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Loans and Allowance for Credit Losses on Loans
 9 Months Ended
Sep. 30, 2024
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 portfolio class as of September 30, 2024 and December 31, 2023.

(in thousands)September 30, 2024December 31, 2023
Commercial and industrial$160,390 $153,750 
Real estate:
  Commercial owner-occupied318,712 333,181 
  Commercial non-owner occupied1,266,377 1,219,385 
  Construction39,326 99,164 
  Home equity86,479 82,087 
  Other residential150,573 118,508 
Installment and other consumer loans68,234 67,645 
Total loans, at amortized cost 1
2,090,091 2,073,720 
Allowance for credit losses on loans(30,675)(25,172)
Total loans, net of allowance for credit losses on loans$2,059,416 $2,048,548 
1 Amortized cost includes net deferred loan origination costs of $2.5 million and $2.7 million at September 30, 2024 and December 31, 2023, respectively. Amounts are also net of unrecognized purchase discounts of $1.1 million and $2.0 million at September 30, 2024 and December 31, 2023, respectively. Amortized cost excludes accrued interest, which totaled $6.7 million and $6.6 million at September 30, 2024 and December 31, 2023, 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 a 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 non-accrual 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 well-defined weaknesses that jeopardize 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 portfolio class, origination/renewal year and internal risk rating as of September 30, 2024 and December 31, 2023. The current year vintage table reflects gross charge-offs by loan portfolio 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
September 30, 202420242023202220212020PriorTotal
Commercial and industrial:
Pass and Watch$9,669 $22,021 $8,149 $1,543 $2,819 $29,046 $70,364 $143,611 
Special Mention882 — — — 11 250 8,152 9,295 
Substandard— — — — — — 7,484 7,484 
Total commercial and industrial$10,551 $22,021 $8,149 $1,543 $2,830 $29,296 $86,000 $160,390 
Gross current period charge-offs$— $— $— $— $— $— $(33)$(33)
Commercial real estate, owner-occupied:
Pass and Watch$11,192 $13,656 $45,195 $44,900 $34,531 $134,195 $209 $283,878 
Special Mention— 380 — 19,046 808 9,563 — 29,797 
Substandard— — 2,141 — — 2,896 — 5,037 
Total commercial real estate, owner-occupied$11,192 $14,036 $47,336 $63,946 $35,339 $146,654 $209 $318,712 
Commercial real estate, non-owner occupied:
Pass and Watch$89,580 $65,290 $165,948 $197,932 $188,605 $468,764 $8,930 $1,185,049 
Special Mention— — 2,750 2,108 — 38,154 — 43,012 
Substandard— 872 — 2,150 — 35,294 — 38,316 
Total commercial real estate, non-owner occupied$89,580 $66,162 $168,698 $202,190 $188,605 $542,212 $8,930 $1,266,377 
(in thousands)Term Loans - Amortized Cost by Origination YearRevolving Loans Amortized Cost
September 30, 202420242023202220212020PriorTotal
Construction:
Pass and Watch$14,518 $2,045 $15,311 $— $— $— $— $31,874 
Special Mention7,452 — — — — — — 7,452 
Total construction$21,970 $2,045 $15,311 $— $— $— $— $39,326 
Home equity:
Pass and Watch$76 $— $— $— $— $1,131 $84,111 $85,318 
Substandard— — — — — 179 982 1,161 
Total home equity$76 $— $— $— $— $1,310 $85,093 $86,479 
Other residential:
Pass and Watch$39,456 $17,371 $19,791 $13,091 $24,549 $36,315 $— $150,573 
Total other residential$39,456 $17,371 $19,791 $13,091 $24,549 $36,315 $— $150,573 
Installment and other consumer:
Pass and Watch$14,656 $16,991 $11,525 $8,133 $3,028 $12,084 $1,385 $67,802 
Substandard— — — 432 — — — 432 
Total installment and other consumer$14,656 $16,991 $11,525 $8,565 $3,028 $12,084 $1,385 $68,234 
Gross current period charge-offs$— $(14)$— $(3)$— $— $(1)$(18)
Total loans:
Pass and Watch$179,147 $137,374 $265,919 $265,599 $253,532 $681,535 $164,999 $1,948,105 
Total Special Mention$8,334 $380 $2,750 $21,154 $819 $47,967 $8,152 $89,556 
Total Substandard$— $872 $2,141 $2,582 $— $38,369 $8,466 $52,430 
Totals$187,481 $138,626 $270,810 $289,335 $254,351 $767,871 $181,617 $2,090,091 
Total gross current period charge-offs$— $(14)$— $(3)$— $— $(34)$(51)
(in thousands)Term Loans - Amortized Cost by Origination YearRevolving Loans Amortized Cost
December 31, 202320232022202120202019PriorTotal
Commercial and industrial:
Pass and Watch$25,615 $9,187 $2,970 $3,718 $15,128 $21,004 $62,486 $140,108 
Special Mention— — — — 334 — 9,300 9,634 
Substandard— — — — 1,311 2,697 — 4,008 
Total commercial and industrial$25,615 $9,187 $2,970 $3,718 $16,773 $23,701 $71,786 $153,750 
Commercial real estate, owner-occupied:
Pass and Watch$13,128 $41,808 $49,887 $37,708 $40,994 $114,018 $56 $297,599 
Special Mention1,431 4,498 15,636 820 286 8,902 — 31,573 
Substandard— 2,231 — — — 1,778 — 4,009 
Total commercial real estate, owner-occupied$14,559 $48,537 $65,523 $38,528 $41,280 $124,698 $56 $333,181 
Commercial real estate, non-owner occupied:
Pass and Watch$76,718 $172,028 $196,340 $150,831 $139,860 $368,675 $9,832 $1,114,284 
Special Mention— 2,790 9,498 11,776 15,708 41,602 — 81,374 
Substandard878 272 2,204 — — 20,373 — 23,727 
Total commercial real estate, non-owner occupied$77,596 $175,090 $208,042 $162,607 $155,568 $430,650 $9,832 $1,219,385 
Construction:
Pass and Watch$13,138 $24,403 $19,521 $29,512 $— $— $— $86,574 
Special Mention12,590 — — — — — — 12,590 
Total construction$25,728 $24,403 $19,521 $29,512 $— $— $— $99,164 
Home equity:
Pass and Watch$— $— $— $— $— $734 $80,773 $81,507 
Substandard— — — — — 369 211 580 
Total home equity$— $— $— $— $— $1,103 $80,984 $82,087 
Other residential:
Pass and Watch$17,861 $20,114 $13,390 $25,637 $20,935 $20,571 $— $118,508 
Total other residential$17,861 $20,114 $13,390 $25,637 $20,935 $20,571 $— $118,508 
Installment and other consumer:
Pass and Watch$22,038 $14,528 $10,632 $4,687 $5,300 $9,399 $1,061 $67,645 
Total installment and other consumer$22,038 $14,528 $10,632 $4,687 $5,300 $9,399 $1,061 $67,645 
Total loans:
Pass and Watch$168,498 $282,068 $292,740 $252,093 $222,217 $534,401 $154,208 $1,906,225 
Total Special Mention$14,021 $7,288 $25,134 $12,596 $16,328 $50,504 $9,300 $135,171 
Total Substandard$878 $2,503 $2,204 $— $1,311 $25,217 $211 $32,324 
Totals$183,397 $291,859 $320,078 $264,689 $239,856 $610,122 $163,719 $2,073,720 
The following table shows the amortized cost of loans by portfolio class, payment aging and non-accrual status as of September 30, 2024 and December 31, 2023.
Loan Aging Analysis by Class
(in thousands)Commercial and industrialCommercial real estate, owner-occupiedCommercial real estate, non-owner occupiedConstructionHome equityOther residentialInstallment and other consumerTotal
September 30, 2024        
 30-59 days past due$547 $2,270 $89 $— $1,152 $— $162 $4,220 
 60-89 days past due4 — 2,917 — 654 — 2 3,577 
 90 days or more past due 1
7,484 122 11,140 — 254 — 216 19,216 
Total past due8,035 2,392 14,146 — 2,060 — 380 27,013 
Current152,355 316,320 1,252,231 39,326 84,419 150,573 67,854 2,063,078 
Total loans 1
$160,390 $318,712 $1,266,377 $39,326 $86,479 $150,573 $68,234 $2,090,091 
Non-accrual loans 2
$7,483 $1,578 $29,229 $— $1,161 $— $432 $39,883 
Non-accrual loans with no allowance$— $1,578 $871 $— $1,161 $— $432 $4,042 
December 31, 2023        
 30-59 days past due$2,991 $618 $— $— $43 $83 $195 $3,930 
 60-89 days past due69 — 2,204 — — — 1 2,274 
 90 days or more past due 1
1,311 149 — — — — — 1,460 
Total past due4,371 767 2,204 — 43 83 196 7,664 
Current149,379 332,414 1,217,181 99,164 82,044 118,425 67,449 2,066,056 
Total loans 1
$153,750 $333,181 $1,219,385 $99,164 $82,087 $118,508 $67,645 $2,073,720 
Non-accrual loans 2
$4,008 $434 $3,081 $— $469 $— $— $7,992 
Non-accrual loans with no allowance$1,311 $434 $877 $— $469 $— $— $3,091 
1 There were no non-performing loans over 90 days past due and accruing interest as of September 30, 2024 or December 31, 2023.
2 None of the non-accrual loans as of September 30, 2024 or December 31, 2023 were earning interest on a cash or accrual basis. We reversed $257 thousand and $523 thousand in accrued interest income for loans that were placed on non-accrual status during the three and nine months ended September 30, 2024, respectively. We reversed accrued interest income of $131 thousand and $158 thousand for loans that were placed on non-accrual status during the three and nine months ended September 30, 2023, respectively.

Collateral Dependent Loans

The following table presents the amortized cost basis of individually analyzed collateral-dependent loans, which were all on non-accrual status, by portfolio class at September 30, 2024 and December 31, 2023.
Amortized Cost by Collateral Type
(in thousands)Commercial Real EstateResidential Real EstateOther
Total 1
Allowance for Credit Losses
September 30, 2024
Commercial real estate, owner-occupied$1,578 $— $— $1,578 $— 
Commercial real estate, non-owner occupied29,229 — — 29,229 7,971 
Home equity— 1,161 — 1,161 — 
Installment and other consumer— — 432 432 — 
Total$30,807 $1,161 $432 $32,400 $7,971 
December 31, 2023
Commercial and industrial$1,311 $— $— $1,311 $— 
Commercial real estate, owner-occupied434 — — 434 — 
Commercial real estate, non-owner occupied3,081 — — 3,081 408 
Home equity— 469 — 469 — 
Total$4,826 $469 $— $5,295 $408 
1 There were no collateral-dependent residential real estate mortgage loans in process of foreclosure or in substance repossessed at September 30, 2024 and December 31, 2023. The weighted average loan-to-value of real estate secured collateral dependent loans was approximately 120% (84% net of individual reserves for credit losses) at September 30, 2024 and 70% (62% net of individual reserves for credit losses) at December 31, 2023.
Loan Modifications to Borrowers Experiencing Financial Difficulty

The following table summarizes the amortized cost of loans as of September 30, 2024 that were modified during the nine months ended September 30, 2024 by portfolio class and type of modification granted. There were no modifications of loans during the three months ended September 30, 2024 requiring disclosure.
(in thousands)Term ExtensionTotal ModificationsPercent of Portfolio Class Total
Nine months ended September 30, 2024
Home equity$192 $192 0.2 %
Total
$192 $192 

The following table summarizes the amortized cost of loans as of September 30, 2023 that were modified during the three and nine months ended September 30, 2023 by portfolio class and type of modification granted.
(in thousands)Term ExtensionTotal ModificationsPercent of Portfolio Class Total
Three months ended September 30, 2023
Commercial and industrial$391 $391 0.2 %
Commercial owner-occupied1,056 1,056 0.3 %
Total$1,447 $1,447 
Nine months ended September 30, 2023
Commercial and industrial$391 $391 0.2 %
Commercial owner-occupied1,056 1,056 0.3 %
Total$1,447 $1,447 

As of September 30, 2024 and September 30, 2023, there were no unfunded loan commitments for loans that were modified during the periods presented.

The following table summarizes the financial effect of loan modifications presented in the table above during the nine months ended September 30, 2024 by portfolio class.

Weighted-Average Term Extension (in years)
Nine months ended September 30, 2024
Home equity6.5

The following table summarizes the financial effect of loan modifications presented in the table above during the three and nine months ended September 30, 2023 by portfolio class.

Weighted-Average Term Extension (in years)
Three months ended September 30, 2023
Commercial and industrial2.3
Commercial owner-occupied2.5
Nine months ended September 30, 2023
Commercial and industrial2.3
Commercial owner-occupied2.5

The loan modifications did not significantly impact the determination of the allowance for credit losses on loans during the three and nine months ended September 30, 2024 or September 30, 2023.
The Bank closely monitors the performance of the modified loans to understand the effectiveness of its modification efforts. The following table summarizes the amortized cost and payment status of loans as of September 30, 2024 that were modified during the nine months ended September 30, 2024 by portfolio class.
(in thousands)Current30-59 Days Past Due60-89 Days Past Due90 Days or More Past DueTotalNon-Accrual
Nine months ended September 30, 2024
Home equity$192 $— $— $— $192 $117 
Total$192 $— $— $— $192 $117 

The following table summarizes the amortized cost and payment status of loans as of September 30, 2023 that were modified during the three and nine months ended September 30, 2023 by portfolio class.
(in thousands)Current30-59 Days Past Due60-89 Days Past Due90 Days or More Past DueTotalNon-Accrual
Three months ended September 30, 2023
Commercial and industrial$391 $— $— $— $391 $— 
Commercial owner-occupied1,056 — — — 1,056 — 
Total$1,447 $— $— $— $1,447 $— 
Nine months ended September 30, 2023
Commercial and industrial$391 $— $— $— $391 $— 
Commercial owner-occupied1,056 — — — 1,056 — 
Total$1,447 $— $— $— $1,447 $— 

There were no loans that defaulted (fully or partially charged-off or became 90 days or more past due) that were modified during the three and nine months ended September 30, 2024 or September 30, 2023.

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 class as of September 30, 2024 and December 31, 2023.

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
September 30, 2024        
Modeled expected credit losses$807 $1,238 $7,580 $49 $583 $1,143 $651 $— $12,051 
Qualitative adjustments663 1,107 6,549 611 64 2 269 1,140 10,405 
Specific allocations248 — 7,971 — — — — — 8,219 
Total$1,718 $2,345 $22,100 $660 $647 $1,145 $920 $1,140 $30,675 
December 31, 2023        
Modeled expected credit losses$897 $1,270 $7,380 $185 $482 $619 $634 $— $11,467 
Qualitative adjustments622 1,205 6,327 1,647 70 33 342 2,038 12,284 
Specific allocations193 1 1,226 — — 1 — — 1,421 
Total$1,712 $2,476 $14,933 $1,832 $552 $653 $976 $2,038 $25,172 
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 September 30, 2024
Beginning balance$1,876 $2,408 $22,165 $874 $650 $769 $910 $1,023 $30,675 
(Reversal) Provision(158)(63)(65)(214)(3)376 10 117 — 
(Charge-offs)— — — — — — — — — 
Recoveries— — — — — — — — — 
Ending balance$1,718 $2,345 $22,100 $660 $647 $1,145 $920 $1,140 $30,675 
Three months ended September 30, 2023
Beginning balance$1,831 $2,589 $13,201 $1,942 $561 $599 $940 $2,169 $23,832 
(Reversal) Provision(20)(59)423 68 4 6 13 (10)425 
(Charge-offs)(4)— — — — — (2)— (6)
Recoveries1 — — 8 — — — — 9 
Ending balance$1,808 $2,530 $13,624 $2,018 $565 $605 $951 $2,159 $24,260 
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
Nine months ended September 30, 2024
Beginning balance$1,712 $2,476 $14,933 $1,832 $552 $653 $976 $2,038 $25,172 
Provision (Reversal)38 (131)7,167 (1,172)95 492 (41)(898)5,550 
(Charge-offs)(33)— — — — — (18)— (51)
Recoveries1 — — — — — 3 — 4 
Ending balance$1,718 $2,345 $22,100 $660 $647 $1,145 $920 $1,140 $30,675 
Nine months ended September 30, 2023
Beginning balance$1,794 $2,487 $12,676 $1,937 $558 $595 $868 $2,068 $22,983 
Provision16 43 948 56 7 10 104 91 1,275 
(Charge-offs)(7)— — — — — (22)— (29)
Recoveries5 — — 25 — — 1 — 31 
Ending balance$1,808 $2,530 $13,624 $2,018 $565 $605 $951 $2,159 $24,260 
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 $1.324 billion and $1.288 billion at September 30, 2024 and December 31, 2023, respectively. In addition, we pledge eligible residential loans, which totaled $109.0 million and $110.4 million at September 30, 2024 and December 31, 2023, 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 $4.3 million and $5.8 million as of September 30, 2024 and December 31, 2023, respectively. In addition, undisbursed commitments to related parties totaled $211 thousand and $212 thousand as of September 30, 2024 and December 31, 2023, respectively.