Loans and Allowance for Loan Losses

Credit Quality of Loans

Outstanding loans by class and payment aging as of September 30, 2016 and December 31, 2015 were as follows:



Loan Aging Analysis by Loan Class
(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential ¹		Installment and other consumer		Total
September 30, 2016
30-59 days past due	$	2	$	135	$	—	$	—	$	90	$	—	$	83	$	310
60-89 days past due	—		—		—		—		—		—		—		—
90 days or more past due	44		176		—		—		99		—		—		319
Total past due	46		311		—		—		189		—		83		629
Current	221,161		237,227		715,051		80,491		111,022		77,769		24,313		1,467,034
Total loans ³	$	221,207	$	237,538	$	715,051	$	80,491	$	111,211	$	77,769	$	24,396	$	1,467,663
Non-accrual ²	$	44	$	176	$	—	$	—	$	260	$	—	$	60	$	540
December 31, 2015
30-59 days past due	$	36	$	—	$	1,096	$	1	$	—	$	—	$	249	$	1,382
60-89 days past due	—		—		—		—		633		—		89		722
90 days or more past due	21		—		—		—		99		—		—		120
Total past due	57		—		1,096		1		732		—		338		2,224
Current	219,395		242,309		714,783		65,494		111,568		73,154		22,301		1,449,004
Total loans ³	$	219,452	$	242,309	$	715,879	$	65,495	$	112,300	$	73,154	$	22,639	$	1,451,228
Non-accrual ²	$	21	$	—	$	1,903	$	1	$	171	$	—	$	83	$	2,179

¹ Our residential loan portfolio does not include sub-prime loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages", the characteristics of which are loans lacking full documentation, borrowers having low FICO scores or higher loan-to-value ratios.

² Amounts include $1 thousand of purchased credit impaired ("PCI") loans that had stopped accreting interest at December 31, 2015. Amounts exclude accreting PCI loans of $2.9 million and $3.7 million at September 30, 2016 and December 31, 2015, respectively, as we have a reasonable expectation about future cash flows to be collected and we continue to recognize accretable yield on these loans in interest income. These accreting PCI loans are included in current loans. There were no accruing loans more than ninety days past due at September 30, 2016 or December 31, 2015.

³ Amounts include net deferred loan costs of $869 thousand and $768 thousand at September 30, 2016 and December 31, 2015, respectively. Amounts are also net of unaccreted purchase discounts on non-PCI loans of $1.9 million and $3.2 million at September 30, 2016 and December 31, 2015, respectively.

Our commercial loans are generally made to established small and mid-sized businesses to provide financing for their growth and working capital needs, equipment purchases and/or acquisitions. Management examines historical, current, and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial loans are made based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral and/or guarantor support. The cash flows of borrowers, however, may not occur as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed, such as accounts receivable and/or inventory, and typically include a personal guarantee. We target stable businesses with guarantors that have proven to be resilient in periods of economic stress. Typically, the guarantors provide an additional source of repayment for most of our credit extensions.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans discussed above. We underwrite these loans to be repaid from cash flow and to be supported by real property collateral. Underwriting standards for commercial real estate loans include, but are not limited to, debt coverage and loan-to-value ratios. Furthermore, the vast majority of our loans are guaranteed by the owners of the properties. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. In the event of a vacancy, guarantors are expected to carry the loans until a replacement tenant can be found. Regardless of the guaranty status, the owner's equity investment provides a strong economic incentive to continue to support the commercial real estate projects. As such, we have experienced a low level of loss and delinquencies in this portfolio.

Construction loans are generally made to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. The construction industry can be affected by significant events, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes. Estimates of construction costs and value associated with the completed project may be inaccurate. Repayment of construction loans is largely dependent on the ultimate success of the project.

Consumer loans primarily consist of home equity lines of credit, other residential (tenancy-in-common, or “TIC”) loans, and installment and other consumer loans. We originate consumer loans utilizing credit score information, debt-to-income ratio and loan-to-value ratio analysis. Diversification, coupled with relatively small loan amounts that are spread across many individual borrowers, mitigates risk. Additionally, trend reports are reviewed by Management on a regular basis. Our residential loan portfolio includes TIC units almost entirely in San Francisco. Installment and other consumer loans include mostly loans for floating homes and mobile homes along with a small number of installment loans.

We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and ultimately in the portfolio. Definitions of loans that are risk graded “Special Mention” or worse are consistent with those used by the Federal Deposit Insurance Corporation ("FDIC"). Our internally assigned grades are as follows:

Pass: Loans to borrowers of acceptable or better credit quality. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt service coverage ratios. These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial consequences. Negative external industry factors are generally not present. The loan may be secured, unsecured or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. This category also includes “Watch” loans, where the primary source of repayment has been delayed. “Watch” is intended to be a transitional grade, with either an upgrade or downgrade within a reasonable period.

Special Mention: Potential weaknesses that deserve close attention. If left uncorrected, those potential weaknesses may result in deterioration of the payment prospects for the asset. Special Mention assets do not present sufficient risk to warrant adverse classification.

Substandard: Inadequately protected by either the current sound worth and paying capacity of the obligor or the collateral pledged, if any. A Substandard asset has a well-defined weakness or weaknesses that jeopardize(s) the liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some loss if such weaknesses or deficiencies are not corrected. Well-defined weaknesses include adverse trends or developments in the borrower’s financial condition, managerial weaknesses and/or significant collateral deficiencies.

Doubtful: Critical weaknesses that make collection or liquidation in full improbable. There may be specific pending events that work to strengthen the asset; however, the amount or timing of the loss may not be determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral; and refinancing. Such loans are placed on non-accrual status and usually are collateral-dependent.

We regularly review our credits for accuracy of risk grades whenever new information is received. Borrowers are required to submit financial information at regular intervals:


•	Generally, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk and complexity.


•	Investor commercial real estate borrowers are generally required to submit rent rolls or property income statements annually.


•	Construction loans are monitored monthly, and reviewed on an ongoing basis.


•	Home equity and other consumer loans are reviewed based on delinquency.


•	Loans graded “Watch” or more severe, regardless of loan type, are reviewed no less than quarterly.

The following table represents an analysis of loans by internally assigned grades, including the PCI loans, at September 30, 2016 and December 31, 2015:



Credit Risk Profile by Internally Assigned Grade
(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential		Installment and other consumer		Purchased credit-impaired		Total
September 30, 2016
Pass	$	203,784	$	224,502	$	711,192	$	77,253	$	108,908	$	77,769	$	23,976	$	2,874	$	1,430,258
Special Mention	8,859		4,478		356		—		1,120		—		—		—		14,813
Substandard	8,524		7,505		1,793		3,238		1,112		—		420		—		22,592
Total loans	$	221,167	$	236,485	$	713,341	$	80,491	$	111,140	$	77,769	$	24,396	$	2,874	$	1,467,663
December 31, 2015
Pass	$	192,560	$	219,060	$	710,042	$	62,255	$	109,959	$	73,154	$	22,307	$	3,260	$	1,392,597
Special Mention	22,457		12,371		372		—		1,100		—		—		—		36,300
Substandard	4,260		9,167		3,739		3,239		1,173		—		332		421		22,331
Total loans	$	219,277	$	240,598	$	714,153	$	65,494	$	112,232	$	73,154	$	22,639	$	3,681	$	1,451,228

Troubled Debt Restructuring

Our loan portfolio includes certain loans that have been modified in a troubled debt restructuring (“TDR”), where economic concessions have been granted to borrowers experiencing financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs on non-accrual status at the time of restructure may be returned to accruing status after Management considers the borrower’s sustained repayment performance for a reasonable period, generally six months, and obtains reasonable assurance of repayment and performance.

A loan may no longer be reported as a TDR if all of the following conditions are met:


•	The loan is subsequently refinanced or restructured at current market interest rates and the new terms are consistent with the treatment of creditworthy borrowers under regular underwriting standards;


•	The borrower is no longer considered to be in financial difficulty;


•	Performance on the loan is reasonably assured; and;


•	Existing loan did not have any forgiveness of principal or interest.

The removal of TDR status must be approved by the same management level that approved the upgrading of the loan classification.

There were no loans removed from TDR designation during 2016. During the first nine months of 2015, four loans with a recorded investment totaling $1.4 million were removed from TDR designation as they met our criteria outlined above.

The table below summarizes outstanding TDR loans by loan class as of September 30, 2016 and December 31, 2015. The summary includes both TDRs that are on non-accrual status and those that continue to accrue interest.



(in thousands)
Recorded investment in Troubled Debt Restructurings ¹	September 30, 2016		December 31, 2015
Commercial and industrial	$	2,964	$	4,698
Commercial real estate, owner-occupied	6,993		6,993
Commercial real estate, investor	2,299		514
Construction ²	3,238		3,238
Home equity	696		460
Other residential	1,974		2,010
Installment and other consumer	1,024		1,168
Total	$	19,188	$	19,081

¹Includes $19.1 million and $19.0 million of TDR loans that were accruing interest as of September 30, 2016 and December 31, 2015, respectively. Includes no acquired loans at September 30, 2016 and $137 thousand of acquired loans at December 31, 2015.

²In June 2015, one TDR loan was transferred to loans held-for-sale at fair value totaling $1.5 million, net of an $839 thousand charge-off to the allowance for loan losses. The loan was subsequently sold in June 2015 for no additional gain or loss.

The table below presents the following information for loans modified in a TDR during the presented periods: number of contracts modified, the recorded investment in the loans prior to modification, and the recorded investment in the loans after being restructured. The table below excludes fully charged-off TDR loans and loans modified in a TDR and subsequently paid-off during the years presented.



(dollars in thousands)	Number of Contracts Modified	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment at Period End
Troubled Debt Restructurings during the three months ended September 30, 2016:
None	—	$	—	$	—	$	—

Troubled Debt Restructurings during the three months ended September 30, 2015:
Commercial and industrial	1	$	700	$	700	$	700



Troubled Debt Restructurings during the nine months ended September 30, 2016:
Commercial real estate, investor	2	$	1,830	$	1,826	$	1,808
Home equity ¹	1	87		222		222
Total	3	$	1,917	$	2,048	$	2,030

Troubled Debt Restructurings during the nine months ended September 30, 2015:
Commercial and industrial	5	$	1,482	$	1,582	$	1,463
Commercial real estate, investor	1	222		221		217
Total	6	$	1,704	$	1,803	$	1,680

¹The home equity TDR modification during the second quarter of 2016 included debt consolidation which increased the post-modification balance.

Modifications during the nine months ended September 30, 2016 primarily involved interest rate concessions, renewals, and other changes to loan terms. Modifications during the nine months ended September 30, 2015 primarily involved maturity extensions and other changes to loan terms. During the first nine months of 2016 and 2015, there were no defaults on loans that had been modified in a TDR within the prior twelve-month period. We report defaulted TDRs based on a payment default definition of more than ninety days past due.

Impaired Loan Balances and Their Related Allowance by Major Classes of Loans

The tables below summarize information on impaired loans and their related allowance. Total impaired loans include non-accrual loans, accruing TDR loans and accreting PCI loans that have experienced post-acquisition declines in cash flows expected to be collected.



(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential		Installment and other consumer		Total
September 30, 2016
Recorded investment in impaired loans:
With no specific allowance recorded	$	1,102	$	—	$	—	$	2,688	$	260	$	1,189	$	108	$	5,347
With a specific allowance recorded	1,906		7,169		2,299		550		625		785		976		14,310
Total recorded investment in impaired loans	$	3,008	$	7,169	$	2,299	$	3,238	$	885	$	1,974	$	1,084	$	19,657
Unpaid principal balance of impaired loans	$	3,008	$	7,169	$	2,299	$	3,238	$	885	$	1,974	$	1,084	$	19,657
Specific allowance	569		108		474		5		34		59		94		1,343
Average recorded investment in impaired loans during the quarter ended September 30, 2016	3,352		7,169		3,146		3,238		1,140		1,981		1,113		21,139
Interest income recognized on impaired loans during the quarter ended September 30, 2016 ¹	44		67		1,385		32		38		22		12		1,600
Average recorded investment in impaired loans during the nine months ended September 30, 2016	3,802		7,081		3,397		3,238		1,098		1,993		1,179		21,788
Interest income recognized on impaired loans during the nine months ended September 30, 2016 ¹	142		133		1,489		105		48		67		37		2,021
Average recorded investment in impaired loans during the quarter ended September 30, 2015	4,473		7,695		2,886		3,262		610		2,025		1,439		22,390
Interest income recognized on impaired loans during the quarter ended September 30, 2015	58		84		10		22		5		23		15		217
Average recorded investment in impaired loans during the nine months ended September 30, 2015	4,121		8,183		2,916		4,473		616		2,033		1,579		23,921
Interest income recognized on impaired loans during the nine months ended September 30, 2015	176		228		24		40		14		69		51		602

¹Interest income recognized on a cash basis totaled $1.4 million for the three and nine months ended September 30, 2016 and was primarily related to the interest recovery upon the pay-off of a partially charged off non-accrual commercial real estate loan during the third quarter. No interest interest income on impaired loans was recognized on a cash basis during the three and nine months ended September 30, 2015.



(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential		Installment and other consumer		Total
December 31, 2015
Recorded investment in impaired loans:
With no specific allowance recorded	$	2,198	$	4,111	$	2,416	$	2,687	$	171	$	1,214	$	131	$	12,928
With a specific allowance recorded	2,522		2,882		—		551		388		797		1,120		8,260
Total recorded investment in impaired loans	$	4,720	$	6,993	$	2,416	$	3,238	$	559	$	2,011	$	1,251	$	21,188
Unpaid principal balance of impaired loans	$	4,763	$	6,993	$	4,408	$	3,424	$	559	$	2,011	$	1,251	$	23,409
Specific allowance	$	912	$	70	$	—	$	1	$	3	$	67	$	116	$	1,169

Management monitors delinquent loans continuously and identifies problem loans, generally loans graded substandard or worse, to be evaluated individually for impairment testing. Generally, the recorded investment in impaired loans is net of any charge-offs from estimated losses related to specifically-identified impaired loans when they are deemed uncollectible. There were no amounts charged off for impaired loans outstanding at September 30, 2016. The charged-off portion of impaired loans outstanding at December 31, 2015 totaled $2.1 million. In addition, the recorded investment in impaired loans is net of purchase discounts or premiums on acquired loans. At both September 30, 2016 and December 31, 2015, unused commitments to extend credit on impaired loans, including loans to borrowers whose terms have been modified in TDRs, totaled $1.3 million.

The following tables disclose loans by major portfolio category and activity in the ALLL, as well as the related ALLL disaggregated by impairment evaluation method.



Allowance for Loan Losses Rollforward for the Period
(in thousands)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction		Home equity			Other residential			Installment and other consumer			Unallocated			Total
Three months ended September 30, 2016
Allowance for loan losses:
Beginning balance	$	2,637		$	1,631		$	6,595		$	831	$	1,076		$	426		$	437		$	1,454		$	15,087
Provision (reversal)	828			(10		)	(2,416		)	105		(125		)	22			(73		)	119			(1,550		)
Charge-offs	—			—			—			—		—			—			—			—			—
Recoveries	29			—			2,146			—		1			—			—			—			2,176
Ending balance	$	3,494		$	1,621		$	6,325		$	936	$	952		$	448		$	364		$	1,573		$	15,713
Three months ended September 30, 2015
Allowance for loan losses:
Beginning balance	$	2,540		$	2,052		$	5,944		$	535	$	843		$	435		$	444		$	1,561		$	14,354
Provision (reversal)	86			17			128			158		9			(50		)	32			(380		)	—
Charge-offs	(2		)	—			—			—		—			—			(1		)	—			(3		)
Recoveries	92			—			12			—		1			—			1			—			106
Ending balance	$	2,716		$	2,069		$	6,084		$	693	$	853		$	385		$	476		$	1,181		$	14,457



Allowance for Loan Losses Rollforward for the Period
(in thousands)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity			Other residential			Installment and other consumer			Unallocated		Total
Nine months ended September 30, 2016
Allowance for loan losses:
Beginning balance	$	3,023		$	2,249		$	6,178		$	724		$	910		$	394		$	425		$	1,096	$	14,999
Provision (reversal)	388			(628		)	(2,009		)	212			40			54			(84		)	477		(1,550		)
Charge-offs	(9		)	—			—			—			—			—			(4		)	—		(13		)
Recoveries	92			—			2,156			—			2			—			27			—		2,277
Ending balance	$	3,494		$	1,621		$	6,325		$	936		$	952		$	448		$	364		$	1,573	$	15,713
Nine months ended September 30, 2015
Allowance for loan losses:
Beginning balance	$	2,837		$	1,924		$	6,672		$	839		$	859		$	433		$	566		$	969	$	15,099
Provision (reversal)	(306		)	145			(606		)	693			(9		)	(48		)	(81		)	212		—
Charge-offs	(5		)	—			—			(839		)	—			—			(12		)	—		(856		)
Recoveries	190			—			18			—			3			—			3			—		214
Ending balance	$	2,716		$	2,069		$	6,084		$	693		$	853		$	385		$	476		$	1,181	$	14,457



Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity			Other residential			Installment and other consumer			Unallocated		Total
September 30, 2016
Ending ALLL related to loans collectively evaluated for impairment	$	2,925		$	1,513		$	5,851		$	931		$	918		$	389		$	270		$	1,573	$	14,370
Ending ALLL related to loans individually evaluated for impairment	569			108			474			5			34			59			94			—		1,343
Ending ALLL related to purchased credit-impaired loans	—			—			—			—			—			—			—			—		—
Total	$	3,494		$	1,621		$	6,325		$	936		$	952		$	448		$	364		$	1,573	$	15,713
Loans outstanding:
Collectively evaluated for impairment	$	218,159		$	229,316		$	711,042		$	77,253		$	110,255		$	75,795		$	23,312		$	—	$	1,445,132
Individually evaluated for impairment	3,008			7,169			2,299			3,238			885			1,974			1,084			—		19,657
Purchased credit-impaired	40			1,053			1,710			—			71			—			—			—		2,874
Total	$	221,207		$	237,538		$	715,051		$	80,491		$	111,211		$	77,769		$	24,396		$	—	$	1,467,663
Ratio of allowance for loan losses to total loans	1.58		%	0.68		%	0.88		%	1.16		%	0.86		%	0.58		%	1.49		%	NM		1.07		%
Allowance for loan losses to non-accrual loans	7,941		%	921		%	NM			NM			366		%	NM			607		%	NM		2,910		%

NM - Not Meaningful



Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity			Other residential			Installment and other consumer			Unallocated		Total
December 31, 2015
Ending ALLL related to loans collectively evaluated for impairment	$	2,111		$	2,179		$	6,178		$	723		$	907		$	327		$	309		$	1,096	$	13,830
Ending ALLL related to loans individually evaluated for impairment	904			70			—			—			3			67			116			—		1,160
Ending ALLL related to purchased credit-impaired loans	8			—			—			1			—			—			—			—		9
Total	$	3,023		$	2,249		$	6,178		$	724		$	910		$	394		$	425		$	1,096	$	14,999
Loans outstanding:
Collectively evaluated for impairment	$	214,695		$	233,605		$	711,737		$	62,256		$	111,673		$	71,143		$	21,388		$	—	$	1,426,497
Individually evaluated for impairment¹	4,582			6,993			2,416			3,238			559			2,011			1,251			—		21,050
Purchased credit-impaired	175			1,711			1,726			1			68			—			—			—		3,681
Total	$	219,452		$	242,309		$	715,879		$	65,495		$	112,300		$	73,154		$	22,639		$	—	$	1,451,228
Ratio of allowance for loan losses to total loans	1.38		%	0.93		%	0.86		%	1.11		%	0.81		%	0.54		%	1.88		%	NM		1.03		%
Allowance for loan losses to non-accrual loans	14,395		%	NM			325		%	72,400		%	532		%	NM			512		%	NM		688		%

¹ Total excludes $138 thousand PCI loans as of December 31, 2015 that have experienced credit deterioration post-acquisition declines in cash flows expected to be collected. These loans are included in the "purchased credit-impaired" amount in the next line below.

NM - Not Meaningful

Purchased Credit-Impaired Loans

We evaluated loans purchased in acquisitions in accordance with accounting guidance in ASC 310-30 related to loans acquired with deteriorated credit quality. Acquired loans are considered credit-impaired if there is evidence of significant deterioration of credit quality since origination and it is probable, at the acquisition date, that we will be unable to collect all contractually required payments receivable. Management has determined certain loans purchased in our two acquisitions to be PCI loans based on credit indicators such as non-accrual status, past due status, loan risk grade, loan-to-value ratio, etc. Revolving credit agreements (e.g., home equity lines of credit and revolving commercial loans) are not considered PCI loans as cash flows cannot be reasonably estimated.

For acquired loans not considered credit-impaired, the difference between the contractual amounts due (principal amount) and the fair value is accounted for subsequently through accretion. We recognize discount accretion based on the acquired loan’s contractual cash flows using an effective interest rate method. The accretion is recognized through the net interest margin.

The following table presents the outstanding balances and related carrying values of PCI loans as of September 30, 2016 and December 31, 2015.



	September 30, 2016				December 31, 2015
PCI Loans (in thousands)	Unpaid principal balance		Carrying value		Unpaid principal balance		Carrying value
Commercial and industrial	$	47	$	40	$	237	$	175
Commercial real estate	3,080		2,763		4,329		3,437
Construction	—		—		187		1
Home equity	220		71		224		68
Total purchased credit-impaired loans	$	3,347	$	2,874	$	4,977	$	3,681

The activities in the accretable yield, or income expected to be earned, for PCI loans were as follows:



Accretable Yield	Three months ended						Nine months ended
(in thousands)	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Balance at beginning of period	$	1,655		$	3,711		$	2,618		$	4,027
Removals ¹	—			(837		)	(778		)	(914		)
Accretion	(89		)	(128		)	(274		)	(367		)
Reclassifications from nonaccretable difference ²	—			—			—			—
Balance at end of period	$	1,566		$	2,746		$	1,566		$	2,746

¹ Represents the accretable difference that is relieved when a loan exits the PCI population due to pay-off, full charge-off, or transfer to repossessed assets, etc.

²Primarily relates to changes in expected credit performance and changes in expected timing of cash flows.

Pledged Loans

Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with an unpaid principal balance of $863.2 million and $833.8 million at September 30, 2016 and December 31, 2015, respectively. In addition, we pledge a certain residential loan portfolio, which totaled $48.7 million and $45.2 million at September 30, 2016 and December 31, 2015, respectively, to secure our borrowing capacity with the Federal Reserve Bank of San Francisco. Also see Note 6, Borrowings.