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ALLOWANCE FOR CREDIT LOSSES FOR LOANS

6 Months Ended

Jun. 30, 2024

Allowance for Loan Losses [Abstract]

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES FOR LOANS

The following tables summarize the Company’s allowance for credit losses for loans, reserve for unfunded commitments, and loan balances individually and collectively evaluated by type of loan, as of the dates and for the periods indicated:


	Commercial		Construction		Commercial								Reserve for
	and industrial		and land		real estate		Residential		Consumer		Total		unfunded commitments
Three months ended June 30, 2024
Allowance for credit losses
Beginning balance	$	4,191	$	312	$	13,432	$	947	$	8	$	18,890	$	215
Charge-offs		(178)		—		—		—		—		(178)		—
Recoveries		2		—		—		99		1		102		—
(Reversal of) provision for credit losses		(28)		(207)		263		159		(1)		186		(15)
Ending balance	$	3,987	$	105	$	13,695	$	1,205	$	8	$	19,000	$	200

Six months ended June 30, 2024
Allowance for credit losses:
Beginning balance	$	4,216	$	298	$	16,498	$	979	$	9	$	22,000	$	225
Charge-offs		(356)		—		(3,206)		—		(1)		(3,563)		—
Recoveries		15		—		—		99		1		115		—
Provision for (reversal of) credit losses		112		(193)		403		127		(1)		448		(25)
Ending balance	$	3,987	$	105	$	13,695	$	1,205	$	8	$	19,000	$	200

June 30, 2024
Allowance for credit losses:
Loans individually evaluated	$	1,140	$	—	$	350	$	—	$	—	$	1,490
Loans collectively evaluated		2,847		105		12,935		1,200		8		17,095
PCD loans		—		—		410		5		—		415

Loans receivable:
Individually evaluated	$	1,436	$	366	$	18,782	$	1,291	$	—	$	21,875
Collectively evaluated		153,545		3,087		1,556,047		103,581		602		1,816,862
PCD loans		165		16		24,914		350		—		25,445
Total loans	$	155,146	$	3,469	$	1,599,743	$	105,222	$	602	$	1,864,182


	Commercial		Construction		Commercial								Reserve for
	and industrial		and land		real estate		Residential		Consumer		Total		unfunded commitments
Three months ended June 30, 2023
Allowance for credit losses
Beginning balance	$	4,470	$	314	$	14,530	$	1,066	$	20	$	20,400	$	320
Charge-offs		(125)		—		—		—		(2)		(127)		—
Recoveries		64		—		2		—		1		67		—
(Reversal of) provision for credit losses		(762)		3		(365)		(107)		(9)		(1,240)		(20)
Ending balance	$	3,647	$	317	$	14,167	$	959	$	10	$	19,100	$	300

Six months ended June 30, 2023
Allowance for loan losses
Beginning balance	$	2,885	$	68	$	14,185	$	1,742	$	20	$	18,900	$	315
Impact of CECL adoption		1,366		402		2		(302)		32		1,500		45
Charge-offs		(283)		—		—		(175)		(3)		(461)		—
Recoveries		80		—		2		—		4		86		—
Reversal of credit losses		(401)		(153)		(22)		(306)		(43)		(925)		(60)
Ending balance	$	3,647	$	317	$	14,167	$	959	$	10	$	19,100	$	300

June 30, 2023
Allowance for credit losses by methodology:
Loans individually evaluated	$	433	$	—	$	259	$	2	$	—	$	694
Loans collectively evaluated		3,212		317		13,293		948		10		17,780
PCD loans		2		—		615		9		—		626

Loans receivable by methodology:
Individually evaluated	$	656	$	—	$	11,251	$	1,698	$	—	$	13,605
Collectively evaluated		179,977		9,999		1,693,072		87,767		916		1,971,731
PCD loans		219		—		27,192		550		—		27,961
Total loans	$	180,852	$	9,999	$	1,731,515	$	90,015	$	916	$	2,013,297

For the three months ended June 30, 2024, the provision for credit losses and related change in the allowance for credit losses on loans was mainly driven by a replenishment of the allowance, partially offset by decreases in outstanding loan balances, leading to lower quantitative reserves. Net charges-offs totaled $76,000 during the second quarter of 2024, which included a $160,000 charge-off for one loan, which was fully specifically reserved for at March 31, 2024. The quantitative reserve was also impacted by improvement in forecasted economic conditions for national gross domestic product, offset by increasing forecasted national unemployment, both of which are key indicators utilized to estimate credit losses.

For the six months ended June 30, 2024, the provision for credit losses and related change in the allowance for credit losses on loans was mainly driven by decreased reserve for individually evaluated loans and a replenishment of the allowance during the period, partially offset by decreases in outstanding loan balances, leading to lower quantitative reserves. Net charges-offs totaled $3.5 million for the six months ended June 30, 2024, of which $3.2 million was specifically reserved for at December 31, 2023. No changes were made to the qualitative risk factor conclusions during the six months ended June 30, 2024. The quantitative reserve was impacted by improvement in forecasted economic conditions, specifically, national unemployment levels and national gross domestic product, both of which are key indicators utilized to estimate credit losses. The reserve for individually evaluated loans decreased during the six months ended June 30, 2024 primarily due to a charge-off of $3.2 million, as the collateral shortfalls were deemed uncollectable.

The following table summarizes the amortized cost basis of individually evaluated collateral-dependent loans, including 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, by loan and collateral type as of the dates indicated.


	Retail and				Convalescent								A/R and
	Office		Multifamily		facility		Hotel		Other		SFR 1-4		Equipment		Total		ACL
June 30, 2024
Commercial and industrial	$	—	$	—	$	—	$	—	$	1,020	$	—	$	416	$	1,436	$	1,140
Construction and land		—		—		—		—		—		366		—		366		—
Commercial real estate		1,258		7,743		1,200		4,672		3,909		—		—		18,782		350
Residential		—		—		—		—		—		1,291		—		1,291		—
Consumer		—		—		—		—		—		—		—		—		—
Total	$	1,258	$	7,743	$	1,200	$	4,672	$	4,929	$	1,657	$	416	$	21,875	$	1,490

December 31, 2023
Commercial and industrial	$	—	$	—	$	—	$	—	$	1,021	$	—	$	1,052	$	2,073	$	1,423
Construction and land		—		—		—		—		—		366		—		366		—
Commercial real estate		224		5,305		2,213		135		1,165		—		—		9,042		3,008
Residential		—		—		—		—		—		1,496		—		1,496		2
Consumer		—		—		—		—		—		—		—		—		—
Total	$	224	$	5,305	$	2,213	$	135	$	2,186	$	1,862	$	1,052	$	12,977	$	4,433

The following table shows the amortized cost and allowance for credit losses for loans on nonaccrual status as of the dates indicated:


	As of June 30, 2024						As of December 31, 2023
	Nonaccrual		Nonaccrual				Nonaccrual		Nonaccrual
	with no allowance		with allowance		Total		with no allowance		with allowance		Total
	for credit losses		for credit losses		nonaccrual		for loan losses		for loan losses		nonaccrual
Commercial and industrial	$	95	$	1,384	$	1,479	$	272	$	1,800	$	2,072
Construction and land		366		—		366		366		—		366
Commercial real estate		7,700		5,161		12,861		1,295		7,748		9,043
Residential		1,291		131		1,422		1,349		147		1,496
Consumer		—		—		—		—		—		—
Total	$	9,452	$	6,676	$	16,128	$	3,282	$	9,695	$	12,977

As part of its acquisition of Pacific Enterprise Bancorp (“PEB”) in 2022, the Company acquired certain small business loans to borrowers qualified under The California Capital Access Program for Small Business, a state guaranteed loan program sponsored by the California Pollution Control Financing Authority (“CalCAP”). PEB ceased originating loans under this loan program in 2017. Under this loan program, the borrower, CalCAP and the participating lender contributed funds to a loss reserve account that is held in a demand deposit account at the participating lender. The borrower’s contributions to the loss reserve account are attributed to the participating lender. Losses on qualified loans are charged to this account after approval by CalCAP. Under the program, if a loan defaults, the participating lender has immediate coverage of 100% of the loss. The participating lender must return recoveries from the borrower, less expenses, to the credit loss reserve account. The funds in the loss reserve account are the property of CalCAP; however, in the event that the participating lender leaves the program any excess funds, after all loans have been repaid or unenrolled from the program by the participating lender and provided there are no pending claims for reimbursement, the remaining excess funds are distributed to CalCAP and the participating lender based on their respective contributions to the loss reserve account. Funds contributed by the participating lender to the loss reserve account are treated as a receivable from CalCAP and evaluated for impairment quarterly. As of June 30, 2024 and December 31, 2023, the Company had $18.8 million and $19.4 million, respectively, of loans enrolled in this loan program. The Company had a loss reserve account of $13.6 million and $13.7 million as of June 30, 2024 and December 31, 2023, respectively.

In addition, as successor to PEB, the Company was approved by CalCAP, in partnership with the California Air Resources Board, to originate loans to California truckers in the On-Road Heavy-Duty Vehicle Air Quality Loan Program. Under this loan program, CalCAP solely contributes funds to a loss reserve account that is held in a demand deposit account at the participating lender. Losses are handled in the same manner as described above. The funds are the property of CalCAP and are payable upon termination of the program. When the loss reserve account balance exceeds the total associated loan balance, the excess is to be remitted to CalCAP. The Company originated loans under this

program of $1.1 million and $4.5 million during the three and six months ended June 30, 2024, and $461,000 and $2.5 million during the three and six months ended June 30, 2023, respectively. As of June 30, 2024, the Company had $16.2 million of loans enrolled in this program and a loss reserve account of $5.2 million. As of December 31, 2023, the Company had $17.7 million of loans enrolled in this program and a loss reserve account of $6.2 million.