Loans and Allowance for Loan Losses

Credit Quality of Loans

Virtually all of our loans are from customers located in California, primarily in Marin, Alameda, Sonoma, San Francisco and Napa counties. Approximately 85% of total loans were secured by real estate at both December 31, 2016 and 2015. At December 31, 2016, 65% of our loans were for commercial real estate, 83% of which were secured by real estate located in Marin, Sonoma, Alameda, San Francisco and Napa counties (California).

The following table shows outstanding loans by class and payment aging as of December 31, 2016 and 2015.



Loan Aging Analysis by 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
December 31, 2016
30-59 days past due	$	283	$	—	$	—	$	—	$	77	$	—	$	2	$	362
60-89 days past due	—		—		—		—				—		49		49
90 days or more past due	—		—		—		—		91		—		—		91
Total past due	283		—		—		—		168		—		51		502
Current	218,332		247,713		724,228		74,809		117,039		78,549		25,444		1,486,114
Total loans ³	$	218,615	$	247,713	$	724,228	$	74,809	$	117,207	$	78,549	$	25,495	$	1,486,616
Non-accrual loans²	$	—	$	—	$	—	$	—	$	91	$	—	$	54	$	145
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 loans 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 There were no purchased credit impaired ("PCI") loans that had stopped accreting interest at December 31, 2016. Amounts include $1 thousand of 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 December 31, 2016 and 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. There were no accruing loans past due more than ninety days at December 31, 2016 or 2015.

³ Amounts include net deferred loan origination costs of $883 thousand and $768 thousand at December 31, 2016 and 2015, respectively. Amounts are also net of unaccreted purchase discounts on non-PCI loans of $1.8 million and $3.2 million at December 31, 2016 and 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, substantially all 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. The owner's substantial equity investment provides a strong economic incentive to continue to support the commercial real estate projects. As such, we have generally experienced a relatively 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 among loan types, 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, California. 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 and Watch: 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 of 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 worse, regardless of loan type, are reviewed no less than quarterly.

The following table represents an analysis of the carrying amount in loans, net of deferred fees or costs and purchase premiums or discounts, by internally assigned risk grades, including PCI loans, at December 31, 2016 and 2015.



Credit Risk Profile by Internally Assigned Risk 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
December 31, 2016
Pass	$	201,987	$	234,849	$	720,417	$	71,564	$	115,680	$	78,549	$	25,083	$	2,920	$	1,451,049
Special Mention	9,197		4,799		607		—		1,334		—		—		—		15,937
Substandard	7,391		6,993		1,498		3,245		91		—		412		—		19,630
Total loans	$	218,575	$	246,641	$	722,522	$	74,809	$	117,105	$	78,549	$	25,495	$	2,920	$	1,486,616
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 we no loans removed from TDR designation during 2016. During 2015, five loans with a recorded investment totaling $1.6 million were removed from TDR designation, after meeting all of the conditions noted above.

The table below summarizes the carrying amount of TDR loans by loan class as of December 31, 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)	As of
Recorded investment in Troubled Debt Restructurings ¹	December 31, 2016		December 31, 2015
Commercial and industrial	$	2,207	$	4,698
Commercial real estate, owner-occupied	6,993		6,993
Commercial real estate, investor	2,256		514
Construction²	3,245		3,238
Home equity	625		460
Other residential	1,965		2,010
Installment and other consumer	877		1,168
Total	$	18,168	$	19,081

¹There were no TDR loans on non-accrual status at December 31, 2016 and $72 thousand in TDR loans on non-accrual status as of December 31, 2015. Includes no acquired loans as of December 31, 2016 and $137 thousand in acquired loans at December 31, 2015.

² In 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 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
TDRs modified during 2016:
Commercial real estate, investor	2	$	1,830	$	1,826	$	1,752
Home equity¹	1	$	87	$	222	$	245
Installment and other consumer	1	$	68	$	67	$	66
Total	4	$	1,985	$	2,115	$	2,063
¹ The home equity line of credit modified in 2016 included debt consolidation, which increased the post-modification balance.
TDRs modified during 2015:
Commercial and industrial	7	$	3,271	$	3,251	$	2,811
TDRs modified during 2014:
Commercial and industrial	6	$	1,039	$	1,258	$	1,251
Commercial real estate, owner occupied	1	4,226		4,216		4,175
Commercial real estate, investor	2	224		224		220
Construction	2	964		1,312		1,309
Installment and other consumer	6	281		278		268
Total	17	$	6,734	$	7,288	$	7,223

Modifications during 2016, 2015 and 2014 primarily involved maturity or payment extensions and interest rate concessions or some combination thereof. During 2016, 2015 and 2014, 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 Loans

The table below summarizes information by class on impaired loans and their related allowances. 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
December 31, 2016
Recorded investment in impaired loans:
With no specific allowance recorded	$	315	$	—	$	—	$	2,692	$	91	$	1,008	$	103	$	4,209
With a specific allowance recorded	1,892		6,993		2,256		553		624		957		829		14,104
Total recorded investment in impaired loans	$	2,207	$	6,993	$	2,256	$	3,245	$	715	$	1,965	$	932	$	18,313
Unpaid principal balance of impaired loans	$	2,177	$	6,993	$	2,252	$	3,238	$	713	$	1,965	$	932	$	18,270
Specific allowance	$	285	$	163	$	375	$	8	$	7	$	55	$	98	$	991
Average recorded investment in impaired loans during 2016	$	3,514	$	7,069	$	2,950	$	3,242	$	945	$	1,988	$	1,127	$	20,835
Interest income recognized on impaired loans during 2016 ¹	$	175	$	199	$	1,514	$	137	$	60	$	90	$	48	$	2,223
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
Average recorded investment in impaired loans during 2015	$	4,237	$	7,886	$	2,833	$	4,164	$	602	$	2,028	$	1,523	$	23,273
Interest income recognized on impaired loans during 2015 ¹	$	238	$	295	$	33	$	86	$	18	$	92	$	64	$	826
Average recorded investment in impaired loans during 2014	$	5,354	$	6,604	$	3,138	$	6,471	$	741	$	1,744	$	1,857	$	25,909
Interest income recognized on impaired loans during 2014 ¹	$	378	$	288	$	28	$	85	$	19	$	74	$	76	$	948
¹Interest income recognized on a cash basis totaled $1.4 million in 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 in 2015 and 2014.

Management monitors delinquent loans continuously and identifies problem loans, generally loans graded substandard or worse, loans on non-accrual status and loans modified in a TDR, 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 charged-off portions of impaired loans outstanding at December 31, 2016. The charged-off portion of impaired loans outstanding at December 31, 2015 totaled approximately $2.1 million. In addition, the recorded investment in impaired loans is net of purchase discounts or premiums on acquired loans and net deferred fees and cost. At December 31, 2016 and 2015, outstanding commitments to extend credit on impaired loans, including performing loans to borrowers whose terms have been modified in TDRs, totaled $1.6 million and $1.3 million, respectively.

The following tables disclose activity in the ALLL and the recorded investment in loans by class, 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
Year ended December 31, 2016
Beginning balance	$	3,023		$	2,249		$	6,178		$	724		$	910		$	394		$	425		$	1,096	$	14,999
Provision (reversal)	93			(476		)	(2,014		)	57			60			60			(75		)	445		(1,850		)
Charge-offs	(11		)	(20		)	—			—			—			—			(5		)	—		(36		)
Recoveries	143			—			2,156			—			3			—			27			—		2,329
Ending balance	$	3,248		$	1,753		$	6,320		$	781		$	973		$	454		$	372		$	1,541	$	15,442
Year ended December 31, 2015
Beginning balance	$	2,837		$	1,924		$	6,672		$	839		$	859		$	433		$	566		$	969	$	15,099
Provision (reversal)	(45		)	325			(517		)	724			48			(39		)	(123		)	127		500
Charge-offs	(5		)	—			—			(839		)	—			—			(20		)	—		(864		)
Recoveries	236			—			23			—			3			—			2			—		264
Ending balance	$	3,023		$	2,249		$	6,178		$	724		$	910		$	394		$	425		$	1,096	$	14,999
Year ended December 31, 2014
Beginning balance	$	3,056		$	2,012		$	6,196		$	633		$	875		$	317		$	629		$	506	$	14,224
Provision (reversal)	(321		)	(93		)	431			314			(19		)	116			(141		)	463		750
Charge-offs	(66		)	—			—			(204		)	—			—			(7		)	—		(277		)
Recoveries	168			5			45			96			3			—			85			—		402
Ending balance	$	2,837		$	1,924		$	6,672		$	839		$	859		$	433		$	566		$	969	$	15,099



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, 2016
Ending ALLL related to loans collectively evaluated for impairment	$	2,963		$	1,590		$	5,945		$	773		$	966		$	399		$	274		$	1,541	$	14,451
Ending ALLL related to loans individually evaluated for impairment	285			163			375			8			7			55			98			—		991
Ending ALLL related to purchased credit-impaired loans	—			—			—			—			—			—			—			—		—
Ending balance	$	3,248		$	1,753		$	6,320		$	781		$	973		$	454		$	372		$	1,541	$	15,442
Recorded Investment:
Collectively evaluated for impairment	$	216,368		$	239,648		$	720,266		$	71,564		$	116,390		$	76,584		$	24,563		$	—	$	1,465,383
Individually evaluated for impairment	2,207			6,993			2,256			3,245			715			1,965			932			—		18,313
Purchased credit-impaired	40			1,072			1,706			—			102			—			—			—		2,920
Total	$	218,615		$	247,713		$	724,228		$	74,809		$	117,207		$	78,549		$	25,495		$	—	$	1,486,616
Ratio of allowance for loan losses to total loans	1.49		%	0.71		%	0.87		%	1.04		%	0.83		%	0.58		%	1.46		%	NM		1.04		%
Allowance for loan losses to non-accrual loans	NM			NM			NM			NM			1,071		%	NM			683		%	NM		10,650		%

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
Ending balance	$	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 Totals exclude $138 thousand in PCI loans that have experienced credit deterioration post-acquisition, which are included in the "purchased credit-impaired" amount in the next line below.

NM - Not Meaningful

Purchased Credit-Impaired Loans

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 bank acquisitions to be PCI loans based on credit indicators such as nonaccrual 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.

The following table reflects the unpaid principal balance and related carrying value of PCI loans:



PCI Loans	December 31, 2016				December 31, 2015
(in thousands)	Unpaid Principal Balance		Carrying Value		Unpaid Principal Balance		Carrying Value
Commercial and industrial	$	45	$	40	$	237	$	175
Commercial real estate, owner occupied	1,344		1,072		2,573		1,711
Commercial real estate, investor	1,713		1,706		1,756		1,726
Construction	—		—		187		1
Home equity	248		102		224		68
Total purchased credit-impaired loans	$	3,350	$	2,920	$	4,977	$	3,681

There were no fluctuations in expected future cash flows on the remaining PCI loans that resulted in changes to the allowance for loan losses during 2016. The specific allowance for PCI loan losses increased by $4 thousand and $3 thousand during 2015 and 2014, respectively. Probable and significant increases in expected cash flows would first reverse any related allowance for loan losses and any remaining increases would be recognized prospectively as interest income over the estimated remaining lives of the loans. The specific allowance for PCI loan losses decreased by $6 thousand during 2016 as a result of loan pay-offs. The allowance for loan losses for PCI loans, due to increases in the present value of cash flows expected to be collected, decreased by $2 thousand and $238 thousand during 2015 and 2014, respectively.

The activities in the accretable yield, or income expected to be earned over the remaining lives of the PCI loans were as follows:



Accretable Yield	Years ended
(in thousands)	December 31, 2016			December 31, 2015			December 31, 2014
Balance at beginning of period	$	2,618		$	4,027		$	3,649
Additions	—			—			—
Removals ¹	(778		)	(914		)	(273		)
Accretion	(364		)	(495		)	(613		)
Reclassifications from nonaccretable difference ²	—			—			1,264
Balance at end of period	$	1,476		$	2,618		$	4,027
¹ Represents the accretable difference that is relieved when a loan exits the PCI population due to payoff, full charge-off, or transfer to repossessed assets, etc.
² Primarily 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 $869.2 million and $833.8 million at December 31, 2016 and 2015, respectively. In addition, we pledge a certain residential loan portfolio, which totaled $54.6 million and $45.2 million at December 31, 2016 and 2015, respectively, to secure our borrowing capacity with the Federal Reserve Bank (“FRB”). Also see Note 7, Borrowings, below.

Related Party Loans

The Bank has, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their associates. These transactions, including loans, are granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to us. Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features.

An analysis of net loans to related parties for each of the three years ended December 31, 2016, 2015 and 2014 is as follows:



(in thousands)	2016			2015			2014
Balance at beginning of year	$	2,562		$	3,329		$	3,749
Additions	—			—			—
Advances	—			165			—
Repayments	(574		)	(390		)	(420		)
Reclassified as unrelated-party loan due to a change in borrower status	—			(542		)	—
Balance at end of year	$	1,988		$	2,562		$	3,329

Undisbursed commitments to related parties totaled $1.1 million and $1.0 million as of December 31, 2016 and 2015, respectively.