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Loans and Allowance for Credit Losses on Loans

12 Months Ended

Dec. 31, 2020

Allowance for Credit Losses on Loans

4) Loans and Allowance for Credit Losses on Loans

The allowance for credit losses on loans was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The loan portfolio is classified into eight segments of loans - commercial, commercial real estate – owner occupied, commercial real estate – non-owner occupied, land and construction, home equity, multifamily, residential mortgage and consumer and other. See Note 1 – Summary of Significant Accounting Polices - Allowance for Credit Losses on Loans for the summary of risk characteristics of each loan segment.

Loans by portfolio segment and the allowance for credit losses on loans were as follows for the periods indicated:


	December 31,		December 31,
	2020		2019

	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	846,386	$	603,345
Real estate:
CRE - owner occupied		560,362		548,907
CRE - non-owner occupied		693,103		767,821
Land and construction		144,594		147,189
Home equity		111,885		151,775
Multifamily		166,425		180,623
Residential mortgages		85,116		100,759
Consumer and other		18,116		33,744
Loans		2,625,987		2,534,163
Deferred loan fees, net		(6,726)		(319)
Loans, net of deferred fees		2,619,261		2,533,844
Allowance for credit losses on loans⁽¹⁾		(44,400)		(23,285)
Loans, net	$	2,574,861	$	2,510,559

⁽¹⁾Allowance for credit losses on loans at December 31, 2020, Allowance for loan losses at December 31, 2019.

Changes in the allowance for credit losses on loans were as follows:


	Year Ended December 31, 2020
			Owner		Non-owner		Land &		Home		Multi-		Residential		Consumer
	Commercial		Occupied		Occupied		Construction		Equity		Family		Mortgage		and Other		Total

	(Dollars in thousands)
Beginning of period balance	$	10,453	$	3,825	$	3,760	$	2,621	$	2,244	$	57	$	243	$	82	$	23,285
Adoption of Topic 326		(3,663)		3,169		7,912		(1,163)		(923)		1,196		435		1,607		8,570
Balance at adoption on January 1, 2020		6,790		6,994		11,672		1,458		1,321		1,253		678		1,689		31,855
Charge-offs		(1,776)		—		—		—		—		—		—		(104)		(1,880)
Recoveries		998		1		—		70		93		—		—		30		1,192
Net (charge-offs) recoveries		(778)		1		—		70		93		—		—		(74)		(688)
Provision (credit) for credit losses on loans		5,575		1,565		4,744		981		(117)		1,551		265		(1,331)		13,233
End of period balance	$	11,587	$	8,560	$	16,416	$	2,509	$	1,297	$	2,804	$	943	$	284	$	44,400

Management’s methodology for estimating the allowance balance consists of several key elements, which include pooling loans with similar characteristics into segments and using a discounted cash flow calculation to estimate losses. The discounted cash flow model inputs include loan level cash flow estimates for each loan segment based on peer and bank historic loss correlations with certain economic factors. Management uses a four quarter forecast of each economic factor that is used for each loan segment and the economic factors are assumed to revert to the historic mean over an eight quarter period after the four quarter forecast period. The economic factors management has selected include the California unemployment rate, California gross state product, California home price index, and a national CRE value index. These factors are evaluated and updated occasionally and as economic conditions change. Additionally, management uses qualitative adjustments to the discounted cash flow quantitative loss estimates in certain cases when management has assessed an adjustment is necessary. These qualitative adjustments are applied by pooled loan segment and have been made for increased risk due to loan quality trends, collateral risk, or other risks management determines are not adequately captured in the discounted cash flow loss estimation. Specific allowances on individually

evaluated loans are combined to the allowance on pools of loans with similar risk characteristics to derive to total allowance for credit losses on loans.

The increase in the allowance for credit loss and related provision during the year ended December 31, 2020 is primarily attributable to the change in projected economic conditions resulting from the COVID-19 pandemic, with elevated levels of unemployment being the most significant factor. Management has also considered other qualitative risks such as collateral values, concentrations of credit risk (geographic, large borrower, and industry), economic conditions, changes in underwriting standards, experience and depth of lending staff, trends in delinquencies, and the level of criticized loans to address asset-specific risks and current conditions that were not fully considered by the macroeconomic variables driving the quantitative estimate.

Changes in the allowance for loan losses were as follows:


	Year Ended December 31, 2019
	Commercial		Real Estate		Consumer		Total

	(Dollars in thousands)
Beginning of period balance	$	17,061	$	10,671	$	116	$	27,848
Charge-offs		(6,609)		—		(14)		(6,623)
Recoveries		1,045		169		—		1,214
Net recoveries		(5,564)		169		(14)		(5,409)
Provision (credit) for loan losses		(1,044)		1,910		(20)		846
End of period balance	$	10,453	$	12,750	$	82	$	23,285


	Year Ended December 31, 2018
	Commercial		Real Estate		Consumer		Total

	(Dollars in thousands)
Beginning of period balance	$	10,608	$	8,950	$	100	$	19,658
Charge-offs		(2,002)		—		(24)		(2,026)
Recoveries		2,645		150		—		2,795
Net recoveries		643		150		(24)		769
Provision for loan losses		5,810		1,571		40		7,421
End of period balance	$	17,061	$	10,671	$	116	$	27,848

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, based on the impairment method as follows at year-end:


	December 31, 2019
					Consumer
	Commercial		Real Estate		and other		Total

	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,835	$	—	$	—	$	1,835
Collectively evaluated for impairment		8,618		12,750		82		21,450
Total allowance balance	$	10,453	$	12,750	$	82	$	23,285
Loans:
Individually evaluated for impairment	$	4,810	$	5,454	$	—	$	10,264
Collectively evaluated for impairment		598,535		1,891,620		33,744		2,523,899
Total loan balance	$	603,345	$	1,897,074	$	33,744	$	2,534,163

The following table presents the amortized cost basis of nonaccrual loans and loans past due over 90 days and still accruing at December 31, 2020:


						Restructured
	Nonaccrual		Nonaccrual			and Loans
	with no Specific		with Specific			over 90 Days
	Allowance for		Allowance for			Past Due
	Credit		Credit			and Still
	Losses		Losses			Accruing	Total

	(Dollars in thousands)
Commercial	$	752	$	1,974	$	81	$	2,807
Real estate:
CRE - Owner Occupied		3,706		—		—		3,706
Home equity		949		—		—		949
Consumer and other		407				—		407
Total	$	5,814	$	1,974	$	81	$	7,869

The following table presents nonperforming loans by class at December 31, 2019:


			Restructured
			and Loans
			over 90 Days
			Past Due
			and Still
	Nonaccrual		Accruing		Total

	(Dollars in thousands)
Commercial	$	3,444	$	1,153	$	4,597
Real estate:
CRE		5,094		—		5,094
Home equity		137		—		137
Total	$	8,675	$	1,153	$	9,828

The following tables presents the aging of past due loans by class for the periods indicated:


	December 31, 2020
	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total
	Past Due		Past Due		Past Due		Past Due		Current		Total

	(Dollars in thousands)
Commercial	$	3,524	$	259	$	392	$	4,175	$	842,211	$	846,386

Real estate:
CRE - Owner Occupied		1,133		—		29		1,162		559,200		560,362
CRE - Non-Owner Occupied		—		485		—		485		692,618		693,103
Land and construction		—		—		—		—		144,594		144,594
Home equity		—		—				—		111,885		111,885
Multifamily		—		—		—		—		166,425		166,425
Residential mortgages		—		—		—		—		85,116		85,116
Consumer and other		—		—		407		407		17,709		18,116
Total	$	4,657	$	744	$	828	$	6,229	$	2,619,758	$	2,625,987


	December 31, 2019
	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total
	Past Due		Past Due		Past Due		Past Due		Current		Total

	(Dollars in thousands)
Commercial	$	4,770	$	2,097	$	3,217	$	10,084	$	593,261	$	603,345
Real estate:
CRE - Owner Occupied		—		—		5,094		5,094		543,813		548,907
CRE - Non-Owner Occupied		—		—		—		—		767,821		767,821
Land and construction		—		—		—		—		147,189		147,189
Home equity		—		137		—		137		151,638		151,775
Multifamily		—		—		—		—		180,623		180,623
Residential mortgages		—		—		—		—		100,759		100,759
Consumer and other		—		—		—		—		33,744		33,744
Total	$	4,770	$	2,234	$	8,311	$	15,315	$	2,518,848	$	2,534,163

Past due loans 30 days or greater totaled $6,229,000 and $15,315,000 at December 31, 2020 and December 31, 2019, respectively, of which $1,918,000 and $7,413,000 were on nonaccrual. At December 31, 2020, there were also $5,870,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2019, there were also $1,262,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. Management’s classification of a loan as “nonaccrual” is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt.

Credit Quality Indicators

Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or activities in the same geographic region, or have similar features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The Company’s loan portfolio is concentrated in commercial (primarily manufacturing, wholesale, and service) and real estate lending, with the remaining balance in consumer loans. While no specific industry concentration is considered significant, the Company’s lending operations are located in the Company’s market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the Company’s borrowers could be adversely impacted by a downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers’ ability to repay their loans.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, and other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Pass loans generally include those loans that are expected to be repaid in accordance with contractual loans terms. Loans not categorized as pass are assigned a rating using the following definitions:

Special Mention. A Special Mention asset has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the asset or in the credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that will jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Substandard-Nonaccrual. Loans classified as substandard-nonaccrual are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any, and it is probable that the Company will not receive payment of the full contractual principal and interest. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. In addition, the Company no longer accrues interest on the loan

because of the underlying weaknesses.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss. Loans classified as loss are considered uncollectable or of so little value that their continuance as assets is not warranted. This classification does not necessarily mean that a loan has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery would occur. Loans classified as loss are immediately charged off against the allowance for credit losses on loans. Therefore, there is no balance to report as of December 31, 2020 and December 31, 2019.

Loans may be reviewed at any time throughout a loan’s duration. If new information is provided, a new risk assessment may be performed if warranted.

The following table presents term loans amortized cost by vintage and loan grade classification, and revolving loans amortized cost by loan grade classification. The loan grade classifications are based on the Bank’s internal loan grading methodology. Loan grade categories for doubtful and loss rated loans are not included on the table below as there are no loans with those grades at December 31, 2020. The vintage year represents the period the loan was originated or in the case of renewed loans, the period last renewed. The amortized balance is the loan balance less any purchase discounts, and plus any loan purchase premiums. The loan categories are based on the loan segmentation in the Company's CECL reserve methodology based on loan purpose and type.


														Revolving
														Loans
		Term Loans Amortized Cost Basis by Originated Period												Amortized
												2015 and		Cost
		2020		2019		2018		2017		2016		Prior		Basis		Total

	(Dollars in thousands)
Commercial:
Pass	$	431,369	$	33,350	$	21,154	$	13,840	$	7,341	$	8,292	$	296,286	$	811,632
Special Mention		15,720		716		1,301		953		713		170		1,937		21,510
Substandard		4,036		-		19		758		2,396		73		3,236		10,518
Substandard-Nonaccrual		2,106		56		36		-		115		26		387		2,726
Total		453,231		34,122		22,510		15,551		10,565		8,561		301,846		846,386

CRE - Owner Occupied:
Pass		168,224		73,064		68,068		51,705		50,716		109,350		15,964		537,091
Special Mention		3,151		2,568		4,128		783		-		2,569		-		13,199
Substandard		2,561		-		400		2,954		-		451		-		6,366
Substandard-Nonaccrual		3,678		-		-		-		-		28		-		3,706
Total		177,614		75,632		72,596		55,442		50,716		112,398		15,964		560,362

CRE - Non-Owner Occupied:
Pass		166,550		128,361		68,796		99,816		57,422		150,683		1,926		673,554
Special Mention		11,930		-		2,557		-		-		-		-		14,487
Substandard		3,166		-		1,411		-		485		-		-		5,062
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		181,646		128,361		72,764		99,816		57,907		150,683		1,926		693,103

Land and construction:
Pass		114,932		22,054		-		-		-		1,343		4,906		143,235
Special Mention		-		-		-		-		-		-		-		-
Substandard		1,359		-		-		-		-		-		-		1,359
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		116,291		22,054		-		-		-		1,343		4,906		144,594

Home equity:
Pass		266		-		74		-		-		-		109,848		110,188
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		143		605		748
Substandard-Nonaccrual		117		-		-		-		-		-		832		949
Total		383		-		74		-		-		143		111,285		111,885

Multifamily:
Pass		31,481		39,183		17,248		24,572		16,235		30,751		880		160,350
Special Mention		-		-		-		-		-		5,186		-		5,186
Substandard		889		-		-		-		-		-		-		889
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		32,370		39,183		17,248		24,572		16,235		35,937		880		166,425

Residential mortgage:
Pass		12,798		10,048		3,246		7,324		28,115		15,568		-		77,099
Special Mention		5,089		-		1,630		-				-		-		6,719
Substandard		-		-		-		-		-		1,298		-		1,298
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		17,887		10,048		4,876		7,324		28,115		16,866		-		85,116

Consumer and other:
Pass		10		522		1,486		20		116		987		14,568		17,709
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Substandard-Nonaccrual		-		-		407		-		-		-		-		407
Total		10		522		1,893		20		116		987		14,568		18,116

Total loans	$	979,432	$	309,922	$	191,961	$	202,725	$	163,654	$	326,918	$	451,375	$	2,625,987

Risk Grades:.
Pass	$	925,630	$	306,582	$	180,072	$	197,277	$	159,945	$	316,974	$	444,378	$	2,530,858
Special Mention		35,890		3,284		9,616		1,736		713		7,925		1,937		61,101
Substandard		12,011		-		1,830		3,712		2,881		1,965		3,841		26,240
Substandard-Nonaccrual		5,901		56		443		-		115		54		1,219		7,788
Grand Total	$	979,432	$	309,922	$	191,961	$	202,725	$	163,654	$	326,918	$	451,375	$	2,625,987

The following table provides a summary of the loan portfolio by loan type and credit quality classification at December 31, 2019:


	December 31, 2019
	Nonclassified		Classified		Total

Commercial	$	599,143		4,202	$	603,345
Real estate:
CRE - Owner Occupied		538,229		10,678		548,907
CRE - Non-Owner Occupied		761,801		6,020		767,821
Land and construction		144,108		3,081		147,189
Home equity		149,131		2,644		151,775
Multifamily		180,623		—		180,623
Residential mortgages		100,262		497		100,759
Consumer and other		28,287		5,457		33,744
Total	$	2,501,584	$	32,579	$	2,534,163

Nonclassified loans include those rated as Pass or Special Mention using the definitions listed above. Classified loans are those rated Substandard, Substandard-Nonaccrual, Doubtful and Loss, using those definitions.

The following table presents the amortized cost basis of collateral-dependent loans by loan classification at December 31, 2020:


		Collateral Type
		Real
		Estate		Business
		Property		Assets		Unsecured		Total

	(Dollars in thousands)
Commercial	$	29	$	1,815	$	130	$	1,974
Total	$	29	$	1,815	$	130	$	1,974

When management determines that foreclosures are probable, expected credit losses for collateral-dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. For loans which foreclosure is not probable, but for which repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty, management has elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, adjusted for selling costs as appropriate. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value.

The following table details the allowance for loan losses and recorded investment in loans individually evaluated for impairment by loan classification as of December 31, 2019, as determined in accordance with ASC 310 prior to adoption of Topic 326:



					Allowance
	Unpaid				for Loan
	Principal		Recorded		Losses
	Balance		Investment		Allocated

	(Dollars in thousands)
With no related allowance recorded:
Commercial	$	2,113	$	2,113	$	—
Real estate:
CRE		5,094		5,094		—
Home Equity		360		360		—
Total with no related allowance recorded		7,567		7,567		—

With an allowance recorded:
Commercial		2,697		2,697		1,835
Total with an allowance recorded		2,697		2,697		1,835
Total	$	10,264	$	10,264	$	1,835

The book balance of troubled debt restructurings at December 31, 2020 was $674,000, which included $468,000 of nonaccrual loans and $206,000 of accruing loans. The book balance of troubled debt restructurings at December 31, 2019 was $1,039,000, which included $590,000 of nonaccrual loans and $449,000 of accruing loans. Approximately $352,000 and $20,000 in specific reserves were established with respect to these loans as of December 31, 2020 and December 31, 2019. As of December 31, 2020 and December 31, 2019, the Company had no additional amounts committed on any loan classified as a troubled debt restructuring.

The following table presents loans by class modified as troubled debt restructurings for the periods indicated:


	During the Year Ended
		December 31, 2020
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment

	(Dollars in thousands)
Commercial		15	$	630	$	630
Total		15	$	630	$	630


	During the Year Ended
		December 31, 2019
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment

	(Dollars in thousands)
Commercial		3	$	591	$	591
Total		3	$	591	$	591

There were 15 new loans with total recorded investment of $630,000 that were modified as troubled debt restructurings during the year ended December 31, 2020.

During the twelve months ended December 31, 2020, there were debt restructurings in which the amount of principal or accrued interest owed from the borrower was forgiven or which resulted in a charge-off or change to the allowance for credit losses on loans.

A loan is considered to be in payment default when it is 30 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings, within twelve months following the modification, during the years ended December 31, 2020 and 2019.

A loan that is a troubled debt restructuring on nonaccrual status may return to accruing status after a period of at least six months of consecutive payments in accordance with the modified terms.

On March 22, 2020, the Interagency Statement was issued by our banking regulators that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. Section 541 of the Consolidated Appropriations Act extends this relief to the earlier of January 1, 2022 or 60 days after the national emergency termination date.

In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term (180 days or less) modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. The table below presents these loan deferrals by loan category:


	Underlying Collateral
		Business		Real
		Assets		Estate		Total

(in $000's, unaudited)
Initial Deferments⁽¹⁾	$	-	$	1,573	$	1,573
2nd Deferments⁽²⁾		295		684		979
Total	$	295	$	2,257	$	2,552

⁽¹⁾Initial deferments were generally for 3 months
⁽²⁾ 2nd deferments were for an additional 3 months