			122,873
Real estate – residential		14,878			15,324
Real estate – commercial		517,289			516,107
Real estate – construction and land development		56,331			43,420
Equity lines of credit		35,877			35,891
Auto		103,050			96,750
Other		5,990			4,904
Total loans		935,214			911,949
Deferred loan costs, net		2,837			2,736
Loans, amortized cost basis		938,051			914,685
Allowance for credit losses		(13,385	)		(10,717	)
Total net loans	$	924,666		$	903,968

To estimate expected losses the Company generally utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. Individual loan credit quality indicators including loan grade and borrower repayment performance have been statistically correlated with historical credit losses and various econometrics, including California unemployment rates, California Housing Prices, California gross domestic product, California Retail Trade Earnings and Wall Street Journal Prime Rate. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and back-testing of model performance to actual realized results. At both January 1, 2023, the adoption and implementation date of ASC Topic 326, and June 30, 2023, the Company utilized a reasonable and supportable forecast period of approximately four quarters and obtained the forecast data from publicly available sources. The Company also considered the impact of portfolio concentrations, changes in underwriting practices, imprecision in its economic forecasts, and other risk factors that might influence its loss estimation process. Management believes that the allowance for credit losses at June 30, 2023 appropriately reflected expected credit losses inherent in the loan portfolio at that date.

In determining the allowance for credit losses, accruing loans with similar risk characteristics are generally evaluated collectively. The Company's policy is that loans designated as nonaccrual no longer share risk characteristics similar to other loans evaluated collectively and as such, all nonaccrual loans are individually evaluated for reserves. As of June 30, 2023 the Bank's nonaccrual loans comprised the entire population of loans individually evaluated. The Company's policy is that nonaccrual loans also represent the subset of loans where borrowers are experiencing financial difficulty where an evaluation of the source of repayment is required to determine if the nonaccrual loans should be categorized as collateral dependent.

The implementation of CECL also impacted the Company's ACL on unfunded loan commitments, as the ACL now represents expected credit losses over the contractual life of commitments not identified as unconditionally cancellable by the Company. The Reserve for Unfunded Commitments is estimated using the same reserve or coverage rates calculated on collectively evaluated loans following the application of a funding rate to the amount of the unfunded commitment. The funding rate represents management's estimate of the amount of the current unfunded commitment that will be funded over the remaining contractual life of the commitment and is based on historical data. Under CECL the ACL on unfunded loan commitments remains in Other Liabilities while any related provision expense is included in the provision for credit loss expense.

Changes in the allowance for credit losses, in thousands, were as follows:

		June 30,				December 31,