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Loans and Lease Finance Receivables and Allowance for Credit Losses
 6 Months Ended
Jun. 30, 2020
Receivables [Abstract]  
Loans and Lease Finance Receivables and Allowance for Credit Losses
5.
LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
The following table provides a summary of total loans and lease finance receivables by type.
 
                                                     
   
June 30, 2020
  
December 31, 2019
   
(Dollars in thousands)
Commercial and industrial
  
  $
840,738
 
  
  $
935,127
 
SBA
  
 
300,156
 
  
 
305,008
 
SBA - Paycheck Protection Program (PPP)
  
 
1,097,150
 
  
 
-
 
Real estate:
    
Commercial real estate
  
 
5,365,120
 
  
 
5,374,617
 
Construction
  
 
125,815
 
  
 
116,925
 
SFR mortgage
  
 
286,526
 
  
 
283,468
 
Dairy & livestock and agribusiness
  
 
251,821
 
  
 
383,709
 
Municipal lease finance receivables
  
 
49,876
 
  
 
53,146
 
Consumer and other loans
  
 
85,332
 
  
 
116,319
 
 
 
 
 
  
 
 
 
Total loans
  
 
8,402,534
 
  
 
7,568,319
 
Less: Deferred loan fees, net (1)
  
 
-
 
  
 
(3,742
) 
 
 
 
 
  
 
 
 
Total loans, net of deferred loan fees
  
 
8,402,534
 
  
 
7,564,577
 
Less: Allowance for credit losses
  
 
(93,983
) 
  
 
(68,660
) 
 
 
 
 
  
 
 
 
Total loans and lease finance receivables, net
  
  $
8,308,551
 
  
  $
7,495,917
 
 
 
 
 
  
 
 
 
 
  (1)
Beginning with March 31, 2020, total loans are presented net of deferred loan fees by respective class of financing receivables.
As of June 30, 2020, 68.76% of the Company’s total loan portfolio consisted of real estate loans, with commercial real estate loans representing 63.85% of total loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of June 30, 2020, $248.6 million, or 4.63% of the total commercial real estate loans included loans secured by farmland, compared to $241.8 million, or 4.50%, at December 31, 2019. The loans secured by farmland included $121.9 million for loans secured by dairy & livestock land and $126.7 million in loans secured by agricultural land at June 30, 2020, compared to $125.9 million for loans secured by dairy & livestock land and $115.9 million for loans secured by agricultural land at December 31, 2019. As of June 30, 2020, dairy & livestock and agribusiness loans of $251.8 million were comprised of $201.7 million for dairy & livestock loans and $50.1 million for agribusiness loans, compared to $323.5 million for dairy & livestock loans and $60.2 million for agribusiness loans at December 31, 2019.
At June 30, 2020 and December 31, 2019, loans totaling $6.00 billion and $6.03 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.
There were no outstanding loans
held-for-sale
as of June 30, 2020 and December 31, 2019.
Credit Quality Indicators
An important element of our approach to credit risk management is our loan risk rating system. The originating officer assigns each loan an initial risk rating, which is reviewed and confirmed or changed, as appropriate, by credit management. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel on an ongoing basis for deterioration or improvement in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.
Loans are risk rated into the following categories (Credit Quality Indicators): Pass, Special Mention, Substandard, Doubtful and Loss. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for losses. These categories can be described as follows:
Pass — These loans, including loans on the Bank’s internal watch list, range from minimal credit risk to lower than average, but still acceptable, credit risk. Watch list loans usually require more than normal management attention. Loans on the watch list may involve borrowers with adverse financial trends, higher debt/equity ratios, or weaker liquidity positions, but not to the degree of being considered a defined weakness or problem loan where risk of loss may be apparent.
Special Mention — Loans assigned to this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard — Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.
Doubtful — Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or the liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Loss — Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset with insignificant value even though partial recovery may be affected in the future.
The following table summarizes loans by type and origination year, according to our internal risk ratings as of the date presented.
 
   
Origination Year
  
Revolving
loans
amortized
cost basis
  
Revolving
loans
converted to
term loans
    
                             
June 30, 2020
  
2020
  
2019
  
2018
  
2017
  
2016
  
Prior
  
Total
   
(Dollars in thousands)
Commercial and industrial loans:
                  
Risk Rating:
                  
Pass
     $ 58,626        $ 166,910        $ 75,223        $ 67,777        $ 43,833        $ 79,031        $ 299,536        $ 9,139        $ 800,075   
Special Mention
     2,013        240        5,074        563        401        4,647        5,531        1,459        19,928   
Substandard
     1,898        151        1,917        1,987        522        36        12,860        1,364        20,735   
Doubtful & Loss
     -        -        -        -        -        -        -        -        -   
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Commercial and industrial loans:
     $ 62,537        $ 167,301        $ 82,214        $ 70,327        $ 44,756        $ 83,714        $ 317,927        $ 11,962        $ 840,738   
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
SBA:
                  
Risk Rating:
                  
Pass
     $ 26,248        $ 13,448        $ 46,979        $ 76,029        $ 27,432        $ 90,955        $ -        $ -        $ 281,091   
Special Mention
     -        -        -        1,144        1,370        7,099        -        -        9,613   
Substandard
     -        -        1,042        2,627        1,411        4,372        -        -        9,452   
Doubtful & Loss
     -        -        -        -        -        -        -        -        -   
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total SBA:
     $ 26,248        $ 13,448       $ 48,021       $ 79,800       $ 30,213       $ 102,426       $ -        $ -        $ 300,156  
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
SBA- PPP
                  
Risk Rating:
                    
Pass
     $ 1,097,150        $ -        $ -        $ -        $ -        $ -        $ -        $ -        $ 1,097,150   
Special Mention
     -        -        -        -        -        -        -        -        -   
Substandard
     -        -        -        -        -        -        -        -        -   
Doubtful & Loss
     -        -        -        -        -        -        -        -        -   
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total SBA- PPP
:
     $ 1,097,150        $ -        $ -        $ -        $ -        $ -        $ -        $ -        $  1,097,150  
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Commercial real estate loans:
                  
Risk Rating:
                  
Pass
     $ 364,047        $ 722,734        $ 719,239        $ 703,597        $ 614,850        $ 1,897,358        $ 192,321        $ 20,802        $ 5,234,948   
Special Mention
     4,637        5,353        9,685        16,423        3,953        56,510        1,339        -        97,900   
Substandard
     -        -        4,437        7,341        1,327        18,633        231        303        32,272   
Doubtful & Loss
     -        -        -        -        -        -        -        -        -   
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Commercial real estate loans:
     $ 368,684        $ 728,087        $ 733,361        $ 727,361        $ 620,130        $ 1,972,501        $ 193,891        $ 21,105       $ 5,365,120  
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Construction loans:
                  
Risk Rating:
                  
Pass
     $ 5,259        $ 16,733        $ 17,013       $ 17,780       $ 10,592       $ 5       $ 52,949       $ 5,484       $ 125,815  
Special Mention
     -        -        -        -        -        -        -        -        -   
Substandard
     -        -        -        -        -        -        -        -        -   
Doubtful & Loss
     -        -        -        -        -        -        -        -        -   
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Construction loans:
     $ 5,259        $ 16,733       $ 17,013       $ 17,780       $ 10,592       $ 5       $ 52,949       $ 5,484       $ 125,815  
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
SFR mortgage loans:
                  
Risk Rating:
                  
Pass
     $ 30,749        $ 65,948       $ 36,731       $ 26,637       $ 33,192       $ 89,651       $ -        $ -        $ 282,908  
Special Mention
     -        -        -        -        -        1,925       -        -        1,925  
Substandard
     -        -        -        375       231       641       -        446       1,693  
Doubtful & Loss
     -        -        -        -        -        -        -        -        -   
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total SFR mortgage loans:
     $ 30,749        $ 65,948       $ 36,731       $ 27,012       $ 33,423       $ 92,217       $ -        $ 446       $ 286,526  
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
Origination Year
  
Revolving
loans
amortized
cost basis
  
Revolving
loans
converted to
term loans
    
                             
June 30, 2020
  
2020
  
2019
  
2018
  
2017
  
2016
  
Prior
  
Total
   
(Dollars in thousands)
Dairy & livestock and agribusiness loans:
                  
Risk Rating:
                  
Pass
     $ 72       $ 2,763       $ 1,852       $ 8,064       $ 2,795       $ 9,955       $ 185,698       $ 327       $ 211,526  
Special Mention
     -       -       -       712       -       -       14,750       3,389       18,851  
Substandard
     -       -       882       -       3,635       -       4,562       12,365       21,444  
Doubtful & Loss
     -       -       -       -       -       -       -       -       -  
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Dairy &
livestock and
agribusiness loans:
     $ 72       $ 2,763       $ 2,734       $ 8,776       $ 6,430       $ 9,955       $ 205,010       $ 16,081       $ 251,821  
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Municipal lease
finance receivables
loans:
                  
Risk Rating:
                  
Pass
     $ 135       $ -       $ 2,557       $ 10,766       $ 7,856       $ 28,115       $ -       $ -       $ 49,429  
Special Mention
     -       -       -       -       -       447       -       -       447  
Substandard
     -       -       -       -       -       -       -       -       -  
Doubtful & Loss
     -       -       -       -       -       -       -       -       -  
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Municipal lease
finance receivables
loans:
     $ 135       $ -       $ 2,557       $ 10,766       $ 7,856       $ 28,562       $ -       $ -       $ 49,876  
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Consumer and other
loans:
                  
Risk Rating:
                  
Pass
     $ 2,079       $ 2,918       $ 1,067       $ 1,165       $ 1,932       $ 1,672       $ 71,191       $ 1,704       $ 83,728  
Special Mention
     -       -       -       -       -       139       733       -       872  
Substandard
     -       -       4       -       4       177       6       541       732  
Doubtful & Loss
     -       -       -       -       -       -       -       -       -  
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Consumer and
other loans:
     $ 2,079       $ 2,918       $ 1,071       $ 1,165       $ 1,936       $ 1,988       $ 71,930       $ 2,245       $ 85,332  
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Gross loans:
                  
Risk Rating:
                  
Pass
   $ 1,584,365       $ 991,454       $ 900,661       $ 911,815       $ 742,482       $ 2,196,742       $ 801,695       $ 37,456       $ 8,166,670  
Special Mention
     6,650       5,593       14,759       18,842       5,724       70,767       22,353       4,848       149,536  
Substandard
     1,898       151       8,282       12,330       7,130       23,859       17,659       15,019       86,328  
Doubtful & Loss
     -       -       -       -       -       -       -       -       -  
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Gross loans:
   $ 1,592,913       $ 997,198       $ 923,702       $ 942,987       $ 755,336       $ 2,291,368       $ 841,707       $ 57,323       $ 8,402,534  
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
The following table summarizes loans by type, according to our internal risk ratings as of the date presented.
 
                                                                                              
    
December 31, 2019
  
    
Pass
     
Special
Mention
     
Substandard
     
Doubtful &
Loss
     
Total
  
    
(Dollars in thousands)
  
Commercial and industrial
   
  $
895,234
 
   
  $
35,473
 
   
$
4,420
 
   
$
-
 
   
  $
935,127
 
SBA
   
 
283,430
 
   
 
11,032
 
   
 
10,546
 
   
 
-
 
   
 
305,008
 
Real estate:
               
Commercial real estate
               
Owner occupied
   
 
1,977,007
 
   
 
78,208
 
   
 
28,435
 
   
 
-
 
   
 
2,083,650
 
Non-owner
occupied
   
 
3,280,580
 
   
 
10,005
 
   
 
382
 
   
 
-
 
   
 
3,290,967
 
Construction
               
Speculative
   
 
106,895
 
   
 
-
 
   
 
-
 
   
 
-
 
   
 
106,895
 
Non-speculative
   
 
10,030
 
   
 
-
 
   
 
-
 
   
 
-
 
   
 
10,030
 
SFR mortgage
   
 
280,010
 
   
 
1,957
 
   
 
1,501
 
   
 
-
 
   
 
283,468
 
Dairy & livestock and agribusiness
   
 
320,670
 
   
 
35,920
 
   
 
27,119
 
   
 
-
 
   
 
383,709
 
Municipal lease finance receivables
   
 
52,676
 
   
 
470
 
   
 
-
 
   
 
-
 
   
 
53,146
 
Consumer and other loans
   
 
114,870
 
   
 
421
 
   
 
1,028
 
   
 
-
 
   
 
116,319
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total gross loans
   
  $
7,321,402
 
   
  $
173,486
 
   
$
73,431
 
   
$
-
 
   
  $
7,568,319
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Allowance for Credit Losses
The allowance for credit losses for 2020 is based upon historical lifetime loss rate models segregated by three loan segments: Commercial and Industrial, Commercial Real Estate, and Consumer Retail. Our methodology for assessing the appropriateness of the allowance is reviewed on a regular basis and considers overall risks in the Bank’s loan portfolio. Refer to Note 3 –
Summary of Significant Accounting Policies
contained herein for a more detailed discussion concerning the allowance for credit losses.
Our allowance for credit losses increased in the second quarter by $11.3 million, as a result of a $11.5 million provision for credit loss and net charge-offs of $158,000. Our allowance for credit losses at June 30, 2020 was $94.0 million or 1.12% of total loans. The provision for credit loss was primarily due to the estimated losses over the expected life of our loans that result from the current and forecasted economic downturn. During the second quarter, the economy in the areas we operate, as well as the broader economy, continued to reflect a significant decline in economic activity due to the
COVID-19
pandemic.
Our forecast of macroeconomic variables utilized in the estimate of future credit losses deteriorated from the end of the first quarter, due to both broader economic factors and the recent reversals in California’s phased approach to re-opening the economy. Our economic forecast is a blend of multiple forecasts produced by Moody’s. The resulting forecast at quarter end assumed the decline in GDP for the second quarter was
 
approximately
33
%, with GDP growth of
18
% in the third quarter, followed by a modest decline in GDP in the fourth quarter. For
2020
, as a whole, GDP is forecasted to decrease by almost
6
%. GDP is forecasted to rebound in the second half of
2021
, with full-year GDP growing in
2021
by approximately
1
%. In
2022
, GDP is forecasted to grow more robustly by approximately
6.4
%. The forecast also assumes heightened levels of unemployment, reflected by a
14
% unemployment rate in the second quarter and unemployment exceeding
9
% for the remainder of
2020
.
Unemployment is forecasted to stay elevated in
 
both
2021
and
2022
, at
9.7
% and
7.5
%, respectively. For the six months ended June 
30
,
2020
, the allowance for credit losses increased by $
25.3
 million due to a $
23.5
 million provision for credit loss resulting from the forecasted downturn in macroeconomic variables related to the pandemic and a $
1.8
 million increase from the adoption of CECL on January 
1
,
2020
.
Management believes that the ACL was appropriate at June 30, 2020 and December 31, 2019. There is a high degree of uncertainty around the epidemiological assumptions that impact our economic forecast, so no assurance can be given that economic conditions that adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for credit losses in the future.
 
The following tables present the
balance
and activity related to the allowance for credit losses for
held-for-investment
loans by type for the periods presented.
 
                                                                                              
    
Three Months Ended June 30, 2020
  
    
 Ending Balance 
March 31, 2020
     
Charge-offs
    
Recoveries
     
Provision for
(Recapture of)
Credit Losses
    
Ending Balance
June 30, 2020
  
    
(Dollars in thousands)
  
Commercial and industrial
   
  $
9,387
 
   
  $
(11
) 
  
  $
3
 
   
  $
(1,388
) 
  
  $
7,991
 
SBA
   
 
3,946
 
   
 
(156
) 
  
 
3
 
   
 
(142
) 
  
 
3,651
 
SBA - PPP
   
 
-    
 
   
 
-    
 
  
 
-    
 
   
 
-    
 
  
 
-    
 
Real estate:
             
Commercial real estate
   
 
58,427
 
   
 
-    
 
  
 
-    
 
   
 
16,501
 
  
 
74,928
 
Construction
   
 
4,632
 
   
 
-    
 
  
 
3
 
   
 
(2,345
) 
  
 
2,290
 
SFR mortgage
   
 
281
 
   
 
-    
 
  
 
-    
 
   
 
(59
) 
  
 
222
 
Dairy & livestock and agribusiness
   
 
4,266
 
   
 
-    
 
  
 
-    
 
   
 
(887
) 
  
 
3,379
 
Municipal lease finance receivables
   
 
277
 
   
 
-    
 
  
 
-    
 
   
 
25
 
  
 
302
 
Consumer and other loans
   
 
1,425
 
   
 
-    
 
  
 
-    
 
   
 
(205
) 
  
 
1,220
 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
  
Total allowance for credit losses
   
  $
82,641
 
   
  $
(167
) 
  
  $
9
 
   
  $
11,500
 
  
  $
93,983
 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
  
 
                                                                                              
    
Three Months Ended June 30, 2019
  
    
 Ending Balance 
March 31, 2019
     
Charge-offs
    
Recoveries
     
Provision for
(Recapture of)
Loan Losses
    
Ending Balance
June 30, 2019
  
    
(Dollars in thousands)
  
Commercial and industrial
   
  $
7,608
 
   
  $
(48
) 
  
  $
49
 
   
  $
248
 
  
  $
7,857
 
SBA
   
 
1,294
 
   
 
(210
) 
  
 
4
 
   
 
31
 
  
 
1,119
 
Real estate:
             
Commercial real estate
   
 
46,227
 
   
 
-    
 
  
 
-    
 
   
 
2,060
 
  
 
48,287
 
Construction
   
 
864
 
   
 
-    
 
  
 
3
 
   
 
4
 
  
 
871
 
SFR mortgage
   
 
2,189
 
   
 
-    
 
  
 
115
 
   
 
19
 
  
 
2,323
 
Dairy & livestock and agribusiness
   
 
5,699
 
   
 
-    
 
  
 
19
 
   
 
(377
) 
  
 
5,341
 
Municipal lease finance receivables
   
 
738
 
   
 
-    
 
  
 
-    
 
   
 
(12
) 
  
 
726
 
Consumer and other loans
   
 
582
 
   
 
(3
) 
  
 
2
 
   
 
27
 
  
 
608
 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
  
Total allowance for loan losses
   
  $
65,201
 
   
  $
(261
) 
  
  $
192
 
   
  $
2,000
 
  
  $
67,132
 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
  
   
Six Months Ended June 30, 2020
  
   
Ending Balance,
prior to adoption
of ASU
2016-13

December 31,
2019
    
Impact of
Adoption ASU
2016-13
    
Charge-offs
    
Recoveries
    
Provision for
(Recapture of)
Credit Losses
    
Ending Balance
June 30, 2020
  
   
(Dollars in thousands)
  
Commercial and industrial
     $ 8,880       $ (2,442 )      $ (11 )      $ 5       $ 1,559       $ 7,991  
SBA
     1,453       1,818       (156 )      3       533       3,651  
SBA - PPP
     -           -           -           -           -           -      
Real estate:
            
Commercial real estate
     48,629       3,547       -           -           22,752       74,928  
Construction
     858       655       -           6       771       2,290  
SFR mortgage
     2,339       (2,043 )      -           206       (280 )      222  
Dairy & livestock and agribusiness
     5,255       (186 )      -           -           (1,690 )      3,379  
Municipal lease finance receivables
     623       (416 )      -           -           95       302  
Consumer and other loans
     623       907       (86 )      16       (240 )      1,220  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total allowance for credit losses
     $ 68,660       $ 1,840       $ (253 )      $ 236       $ 23,500       $ 93,983  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
      
Six Months Ended June 30, 2019
  
      
  Ending Balance  
December 31,
2018
       
  Charge-offs  
       
  Recoveries  
       
Provision for
(Recapture of)
    Loan Losses    
       
  Ending Balance  
June 30, 2019
  
      
(Dollars in thousands)
  
Commercial and industrial
        $ 7,528          $ (48 )         $ 159          $ 218          $ 7,857  
SBA
        1,078          (230 )         9          262          1,119  
Real estate:
                         
Commercial real estate
        45,097          -              -              3,190          48,287  
Construction
        981          -              6          (116 )         871  
SFR mortgage
        2,197          -              183          (57 )         2,323  
Dairy & livestock and agribusiness
        5,225          (78 )         19          175          5,341  
Municipal lease finance receivables
        775          -              -              (49 )         726  
Consumer and other loans
        732          (4 )         3          (123 )         608  
    
 
 
       
 
 
       
 
 
       
 
 
       
 
 
  
Total allowance for loan losses
        $ 63,613          $ (360 )         $ 379          $ 3,500          $ 67,132  
    
 
 
       
 
 
       
 
 
       
 
 
       
 
 
  
The following table presents the recorded investment in loans
held-for-investment
and the related ACL by loan type, based on the Company’s methodology for determining the ACL for the periods presented.
 
      
June 30, 2019
  
      
Recorded Investment in Loans
       
Allowance for Loan Losses
  
      
Individually

      Evaluated for      
Impairment
       
Collectively

      Evaluated for      
Impairment
       
Individually

      Evaluated for      
Impairment
       
Collectively

      Evaluated for      
Impairment
  
      
(Dollars in thousands)
  
Commercial and industrial
        $ 2,088          $ 915,865          $ 276          $ 7,581  
SBA
        5,632          321,974          93          1,026  
Real estate:
                    
Commercial real estate
        1,531          5,415,820          -          48,287  
Construction
        -          116,457          -          871  
SFR mortgage
        4,858          273,427          -          2,323  
Dairy & livestock and agribusiness
        -          301,752          -          5,341  
Municipal lease finance receivables
        -          59,985          -          726  
Consumer and other loans
        397          120,382          2          606  
    
 
 
       
 
 
       
 
 
       
 
 
  
Total
        $ 14,506          $ 7,525,662          $ 371          $ 66,761  
    
 
 
       
 
 
       
 
 
       
 
 
  
 
Past Due and Nonperforming Loans
We seek to manage asset quality and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the adequacy of the ACL, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2019, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.
The following table presents the recorded investment in, and the aging of, past due loans (including nonaccrual loans), by type of loans as of the date presented.
 
    
June 30, 2020
  
    
30-59 Days

Past Due
     
60-89 Days

Past Due
     
Greater than
89 Days Past
Due
     
Total Past
Due
     
Loans Not
Past Due
     
Total Loans
and Financing
Receivables
  
    
(Dollars in thousands)
 
Commercial and industrial
      $ 630        $ 218        $ 1,004        $ 1,852        $ 838,886        $ 840,738  
SBA
      -        214        1,588        1,802        298,354        300,156  
SBA - PPP
      -        -        -        -        1,097,150        1,097,150  
Real estate:
                  
Commercial real estate
                  
Owner occupied
      -        -        232        232        2,074,233        2,074,465  
Non-owner
occupied
      4        -        1,715        1,719        3,288,936        3,290,655  
Construction
                  
Speculative (1)
      -        -        -        -        111,222        111,222  
Non-speculative
      -        -        -        -        14,593        14,593  
SFR mortgage
      -        446        704        1,150        285,376        286,526  
Dairy & livestock and agribusiness
      882        -        -        882        250,939        251,821  
Municipal lease finance receivables
      -        -        -        -        49,876        49,876  
Consumer and other loans
      409        52        220        681        84,651        85,332  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total gross loans
      $ 1,925        $ 930        $ 5,463        $ 8,318        $ 8,394,216        $ 8,402,534  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
  (1)
Speculative construction loans are generally for properties where there is no identified buyer or renter.
 
Following the adoption of CECL on January 1, 2020, the definitions of impairment and related impaired loan disclosures were removed. Under CECL, amortized cost of our finance receivables and loans that are on nonaccrual status, including loans with no allowance, are presented as of June 30, 2020 by type of loan.
 
                                                              
    
June 30, 2020
  
    
Nonaccrual
with No
Allowance
for Credit
Losses
     
Total
Nonaccrual
(1) (3)
     
Loans Past
Due Over 89
Days Still
Accruing
  
    
(Dollars in thousands)
 
Commercial and industrial
   
  $
567
 
   
  $
1,197
 
   
  $
25
 
SBA
   
 
1,140
 
   
 
1,598
 
   
 
-
 
SBA - PPP
   
 
-
 
   
 
-
 
   
 
-
 
Real estate:
         
Commercial real estate
         
Owner occupied
   
 
534
 
   
 
684
 
   
 
-
 
Non-owner
occupied
   
 
228
 
   
 
1,944
 
   
 
-
 
Construction
         
Speculative (2)
   
 
-
 
   
 
-
 
   
 
-
 
Non-speculative
   
 
-
 
   
 
-
 
   
 
-
 
SFR mortgage
   
 
1,079
 
   
 
1,080
 
   
 
-
 
Dairy & livestock and agribusiness
   
 
-
 
   
 
-
 
   
 
-
 
Municipal lease finance receivables
   
 
-
 
   
 
-
 
   
 
-
 
Consumer and other loans
   
 
289
 
   
 
289
 
   
 
-
 
  
 
 
     
 
 
     
 
 
  
Total gross loans
   
  $
3,837
 
   
  $
6,792
 
   
  $
25
 
  
 
 
     
 
 
     
 
 
  
 
  (1)
As of June 30, 2020, $1.1 million of nonaccruing loans were current, $267,000 were
60-89
days past due, and $5.5 million were 90+ days past due.
  (2)
Speculative construction loans are generally for properties where there is no identified buyer or renter.
  (3)
Excludes $1.3 million of guaranteed portion of nonaccrual SBA loans that are in process of collection.
The following table presents the recorded investment in, and the aging of, past due and nonaccrual loans, by type of loans as of the date presented.
 
    
December 31, 2019
  
    
30-59 Days

Past Due
     
60-89 Days

Past Due
     
Total Past
Due and
Accruing
     
Nonaccrual
(1) (3)
     
Current
     
Total Loans
and Financing
Receivables
  
    
(Dollars in thousands)
 
Commercial and industrial
      $ 2        $ -        $ 2        $ 1,266        $ 933,859        $ 935,127  
SBA
      870        532        1,402        2,032        301,574        305,008  
Real estate:
                  
Commercial real estate
                  
Owner occupied
      -        -        -        479        2,083,171        2,083,650  
Non-owner
occupied
      -        -        -        245        3,290,722        3,290,967  
Construction
                  
Speculative (2)
      -        -        -        -        106,895        106,895  
Non-speculative
      -        -        -        -        10,030        10,030  
SFR mortgage
      6        243        249        878        282,341        283,468  
Dairy & livestock and agribusiness
      -        -        -        -        383,709        383,709  
Municipal lease finance receivables
      -        -        -        -        53,146        53,146  
Consumer and other loans
      -        -        -        377        115,942        116,319  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total gross loans
      $ 878        $ 775        $ 1,653        $ 5,277        $ 7,561,389        $ 7,568,319  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
  (1)
As of December 31, 2019, $1.2 million of nonaccruing loans were current, $59,000 were
30-59
days past due, $1.1 million were
60-89
days past due and $2.9 million were 90+ days past due.
  (2)
Speculative construction loans are generally for properties where there is no identified buyer or renter.
  (3)
Excludes $2.0 million of guaranteed portion of nonaccrual SBA loans that are in process of collection.
Impaired Loans (prior to adoption of CECL)
Following the adoption of CECL as of January 1, 2020, the definitions of impairment and related impaired loan disclosures were removed
.
As a result of the change, the following tables present information about our impaired loans and lease finance receivables, individually evaluated for impairment by type of loans, as of June 30, 2019 and December 31, 2019, prior to the date of adoption of the amendments to the credit loss standard.
 
                                                                                    
    
Six Months Ended June 30, 2019
  
    
Recorded
Investment
     
Unpaid
Principal
Balance
     
Related
Allowance
     
Average
Recorded
Investment
     
Interest
Income
Recognized
  
    
(Dollars in thousands)
  
With no related allowance recorded:
               
Commercial and industrial
   
  $
898
 
   
  $
1,033
 
   
  $
-    
 
   
  $
1,022
 
   
  $
2
 
SBA
   
 
4,369
 
   
 
5,714
 
   
 
-    
 
   
 
3,703
 
   
 
21
 
Real estate:
         
 
    
 
      
Commercial real estate
               
Owner occupied
   
 
502
 
   
 
616
 
   
 
-    
 
   
 
515
 
   
 
-    
 
Non-owner
occupied
   
 
1,029
 
   
 
1,209
 
   
 
-    
 
   
 
1,068
 
   
 
14
 
Construction
               
Speculative
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
Non-speculative
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
SFR mortgage
   
 
4,858
 
   
 
5,467
 
   
 
-    
 
   
 
4,893
 
   
 
42
 
Dairy & livestock and agribusiness
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
Municipal lease finance receivables
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
Consumer and other loans
   
 
395
 
   
 
518
 
   
 
-    
 
   
 
407
 
   
 
-    
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
 
12,051
 
   
 
14,557
 
   
 
-    
 
   
 
11,608
 
   
 
79
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
With a related allowance recorded:
               
Commercial and industrial
   
 
1,190
 
   
 
1,263
 
   
 
276
 
   
 
1,251
 
   
 
-    
 
SBA
   
 
1,263
 
   
 
1,534
 
   
 
93
 
   
 
1,179
 
   
 
-    
 
Real estate:
               
Commercial real estate
               
Owner occupied
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
Non-owner
occupied
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
Construction
               
Speculative
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
Non-speculative
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
SFR mortgage
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
Dairy & livestock and agribusiness
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
Municipal lease finance receivables
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
   
 
-    
 
Consumer and other loans
   
 
2
 
   
 
3
 
   
 
2
 
   
 
2
 
   
 
-    
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
 
2,455
 
   
 
2,800
 
   
 
371
 
   
 
2,432
 
   
 
-    
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total impaired loans
   
  $
14,506
 
   
  $
17,357
 
   
  $
371
 
   
  $
14,040
 
   
  $
79
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
                                                        
    
December 31, 2019
  
    
Recorded
Investment
     
Unpaid
Principal
Balance
     
Related
Allowance
  
    
(Dollars in thousands)
  
With no related allowance recorded:
         
Commercial and industrial
   
  $
1,091
 
   
  $
1,261
 
   
  $
-    
SBA
   
 
2,243
 
   
 
2,734
 
   
 
-    
 
Real estate:
         
Commercial real estate
         
Owner occupied
   
 
479
 
   
 
613
 
   
 
-    
 
Non-owner
occupied
   
 
642
 
   
 
643
 
   
 
-    
 
Construction
         
Speculative
   
 
-    
 
   
 
-    
 
   
 
-    
 
Non-speculative
   
 
-    
 
   
 
-    
 
   
 
-    
 
SFR mortgage
   
 
2,979
 
   
 
3,310
 
   
 
-    
 
Dairy & livestock and agribusiness
   
 
-    
 
   
 
-    
 
   
 
-    
 
Municipal lease finance receivables
   
 
-    
 
   
 
-    
 
   
 
-    
 
Consumer and other loans
   
 
377
 
   
 
514
 
   
 
-    
 
  
 
 
     
 
 
     
 
 
  
Total
   
 
7,811
 
   
 
9,075
 
   
 
-    
 
  
 
 
     
 
 
     
 
 
  
With a related allowance recorded:
         
Commercial and industrial
   
 
253
 
   
 
347
 
   
 
251
 
SBA
   
 
325
 
   
 
324
 
   
 
257
 
Real estate:
         
Commercial real estate
         
Owner occupied
   
 
-    
 
   
 
-    
 
   
 
-    
 
Non-owner
occupied
   
 
-    
 
   
 
-    
 
   
 
-    
 
Construction
         
Speculative
   
 
-    
 
   
 
-    
 
   
 
-    
 
Non-speculative
   
 
-    
 
   
 
-    
 
   
 
-    
 
SFR mortgage
   
 
-    
 
   
 
-    
 
   
 
-    
 
Dairy & livestock and agribusiness
   
 
-    
 
   
 
-    
 
   
 
-    
 
Municipal lease finance receivables
   
 
-    
 
   
 
-    
 
   
 
-    
 
Consumer and other loans
   
 
-    
 
   
 
-    
 
   
 
-    
 
  
 
 
     
 
 
     
 
 
  
Total
   
 
578
 
   
 
671
 
   
 
508
 
  
 
 
     
 
 
     
 
 
  
Total impaired loans
   
  $
8,389
 
   
  $
9,746
 
   
  $
508
 
  
 
 
     
 
 
     
 
 
  
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 loans as of the date presented.
 
                                                                                                               
   
June 30, 2020
  
Number of
Loans
Dependent on
Collateral
   
Real Estate
  
Business Assets
  
Other
   
(Dollars in thousands)
    
Commercial and industrial
  
  $
231
 
  
  $
828
 
  
  $
189
 
  
 
15
 
SBA
  
 
997
 
  
 
583
 
  
 
8
 
  
 
12
 
SBA - PPP
  
 
-    
 
  
 
-    
 
  
 
-    
 
  
 
-    
 
Real estate:
        
Commercial real estate
  
 
2,998
 
  
 
-    
 
  
 
-    
 
  
 
6
 
Construction
  
 
-    
 
  
 
-    
 
  
 
-    
 
  
 
-    
 
SFR mortgage
  
 
1,080
 
  
 
-    
 
  
 
-    
 
  
 
4
 
Dairy & livestock and agribusiness
  
 
-    
 
  
 
-    
 
  
 
-    
 
  
 
-    
 
Municipal lease finance receivables
  
 
-    
 
  
 
-    
 
  
 
-    
 
  
 
-    
 
Consumer and other loans
  
 
268
 
  
 
-    
 
  
 
21
 
  
 
5
 
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total collateral-dependent loans
  
  $
      5,574
 
  
  $
      1,411
 
  
  $
              218
 
  
 
          42
 
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Reserve for Unfunded Loan 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 at the same time as it evaluates credit risk associated with the loan and lease portfolio. As a result of the adoption of ASU
2016-13,
the reserve for unfunded loan commitments included a transition adjustment of $41,000 as of January 1, 2020. There was no provision or recapture of provision for unfunded commitments for the six months ended June 30, 2020. As of June 30, 2020 and December 31, 2019, the balance in this reserve was $9.0 million and was included in other liabilities.
Troubled Debt Restructurings (“TDRs”)
Loans that are reported as TDRs are considered nonperforming and
charge-off
amounts are taken on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal. Refer to Note 3 –
Summary of Significant Accounting Policies,
included in our Annual Report on Form
10-K
for the year ended December 31, 2019 for a more detailed discussion regarding TDRs.
As of June 30, 2020, there were $2.8 
million of loans classified as a TDR, all of which were performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At June 30, 2020, performing TDRs were comprised of seven SFR mortgage loans
 
of $
1.8
 million, one SBA loan of $
517,000
, one commercial real estate loan of $
371,000
, and one commercial and industrial loan of $
51,000
.
The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time a probable loss is determined. We have no allocated allowance to TDRs as of June 30, 2020 and December 31, 2019.
The following table provides a summary of the activity related to TDRs for the periods presented.
 
                                                                           
    
Three Months Ended
June 30,
   
Six Months Ended
June 30,
    
2020
   
2019
   
2020
   
2019
    
(Dollars in thousands)
Performing TDRs:
            
Beginning balance
   
  $
2,813
 
   
  $
3,299
 
   
  $
3,112
 
   
  $
3,594
 
New modifications
   
 
-
 
   
 
-
 
   
 
-
 
   
 
-
 
Payoffs/payments, net and other
   
 
(42
) 
   
 
(80
) 
   
 
(341
) 
   
 
(375
) 
TDRs returned to accrual status
   
 
-
 
   
 
-
 
   
 
-
 
   
 
-
 
TDRs placed on nonaccrual status
   
 
-
 
   
 
-
 
   
 
-
 
   
 
-
 
  
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
  Ending balance
   
  $
2,771
 
   
  $
3,219
 
   
  $
2,771
 
   
  $
3,219
 
  
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Nonperforming TDRs:
            
Beginning balance
   
  $
-
 
   
  $
277
 
   
  $
244
 
   
$
3,509
 
New modifications
   
 
-
 
   
 
-
 
   
 
-
 
   
 
-
 
Charge-offs
   
 
-
 
   
 
-
 
   
 
-
 
   
 
(78
) 
Transfer to OREO
   
 
-
 
   
 
-
 
   
 
-
 
   
 
(2,275
) 
Payoffs/payments, net and other
   
 
-
 
   
 
(14
) 
   
 
(244
) 
   
 
(893
) 
TDRs returned to accrual status
   
 
-
 
   
 
-
 
   
 
-
 
   
 
-
 
TDRs placed on nonaccrual status
   
 
-
 
   
 
-
 
   
 
-
 
   
 
-
 
  
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
  Ending balance
   
  $
-
 
   
  $
263
 
   
  $
-
 
   
  $
263
 
  
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
  Total TDRs
   
  $
2,771
 
   
  $
3,482
 
   
  $
2,771
 
   
  $
3,482
 
  
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
As of June 30, 2020 and 2019, there were no loans that were modified as TDRs during the six months ended June 30, 2020 and 2019, respectively.
There were no loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the six months ended June 30, 2020 and 2019.
In accordance with regulatory guidance, if borrowers are less than 30 days past due on their loans, upon implementation of the modification program, or as allowed under the CARES Act if borrowers are less than 30 days past due on their loans as of December 31, 2019, and enter into short-term loan modifications offered as a result of
COVID-19,
their loans generally continue to be considered performing loans and continue to accrue interest during the period of the loan modification. For borrowers who are 30 days or more past due when entering into loan modifications offered as a result of
COVID-19,
we evaluate the loan modifications under our existing troubled debt restructuring framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR and will generally not accrue interest. For all borrowers who enroll in these loan modification programs offered as a result of
COVID-19,
the delinquency status of the borrowers is frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency will resume where it had left off upon entry into the program.