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Loans and Allowance for Credit Losses on Loans
 6 Months Ended
Jun. 30, 2023
Receivables [Abstract]  
Loans and Allowance for Credit Losses on Loans Loans and Allowance for Credit Losses on Loans
The following table presents the amortized cost of loans by class as of June 30, 2023 and December 31, 2022.

(in thousands)June 30, 2023December 31, 2022
Commercial and industrial$183,157 $173,547 
Real estate:
  Commercial owner-occupied344,951 354,877 
  Commercial non-owner occupied1,196,158 1,191,889 
  Construction108,986 114,373 
  Home equity85,587 88,748 
  Other residential118,646 112,123 
Installment and other consumer loans65,311 56,989 
Total loans, at amortized cost 1
2,102,796 2,092,546 
Allowance for credit losses on loans(23,832)(22,983)
Total loans, net of allowance for credit losses on loans$2,078,964 $2,069,563 
1 Amortized cost includes net deferred loan origination costs of $2.4 million and $1.8 million at June 30, 2023 and December 31, 2022, respectively. Amounts are also net of unrecognized purchase discounts of $2.2 million and $2.6 million at June 30, 2023 and December 31, 2022, respectively. Amortized cost excludes accrued interest, which totaled $6.0 million and $6.1 million at June 30, 2023 and December 31, 2022, respectively, and is included in interest receivable and other assets in the consolidated statements of condition.
Lending Risks

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, may have an effect on the credit quality of commercial loans.

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 from either the business or investment property and 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, floating homes, and indirect luxury auto loans, 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 and at each quarterly and year-end reporting period. 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 tables present the loan portfolio by loan class, origination year and internal risk rating as of June 30, 2023 and December 31, 2022. The current year vintage table reflects gross charge-offs by loan class and year of origination. 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.
(in thousands)Term Loans - Amortized Cost by Origination YearRevolving Loans Amortized Cost
June 30, 202320232022202120202019PriorTotal
Commercial and industrial:
Pass and Watch$30,686 $11,481 $3,726 $5,173 $16,419 $25,287 $67,323 $160,095 
Special Mention— — — — 2,718 664 8,656 12,038 
Substandard— 274 — 1,030 — 3,641 6,079 11,024 
Total commercial and industrial$30,686 $11,755 $3,726 $6,203 $19,137 $29,592 $82,058 $183,157 
Gross current period charge-offs$— $— $— $— $(3)$— $— $(3)
Commercial real estate, owner-occupied:
Pass and Watch$1,045 $55,268 $50,712 $39,447 $44,398 $125,506 $— $316,376 
Special Mention— — 15,919 — 293 10,537 — 26,749 
Substandard— — — — — 1,826 — 1,826 
Total commercial real estate, owner-occupied$1,045 $55,268 $66,631 $39,447 $44,691 $137,869 $— $344,951 
Commercial real estate, non-owner occupied:
Pass and Watch$21,865 $175,197 $208,613 $153,439 $145,528 $419,415 $— $1,124,057 
Special Mention— 2,815 3,320 11,918 15,903 13,797 — 47,753 
Substandard— — 2,227 — — 22,121 — 24,348 
Total commercial real estate, non-owner occupied$21,865 $178,012 $214,160 $165,357 $161,431 $455,333 $— $1,196,158 
(in thousands)Term Loans - Amortized Cost by Origination YearRevolving Loans Amortized Cost
June 30, 202320232022202120202019PriorTotal
Construction:
Pass and Watch$10,537 $45,971 $24,061 $28,417 $— $— $— $108,986 
Total construction$10,537 $45,971 $24,061 $28,417 $— $— $— $108,986 
Home equity:
Pass and Watch$— $— $— $— $— $717 $84,007 $84,724 
Substandard— — — — — 441 422 863 
Total home equity$— $— $— $— $— $1,158 $84,429 $85,587 
Other residential:
Pass and Watch$12,521 $20,322 $13,818 $27,340 $21,605 $23,040 $— $118,646 
Total other residential$12,521 $20,322 $13,818 $27,340 $21,605 $23,040 $— $118,646 
Installment and other consumer:
Pass and Watch$14,426 $16,790 $11,884 $5,182 $5,741 $10,264 $1,024 $65,311 
Total installment and other consumer$14,426 $16,790 $11,884 $5,182 $5,741 $10,264 $1,024 $65,311 
Gross current period charge-offs$(6)$(5)$— $(4)$— $(1)$(4)$(20)
Total loans:
Pass and Watch$91,080 $325,029 $312,814 $258,998 $233,691 $604,229 $152,354 $1,978,195 
Total Special Mention$— $2,815 $19,239 $11,918 $18,914 $24,998 $8,656 $86,540 
Total Substandard$— $274 $2,227 $1,030 $— $28,029 $6,501 $38,061 
Totals$91,080 $328,118 $334,280 $271,946 $252,605 $657,256 $167,511 $2,102,796 
Total gross current period charge-offs$(6)$(5)$— $(4)$(3)$(1)$(4)$(23)
(in thousands)Term Loans - Amortized Cost by Origination YearRevolving Loans Amortized Cost
December 31, 202220222021202020192018PriorTotal
Commercial and industrial:
Pass and Watch$15,349 $6,679 $7,603 $19,982 $5,362 $24,954 $84,655 $164,584 
Special Mention275 — — 2,272 3,836 — 402 6,785 
Substandard— — 1,252 — — 625 301 2,178 
Total commercial and industrial$15,624 $6,679 $8,855 $22,254 $9,198 $25,579 $85,358 $173,547 
Commercial real estate, owner-occupied:
Pass and Watch$54,188 $52,080 $40,369 $44,798 $29,856 $104,377 $— $325,668 
Special Mention— 16,199 — 304 5,255 4,493 — 26,251 
Substandard— — — 1,160 — 1,699 — 2,859 
Doubtful— — 99 — — — — 99 
Total commercial real estate, owner-occupied$54,188 $68,279 $40,468 $46,262 $35,111 $110,569 $— $354,877 
Commercial real estate, non-owner occupied:
Pass and Watch$177,822 $211,228 $155,278 $160,670 $129,166 $308,509 $57 $1,142,730 
Special Mention— 1,172 12,097 3,934 678 9,290 — 27,171 
Substandard— 2,264 — — — 19,724 — 21,988 
Total commercial real estate, non-owner occupied$177,822 $214,664 $167,375 $164,604 $129,844 $337,523 $57 $1,191,889 
Construction:
Pass and Watch$49,262 $19,393 $28,861 $7,745 $9,112 $— $— $114,373 
Total construction$49,262 $19,393 $28,861 $7,745 $9,112 $— $— $114,373 
Home equity:
Pass and Watch$— $— $— $— $— $883 $86,971 $87,854 
Substandard— — — — — 480 414 894 
Total home equity$— $— $— $— $— $1,363 $87,385 $88,748 
Other residential:
Pass and Watch$21,154 $14,547 $29,018 $21,890 $11,064 $14,450 $— $112,123 
Total other residential$21,154 $14,547 $29,018 $21,890 $11,064 $14,450 $— $112,123 
Installment and other consumer:
Pass and Watch$20,054 $13,022 $5,727 $6,492 $4,181 $6,478 $944 $56,898 
Substandard— — — — — 91 — 91 
Total installment and other consumer$20,054 $13,022 $5,727 $6,492 $4,181 $6,569 $944 $56,989 
Total loans:
Pass and Watch$337,829 $316,949 $266,856 $261,577 $188,741 $459,651 $172,627 $2,004,230 
Total Special Mention$275 $17,371 $12,097 $6,510 $9,769 $13,783 $402 $60,207 
Total Substandard$— $2,264 $1,252 $1,160 $— $22,619 $715 $28,010 
Total Doubtful$— $— $99 $— $— $— $— $99 
Totals$338,104 $336,584 $280,304 $269,247 $198,510 $496,053 $173,744 $2,092,546 
The following table shows the amortized cost of loans by class, payment aging and non-accrual status as of June 30, 2023 and December 31, 2022.
Loan Aging Analysis by Class
(in thousands)Commercial and industrialCommercial real estate, owner-occupiedCommercial real estate, non-owner occupiedConstructionHome equityOther residentialInstallment and other consumerTotal
June 30, 2023        
 30-59 days past due$— $— $371 $— $124 $— $51 $546 
 60-89 days past due436 — — — 91 — 1 528 
 90 days or more past due— 164 906 — 218 — — 1,288 
Total past due436 164 1,277 — 433 — 52 2,362 
Current182,721 344,787 1,194,881 108,986 85,154 118,646 65,259 2,100,434 
Total loans 1
$183,157 $344,951 $1,196,158 $108,986 $85,587 $118,646 $65,311 $2,102,796 
Non-accrual loans 2
$— $457 $906 $— $749 $— $— $2,112 
Non-accrual loans with no allowance$— $457 $906 $— $749 $— $— $2,112 
December 31, 2022        
 30-59 days past due$3 $— $— $— $319 $93 $5 $420 
 60-89 days past due— — — — 244 — — 244 
 90 days or more past due264 — — — 414 — — 678 
Total past due267 — — — 977 93 5 1,342 
Current173,280 354,877 1,191,889 114,373 87,771 112,030 56,984 2,091,204 
Total loans 1
$173,547 $354,877 $1,191,889 $114,373 $88,748 $112,123 $56,989 $2,092,546 
Non-accrual loans 2
$— $1,563 $— $— $778 $— $91 $2,432 
Non-accrual loans with no allowance$— $1,563 $— $— $778 $— $91 $2,432 
1 There were no non-performing loans past due more than ninety days and accruing interest as of June 30, 2023 and December 31, 2022.
2 None of the non-accrual loans as of June 30, 2023 or December 31, 2022 were earning interest on a cash basis. We recognized no interest income on non-accrual loans for the three and six months ended June 30, 2023 and 2022. We reversed interest income of $14 thousand and less than $8 thousand for loans on non-accrual status during the six months ended June 30, 2023 and June 30, 2022, respectively.

Collateral Dependent Loans

The following table presents the amortized cost basis of individually analyzed collateral-dependent loans, which are all on non-accrual status, by class at June 30, 2023 and December 31, 2022.
Amortized Cost by Collateral Type
(in thousands)Commercial Real EstateResidential Real EstateOther
Total 1
Allowance for Credit Losses
June 30, 2023
Commercial real estate, owner-occupied$457 $— $— $457 $— 
Commercial real estate, non-owner occupied906 — — 906 — 
Home equity— 749 — 749 — 
Total$1,363 $749 $— $2,112 $— 
December 31, 2022
Commercial real estate, owner-occupied$1,563 $— $— $1,563 $— 
Home equity— 778 — 778 — 
Installment and other consumer— — 91 91 — 
Total$1,563 $778 $91 $2,432 $— 
1 There were no collateral-dependent residential real estate mortgage loans in process of foreclosure or in substance repossessed at June 30, 2023 or December 31, 2022. The weighted average loan-to-value of collateral dependent loans was approximately 40% at June 30, 2023 and 42% at December 31, 2022.
Loan Modifications

We adopted ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023, as described in Note 2, Recently Adopted and Issued Accounting Standards. The amendments enhanced disclosures related to certain types of loan modifications for borrowers experiencing financial difficulty, including principal forgiveness, interest rate reductions, other-than-insignificant payment delays, and/or term extensions. There were no material modifications during the six months ended June 30, 2023 requiring disclosure.
Allocation of the Allowance for Credit Losses on Loans

The following table presents the details of the allowance for credit losses on loans segregated by loan portfolio segments as of June 30, 2023 and December 31, 2022.

Allocation of the Allowance for Credit Losses on Loans
(in thousands)Commercial and industrialCommercial real estate, owner-occupiedCommercial real estate, non-owner occupiedConstructionHome equityOther residentialInstallment and other consumerUnallocatedTotal
June 30, 2023        
Modeled expected credit losses$1,100 $1,329 $7,441 $195 $486 $558 $609 $— $11,718 
Qualitative adjustments711 1,260 5,760 1,747 75 40 331 2,169 12,093 
Specific allocations20 — — — — 1 — — 21 
Total$1,831 $2,589 $13,201 $1,942 $561 $599 $940 $2,169 $23,832 
December 31, 2022        
Modeled expected credit losses$1,079 $1,497 $7,937 $453 $504 $571 $610 $— $12,651 
Qualitative adjustments706 990 4,739 1,484 54 24 258 2,068 10,323 
Specific allocations9 — — — — — — — 9 
Total$1,794 $2,487 $12,676 $1,937 $558 $595 $868 $2,068 $22,983 

Allowance for Credit Losses on Loans Rollforward

The following table discloses activity in the allowance for credit losses on loans for the periods presented.
Allowance for Credit Losses on Loans Rollforward
(in thousands)Commercial and industrialCommercial real estate, owner-occupiedCommercial real estate, non-owner occupiedConstructionHome equityOther residentialInstallment and other consumerUnallocatedTotal
Three months ended June 30, 2023
Beginning balance$1,941 $2,640 $12,701 $2,019 $538 $577 $882 $2,032 $23,330 
(Reversal) Provision (111)(51)500 (86)23 22 66 137 500 
(Charge-offs)— — — — — — (9)— (9)
Recoveries1 — — 9 — — 1 — 11 
Ending balance$1,831 $2,589 $13,201 $1,942 $561 $599 $940 $2,169 $23,832 
Three months ended June 30, 2022
Beginning balance$1,784 $2,622 $12,301 $1,717 $549 $628 $641 $2,305 $22,547 
(Reversal) Provision(89)(5)138 12 (19)(43)112 (106)— 
(Charge-offs)— — — — — — (20)— (20)
Recoveries4 — — 8 — — — — 12 
Ending balance$1,699 $2,617 $12,439 $1,737 $530 $585 $733 $2,199 $22,539 
Allowance for Credit Losses on Loans Rollforward
(in thousands)Commercial and industrialCommercial real estate, owner-occupiedCommercial real estate, investorConstructionHome equityOther residentialInstallment and other consumerUnallocatedTotal
Six months ended June 30, 2023
Beginning balance$1,794 $2,487 $12,676 $1,937 $558 $595 $868 $2,068 $22,983 
Provision (reversal) 36 102 525 (12)3 4 91 101 850 
Charge-offs(3)— — — — — (20)— (23)
Recoveries4 — — 17 — — 1 — 22 
Ending balance$1,831 $2,589 $13,201 $1,942 $561 $599 $940 $2,169 $23,832 
Six months ended June 30, 2022
Beginning balance$1,709 $2,776 $12,739 $1,653 $595 $644 $621 $2,286 $23,023 
(Reversal) Provision(17)(159)(300)68 (65)(59)134 (87)(485)
Charge-offs— — — — — — (22)— (22)
Recoveries7 — — 16 — — — — 23 
Ending balance$1,699 $2,617 $12,439 $1,737 $530 $585 $733 $2,199 $22,539 
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 $1.293 billion and $1.298 billion at June 30, 2023 and December 31, 2022, respectively. In addition, we pledge eligible TIC loans, which totaled $109.0 million and $105.0 million at June 30, 2023 and December 31, 2022, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB"). For additional information, see Note 6, 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. Related party loans totaled $6.3 million at June 30, 2023 and $6.4 million at December 31, 2022. In addition, undisbursed commitments to related parties totaled $562 thousand at both June 30, 2023 and December 31, 2022.