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LOANS

6 Months Ended

Jun. 30, 2024

NOTE 4 – LOANS

The Company’s loan portfolio at the dates indicated is summarized below:


	June 30,		December 31,
	2024		2023
Commercial and industrial (1)	$	155,146	$	162,889
Construction and land		3,469		9,559
Commercial real estate		1,599,743		1,668,585
Residential		105,222		86,002
Consumer		602		738
Total loans		1,864,182		1,927,773
Net deferred loan (fees) costs		(10)		56
Allowance for credit losses		(19,000)		(22,000)
Net loans	$	1,845,172	$	1,905,829

(1)

Includes $2.3 million and $3.8 million of U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans as of June 30, 2024 and December 31, 2023, respectively.

Net loans exclude accrued interest receivable of $5.8 million and $6.7 million at June 30, 2024 and December 31, 2023, respectively, which is included in interest receivable and other assets in the condensed consolidated balance sheets.

The Company’s total individually evaluated loans, including collateral dependent loans, nonaccrual loans, modified loans to borrowers experiencing financial difficulty, and accreting purchase credit deteriorated (“PCD”) loans that have experienced post-acquisition declines in cash flows expected to be collected are summarized as follows:


	Commercial		Construction		Commercial
	and industrial		and land		real estate		Residential		Consumer		Total
June 30, 2024
Recorded investment in loans individually evaluated:
With no specific allowance recorded	$	95	$	366	$	12,715	$	1,291	$	—	$	14,467
With a specific allowance recorded		1,341		—		6,067		—		—		7,408
Total recorded investment in loans individually evaluated	$	1,436	$	366	$	18,782	$	1,291	$	—	$	21,875
Specific allowance on loans individually evaluated	$	1,140	$	—	$	350	$	—	$	—	$	1,490

December 31, 2023
Recorded investment in loans individually evaluated:
With no specific allowance recorded	$	273	$	366	$	1,298	$	1,349	$	—	$	3,286
With a specific allowance recorded		1,799		—		7,745		147		—		9,691
Total recorded investment in loans individually evaluated	$	2,072	$	366	$	9,043	$	1,496	$	—	$	12,977
Specific allowance on loans individually evaluated	$	1,423	$	—	$	3,008	$	2	$	—	$	4,433

From time to time, the Company may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers who may be experiencing financial difficulties. At the time of restructuring, these loans are generally placed on nonaccrual. These loans may be returned to accrual status after the borrower demonstrates performance with the modified terms for a sustained period of time (generally six months) and the capacity to continue to perform in accordance with the modified terms of the restructured debt. The ACL on a modified loan to a borrower experiencing financial difficulty is measured using the same method as individually evaluated loans.

During the three and six months ended June 30, 2024 and 2023, there were no modifications of loans to borrowers experiencing financial difficulty.

A summary of previously modified loans to borrowers experiencing financial difficulty by type of concession and type of loan, as of the dates indicated, is set forth below:


	Number of	Rate		Term		Rate & term				% of Total
	loans	modification		modification		modification		Total		loans outstanding
June 30, 2024
Commercial and industrial	2	$	—	$	110	$	—	$	110		0.07	%
Construction and land	—		—		—		—		—		—	%
Commercial real estate	4		—		2,079		—		2,079		0.13	%
Residential	1		—		747		—		747		0.71	%
Consumer	—		—		—		—		—		—	%
Total	7	$	—	$	2,936	$	—	$	2,936		0.16	%


	Number of	Rate		Term		Rate & term				% of Total
	loans	modification		modification		modification		Total		loans outstanding
December 31, 2023
Commercial and industrial	2	$	—	$	125	$	—	$	125		0.08	%
Construction and land	—		—		—		—		—		—	%
Commercial real estate	4		—		3,400		—		3,400		0.20	%
Residential	1		—		778		—		778		0.90	%
Consumer	—		—		—		—		—		—	%
Total	7	$	—	$	4,303	$	—	$	4,303		0.22	%

For the three and six months ended June 30, 2024, the Company recorded no charge-offs and $1.3 million of charge-offs for modified loans to borrowers experiencing financial difficulty, respectively. During the three and six months ended June 30, 2023, the Company recorded no charge-offs for modified loans to borrowers experiencing financial difficulty.

As of June 30, 2024 and December 31, 2023, individually evaluated modified loans to borrowers experiencing financial difficulty had a related allowance of $27,000 and $1.3 million, respectively. As of June 30, 2024 and December 31, 2023, none of the modified loans to borrowers experiencing financial difficulty were performing in accordance with their modified terms. Accruing modified loans to borrowers experiencing financial difficulty are included in the loans individually evaluated as part of the calculation of the allowance for credit losses for loans.

Risk Rating System

The Company evaluates and assigns a risk grade to each loan based on certain criteria to assess the credit quality of the loan. The assignment of a risk rating is done for each individual loan. Loans are graded from inception and on a continuing basis until the debt is repaid. Any adverse or beneficial trends will trigger a review of the loan risk rating. Each loan is assigned a risk grade based on its characteristics. Loans with low to average credit risk are assigned a lower risk grade than those with higher credit risk as determined by the individual loan characteristics.

The Company’s Pass loans include loans with acceptable business or individual credit risk where the borrower’s operations, cash flow or financial condition provides evidence of low to average levels of risk.

Loans that are assigned higher risk grades are loans that exhibit the following characteristics:

Special Mention loans have potential weaknesses that deserve close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. A Special Mention rating is a temporary rating, pending the occurrence of an event that would cause the risk rating either to improve or to be downgraded.

Loans in this category would be characterized by any of the following situations:

●

Credit that is currently protected but is potentially a weak asset;

●

Credit that is difficult to manage because of an inadequate loan agreement, the condition of and/or control over collateral, failure to obtain proper documentation, or any other deviation from product lending practices; and

●

Adverse financial trends.

Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged. Loans classified substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. The potential loss does not have to be recognizable in an individual credit for that credit to be risk rated Substandard. A loan can be fully and adequately secured and still be considered Substandard.

Some characteristics of Substandard loans are:

●

Inability to service debt from ordinary and recurring cash flow;

●

Chronic delinquency;

●

Reliance upon alternative sources of repayment;

●

Term loans that are granted on liberal terms because the borrower cannot service normal payments for that type of debt;

●

Repayment dependent upon the liquidation of collateral;

●

Inability to perform as agreed, but adequately protected by collateral;

●

Necessity to renegotiate payments to a non-standard level to ensure performance; and

●

The borrower is bankrupt, or for any other reason, future repayment is dependent on court action.

Doubtful loans have all the weaknesses inherent in loans classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and value, highly questionable and improbable. Doubtful loans have a high probability of loss, yet certain important and reasonably specific pending factors may work toward the strengthening of the credit.

Losses are recognized as charges to the allowance when the loan or portion of the loan is considered uncollectible or at the time of foreclosure. Recoveries on loans previously charged off are credited to the allowance for credit losses.

Revolving loans that are converted to term loans are treated as new originations in the tables below and are presented by year of initial origination. During the six months ended June 30, 2024, and the year ended December 31, 2023, $512,000 and $7.1 million of revolving loans were converted to term loans, respectively.

The following tables present the internally assigned risk grade by class of loans at the dates indicated:


													Revolving
		Term loans - amortized cost by origination year											loans
	2024		2023		2022		2021		2020		Prior		amortized cost		Total
June 30, 2024
Commercial and industrial:
Pass	$	15,600	$	22,939	$	22,686	$	15,047	$	18,047	$	37,339	$	15,586	$	147,244
Special mention		—		555		—		—		563		2,498		1,785		5,401
Substandard		—		—		—		—		854		626		1,021		2,501
Total commercial and industrial	$	15,600	$	23,494	$	22,686	$	15,047	$	19,464	$	40,463	$	18,392	$	155,146
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	45	$	311	$	—	$	356
Construction and land:
Pass	$	—	$	1,370	$	—	$	134	$	1,136	$	463	$	—	$	3,103
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		366		—		—		366
Total construction and land	$	—	$	1,370	$	—	$	134	$	1,502	$	463	$	—	$	3,469
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Pass	$	24,908	$	80,443	$	372,000	$	483,577	$	102,200	$	418,761	$	8,454	$	1,490,343
Special mention		—		637		7,066		3,198		19,040		44,993		—		74,934
Substandard		—		—		2,288		16,588		—		15,590		—		34,466
Total commercial real estate	$	24,908	$	81,080	$	381,354	$	503,363	$	121,240	$	479,344	$	8,454	$	1,599,743
YTD gross charge-offs	$	—	$	—	$	—	$	1,934	$	—	$	1,272	$	—	$	3,206
Residential:
Pass	$	23,135	$	—	$	—	$	41,237	$	1,589	$	5,208	$	32,185	$	103,354
Special mention		—		—		—		—		—		424		—		424
Substandard		—		—		—		316		—		1,128		—		1,444
Total residential	$	23,135	$	—	$	—	$	41,553	$	1,589	$	6,760	$	32,185	$	105,222
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer:
Pass	$	88	$	39	$	44	$	—	$	—	$	39	$	373	$	583
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		19		—		19
Total consumer	$	88	$	39	$	44	$	—	$	—	$	58	$	373	$	602
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	1	$	1
Total loans outstanding
Risk ratings
Pass	$	63,731	$	104,791	$	394,730	$	539,995	$	122,972	$	461,810	$	56,598	$	1,744,627
Special mention		—		1,192		7,066		3,198		19,603		47,915		1,785		80,759
Substandard		—		—		2,288		16,904		1,220		17,363		1,021		38,796
Doubtful		—		—		—		—		—		—		—		—
Total loans outstanding	$	63,731	$	105,983	$	404,084	$	560,097	$	143,795	$	527,088	$	59,404	$	1,864,182
YTD gross charge-offs	$	—	$	—	$	—	$	1,934	$	45	$	1,583	$	1	$	3,563


													Revolving
		Term loans - amortized cost by origination year											loans
	2023		2022		2021		2020		2019		Prior		amortized cost		Total
December 31, 2023
Commercial and industrial:
Pass	$	26,055	$	25,039	$	19,294	$	22,831	$	26,008	$	17,357	$	17,754	$	154,338
Special mention		—		—		—		1,323		932		1,926		1,831		6,012
Substandard		—		—		—		156		320		1,039		1,024		2,539
Total commercial and industrial	$	26,055	$	25,039	$	19,294	$	24,310	$	27,260	$	20,322	$	20,609	$	162,889
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	27	$	436	$	—	$	463
Construction and land:
Pass	$	1,217	$	6,040	$	—	$	1,177	$	109	$	650	$	—	$	9,193
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		366		—		—		—		366
Total construction and land	$	1,217	$	6,040	$	—	$	1,543	$	109	$	650	$	—	$	9,559
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Pass	$	80,576	$	397,319	$	377,165	$	140,265	$	180,859	$	370,887	$	9,405	$	1,556,476
Special mention		—		10,348		1,894		17,001		15,101		41,482		—		85,826
Substandard		—		158		946		—		11,579		13,600		—		26,283
Total commercial real estate	$	80,576	$	407,825	$	380,005	$	157,266	$	207,539	$	425,969	$	9,405	$	1,668,585
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential:
Pass	$	—	$	—	$	2,432	$	4,319	$	7,986	$	36,814	$	32,420	$	83,971
Special mention		—		—		—		—		437		—		—		437
Substandard		—		—		—		—		—		1,594		—		1,594
Total residential	$	—	$	—	$	2,432	$	4,319	$	8,423	$	38,408	$	32,420	$	86,002
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	172	$	3	$	175
Consumer:
Pass	$	65	$	67	$	—	$	6	$	18	$	69	$	494	$	719
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		19		—		—		19
Total consumer	$	65	$	67	$	—	$	6	$	37	$	69	$	494	$	738
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	5	$	5
Total loans outstanding
Risk ratings
Pass	$	107,913	$	428,465	$	398,891	$	168,598	$	214,980	$	425,777	$	60,073	$	1,804,697
Special mention		—		10,348		1,894		18,324		16,470		43,408		1,831		92,275
Substandard		—		158		946		522		11,918		16,233		1,024		30,801
Doubtful		—		—		—		—		—		—		—		—
Total loans outstanding	$	107,913	$	438,971	$	401,731	$	187,444	$	243,368	$	485,418	$	62,928	$	1,927,773
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	27	$	608	$	8	$	643

The following tables provide an aging of the Company’s loans receivable as of the dates indicated:


															Recorded
					90 Days										investment >
	30–59 Days		60–89 Days		or more		Total						Total loans		90 days and
	past due		past due		past due		past due		Current		PCD loans		receivable		accruing
June 30, 2024
Commercial and industrial	$	556	$	218	$	1,253	$	2,027	$	152,954	$	165	$	155,146	$	—
Construction and land		—		—		366		366		3,087		16		3,469		—
Commercial real estate		2,375		675		4,696		7,746		1,567,083		24,914		1,599,743		—
Residential		69		747		283		1,099		103,773		350		105,222		—
Consumer		—		—		—		—		602		—		602		—
Total	$	3,000	$	1,640	$	6,598	$	11,238	$	1,827,499	$	25,445	$	1,864,182	$	—


															Recorded
					90 Days										investment >
	30–59 Days		60–89 Days		or more		Total						Total loans		90 days and
	past due		past due		past due		past due		Current		PCD loans		receivable		accruing
December 31, 2023
Commercial and industrial	$	803	$	146	$	1,782	$	2,731	$	159,960	$	198	$	162,889	$	—
Construction and land		97		—		366		463		9,071		25		9,559		—
Commercial real estate		2,908		1,702		7,793		12,403		1,631,129		25,053		1,668,585		—
Residential		55		—		—		55		85,500		447		86,002		—
Consumer		—		—		—		—		738		—		738		—
Total	$	3,863	$	1,848	$	9,941	$	15,652	$	1,886,398	$	25,723	$	1,927,773	$	—

Nonaccrual loans totaled $16.1 million and $13.0 million at June 30, 2024 and December 31, 2023, respectively. Nonaccrual loans guaranteed by a government agency, which reduces the Company’s credit exposure, were $2.1 million at June 30, 2024 compared to $740,000 at December 31, 2023. At June 30, 2024, nonaccrual loans included $3.2 million of loans 30-89 days past due and $6.3 million of loans less than 30 days past due. At December 31, 2023, nonaccrual loans included $927,000 of loans 30-89 days past due and $2.1 million of loans less than 30 days past due. At June 30, 2024, the $3.2 million of nonaccrual loans 30-89 days past due was comprised of three loans and the $6.3 million of loans less than 30 days past due was comprised of 19 loans. All these loans were placed on nonaccrual due to concerns over the financial condition of the borrowers. There were no loans that were 90 days or more past due and still accruing at June 30, 2024 or December 31, 2023.

Interest foregone on nonaccrual loans was approximately $226,000 and $709,000 for the three and six months ended June 30, 2024, compared to $185,000 and $420,000 for the three and six months ended June 30, 2023. Interest income recognized on nonaccrual loans was approximately $79,000 and $86,000 for the three and six months ended June 30, 2024, compared to $16,000 and $81,000 for the three and six months ended June 30, 2023, respectively.

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 $977.9 million and $1.14 billion at June 30, 2024 and December 31, 2023, respectively. Our discount window advance line with the FRB of San Francisco is secured by a pledge of certain qualifying loans with unpaid principal balances of $84.2 million at June 30, 2024. No loans were pledged to the FRB of San Francisco at December 31, 2023. For additional information, see Note 11, Other Borrowings.