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Loans and Allowance for Credit Losses

12 Months Ended

Dec. 31, 2020

We adopted the new current expected credit loss accounting guidance, CECL, and all related amendments as of December 31, 2020. Certain prior period credit quality disclosures related to impaired loans and individually and collectively evaluated loans were superseded with the current guidance and have not been included below. Refer to Note 3, Loans and Allowance for Loan Losses, under Part II, Item 8 of our 2019 Form 10-K for additional prior period information. Also refer to Note 1, Summary of Significant Accounting Policies, for additional information regarding the adoption of CECL.

The following table presents the amortized cost of loans by class as of December 31, 2020 and 2019.


	December 31,
(in thousands)	2020		2019
Commercial and industrial	$	498,408	$	246,687
Real estate:
Commercial owner-occupied	304,963		308,824
Commercial investor-owned	961,208		946,317
Construction	73,046		61,095
Home equity	104,813		116,024
Other residential	123,395		136,657
Installment and other consumer loans	22,723		27,682
Total loans, at amortized cost 1	2,088,556		1,843,286
Allowance for credit losses on loans	(22,874)		(16,677)
Total loans, net	$	2,065,682	$	1,826,609

1 Amortized cost includes net deferred loan origination (fees) costs of $(4.9) million and $983 thousand at December 31, 2020 and 2019, respectively. Amounts are also net of unrecognized purchase discounts of $815 thousand and $958 thousand at December 31, 2020 and 2019, respectively. Amortized cost excludes accrued interest, which totaled $8.8 million and $7.7 million at December 31, 2020 and 2019, respectively, and is included in interest receivable and other assets in the consolidated statements of condition.

Lending Risks

Concentrations of Credit - Virtually all of our loans are from customers located in California, primarily in Marin, Alameda, Sonoma, San Francisco, Napa, and Contra Costa counties. Approximately 77% and 88%, of total loans were secured by real estate at December 31, 2020 and 2019, respectively. The decrease in the percentage secured by real estate from 2019 to 2020 was due to $291.6 million in unsecured loans guaranteed by the SBA under the PPP, which are included in commercial and industrial loans at December 31, 2020. At December 31, 2020 and 2019, 61% and 68%, respectively, of our loans were for commercial real estate, 85% and 84% of which were secured by real estate located in Marin, Sonoma, Alameda, San Francisco and Napa counties (California).

Commercial and Industrial Loans - 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 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. A weakened economy, and resultant decreased consumer and/or business spending, will have an effect on the credit quality of commercial loans.

Pursuant to the CARES Act, the Bank funded over 1,800 loans to eligible small businesses and non-profit organizations who participated in the PPP administered by the SBA. PPP loans have terms of two to five years and earn interest at 1%. In addition, the SBA paid the Bank a fee of 1%-5% depending on the loan amount, which was

netted with loan origination costs and amortized into interest income using the effective yield method over the contractual life of each 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. At December 31, 2020, PPP loans totaling $291.6 million, net of $5.4 million in unearned fees, were included in commercial and industrial loan balances. The Bank ended its origination of new PPP loans under the provisions of the CARES Act 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 also extended the time over which the accretion of PPP net loan origination fees are recognized. In addition, on January 19, 2021, the Bank launched the application process and began accepting loan requests for the second round of PPP loans as revised by the Economic Aid Act.

Commercial Real Estate Loans - Commercial real estate loans, which include income producing investment properties and owner-occupied real estate used for business purposes, 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 downturn 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 - 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 - 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.

Credit Quality Indicators

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.

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 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. We monitor construction loans monthly. We review home equity and other consumer loans based on delinquency. We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly.

The following table presents the loan portfolio by loan class, origination year and internal risk rating as of December 31, 2020. Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to perm loans, are presented by year of origination.


	Term Loans - Amortized Cost by Origination Year												Revolving Loans Amortized Cost
(in thousands)	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost		Total
Commercial and industrial:
Pass	$	308,237	$	22,589	$	12,596	$	4,508	$	5,915	$	34,282	$	85,889	$	474,016
Special Mention	—		2,034		1,318		141		11		49		19,092		22,645
Substandard	1,747		—		—		—		—		—		—		1,747
Total commercial and industrial	$	309,984	$	24,623	$	13,914	$	4,649	$	5,926	$	34,331	$	104,981	$	498,408
Commercial real estate, owner-occupied:
Pass	$	31,029	$	27,581	$	32,603	$	43,843	$	12,768	$	101,014	$	—	$	248,838
Special Mention	—		—		11,764		17,062		7,343		6,601		—		42,770
Substandard	7,147		—		—		—		6,208		—		—		13,355
Total commercial real estate, owner-occupied	$	38,176	$	27,581	$	44,367	$	60,905	$	26,319	$	107,615	$	—	$	304,963
Commercial real estate, investor-owned:
Pass	$	162,300	$	144,751	$	173,955	$	100,842	$	94,862	$	253,611	$	117	$	930,438
Special Mention	—		10,695		—		1,819		—		8,124		—		20,638
Substandard	—		2,716		4,435		—		1,553		1,428		—		10,132
Total commercial real estate, investor-owned	$	162,300	$	158,162	$	178,390	$	102,661	$	96,415	$	263,163	$	117	$	961,208
Construction:
Pass	$	31,654	$	30,150	$	11,242	$	—	$	—	$	—	$	—	$	73,046
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Total construction	$	31,654	$	30,150	$	11,242	$	—	$	—	$	—	$	—	$	73,046
Home equity:
Pass	$	—	$	—	$	—	$	—	$	128	$	694	$	102,614	$	103,436
Special Mention	—		—		—		—		—		—		799		799
Substandard	—		—		—		—		—		391		187		578
Total home equity	$	—	$	—	$	—	$	—	$	128	$	1,085	$	103,600	$	104,813
Other residential:
Pass	$	34,447	$	31,079	$	23,673	$	10,574	$	6,035	$	17,587	$	—	$	123,395
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Total other residential	$	34,447	$	31,079	$	23,673	$	10,574	$	6,035	$	17,587	$	—	$	123,395
Installment and other consumer:
Pass	$	2,361	$	4,382	$	3,483	$	1,543	$	3,423	$	4,921	$	2,593	$	22,706
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		17		—		—		—		17
Total installment and other consumer	$	2,361	$	4,382	$	3,483	$	1,560	$	3,423	$	4,921	$	2,593	$	22,723
Total loans:
Pass	$	570,028	$	260,532	$	257,552	$	161,310	$	123,131	$	412,109	$	191,213	$	1,975,875
Total Special Mention	$	—	$	12,729	$	13,082	$	19,022	$	7,354	$	14,774	$	19,891	$	86,852
Total Substandard	$	8,894	$	2,716	$	4,435	$	17	$	7,761	$	1,819	$	187	$	25,829
Totals	$	578,922	$	275,977	$	275,069	$	180,349	$	138,246	$	428,702	$	211,291	$	2,088,556

The following table summarizes the amortized cost of loans by internally assigned risk grades and loan class at December 31, 2019.


(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
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

The following table shows the amortized cost of loans by class, payment aging and non-accrual status as of December 31, 2020 and 2019.


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
December 31, 2020
30-59 days past due	$	—	$	—	$	1,673	$	—	$	274	$	—	$	136	$	2,083
60-89 days past due	—		—		—		—		—		—		622		622
90 days or more past due	—		—		—		—		—		—		—		—
Total past due	—		—		1,673		—		274		—		758		2,705
Current	498,408		304,963		959,535		73,046		104,539		123,395		21,965		2,085,851
Total loans 1	$	498,408	$	304,963	$	961,208	$	73,046	$	104,813	$	123,395	$	22,723	$	2,088,556
Non-accrual loans 2	$	—	$	7,147	$	1,610	$	—	$	459	$	—	$	17	$	9,233
Non-accrual loans with no allowance	$	—	$	7,147	$	1,610	$	—	$	459	$	—	$	17	$	9,233
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
Non-accrual loans with no allowance	$	—	$	—	$	—	$	—	$	168	$	—	$	58	$	226

1 There were no loans past due more than ninety days accruing interest at December 31, 2020 or 2019.

2 None of the non-accrual loans as of December 31, 2020 or 2019 were earning interest on a cash basis. We recognized no interest income on non-accrual loans for the years ended December 31, 2020, 2019 or 2018. Accrued interest of $36 thousand was reversed from interest income for loans that were placed on non-accrual status during the year ended December 31, 2020.

Collateral Dependent Loans

The following table presents the amortized cost basis of individually analyzed collateral-dependent non-accrual loans by class at December 31, 2020.


	Amortized Cost by Collateral Type
(in thousands)	Commercial Real Estate		Residential Real Estate		Other		Total		Allowance for Credit Losses

Commercial real estate, owner-occupied	$	7,147	$	—	$	—	$	7,147	$	—
Commercial real estate, investor-owned	1,610		—		—		1,610		—

Home equity	—		459		—		459		—

Installment and other consumer	—		—		17		17		—
Total	$	8,757	$	459	$	17	$	9,233	$	—

No collateral-dependent loans were in process of foreclosure at December 31, 2020. In addition, the weighted average loan-to-value of collateral dependent loans was approximately 56%.

Troubled Debt Restructuring

The following table summarizes the amortized cost of TDR loans by loan class as of December 31, 2020 and 2019.


	December 31,
(in thousands)	2020		2019
Commercial and industrial	$	1,021	$	1,223
Commercial real estate, owner-occupied	7,147		6,998
Commercial real estate, investor-owned	3,305		1,770

Home equity	281		251
Other residential	—		452
Installment and other consumer	752		639
Total 1	$	12,506	$	11,333

1 TDR loans on non-accrual status totaled $7.4 million at December 31, 2020 and $58 thousand at December 31, 2019. Unfunded commitments for TDR loans totaled $704 thousand as of December 31, 2020.

There were no loans removed from TDR designation during 2020. After meeting all of the conditions specified in Note 1, there was one commercial loan with an amortized cost of $3 thousand removed from TDR designation during 2019, and one TIC loan and one home equity loan with amortized costs totaling $247 thousand removed from TDR designation during 2018.

In accordance with section 4013 of the CARES Act, subsequently amended by section 541 of the Economic Aid Act, we elected to apply the temporary accounting relief provisions for loan modifications that met certain criteria, which would otherwise be designated as a TDR under existing GAAP. Since the onset of the pandemic, the Bank granted payment relief for 269 loans that included full payment deferral or interest-only payments on loan balances exceeding $402.9 million. Of these loans, 222 or $324.2 million have resumed normal payments and 18 loans or $7.7 million paid off. As of December 31, 2020, 21 borrowing relationships with 29 loans totaling $71.0 million had requested additional payment relief. 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.

The following table presents information for loans modified in a TDR during the presented periods, including the number of modified contracts, the amortized cost of the loans prior to modification, and the amortized cost of 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 Amortized Cost		Post-Modification Amortized Cost		Post-Modification Amortized Cost at Period End
TDRs modified during 2020:
Commercial and industrial	1	$	170	$	162	$	96
Commercial real estate, investor-owned	1	1,553		1,553		1,553
Home equity	1	276		276		271
Installment and other consumer	2	204		204		201
Total	5	$	2,203	$	2,195	$	2,121
TDRs modified during 2019:
Commercial and industrial	1	$	298	$	298	$	150
TDRs modified during 2018:
Commercial and industrial	2	$	254	$	245	$	172

The loans modified during 2020 reflected debt consolidation, interest rate concessions, and/or other loan term and payment modifications that did not meet the criteria specified by the CARES Act for temporary relief from TDR accounting. The loan modified during 2019 reflected a maturity extension and interest rate concession. The loans modified during 2018 were to the same borrower and included maturity extensions and other changes to loan terms. One consumer loan for $7 thousand, which was designated as a TDR during 2020, was subsequently charged-off in the fourth quarter. During 2020, 2019 and 2018, there were no other 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.

The following tables disclose activity in the allowance for credit losses.


Allowance for Credit Losses Rollforward
(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
Year ended December 31, 2020
Beginning balance	$	2,334	$	2,462	$	8,483	$	638	$	850	$	973	$	284	$	653	$	16,677
Provision - incurred loss method	208		673		3,141		219		188		287		122		612		5,450
(Charge-offs)	(30)		—		—		—		—		—		—		—		(30)
Recoveries	13		—		—		3		—		—		—		—		16
Balance at September 30, 2020	2,525		3,135		11,624		860		1,038		1,260		406		1,265		22,113
Impact of CECL adoption	(278)		138		1,755		201		(361)		(212)		(125)		486		1,604
Post adoption balance at October 1, 2020	2,247		3,273		13,379		1,061		677		1,048		281		1,751		23,717
Provision (reversal) - CECL method	269		(495)		(697)		496		61		(50)		11		(451)		(856)
(Charge-offs)	—		—		—		—		—		—		(1)		—		(1)
Recoveries	14		—		—		—		—		—		—		—		14
Ending balance	$	2,530	$	2,778	$	12,682	$	1,557	$	738	$	998	$	291	$	1,300	$	22,874
Year ended December 31, 2019
Beginning balance	$	2,436	$	2,407	$	7,703	$	756	$	915	$	800	$	310	$	494	$	15,821
Provision (reversal) - incurred loss method	(49)		55		768		(118)		(65)		173		(23)		159		900
(Charge-offs)	(75)		—		—		—		—		—		(3)		—		(78)
Recoveries	22		—		12		—		—		—		—		—		34
Ending balance	$	2,334	$	2,462	$	8,483	$	638	$	850	$	973	$	284	$	653	$	16,677
Year ended December 31, 2018
Beginning balance	$	3,654	$	2,294	$	6,475	$	681	$	1,031	$	536	$	378	$	718	$	15,767
Provision (reversal) - incurred loss method	(1,232)		113		1,228		75		(116)		264		(108)		(224)		—
(Charge-offs)	(3)		—		—		—		—		—		(2)		—		(5)
Recoveries	17		—		—		—		—		—		42		—		59
Ending balance	$	2,436	$	2,407	$	7,703	$	756	$	915	$	800	$	310	$	494	$	15,821

We adopted the CECL accounting standard on December 31, 2020, which was previously postponed under the optional accounting relief provisions of the CARES Act passed in March 2020 to the earlier of the end of the national emergency or December 31, 2020. During the first nine months of 2020, we applied the incurred loss method in determining the allowance for credit losses on loans ("ACL") and recorded a $5.5 million provision for credit losses. Upon adoption of the CECL standard, we increased the ACL by $748 thousand, which represented the difference between allowances calculated under the CECL method as of December 31, 2020 and the incurred loss method as of September 30, 2020. Refer to Note 1, Summary of Significant Accounting Policies, for additional information on the adoption of CECL.

Pledged Loans

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 $1.165 billion and $1.133 billion at December 31, 2020 and 2019, respectively. In addition, we pledge eligible TIC loans, which totaled $113.6 million and $115.7 million at December 31, 2020 and 2019, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB"). For additional information , see Note 7, Borrowings.

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 businesses or 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.

The following table shows changes in net loans to related parties for each of the three years ended December 31, 2020, 2019 and 2018.


(in thousands)	2020		2019		2018
Balance at beginning of year	$	8,333	$	10,635	$	11,852
Additions	—		—		863

Repayments	(1,910)		(2,320)		(2,080)
Reclassified due to a change in borrower status	—		18		—
Balance at end of year	$	6,423	$	8,333	$	10,635

Undisbursed commitments to related parties totaled $9.1 million and $9.2 million as of December 31, 2020 and 2019, respectively.