
Loan Aging Analysis by Class
(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor-owned		Construction		Home equity		Other residential		Installment and other consumer		Total
September 30, 2020
30-59 days past due	$	198	$	—	$	—	$	—	$	217	$	—	$	—	$	415
60-89 days past due	—		—		—		—		276		—		7		283
90 days or more past due	—		—		—		—		—		—		—		—
Total past due	198		—		—		—		493		—		7		698
Current	512,775		299,754		966,517		66,663		106,871		130,915		23,798		2,107,293
Total loans 1	$	512,973	$	299,754	$	966,517	$	66,663	$	107,364	$	130,915	$	23,805	$	2,107,991
Non-accrual loans 2	$	—	$	—	$	886	$	—	$	532	$	—	$	24	$	1,442
December 31, 2019
30-59 days past due	$	1	$	—	$	1,001	$	—	$	279	$	—	$	7	$	1,288
60-89 days past due	—		—		—		—		98		—		95		193
90 days or more past due	—		—		—		—		167		—		—		167
Total past due	1		—		1,001		—		544		—		102		1,648
Current	246,686		308,824		945,316		61,095		115,480		136,657		27,580		1,841,638
Total loans 1	$	246,687	$	308,824	$	946,317	$	61,095	$	116,024	$	136,657	$	27,682	$	1,843,286
Non-accrual loans 2	$	—	$	—	$	—	$	—	$	168	$	—	$	58	$	226

1 Amounts include net deferred loan origination (fees) costs of $(5.1) million (including $6.5 million in deferred SBA PPP loan fees, net of costs) and $983 thousand at September 30, 2020 and December 31, 2019, respectively. Amounts are also net of unaccreted purchase discounts on non-PCI loans of $878 thousand at September 30, 2020 and $983 thousand at December 31, 2019.

We generally make commercial loans to established small and mid-sized businesses to provide financing for their growth and working capital needs, equipment purchases and 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 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 inventory, and typically include personal guarantees. We target stable businesses with guarantors who provide additional sources of repayment and have proven to be resilient in periods of economic stress.

Pursuant to the CARES Act, the Bank funded over 1,800 loans to eligible small businesses and non-profit organizations who participated in the Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”). PPP loans have terms of two to five years and earn interest at 1%. In addition, the Bank received a fee of 1%-5% from the SBA depending on the loan amount, which was netted with loan origination costs and amortized into interest income under the effective yield method over the contractual life of the loan. The recognition of fees and costs is accelerated when the loan is forgiven by the SBA and/or paid off prior to maturity. PPP loans are fully guaranteed by the SBA and are expected to be forgiven by the SBA if they meet the requirements of the program. PPP loans totaling $301.7 million at September 30, 2020 are included in commercial and industrial loan balances. The Bank ended its origination of new PPP loans on June 30, 2020. On June 5, 2020, the PPP Flexibility Act was signed into law that modified, among other things, rules governing the PPP payment deferral period. In October 2020, due to the continued delay in the PPP forgiveness process, the Bank modified the first payment due dates for PPP loans that originated prior to June 5, 2020 and extended the payment deferral period from six to sixteen months. The extended payment deferral period will affect the timing over which the accretion of PPP net loan origination fees are recognized.

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, a large majority of our loans are guaranteed by the owners of the properties. Conditions in the real estate markets or in the general economy may adversely affect our commercial real estate loans. In the event of a vacancy, we expect guarantors to carry the loans until they find a replacement tenant. 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. Construction loans include interest reserves that are used for the payment of interest during the development and marketing periods and are capitalized as part of the loan balance. When a construction loan is placed on nonaccrual status before the depletion of the interest reserve, we apply the interest funded by the interest reserve against the loan's principal balance. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. We monitor all construction projects to determine whether they are on schedule, completed as planned and in accordance with the approved construction budgets. Significant events can affect the construction industry, 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 loans and floating homes, along with a small number of installment loans. Our other residential loans include tenancy-in-common fractional interest loans ("TIC") located almost entirely in San Francisco County. We originate consumer loans utilizing credit score information, debt-to-income ratio and loan-to-value ratio analysis. Diversification among consumer loan types, coupled with relatively small loan amounts that are spread across many individual borrowers, mitigates risk. We do not originate sub-prime residential mortgage loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages," the characteristics of which are reduced documentation, borrowers with low FICO scores or collateral with high loan-to-value ratios.

We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and in the loan portfolio. Our definitions of “Special Mention” risk graded loans, 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.

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 we receive new information. Borrowers are generally required to submit financial information at regular intervals. Typically, 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. In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually.


Credit Risk Profile by Internally Assigned Risk Grade
(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor-owned		Construction		Home equity		Other residential		Installment and other consumer		Total
September 30, 2020
Pass	$	484,305	$	251,741	$	946,166	$	66,663	$	105,824	$	130,915	$	23,665	$	2,009,279
Special Mention	28,544		41,010		17,359		—		800		—		—		87,713
Substandard	124		7,003		2,992		—		740		—		140		10,999
Total loans	$	512,973	$	299,754	$	966,517	$	66,663	$	107,364	$	130,915	$	23,805	$	2,107,991
December 31, 2019
Pass	$	209,213	$	264,766	$	945,757	$	61,095	$	114,935	$	136,657	$	27,538	$	1,759,961
Special Mention	37,065		35,016		560		—		750		—		—		73,391
Substandard	409		9,042		—		—		339		—		144		9,934
Total loans	$	246,687	$	308,824	$	946,317	$	61,095	$	116,024	$	136,657	$	27,682	$	1,843,286

Our loan portfolio includes certain loans modified in a troubled debt restructuring (“TDR”), where we have granted economic concessions 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 nine months, and obtains reasonable assurance of repayment and performance.

The same Management level that approved the loan classification upgrade must approve the removal of TDR status. There were no loans removed from TDR designation during the nine months ended September 30, 2020. There was one commercial loan with a recorded investment of $3 thousand removed from TDR designation during the nine months ended September 30, 2019 after meeting all of the conditions above.

Section 4013 of the CARES Act provided optional, temporary relief from evaluating loans that may have been considered TDRs under GAAP. This relief applies to loan modifications executed between March 1, 2020 and the earlier of 60 days after the national emergency is terminated or December 31, 2020. The Bank elected to apply these temporary accounting provisions to payment relief loans beginning in March 2020. The Bank approved 264 loan modifications for full payment deferral or interest-only payments for up to 120 days on loan balances exceeding $388.5 million. As of October 19, 2020, 20 loans totaling $47.2 million had either requested additional payment relief or the relief period had not expired. We accrue and recognize interest income on loans under payment relief based on the original contractual interest rates. When payments resume at the end of the relief period, the payments will generally be applied to accrued interest due until accrued interest is fully paid.


(in thousands)
Recorded Investment in Troubled Debt Restructurings 1	September 30, 2020		December 31, 2019
Commercial and industrial	$	1,017	$	1,223
Commercial real estate, owner-occupied	7,003		6,998
Commercial real estate, investor-owned	3,309		1,770

Home equity	527		251
Other residential	—		452
Installment and other consumer	769		639
Total	$	12,625	$	11,333

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


(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 during the three months ended September 30, 2020:
Commercial real estate, investor-owned	1	$	1,553	$	1,553	$	1,553


TDRs during the three months ended September 30, 2019:
None	—	$	—	$	—	$	—


TDRs during the nine months ended September 30, 2020:
Commercial and industrial	1	$	170	$	162	$	125
Commercial real estate, investor-owned	1	1,553		1,553		1,553
Home equity	1	276		276		276
Installment and other consumer	3	211		211		209
	6	$	2,210	$	2,202	$	2,163
TDRs during the nine months ended September 30, 2019:
Commercial and industrial	1	$	298	$	298	$	173

The loans modified in 2020 reflected debt consolidation, interest rate concessions, and/or other loan term and payment modifications. The loan modified during the first nine months of 2019 reflected a maturity extension and interest rate concession. During the nine months ended September 30, 2020 and 2019, 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.


(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor-owned		Construction		Home equity		Other residential		Installment and other consumer		Total
September 30, 2020
Recorded investment in impaired loans:
With no specific allowance recorded	$	291	$	—	$	885	$	—	$	532	$	—	$	89	$	1,797
With a specific allowance recorded	726		7,003		3,310		—		251		—		680		11,970
Total recorded investment in impaired loans	$	1,017	$	7,003	$	4,195	$	—	$	783	$	—	$	769	$	13,767
Unpaid principal balance of impaired loans	$	1,012	$	6,993	$	4,187	$	—	$	801	$	—	$	767	$	13,760
Specific allowance	19		225		697		—		4		—		161		1,106
Average recorded investment in impaired loans during the quarter ended September 30, 2020	798		7,002		3,430		—		829		—		774		12,833
Interest income recognized on impaired loans during the quarter ended September 30, 20201	11		64		30		—		3		—		7		115
Average recorded investment in impaired loans during the nine months ended September 30, 2020	948		7,000		2,832		—		740		225		730		12,475
Interest income recognized on impaired loans during the nine months ended September 30, 20201	32		197		68		—		10		4		22		333
Average recorded investment in impaired loans during the quarter ended September 30, 2019	1,324		7,000		1,791		684		413		456		659		12,327
Interest income recognized on impaired loans during the quarter ended September 30, 20191	16		67		20		400		9		4		6		522
Average recorded investment in impaired loans during the nine months ended September 30, 2019	1,495		6,998		1,804		1,687		497		458		670		13,609
Interest income recognized on impaired loans during the nine months ended September 30, 20191	56		199		59		456		42		14		18		844

1 No interest income was recognized on a cash basis during the three and nine months ended September 30, 2020. Interest income recognized on a cash basis of $393 thousand and $416 thousand during the respective three and nine months ended September 30, 2019 was related to a principal payment applied to interest collected but unrecognized on a former non-accrual land development loan and the pay-off of three non-accrual loans.


(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor-owned		Construction		Home equity		Other residential		Installment and other consumer		Total
December 31, 2019
Recorded investment in impaired loans:
With no specific allowance recorded	$	349	$	—	$	—	$	—	$	167	$	452	$	98	$	1,066
With a specific allowance recorded	874		6,998		1,770		—		251		—		541		10,434
Total recorded investment in impaired loans	$	1,223	$	6,998	$	1,770	$	—	$	418	$	452	$	639	$	11,500
Unpaid principal balance of impaired loans	$	1,209	$	6,992	$	1,764	$	—	$	417	$	451	$	638	$	11,471
Specific allowance	$	103	$	195	$	41	$	—	$	5	$	—	$	53	$	397

Management monitors delinquent loans continuously and identifies problem loans (loans on non-accrual status and loans modified in a TDR) to evaluate individually for impairment. 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 amounts on impaired loans at September 30, 2020 or December 31, 2019. In addition, the recorded investment in impaired loans is net of purchase discounts or premiums on acquired loans and deferred fees and costs. At September 30, 2020 and December 31, 2019, unused commitments to extend credit on impaired loans, including performing loans to borrowers whose terms have been modified in TDRs, totaled $500 thousand and $534 thousand, respectively.


Allowance for Loan Losses Rollforward for the Period
(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor-owned		Construction		Home equity		Other residential		Installment and other consumer		Unallocated		Total
Three months ended September 30, 2020
Beginning balance	$	2,609	$	2,910	$	10,403	$	836	$	1,044	$	1,266	$	426	$	1,374	$	20,868
Provision (reversal)	(79)		225		1,221		24		(6)		(6)		(20)		(109)		1,250
Charge-offs	(10)		—		—		—		—		—		—		—		(10)
Recoveries	5		—		—		—		—		—		—		—		5
Ending balance	$	2,525	$	3,135	$	11,624	$	860	$	1,038	$	1,260	$	406	$	1,265	$	22,113
Three months ended September 30, 2019
Beginning balance	$	2,368	$	2,321	$	7,721	$	619	$	907	$	849	$	323	$	727	$	15,835
Provision (reversal)	326		21		211		(117)		(28)		56		(28)		(41)		400
Charge-offs	—		—		—		—		—		—		—		—		—
Recoveries	5		—		—		—		—		—		—		—		5
Ending balance	$	2,699	$	2,342	$	7,932	$	502	$	879	$	905	$	295	$	686	$	16,240



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, 2020
Beginning balance	$	2,334	$	2,462	$	8,483	$	638	$	850	$	973	$	284	$	653	$	16,677
Provision (reversal)	208		673		3,141		219		188		287		122		612		5,450
Charge-offs	(30)		—		—		—		—		—		—		—		(30)
Recoveries	13		—		—		3		—		—		—		—		16
Ending balance	$	2,525	$	3,135	$	11,624	$	860	$	1,038	$	1,260	$	406	$	1,265	$	22,113
Nine months ended September 30, 2019
Beginning balance	$	2,436	$	2,407	$	7,703	$	756	$	915	$	800	$	310	$	494	$	15,821
Provision (reversal)	256		(65)		217		(254)		(36)		105		(15)		192		400
Charge-offs	(9)		—		—		—		—		—		—		—		(9)
Recoveries	16		—		12		—		—		—		—		—		28
Ending balance	$	2,699	$	2,342	$	7,932	$	502	$	879	$	905	$	295	$	686	$	16,240


Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor-owned			Construction			Home equity			Other residential			Installment and other consumer			Unallocated		Total
September 30, 2020
Ending ALLL related to loans collectively evaluated for impairment	$	2,506		$	2,910		$	10,927		$	860		$	1,034		$	1,260		$	245		$	1,265	$	21,007
Ending ALLL related to loans individually evaluated for impairment	19			225			697			—			4			—			161			—		1,106

Ending balance	$	2,525		$	3,135		$	11,624		$	860		$	1,038		$	1,260		$	406		$	1,265	$	22,113
Recorded Investment:
Collectively evaluated for impairment	$	511,956		$	292,751		$	962,322		$	66,663		$	106,581		$	130,915		$	23,036		$	—	$	2,094,224
Individually evaluated for impairment	1,017			7,003			4,195			—			783			—			769			—		13,767

Total	$	512,973		$	299,754		$	966,517		$	66,663		$	107,364		$	130,915		$	23,805		$	—	$	2,107,991
Ratio of allowance for loan losses to total loans	0.49		%	1.05		%	1.20		%	1.29		%	0.97		%	0.96		%	1.71		%	NM		1.05		%
Allowance for loan losses to non-accrual loans	NM			NM			1,312		%	NM			195		%	NM			1,692		%	NM		1,533		%


Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor-owned			Construction			Home equity			Other residential			Installment and other consumer			Unallocated		Total
December 31, 2019
Ending ALLL related to loans collectively evaluated for impairment	$	2,231		$	2,267		$	8,442		$	638		$	845		$	973		$	231		$	653	$	16,280
Ending ALLL related to loans individually evaluated for impairment	103			195			41			—			5			—			53			—		397

Ending balance	$	2,334		$	2,462		$	8,483		$	638		$	850		$	973		$	284		$	653	$	16,677
Recorded Investment:
Collectively evaluated for impairment	$	245,464		$	301,826		$	944,547		$	61,095		$	115,606		$	136,205		$	27,043		$	—	$	1,831,786
Individually evaluated for impairment	1,223			6,998			1,770			—			418			452			639			—		11,500

Total	$	246,687		$	308,824		$	946,317		$	61,095		$	116,024		$	136,657		$	27,682		$	—	$	1,843,286
Ratio of allowance for loan losses to total loans	0.95		%	0.80		%	0.90		%	1.04		%	0.73		%	0.71		%	1.03		%	NM		0.90		%
Allowance for loan losses to non-accrual loans	NM			NM			NM			NM			506		%	NM			490		%	NM		7,379		%

Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $1,149.5 million and $1,133.4 million at September 30, 2020 and December 31, 2019, respectively. In addition, we pledge eligible TIC loans, which totaled $120.4 million and $115.7 million at September 30, 2020 and December 31, 2019, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB"). Also, see Note 6, Borrowings.

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 businesses or associates. These 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. Related party loans totaled $7.2 million at September 30, 2020 and $8.3 million at December 31, 2019. In addition, undisbursed commitments to related parties totaled $8.7 million at September 30, 2020 and $9.2 million at December 31, 2019.