Loans and Lease Finance Receivables and Allowance for Loan Losses | 6. LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR LOAN LOSSES Prior to April 1, 2019, our loans and lease finance receivables consisted of purchase credit impaired (“PCI”) loans associated with the acquisition of San Joaquin Bank (SJB”) on October 16, 2009, and loans and lease finance receivables excluding PCI loans (“Non-PCI – Summary of Significant Accounting Policies Non-PCI The following table provides a summary of total loans and lease finance receivables by type. December 31, 2019 December 31, 2018 Total Loans Non-PCI PCI Loans Total Loans (Dollars in thousands) Commercial and industrial $ 935,127 $ 1,002,209 $ 519 $ 1,002,728 SBA 305,008 350,043 1,258 351,301 Real estate: Commercial real estate 5,374,617 5,394,229 14,407 5,408,636 Construction 116,925 122,782 - 122,782 SFR mortgage 283,468 296,504 145 296,649 Dairy & livestock and agribusiness 383,709 393,843 700 394,543 Municipal lease finance receivables 53,146 64,186 - 64,186 Consumer and other loans 116,319 128,429 185 128,614 Gross loans 7,568,319 7,752,225 17,214 7,769,439 Less: Deferred loan fees, net (3,742 ) (4,828 ) - (4,828 ) Gross loans, net of deferred loan fees 7,564,577 7,747,397 17,214 7,764,611 Less: Allowance for loan losses (68,660 ) (63,409 ) (204 ) (63,613 ) Total loans and lease finance receivables $ 7,495,917 $ 7,683,988 $ 17,010 $ 7,700,998 As of December 31, 2019, 76.31% of the Company’s total gross loan portfolio consisted of real estate loans, with commercial real estate loans representing 71.01% of total loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of December 31, 2019, $241.8 million, or 4.50% of the total commercial real estate loans included loans secured by farmland, compared to $231.0 million, or 4.27%, at December , . The loans secured by farmland included $ million for loans secured by dairy & livestock land and $ million for loans secured by agricultural land at December , , compared to $ million for loans secured by dairy & livestock land and $ million for loans secured by agricultural land at December , . As of December , , dairy & livestock and agribusiness loans of $ million were comprised of $ million for dairy & livestock loans and $ million for agribusiness loans, compared to $ million for dairy & livestock loans and $ million for agribusiness loans at December , . At December 31, 2019, the Company held approximately $3.86 billion of total fixed rate loans. At December 31, 2019 and 2018, loans totaling $6.03 billion and $5.71 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank. There were no outstanding loans held-for-sale Credit Quality Indicators An important element of our approach to credit risk management is our loan risk rating system. The originating officer assigns each loan an initial risk rating, which is reviewed and confirmed or changed, as appropriate, by credit management. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel for deterioration or improvement in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary. Loans are risk rated into the following categories (Credit Quality Indicators): Pass, Special Mention, Substandard, Doubtful and Loss. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for losses. These categories can be described as follows: Pass — These loans, including loans on the Bank’s internal watch list, range from minimal credit risk to lower than average, but still acceptable, credit risk. Watch list loans usually require more than normal management attention. Loans on the watch list may involve borrowers with adverse financial trends, higher debt/equity ratios, or weaker liquidity positions, but not to the degree of being considered a defined weakness or problem loan where risk of loss may be apparent. Special Mention — Loans assigned to this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Substandard — Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified 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 deficiencies are not corrected. Doubtful — Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or the liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loss — Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset with insignificant value even though partial recovery may be affected in the future. The following table summarizes loans by type, according to our internal risk ratings as of the dates presented. December 31, 2019 Pass Special Substandard (1) Doubtful & Total (Dollars in thousands) Commercial and industrial $ 895,234 $ 35,473 $ 4,420 $ - $ 935,127 SBA 283,430 11,032 10,546 - 305,008 Real estate: Commercial real estate Owner occupied 1,977,007 78,208 28,435 - 2,083,650 Non-owner 3,280,580 10,005 382 - 3,290,967 Construction Speculative 106,895 - - - 106,895 Non-speculative 10,030 - - - 10,030 SFR mortgage 280,010 1,957 1,501 - 283,468 Dairy & livestock and agribusiness 320,670 35,920 27,119 - 383,709 Municipal lease finance receivables 52,676 470 - - 53,146 Consumer and other loans 114,870 421 1,028 - 116,319 Total gross loans $ 7,321,402 $ 173,486 $ 73,431 $ - $ 7,568,319 (1) Includes $26.8 million of classified loans acquired from CB in the third quarter of 2018. December 31, 2018 (1) Pass Special Substandard (2) Doubtful & Total (Dollars in thousands) Commercial and industrial $ 961,909 $ 29,358 $ 10,942 $ - $ 1,002,209 SBA 336,033 7,375 6,635 - 350,043 Real estate: Commercial real estate Owner occupied 2,008,169 95,841 13,980 - 2,117,990 Non-owner 3,260,822 9,938 5,479 - 3,276,239 Construction Speculative 118,233 - - - 118,233 Non-speculative 4,549 - - - 4,549 SFR mortgage 289,607 3,310 3,587 - 296,504 Dairy & livestock and agribusiness 350,044 34,586 9,213 - 393,843 Municipal lease finance receivables 63,650 536 - - 64,186 Consumer and other loans 126,085 1,263 1,081 - 128,429 Total gross loans $ 7,519,101 $ 182,207 $ 50,917 $ - $ 7,752,225 (1) Excludes PCI loans of $17.2 million as of December 31, 2018, of which $15.8 million were rated pass, $1.2 million were rated special mention, $224,000 were rated substandard, and zero were rated doubtful & loss. (2) Includes $19.0 million of classified loans acquired from CB in the third quarter of 2018. Allowance for Loan Losses The Bank’s Audit and Director Loan Committees provide Board oversight of the ALLL process and approve the ALLL methodology on a quarterly basis. Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers the Bank’s overall loan portfolio. Refer to Note 3 — Summary of Significant Accounting Policies Management believes that the ALLL was appropriate at December 31, 2019 and 2018. No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for loan losses in the future. The following tables present the balance and activity related to the allowance for loan losses for held-for-investment Year Ended December 31, 2019 Ending Balance Charge-offs Recoveries Provision for Ending Balance (Dollars in thousands) Commercial and industrial $ 7,528 $ (48 ) $ 255 $ 1,145 $ 8,880 SBA 1,078 (321 ) 9 687 1,453 Real estate: Commercial real estate 45,097 - - 3,532 48,629 Construction 981 - 12 (135 ) 858 SFR mortgage 2,197 - 196 (54 ) 2,339 Dairy & livestock and agribusiness 5,225 (78 ) 19 89 5,255 Municipal lease finance receivables 775 - - (152 ) 623 Consumer and other loans 732 (7 ) 10 (112 ) 623 Total allowance for loan losses $ 63,613 $ (454 ) $ 501 $ 5,000 $ 68,660 Year Ended December 31, 2018 Ending Balance December 31, Charge-offs Recoveries Provision for (Recapture of) Loan Losses Ending Balance (Dollars in thousands) Commercial and industrial $ 7,280 $ (10 ) $ 82 $ 168 $ 7,520 SBA 869 (257 ) 20 430 1,062 Real estate: Commercial real estate 41,722 - - 3,212 44,934 Construction 984 - 2,506 (2,509 ) 981 SFR mortgage 2,112 (13 ) 51 46 2,196 Dairy & livestock and agribusiness 4,647 - 19 549 5,215 Municipal lease finance receivables 851 - - (76 ) 775 Consumer and other loans 753 (11 ) 141 (157 ) 726 PCI loans 367 - - (163 ) 204 Total allowance for loan losses $ 59,585 $ (291 ) $ 2,819 $ 1,500 $ 63,613 Year Ended December 31, 2017 Ending Balance December 31, Charge-offs Recoveries (Recapture of) Provision for Loan Losses Ending Balance (Dollars in thousands) Commercial and industrial $ 8,154 $ (138 ) $ 118 $ (854 ) $ 7,280 SBA 871 - 78 (80 ) 869 Real estate: Commercial real estate 37,443 - 154 4,125 41,722 Construction 1,096 - 6,036 (6,148 ) 984 SFR mortgage 2,287 - 212 (387 ) 2,112 Dairy & livestock and agribusiness 8,541 - 19 (3,913 ) 4,647 Municipal lease finance receivables 941 - - (90 ) 851 Consumer and other loans 988 (13 ) 79 (301 ) 753 PCI loans 1,219 - - (852 ) 367 Total allowance for loan losses $ 61,540 $ (151 ) $ 6,696 $ (8,500 ) $ 59,585 The following tables present the recorded investment in loans held-for-investment December 31, 2019 Recorded Investment in Loans Allowance for Loan Losses Individually Collectively Individually Collectively (Dollars in thousands) Commercial and industrial $ 1,344 $ 933,783 $ 251 $ 8,629 SBA 2,568 302,440 257 1,196 Real estate: Commercial real estate 1,121 5,373,496 - 48,629 Construction - 116,925 - 858 SFR mortgage 2,979 280,489 - 2,339 Dairy & livestock and agribusiness - 383,709 - 5,255 Municipal lease finance receivables - 53,146 - 623 Consumer and other loans 377 115,942 - 623 Total $ 8,389 $ 7,559,930 $ 508 $ 68,152 December 31, 2018 Recorded Investment in Loans Allowance for Loan Losses Individually Collectively Acquired with Individually Collectively Acquired with (Dollars in thousands) Commercial and industrial $ 7,625 $ 994,584 $ - $ 3 $ 7,517 $ - SBA 3,467 346,576 - - 1,062 - Real estate: Commercial real estate 6,540 5,387,689 - 478 44,456 - Construction - 122,782 - - 981 - SFR mortgage 5,349 291,155 - - 2,196 - Dairy & livestock and agribusiness 78 393,765 - 12 5,203 - Municipal lease finance receivables - 64,186 - - 775 - Consumer and other loans 486 127,943 - 68 658 - PCI loans - - 17,214 - - 204 Total $ 23,545 $ 7,728,680 $ 17,214 $ 561 $ 62,848 $ 204 Past Due and Nonperforming Loans The following tables present the recorded investment in, and the aging of, past due and nonaccrual loans, by type of loans as of the dates presented. December 31, 2019 30-59 60-89 Total Past Due Nonaccrual Current Total Loans (Dollars in thousands) Commercial and industrial $ 2 $ - $ 2 $ 1,266 $ 933,859 $ 935,127 SBA 870 532 1,402 2,032 301,574 305,008 Real estate: Commercial real estate Owner occupied - - - 479 2,083,171 2,083,650 Non-owner - - - 245 3,290,722 3,290,967 Construction Speculative (2) - - - - 106,895 106,895 Non-speculative - - - - 10,030 10,030 SFR mortgage 6 243 249 878 282,341 283,468 Dairy & livestock and agribusiness - - - - 383,709 383,709 Municipal lease finance receivables - - - - 53,146 53,146 Consumer and other loans - - - 377 115,942 116,319 Total gross loans, excluding PCI loans $ 878 $ 775 $ 1,653 $ 5,277 $ 7,561,389 $ 7,568,319 (1) As of December 31, 2019, $1.2 million of nonaccruing loans were current, $59,000 were 30-59 60-89 , (2) Speculative construction loans are generally for properties where there is no identified buyer or renter. (3) Includes $3.5 million of nonaccrual loans acquired from CB in the third quarter of 2018. (4) Excludes $2.0 million of guaranteed portion of nonaccrual SBA loans that are in process of collection. December 31, 2018 (1) 30-59 60-89 Total Past Due Nonaccrual Current Total Loans (Dollars in thousands) Commercial and industrial $ 820 $ 89 $ 909 $ 7,490 $ 993,810 $ 1,002,209 SBA 1,172 135 1,307 2,892 345,844 350,043 Real estate: Commercial real estate Owner occupied 2,439 350 2,789 589 2,114,612 2,117,990 Non-owner - - - 5,479 3,270,760 3,276,239 Construction Speculative ( 3 - - - - 118,233 118,233 Non-speculative - - - - 4,549 4,549 SFR mortgage - 285 285 2,937 293,282 296,504 Dairy & livestock and agribusiness - - - 78 393,765 393,843 Municipal lease finance receivables - - - - 64,186 64,186 Consumer and other loans - - - 486 127,943 128,429 Total gross loans, excluding PCI loans $ 4,431 $ 859 $ 5,290 $ 19,951 $ 7,726,984 $ 7,752,225 (1) Excludes PCI loans. (2) As of December 31, 2018, $2.3 million of nonaccruing loans were current, $33,000 were 30-59 60-89 (3) Speculative construction loans are generally for properties where there is no identified buyer or renter. (4) Includes $12.3 million of nonaccrual loans acquired from CB in the third quarter of 2018. Impaired Loans At December 31, 2019, the Company had impaired loans of $8.4 million. Impaired loans included $2.0 million of nonaccrual SBA loans, $1.3 million of nonaccrual commercial and industrial loans, $878,000 of nonaccrual SFR mortgage loans, $724,000 of nonaccrual commercial real estate loans, and $377,000 of nonaccrual consumer and other loans. These impaired loans included $3.4 million of loans whose terms were modified in a troubled debt restructuring, of which $244,000 are classified as nonaccrual. The remaining balance of $3.1 million consisted of 12 loans performing according to the restructured terms. The impaired loans had a specific allowance of $508,000 at December 31, 2019 . At December 31, 2018, the Company had classified as impaired, loans with a balance of $23.5 million with a related allowance of $561,000. The following tables present information for held-for-investment Year Ended December 31, 2019 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized (Dollars in thousands) With no related allowance recorded: Commercial and industrial $ 1,091 $ 1,261 $ - $ 1,369 $ 4 SBA 2,243 2,734 - 2,389 41 Real estate: Commercial real estate Owner occupied 479 613 - 505 - Non-owner 642 643 - 681 26 Construction Speculative - - - - - Non-speculative - - - - - SFR mortgage 2,979 3,310 - 3,043 86 Dairy & livestock and agribusiness - - - - - Municipal lease finance receivables - - - - - Consumer and other loans 377 514 - 396 - Total 7,811 9,075 - 8,383 157 With a related allowance recorded: Commercial and industrial 253 347 251 699 - SBA 325 324 257 327 - Real estate: Commercial real estate Owner occupied - - - - - Non-owner - - - - - Construction Speculative - - - - - Non-speculative - - - - - SFR mortgage - - - - - Dairy & livestock and agribusiness - - - - - Municipal lease finance receivables - - - - - Consumer and other loans - - - - - Total 578 671 508 1,026 - Total impaired loans $ 8,389 $ 9,746 $ 508 $ 9,409 $ 157 Year Ended December 31, 2018 (1) Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized (Dollars in thousands) With no related allowance recorded: Commercial and industrial $ 7,436 $ 11,457 $ - $ 7,718 $ 7 SBA 3,467 5,746 - 3,919 44 Real estate: Commercial real estate Owner occupied 589 705 - 624 - Non-owner 2,808 4,324 - 4,585 32 Construction Speculative - - - - - Non-speculative - - - - - SFR mortgage 5,349 6,270 - 5,484 80 Dairy & livestock and agribusiness - - - - - Municipal lease finance receivables - - - - - Consumer and other loans 418 526 - 459 - Total 20,067 29,028 - 22,789 163 With a related allowance recorded: Commercial and industrial 189 191 3 203 - SBA - - - - - Real estate: Commercial real estate Owner occupied - - - - - Non-owner 3,143 3,144 478 3,144 - Construction Speculative - - - - - Non-speculative - - - - - SFR mortgage - - - - - Dairy & livestock and agribusiness 78 78 12 78 - Municipal lease finance receivables - - - - - Consumer and other loans 68 100 68 76 - Total 3,478 3,513 561 3,501 - Total impaired loans $ 23,545 $ 32,541 $ 561 $ 26,290 $ 163 Ye ar Ended Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized (Dollars in thousands) With no related allowance recorded: Commercial and industrial $ 440 $ 980 $ - $ 548 $ 10 SBA 1,530 1,699 - 1,598 47 Real estate: Commercial real estate Owner occupied 4,365 4,763 - 4,414 36 Non-owner 3,768 5,107 - 3,951 94 Construction Speculative - - - - - Non-speculative - - - - - SFR mortgage 4,040 4,692 - 4,119 118 Dairy & livestock and agribusiness 829 1,091 - 988 1 Municipal lease finance receivables - - - - - Consumer and other loans 174 370 - 202 - Total 15,146 18,702 - 15,820 306 With a related allowance recorded: Commercial and industrial - - - - - SBA 1 18 1 6 - Real estate: Commercial real estate Owner occupied - - - - - Non-owner occupied - - - - - Construction Speculative - - - - - Non-speculative - - - - - SFR mortgage - - - - - Dairy & livestock and agribusiness - - - - - Municipal lease finance receivables - - - - - Consumer and other loans 378 391 74 385 - Total 379 409 75 391 - Total impaired loans $ 15,525 $ 19,111 $ 75 $ 16,211 $ 306 (1) Excludes PCI loans. Reserve for Unfunded Loan Commitments The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet loan commitments at the same time as it evaluates credit risk associated with the loan and lease portfolio. As a result of the acquisition of CB, the reserve for unfunded loan commitments increased by $2.9 million in 2018. There was no provision or recapture of provision for unfunded commitments for the year ended December 31, 2019, compared with a recapture of provision for unfunded loan commitments of $250,000 for the year ended December 31, 2018 and a recapture of provision for unfunded loan commitments of $400,000 for the year ended December 31, 2017. As of December 31, 2019 and 2018, the balance in this reserve was $9.0 million and was included in other liabilities. Troubled Debt Restructurings Loans that are reported as TDRs are considered impaired and charge-off Summary of Significant Accounting Policies, Troubled Debt Restructurings As of December 31, 2019, there were $3.4 million of loans classified as a TDR, of which $244,000 were nonperforming and $3.1 million were performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At December 31, 2019, performing TDRs were comprised of eight SFR mortgage loans of $2.1 million, one SBA loan of $536,000, one commercial real estate loan of $397,000, and two commercial and industrial loans of $78,000. The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time a probable loss is determined. We have allocated zero and $490,000 of specific allowance to TDRs as of December 31, 2019 and December 31, 2018, respectively. The following table provides a summary of the activity related to TDRs for the periods presented. Year Ended December 31, 2019 2018 (1) (Dollars in thousands) Performing TDRs: Beginning balance $ 3,594 $ 4,809 New modifications - 311 Payoffs/payments, net and other (482 ) (1,526 ) TDRs returned to accrual status - - TDRs placed on nonaccrual status - - Ending balance $ 3,112 $ 3,594 Nonperforming TDRs: Beginning balance $ 3,509 $ 4,200 New modifications - 316 Charge-offs (78 ) - Transfer to OREO (2,275 ) - Payoffs/payments, net and other (912 ) (1,007 ) TDRs returned to accrual status - - TDRs placed on nonaccrual status - - Ending balance $ 244 $ 3,509 Total TDRs $ 3,356 $ 7,103 (1) Excludes PCI loans. There were no loans that were modified as TDRs for the year ended December 31, 2019. The following tables summarize loans modified as TDRs for the periods presented Modifications (1) Year Ended December 31, 2018 (2) Number of Pre-Modification Post-Modification Investment Outstanding Recorded Financial Effect 3 (Dollars in thousands) Commercial and industrial: Interest rate reduction - $ - $ - $ - $ - Change in amortization period or maturity 1 38 38 20 - Real estate: Commercial real estate: Owner occupied Interest rate reduction - - - - - Change in amortization period or maturity - - - - - Non-owner Interest rate reduction - - - - - Change in amortization period or maturity - - - - - SFR mortgage: Interest rate reduction - - - - - Change in amortization period or maturity 1 311 311 300 - Dairy & livestock and agribusiness: Interest rate reduction - - - - - Change in amortization period or maturity - - - - - Consumer: Interest rate reduction - - - - - Change in amortization period or maturity 1 278 278 267 - Total loans 3 $ 627 $ 627 $ 587 $ - Year Ended December 31, 2017 (2) Number of Pre-Modification Post-Modification Investment Outstanding Recorded Financial Effect 3 (Dollars in thousands) Commercial and industrial: Interest rate reduction - $ - $ - $ - $ - Change in amortization period or maturity - - - - - Real estate: Commercial real estate: Owner occupied Interest rate reduction - - - - - Change in amortization period or maturity - - - - - Non-owner Interest rate reduction - - - - - Change in amortization period or maturity 1 3,143 3,143 3,143 - SFR mortgage: Interest rate reduction - - - - - Change in amortization period or maturity - - - - - Dairy & livestock and agribusiness: Interest rate reduction - - - - - Change in amortization period or maturity 1 1,984 1,984 78 - Consumer: Interest rate reduction - - - - - Change in amortization period or maturity - - - - - Total loans 2 $ 5,127 $ 5,127 $ 3,221 $ - (1) The tables above exclude modified loans that were paid off prior to the end of the period. (2) Excludes PCI loans. (3) Financial effects resulting from modifications represent charge-offs and specific allowance recorded at modification date. As of December 31, 2019 and 2018, there were no loans that were modified as a TDR within the previous 12 months that subsequently defaulted. As of December 31, 2017, there was one 3.1 was |