Loans and Lease Finance Receivables and Allowance for Credit Losses

9 Months Ended

Sep. 30, 2023

Loans and Lease Finance Receivables and Allowance for Credit Losses

6. 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.


	September 30, 2023			December 31, 2022
	(Dollars in thousands)
Commercial real estate	$	6,843,059		$	6,884,948
Construction		63,022			88,271
SBA		283,124			290,908
SBA - Paycheck Protection Program (PPP)		3,233			9,087
Commercial and industrial		938,064			948,683
Dairy & livestock and agribusiness		351,463			433,564
Municipal lease finance receivables		75,621			81,126
SFR mortgage		268,171			266,024
Consumer and other loans		51,875			76,781
Total loans, at amortized cost		8,877,632			9,079,392
Less: Allowance for credit losses		(88,995	)		(85,117	)
Total loans and lease finance receivables, net	$	8,788,637		$	8,994,275

As of September 30, 2023, 80.81% of the Company’s total loan portfolio consisted of real estate loans, with commercial real estate loans representing 77.08% of total loans. The Company’s real estate loans and construction loans are secured by real properties primarily located in California. As of September 30, 2023, $509.2 million, or 7.44% of the total commercial real estate loans included loans secured by farmland, compared to $517.8 million, or 7.52%, at December 31, 2022. The loans secured by farmland included $133.2 million for loans secured by dairy & livestock land and $376.0 million for loans secured by agricultural land at September 30, 2023, compared to $140.5 million for loans secured by dairy & livestock land and $377.3 million for loans secured by agricultural land at December 31, 2022. As of September 30, 2023, dairy & livestock and agribusiness loans of $351.5 million were comprised of $301.5 million for dairy & livestock loans and $50.0 million for agribusiness loans, compared to $433.6 million comprised of $388.5 million of dairy & livestock loans and $45.1 million of agribusiness loans December 31, 2022.

At September 30, 2023 and December 31, 2022, loans totaling $4.35 billion and $4.30 billion, respectively, were pledged to secure available lines of credit from the FHLB and the Federal Reserve Bank.

There were no outstanding loans held-for-sale as of September 30, 2023 and December 31, 2022.

Credit Quality Indicators

We monitor credit quality by evaluating various risk attributes and utilize such information in our evaluation of the appropriateness of the allowance for credit losses. Internal credit risk ratings, within our loan risk rating system, are the credit quality indicators that we most closely monitor.

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 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: 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, and includes gross charge-offs in accordance with ASU 2022-02 effective January 1, 2023, as of the dates presented.


	Origination Year												Revolving loans amortized		Revolving loans converted to
September 30, 2023	2023		2022		2021		2020		2019		Prior		cost basis		term loans		Total
	(Dollars in thousands)
Commercial real estate loans:
Risk Rating:
Pass	$	373,704	$	1,327,377	$	1,159,196	$	900,512	$	508,645	$	2,119,797	$	160,435	$	38,875	$	6,588,541
Special Mention		3,256		4,417		16,273		28,896		42,458		77,508		1,911		—		174,719
Substandard		244		8,168		—		22,598		12,769		35,220		800		—		79,799
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total Commercial real estate loans:	$	377,204	$	1,339,962	$	1,175,469	$	952,006	$	563,872	$	2,232,525	$	163,146	$	38,875	$	6,843,059
Current YTD Period: Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Construction loans:
Risk Rating:
Pass	$	375	$	14,984	$	24,400	$	8,062	$	—	$	—	$	15,201	$	—	$	63,022
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total Construction loans:	$	375	$	14,984	$	24,400	$	8,062	$	—	$	—	$	15,201	$	—	$	63,022
Current YTD Period: Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

SBA loans:
Risk Rating:
Pass	$	20,163	$	50,643	$	53,354	$	34,387	$	6,249	$	110,538	$	—	$	—	$	275,334
Special Mention		—		—		—		—		1,890		2,560		—		—		4,450
Substandard		—		—		—		—		—		3,340		—		—		3,340
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total SBA loans:	$	20,163	$	50,643	$	53,354	$	34,387	$	8,139	$	116,438	$	—	$	—	$	283,124
Current YTD Period: Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	207	$	—	$	—	$	207

SBA - PPP loans:
Risk Rating:
Pass	$	—	$	—	$	809	$	2,424	$	—	$	—	$	—	$	—	$	3,233
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total SBA - PPP loans:	$	—	$	—	$	809	$	2,424	$	—	$	—	$	—	$	—	$	3,233
Current YTD Period: Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial and industrial loans:
Risk Rating:
Pass	$	116,890	$	152,983	$	107,790	$	93,749	$	73,760	$	102,963	$	248,769	$	6,218	$	903,122
Special Mention		7,418		986		1,300		643		4,482		4,110		5,098		5,702		29,739
Substandard		—		273		—		—		89		1,304		2,487		1,050		5,203
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total Commercial and industrial loans:	$	124,308	$	154,242	$	109,090	$	94,392	$	78,331	$	108,377	$	256,354	$	12,970	$	938,064
Current YTD Period: Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	16	$	—	$	—	$	16


	Origination Year												Revolving loans amortized		Revolving loans converted to
September 30, 2023	2023		2022		2021		2020		2019		Prior		cost basis		term loans		Total
	(Dollars in thousands)
Dairy & livestock and agribusiness loans:
Risk Rating:
Pass	$	247	$	—	$	2,074	$	1,054	$	120	$	205	$	280,524	$	—	$	284,224
Special Mention		463		—		—		—		61		—		62,670		1,304		64,498
Substandard		—		—		—		—		—		208		2,498		35		2,741
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total Dairy & livestock and agribusiness loans:	$	710	$	—	$	2,074	$	1,054	$	181	$	413	$	345,692	$	1,339	$	351,463
Current YTD Period: Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Municipal lease finance receivables loans:
Risk Rating:
Pass	$	—	$	5,989	$	26,088	$	6,188	$	4,266	$	32,867	$	—	$	—	$	75,398
Special Mention		—		—		—		—		—		223		—		—		223
Substandard		—		—		—		—		—		—		—		—		—
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total Municipal lease finance receivables loans:	$	—	$	5,989	$	26,088	$	6,188	$	4,266	$	33,090	$	—	$	—	$	75,621
Current YTD Period: Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

SFR mortgage loans:
Risk Rating:
Pass	$	16,831	$	61,882	$	43,841	$	44,529	$	28,963	$	69,010	$	—	$	—	$	265,056
Special Mention		750		—		—		924		558		339		—		—		2,571
Substandard		—		—		—		—		—		205		—		339		544
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total SFR mortgage loans:	$	17,581	$	61,882	$	43,841	$	45,453	$	29,521	$	69,554	$	—	$	339	$	268,171
Current YTD Period: Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer and other loans:
Risk Rating:
Pass	$	2,548	$	4,763	$	2,967	$	830	$	710	$	525	$	36,846	$	900	$	50,089
Special Mention		—		—		278		—		—		—		5		884		1,167
Substandard		—		—		—		—		—		11		7		601		619
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total Consumer and other loans:	$	2,548	$	4,763	$	3,245	$	830	$	710	$	536	$	36,858	$	2,385	$	51,875
Current YTD Period: Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	1	$	—	$	—	$	1

Total Loans, at amortized cost:
Risk Rating:
Pass	$	530,758	$	1,618,621	$	1,420,519	$	1,091,735	$	622,713	$	2,435,905	$	741,775	$	45,993	$	8,508,019
Special Mention		11,887		5,403		17,851		30,463		49,449		84,740		69,684		7,890		277,367
Substandard		244		8,441		—		22,598		12,858		40,288		5,792		2,025		92,246
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total Loans at amortized cost:	$	542,889	$	1,632,465	$	1,438,370	$	1,144,796	$	685,020	$	2,560,933	$	817,251	$	55,908	$	8,877,632
Current YTD Period: Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	224	$	—	$	—	$	224


	Origination Year												Revolving loans amortized		Revolving loans converted to
December 31, 2022	2022		2021		2020		2019		2018		Prior		cost basis		term loans		Total
	(Dollars in thousands)
Commercial real estate loans:
Risk Rating:
Pass	$	1,363,733	$	1,197,290	$	957,965	$	542,827	$	506,613	$	1,889,478	$	175,373	$	39,616	$	6,672,895
Special Mention		3,285		12,114		11,284		32,976		21,646		76,290		908		—		158,503
Substandard		—		—		15,624		16,297		94		21,535		—		—		53,550
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total Commercial real estate loans:	$	1,367,018	$	1,209,404	$	984,873	$	592,100	$	528,353	$	1,987,303	$	176,281	$	39,616	$	6,884,948

Construction loans:
Risk Rating:
Pass	$	17,203	$	26,689	$	16,578	$	—	$	—	$	—	$	22,850	$	—	$	83,320
Special Mention		—		—		—		—		4,951		—		—		—		4,951
Substandard		—		—		—		—		—		—		—		—		—
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total Construction loans:	$	17,203	$	26,689	$	16,578	$	—	$	4,951	$	—	$	22,850	$	—	$	88,271

SBA loans:
Risk Rating:
Pass	$	60,623	$	54,781	$	35,243	$	7,460	$	28,886	$	96,473	$	1,026	$	—	$	284,492
Special Mention		—		—		—		1,321		1,293		2,065		—		—		4,679
Substandard		—		—		—		—		556		1,181		—		—		1,737
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total SBA loans:	$	60,623	$	54,781	$	35,243	$	8,781	$	30,735	$	99,719	$	1,026	$	—	$	290,908

SBA - PPP loans:
Risk Rating:
Pass	$	—	$	5,515	$	3,572	$	—	$	—	$	—	$	—	$	—	$	9,087
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total SBA - PPP loans:	$	—	$	5,515	$	3,572	$	—	$	—	$	—	$	—	$	—	$	9,087

Commercial and industrial loans:
Risk Rating:
Pass	$	154,765	$	135,162	$	80,763	$	101,192	$	42,731	$	85,406	$	305,589	$	7,775	$	913,383
Special Mention		3,955		761		459		1,693		462		8		15,156		544		23,038
Substandard		494		—		728		959		5,624		496		3,200		761		12,262
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total Commercial and industrial loans:	$	159,214	$	135,923	$	81,950	$	103,844	$	48,817	$	85,910	$	323,945	$	9,080	$	948,683


	Origination Year												Revolving loans amortized		Revolving loans converted to
December 31, 2022	2022		2021		2020		2019		2018		Prior		cost basis		term loans		Total
	(Dollars in thousands)
Dairy & livestock and agribusiness loans:
Risk Rating:
Pass	$	207	$	2,318	$	1,515	$	187	$	69	$	628	$	400,229	$	450	$	405,603
Special Mention		—		—		—		599		46		—		17,129		853		18,627
Substandard		1,041		—		40		—		95		113		1,841		6,204		9,334
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total Dairy & livestock and agribusiness loans:	$	1,248	$	2,318	$	1,555	$	786	$	210	$	741	$	419,199	$	7,507	$	433,564

Municipal lease finance receivables loans:
Risk Rating:
Pass	$	6,442	$	26,858	$	6,814	$	4,327	$	4,948	$	31,292	$	—	$	—	$	80,681
Special Mention		—		—		—		—		—		262		—		—		262
Substandard		—		—		—		—		—		183		—		—		183
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total Municipal lease finance receivables loans:	$	6,442	$	26,858	$	6,814	$	4,327	$	4,948	$	31,737	$	—	$	—	$	81,126

SFR mortgage loans:
Risk Rating:
Pass	$	63,761	$	46,748	$	45,819	$	33,585	$	15,836	$	58,730	$	—	$	—	$	264,479
Special Mention		—		—		943		—		—		—		—		—		943
Substandard		—		—		—		—		—		214		—		388		602
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total SFR mortgage loans:	$	63,761	$	46,748	$	46,762	$	33,585	$	15,836	$	58,944	$	—	$	388	$	266,024

Consumer and other loans:
Risk Rating:
Pass	$	7,653	$	3,722	$	1,298	$	926	$	79	$	1,277	$	58,578	$	1,107	$	74,640
Special Mention		—		561		—		—		—		—		590		—		1,151
Substandard		—		—		—		—		—		13		5		972		990
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total Consumer and other loans:	$	7,653	$	4,283	$	1,298	$	926	$	79	$	1,290	$	59,173	$	2,079	$	76,781

Total Loans, at amortized cost:
Risk Rating:
Pass	$	1,674,387	$	1,499,083	$	1,149,567	$	690,504	$	599,162	$	2,163,284	$	963,645	$	48,948	$	8,788,580
Special Mention		7,240		13,436		12,686		36,589		28,398		78,625		33,783		1,397		212,154
Substandard		1,535		—		16,392		17,256		6,369		23,735		5,046		8,325		78,658
Doubtful & Loss		—		—		—		—		—		—		—		—		—
Total Loans at amortized cost:	$	1,683,162	$	1,512,519	$	1,178,645	$	744,349	$	633,929	$	2,265,644	$	1,002,474	$	58,670	$	9,079,392

Allowance for Credit Losses ("ACL")

Our allowance for credit losses is based upon lifetime loss rate models developed from an estimation framework that uses historical lifetime loss experiences to derive loss rates at a collective pool level. We measure the expected credit losses on a collective (pooled) basis for those loans that share similar risk characteristics. We have three collective loan pools: Commercial Real Estate, Commercial and Industrial, and Consumer. Our ACL amounts are largely driven by portfolio characteristics, including loss history and various risk attributes, and the economic outlook for certain macroeconomic variables. Risk attributes for commercial real estate loans include Original Loan to Value ratios ("OLTV"), origination year, loan seasoning, and macroeconomic variables that include GDP growth, commercial real estate price index and unemployment rate. Risk attributes for commercial and industrial loans include internal risk ratings, borrower industry sector, loan credit spreads and macroeconomic variables that include unemployment rate and BBB spread. The macroeconomic variables for Consumer include unemployment rate and GDP. The Commercial Real Estate methodology is applied over commercial real estate loans, a portion of construction loans, and a portion of SBA loans (excluding Paycheck Protection Program loans). The Commercial and Industrial methodology is applied over a substantial portion of the Company’s commercial and industrial loans, all dairy & livestock and agribusiness loans, municipal lease receivables, as well as the remaining portion of SBA loans (excluding Paycheck Protection Program loans). The Consumer methodology is applied to SFR mortgage loans, consumer loans, as well as the remaining construction loans. In addition to determining the quantitative life of loan loss rate to be applied against the amortized cost basis of the portfolio segments, management reviews current conditions and forecasts to determine whether adjustments are needed to ensure

that the life of loan loss rates reflect both the current state of the portfolio, and expectations for macroeconomic changes. 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 included in our Annual Report on Form 10-K for the year ended December 31, 2022 for a more detailed discussion concerning the allowance for credit losses.

The ACL totaled $89.0 million at September 30, 2023, compared to $85.1 million at December 31, 2022. The $3.9 million increase in the ACL from December 31, 2022 to September 30, 2023 is comprised of $4.0 million in provision for credit losses, offset by $122,000 in net charge-offs. At September 30, 2023, the ACL as a percentage of total loans and leases, at amortized cost, was 1.00%. This compares to 0.94% at December 31, 2022. Our economic forecast continues to be a blend of multiple forecasts produced by Moody’s. The baseline forecast continues to represent the largest weighting in our multi-weighted forecast scenario, with the remaining weighting on forecasts that reflect greater downside risks of recession. As of September 30, 2023, the resulting weighted forecast assumes GDP will increase by 2.1% for all of 2023 and 0.3% for 2024 and then grow by 1.1% in 2025. The unemployment rate is forecasted to be 3.8% in 2023, 5.2% in 2024 and 5.7% in 2025.

Management believes that the ACL was appropriate at September 30, 2023 and December 31, 2022. Due to inflationary pressures, high interest rates, lower commercial real estate values, and geopolitical events, 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 September 30, 2023
	Ending Balance June 30, 2023		Charge-offs			Recoveries		Provision for (Recapture of) Credit Losses			Ending Balance September 30, 2023
	(Dollars in thousands)
Commercial real estate	$	67,943	$	—		$	—	$	2,957		$	70,900
Construction		1,162		—			3		(166	)		999
SBA		2,656		(26	)		48		371			3,049
SBA - PPP		—		—			—		—			—
Commercial and industrial		9,121		—			—		161			9,282
Dairy & livestock and agribusiness		4,960		—			3		(1,396	)		3,567
Municipal lease finance receivables		273		—			—		(27	)		246
SFR mortgage		450		—			—		75			525
Consumer and other loans		402		—			—		25			427
Total allowance for credit losses	$	86,967	$	(26	)	$	54	$	2,000		$	88,995


	Three Months Ended September 30, 2022
	Ending Balance June 30, 2022		Charge-offs			Recoveries		Provision for (Recapture of) Credit Losses			Ending Balance September 30, 2022
	(Dollars in thousands)
Commercial real estate	$	61,513	$	—		$	—	$	3,392		$	64,905
Construction		1,062		—			3		657			1,722
SBA		2,613		—			41		151			2,805
SBA - PPP		—		—			—		—			—
Commercial and industrial		7,194		(45	)		—		(16	)		7,133
Dairy & livestock and agribusiness		6,832		—			381		(2,220	)		4,993
Municipal lease finance receivables		183		—			—		56			239
SFR mortgage		254		—			—		50			304
Consumer and other loans		571		(1	)		—		(70	)		500
Total allowance for credit losses	$	80,222	$	(46	)	$	425	$	2,000		$	82,601


	Nine Months Ended September 30, 2023
	Ending Balance December 31, 2022		Charge-offs			Recoveries		Provision for (Recapture of) Credit Losses			Ending Balance September 30, 2023
	(Dollars in thousands)
Commercial real estate	$	64,806	$	—		$	—	$	6,094		$	70,900
Construction		1,702		—			9		(712	)		999
SBA		2,809		(207	)		69		378			3,049
SBA - PPP		—		—			—		—			—
Commercial and industrial		10,206		(16	)		14		(922	)		9,282
Dairy & livestock and agribusiness		4,400		—			10		(843	)		3,567
Municipal lease finance receivables		296		—			—		(50	)		246
SFR mortgage		366		—			—		159			525
Consumer and other loans		532		(1	)		—		(104	)		427
Total allowance for credit losses	$	85,117	$	(224	)	$	102	$	4,000		$	88,995


	Nine Months Ended September 30, 2022
	Ending Balance December 31, 2021		Charge-offs			Recoveries		Initial ACL for PCD Loans at Acquisition		Provision Recorded at Acquisition		Provision for (Recapture of) Credit Losses			Ending Balance September 30, 2022
	(Dollars in thousands)
Commercial real estate	$	50,950	$	—		$	—	$	5,086	$	4,127	$	4,742		$	64,905
Construction		765		—			9		122		58		768			1,722
SBA		2,668		—			99		62		64		(88	)		2,805
Commercial and industrial		6,669		(66	)		456		500		508		(934	)		7,133
Dairy & livestock and agribusiness		3,066		—			383		2,832		149		(1,437	)		4,993
Municipal lease finance receivables		100		—			—		3		26		110			239
SFR mortgage		188		—			—		—		—		116			304
Consumer and other loans		613		(4	)		—		—		—		(109	)		500
Total allowance for credit losses	$	65,019	$	(70	)	$	947	$	8,605	$	4,932	$	3,168		$	82,601

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 responsible for 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 credit losses, 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 credit 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, 2022, 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 dates presented.


	September 30, 2023
	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 real estate
Owner occupied	$	92	$	44	$	3,107	$	3,243	$	2,468,477	$	2,471,720
Non-owner occupied		—		—		531		531		4,370,808		4,371,339
Construction
Speculative (1)		—		—		—		—		53,058		53,058
Non-speculative		—		—		—		—		9,964		9,964
SBA		—		54		996		1,050		282,074		283,124
SBA - PPP		—		—		—		—		3,233		3,233
Commercial and industrial		—		2,487		1,911		4,398		933,666		938,064
Dairy & livestock and agribusiness		—		95		36		131		351,332		351,463
Municipal lease finance receivables		—		—		—		—		75,621		75,621
SFR mortgage		—		—		—		—		268,171		268,171
Consumer and other loans		4		—		—		4		51,871		51,875
Total gross loans	$	96	$	2,680	$	6,581	$	9,357	$	8,868,275	$	8,877,632

(1)

Speculative construction loans are generally for properties where there is no identified buyer or renter.


	December 31, 2022
	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 real estate
Owner occupied	$	—	$	—	$	2,639	$	2,639	$	2,482,471	$	2,485,110
Non-owner occupied		—		—		—		—		4,399,838		4,399,838
Construction
Speculative (1)		—		—		—		—		67,436		67,436
Non-speculative		—		—		—		—		20,835		20,835
SBA		374		182		443		999		289,909		290,908
SBA - PPP		—		—		—		—		9,087		9,087
Commercial and industrial		—		—		1,318		1,318		947,365		948,683
Dairy & livestock and agribusiness		—		—		269		269		433,295		433,564
Municipal lease finance receivables		—		—		—		—		81,126		81,126
SFR mortgage		—		388		—		388		265,636		266,024
Consumer and other loans		175		—		33		208		76,573		76,781
Total gross loans	$	549	$	570	$	4,702	$	5,821	$	9,073,571	$	9,079,392

(1)

Speculative construction loans are generally for properties where there is no identified buyer or renter.

Amortized cost of our finance receivables and loans that are on nonaccrual status, including loans with no allowance are presented as of September 30, 2023 and December 31, 2022 by type of loan.


	September 30, 2023
	Nonaccrual with No Allowance for Credit Losses		Total Nonaccrual (1)		Loans Past Due Over 89 Days Still Accruing
	(Dollars in thousands)
Commercial real estate
Owner occupied	$	3,107	$	3,107	$	—
Non-owner occupied		548		548		—
Construction
Speculative (2)		—		—		—
Non-speculative		—		—		—
SBA		868		1,050		—
SBA - PPP		—		—		—
Commercial and industrial		939		4,672		—
Dairy & livestock and agribusiness		131		243		—
Municipal lease finance receivables		—		—		—
SFR mortgage		339		339		—
Consumer and other loans		—		4		—
Total gross loans	$	5,932	$	9,963	$	—

(1)

As of September 30, 2023, $742,000 of nonaccruing loans were current, $4,000 were 30-59 days past due, $2.6 million were 60-89 days past due, and $6.6 million were 90+ days past due.

(2)

Speculative construction loans are generally for properties where there is no identified buyer or renter.


	December 31, 2022
	Nonaccrual with No Allowance for Credit Losses		Total Nonaccrual (1) (3)		Loans Past Due Over 89 Days Still Accruing
	(Dollars in thousands)
Commercial real estate
Owner occupied	$	2,639	$	2,639	$	—
Non-owner occupied		18		18		—
Construction
Speculative (2)		—		—		—
Non-speculative		—		—		—
SBA		268		443		—
SBA - PPP		—		—		—
Commercial and industrial		771		1,320		—
Dairy & livestock and agribusiness		364		477		—
Municipal lease finance receivables		—		—		—
SFR mortgage		—		—		—
Consumer and other loans		34		33		—
Total gross loans	$	4,094	$	4,930	$	—

(1)

As of December 31, 2022, $228,000 of nonaccruing loans were current and $4.7 million were 90+ days past due.

(2)

Speculative construction loans are generally for properties where there is no identified buyer or renter.

(3)

Excludes $221,000 of guaranteed portion of nonaccrual SBA loans that are in process of collection.

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 dates presented.


	September 30, 2023						Number of Loans
	Real Estate		Business Assets		Other		Dependent on Collateral
	(Dollars in thousands)
Commercial real estate	$	3,655	$	—	$	—		5
Construction		—		—		—		—
SBA		830		220		—		5
SBA - PPP		—		—		—		—
Commercial and industrial		401		3,104		1,167		10
Dairy & livestock and agribusiness		130		—		113		3
Municipal lease finance receivables		—		—		—		—
SFR mortgage		339		—		—		1
Consumer and other loans		—		—		4		1
Total collateral-dependent loans	$	5,355	$	3,324	$	1,284		25


	December 31, 2022						Number of Loans
	Real Estate		Business Assets		Other		Dependent on Collateral
	(Dollars in thousands)
Commercial real estate	$	17,935	$	—	$	—		4
Construction		—		—		—		—
SBA		151		292		—		6
SBA - PPP		—		—		—		—
Commercial and industrial		87		2,774		81		13
Dairy & livestock and agribusiness		269		2,000		208		4
Municipal lease finance receivables		—		—		—		—
SFR mortgage		—		—		—		—
Consumer and other loans		33		—		—		1
Total collateral-dependent loans	$	18,475	$	5,066	$	289		28

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 in the same manner as it evaluates credit risk associated with the loan and lease portfolio. The Bank's ACL methodology produced an allowance of $8.0 million for the off-balance sheet credit exposures as of September 30, 2023. There was no provision or recapture of provision for unfunded loan commitments for the nine months ended September 30, 2023 and September 30, 2022. As of September 30, 2023 and December 31, 2022, the balance in this reserve was $8.0 million and was included in other liabilities.

Modifications of Loans to Borrowers Experiencing Financial Difficulty

The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1,2023. The amendments in ASU 2022-02 eliminated the recognition and measurement of TDRs and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.

The table below reflects the amortized cost of loans by type made to borrowers experiencing financial difficulty that were modified during the three months ended September 30, 2023.


	Term Extension
	Amortized Cost Basis		% of Total Class of
	at September 30,2023		Financing Receivables
	(Dollars in thousands)
Commercial real estate loans	$	1,815		0.02	%
Dairy & livestock and agribusiness		4,799		0.05	%
Total	$	6,614

	Combination-Term Extension and Interest Rate Reduction
	Amortized Cost Basis		% of Total Class of
	at September 30,2023		Financing Receivables
Commercial real estate loans	$	690		0.01	%
Total	$	690

The following table describes the financial effect of the loan modifications made to borrowers experiencing financial difficulty during the three months ended September 30, 2023.



	Loan Type		Financial Effect

			Term Extension
	Commercial real estate loans		Added a weighted-average 1.0 years to the life of loans, which reduced monthly payment amounts for the borrowers.
	Dairy & livestock and agribusiness		Added a weighted-average 0.5 years to the life of loans, which reduced monthly payment amounts for the borrowers.

			Combination-Term Extension and Interest Rate Reduction
	Commercial real estate loans		Added a weighted-average 7.6 years to the life of loans, which reduced monthly payment amounts for the borrowers; reduced weighted-average contractual interest rate from 10% to 7.25%.

As of September 30, 2023, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the first nine months of 2023 that subsequently defaulted. Payment default is defined as movement to nonaccrual (nonperforming) status, foreclosure or charge-off, whichever occurs first.

The following table presents the recorded investment in, and the aging of, past due loans at amortized cost (including nonaccrual loans), by type of loans, made to borrowers experiencing financial difficulty that were modified on or after January 1, 2023, the date we adopted ASU 2022-02.


	Payment Status (amortized cost basis)
	Current		30-89 Days Past Due		90+ Days Past Due
	(Dollars in thousands)
Commercial real estate loans	$	2,505	$	—	$	—
Dairy & livestock and agribusiness		4,799		—		—
Total	$	7,304	$	—	$	—

Prior to January 1, 2023, loans reported as TDRs were considered impaired and charge-off amounts were 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, 2022 for a more detailed discussion regarding TDRs.

As of December 31, 2022, there were $7.8 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 December 31, 2022, performing TDRs were comprised of four commercial and industrial loans of $4.8 million, one dairy & livestock and agribusiness loan of $2.0 million, and five SFR mortgage loans of $1.0 million.

The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time the loan is considered uncollectible. We had no allocated allowance to TDRs as of December 31, 2022 and September 30, 2022.

As of December 31, 2022 and September 30, 2022, there were no loans that were modified as a TDR within the previous 12 months that subsequently defaulted during the twelve months ended December 31, 2022 and the nine months ended September 30, 2022.