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Loans and Allowance for Loan Losses
12 Months Ended
Dec. 31, 2017
Receivables [Abstract]  
Loans and Allowance for Loan Losses
Loans and Allowance for Loan Losses
 
Credit Quality of Loans
 
Virtually all of our loans are from customers located in California, primarily in Marin, Alameda, Sonoma, San Francisco and Napa counties. Approximately 87% and 85% of total loans were secured by real estate at December 31, 2017 and 2016, respectively. At December 31, 2017, 67% of our loans were for commercial real estate, 85% of which were secured by real estate located in Marin, Sonoma, Alameda, San Francisco and Napa counties (California).

The following table shows outstanding loans by class and payment aging as of December 31, 2017 and 2016.
Loan Aging Analysis by Class
(in thousands)
Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Construction

Home equity

Other residential 1

Installment and other consumer

Total

December 31, 2017
 
 
 
 
 
 
 
 
30-59 days past due
$

$

$

$

$
99

$
255

$
330

$
684

60-89 days past due
1,340







1,340

90 days or more past due




307



307

Total past due
1,340




406

255

330

2,331

Current
234,495

300,963

822,984

63,828

132,061

95,271

27,080

1,676,682

Total loans 3
$
235,835

$
300,963

$
822,984

$
63,828

$
132,467

$
95,526

$
27,410

$
1,679,013

Non-accrual loans 2
$

$

$

$

$
406

$

$

$
406

December 31, 2016
 

 

 

 

 

 

 

 

30-59 days past due
$
283

$

$

$

$
77

$

$
2

$
362

60-89 days past due






49

49

90 days or more past due




91



91

Total past due
283




168


51

502

Current
218,332

247,713

724,228

74,809

117,039

78,549

25,444

1,486,114

Total loans 3
$
218,615

$
247,713

$
724,228

$
74,809

$
117,207

$
78,549

$
25,495

$
1,486,616

Non-accrual loans 2
$

$

$

$

$
91

$

$
54

$
145

1 Our residential loan portfolio does not include sub-prime loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages," the characteristics of which are loans lacking full documentation, borrowers having low FICO scores or higher loan-to-value ratios.

2 There were three purchased credit impaired ("PCI") loans with unpaid balances totaling $131 thousand and no carrying values that had stopped accreting interest at December 31, 2017. There were no PCI loans that had stopped accreting interest at December 31, 2016. Amounts exclude accreting PCI loans of $2.1 million and $2.9 million at December 31, 2017 and 2016, respectively, as we have a reasonable expectation about future cash flows to be collected and we continue to recognize accretable yield on these loans in interest income. There were no accruing loans past due more than ninety days at December 31, 2017 or 2016.

3 Amounts include net deferred loan origination costs of $818 thousand and $883 thousand at December 31, 2017 and 2016, respectively. Amounts are also net of unaccreted purchase discounts on non-PCI loans of $1.2 million and $1.8 million at December 31, 2017 and 2016, respectively.

Our 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 a personal guarantee. We target stable businesses with guarantors who provide additional sources of repayment and have proven to be resilient in periods of economic stress.  
 
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans discussed above. We underwrite these loans to be repaid from cash flow and to be 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, substantially all of our loans are guaranteed by the owners of the properties.  Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. In the event of a vacancy, guarantors are expected to carry the loans until a replacement tenant can be found.  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 are generally made to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. The construction industry can be affected by significant events, 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 primarily consist of home equity lines of credit and other residential tenancy-in-common fractional interest loans ("TIC"), floating homes and mobile homes along with a small number of installment loans. 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. Our other residential loans include TIC units located almost entirely in San Francisco County.
 
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. Definitions of loans that are risk graded “Special Mention” 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 new information is received. Borrowers are required to submit financial information at regular intervals. Generally, 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. Investor commercial real estate borrowers are generally required to submit rent rolls or property income statements annually. Construction loans are monitored monthly, and reviewed on an ongoing basis. Home equity and other consumer loans are reviewed based on delinquency. Loans graded “Watch” or worse, regardless of loan type, are reviewed no less than quarterly.

The following table represents an analysis of the carrying amount in loans, net of deferred fees and costs and purchase premiums or discounts, by internally assigned risk grades, including PCI loans, at December 31, 2017 and 2016.
Credit Risk Profile by Internally Assigned Risk Grade
(in thousands)
Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Construction

Home equity

Other residential

Installment and other consumer

Purchased credit-impaired

Total

December 31, 2017
 
 
 
 
 
 
 
 
Pass
$
214,636

$
281,104

$
818,570

$
60,859

$
130,558

$
95,526

$
27,287

$
1,325

$
1,629,865

Special Mention
9,318

9,284

1,850





790

21,242

Substandard
11,816

9,409

1,774

2,969

1,815


123


27,906

Total loans
$
235,770

$
299,797

$
822,194

$
63,828

$
132,373

$
95,526

$
27,410

$
2,115

$
1,679,013

December 31, 2016
 

 

 

 

 

 

 

 

Pass
$
201,987

$
234,849

$
720,417

$
71,564

$
115,680

$
78,549

$
25,083

$
2,920

$
1,451,049

Special Mention
9,197

4,799

607


1,334




15,937

Substandard
7,391

6,993

1,498

3,245

91


412


19,630

Total loans
$
218,575

$
246,641

$
722,522

$
74,809

$
117,105

$
78,549

$
25,495

$
2,920

$
1,486,616


 
Troubled Debt Restructuring
 
Our loan portfolio includes certain loans that have been modified in a troubled debt restructuring (“TDR”), where economic concessions have been granted to borrowers experiencing financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs on non-accrual status at the time of restructure may be returned to accruing status after Management considers the borrower’s sustained repayment performance for a reasonable period, generally six months, and obtains reasonable assurance of repayment and performance.
 
A loan may no longer be reported as a TDR if all of the following conditions are met:
The loan is subsequently refinanced or restructured at current market interest rates and the new terms are consistent with the treatment of creditworthy borrowers under regular underwriting standards;
The borrower is no longer considered to be in financial difficulty;
Performance on the loan is reasonably assured, and;
Existing loan did not have any forgiveness of principal or interest.

The removal of TDR status must be approved by the same Management level that approved the upgrading of the loan classification.

There were no loans removed from TDR designation during 2017 or 2016. During 2015, five loans with a recorded investment totaling $1.6 million were removed from TDR designation, after meeting all of the conditions noted above.

The following table summarizes the carrying amount of TDR loans by loan class as of December 31, 2017 and December 31, 2016.
(in thousands)
As of
Recorded investment in Troubled Debt Restructurings 1
December 31, 2017

December 31, 2016

Commercial and industrial
$
2,165

$
2,207

Commercial real estate, owner-occupied
6,999

6,993

Commercial real estate, investor
2,171

2,256

Construction
2,969

3,245

Home equity
347

625

Other residential
1,148

1,965

Installment and other consumer
721

877

Total
$
16,520

$
18,168

1 There were no TDR loans on non-accrual status at December 31, 2017 or December 31, 2016. Includes no acquired TDR loans as of December 31, 2017 or December 31, 2016.

The following table presents information for loans modified in a TDR during the presented periods, including the number of contracts modified, the recorded investment in the loans prior to modification, and the recorded investment in the loans at period end after being restructured. The table excludes fully charged-off TDR loans and loans modified in a TDR and subsequently paid-off during the years presented.
(dollars in thousands)
Number of Contracts Modified

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment at Period End

TDRs modified during 2017:
 

 

 

 
Installment and other consumer
1

$
50

$
50

$
47

TDRs modified during 2016:
 

 

 

 
Commercial real estate, investor
2

$
1,830

$
1,826

$
1,752

Home equity 1
1

87

222

245

Installment and other consumer
1

68

67

66

Total
4

$
1,985

$
2,115

$
2,063

1 The home equity line of credit modified in 2016 included debt consolidation, which increased the post-modification balance.
TDRs modified during 2015:
 
 
 
 
Commercial and industrial
7

$
3,271

$
3,251

$
2,811



The modifications during 2017, 2016 and 2015 primarily involved maturity or payment extensions, interest rate concessions, renewals, and other changes to loan terms. During 2017, 2016 and 2015, there were no defaults on loans that had been modified in a TDR within the prior twelve-month period. We report defaulted TDRs based on a payment default definition of more than ninety days past due.

Impaired Loans

The following tables summarize information by class on impaired loans and their related allowances. Total impaired loans include non-accrual loans, accruing TDR loans and accreting PCI loans that have experienced post-acquisition declines in cash flows expected to be collected.
(in thousands)
Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Construction

Home equity

Other residential

Installment and other consumer

Total

December 31, 2017
 
 
 
 
 
 
 
Recorded investment in impaired loans:
 
 
 
 
 
 
With no specific allowance recorded
$
309

$

$

$
2,689

$
406

$
995

$
46

$
4,445

With a specific allowance recorded
1,856

6,999

2,171

280

347

153

675

12,481

Total recorded investment in impaired loans
$
2,165

$
6,999

$
2,171

$
2,969

$
753

$
1,148

$
721

$
16,926

Unpaid principal balance of impaired loans
$
2,278

$
6,993

$
2,168

$
2,963

$
750

$
1,147

$
720

$
17,019

Specific allowance
$
50

$
188

$
159

$
7

$
6

$
1

$
102

$
513

Average recorded investment in impaired loans during 2017
$
2,113

$
6,998

$
2,842

$
3,132

$
679

$
1,324

$
841

$
17,929

Interest income recognized on impaired loans during 2017 1
$
202

$
266

$
87

$
147

$
24

$
62

$
37

$
825

December 31, 2016
 

 

 

 

 

 

 

Recorded investment in impaired loans:
 

 

 

 

 

 

With no specific allowance recorded
$
315

$

$

$
2,692

$
91

$
1,008

$
103

$
4,209

With a specific allowance recorded
1,892

6,993

2,256

553

624

957

829

14,104

Total recorded investment in impaired loans
$
2,207

$
6,993

$
2,256

$
3,245

$
715

$
1,965

$
932

$
18,313

Unpaid principal balance of impaired loans
$
2,177

$
6,993

$
2,252

$
3,238

$
713

$
1,965

$
932

$
18,270

Specific allowance
$
285

$
163

$
375

$
8

$
7

$
55

$
98

$
991

Average recorded investment in impaired loans during 2016
$
3,514

$
7,069

$
2,950

$
3,242

$
945

$
1,988

$
1,127

$
20,835

Interest income recognized on impaired loans during 2016 1
$
175

$
199

$
1,514

$
137

$
60

$
90

$
48

$
2,223

Average recorded investment in impaired loans during 2015
$
4,237

$
7,886

$
2,833

$
4,164

$
602

$
2,028

$
1,523

$
23,273

Interest income recognized on impaired loans during 2015 1
$
238

$
295

$
33

$
86

$
18

$
92

$
64

$
826

1 Interest income recognized on a cash basis totaled $100 thousand in 2017 and was primarily related to the pay-off of a commercial non-accrual PCI loan in the fourth quarter. Interest income recognized on a cash basis totaled $1.4 million in 2016 and was primarily related to the interest recovery upon the pay-off of a partially charged off non-accrual commercial real estate loan during the third quarter. No interest income on impaired loans was recognized on a cash basis in 2015.


Management monitors delinquent loans continuously and identifies problem loans, generally loans graded substandard or worse, loans on non-accrual status and loans modified in a TDR, to be evaluated individually for impairment testing. Generally, the recorded investment in impaired loans is net of any charge-offs from estimated losses related to specifically-identified impaired loans when they are deemed uncollectible. There were no charged-off portions of impaired loans outstanding at December 31, 2017 and 2016. In addition, the recorded investment in impaired loans is net of purchase discounts or premiums on acquired loans and deferred fees and costs. At December 31, 2017 and 2016, outstanding commitments to extend credit on impaired loans, including performing loans to borrowers whose terms have been modified in TDRs, totaled $935 thousand and $1.6 million, respectively.

The following tables disclose activity in the allowance for loan losses ("ALLL") and the recorded investment in loans by class, as well as the related ALLL disaggregated by impairment evaluation method.
Allowance for Loan Losses Rollforward for the Year Ended
(in thousands)
Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Construction

Home equity

Other residential

Installment and other consumer

Unallocated

Total

Year ended December 31, 2017
 
 
 
 
 
 
 
Beginning balance
$
3,248

$
1,753

$
6,320

$
781

$
973

$
454

$
372

$
1,541

$
15,442

Provision (reversal)
584

541

155

(100
)
58

82

3

(823
)
500

Charge-offs
(289
)





(4
)

(293
)
Recoveries
111






7


118

Ending balance
$
3,654

$
2,294

$
6,475

$
681

$
1,031

$
536

$
378

$
718

$
15,767

Year ended December 31, 2016
 
 
 
 
 
 
 
 
 
Beginning balance
$
3,023

$
2,249

$
6,178

$
724

$
910

$
394

$
425

$
1,096

$
14,999

Provision (reversal)
93

(476
)
(2,014
)
57

60

60

(75
)
445

(1,850
)
Charge-offs
(11
)
(20
)




(5
)

(36
)
Recoveries
143


2,156


3


27


2,329

Ending balance
$
3,248

$
1,753

$
6,320

$
781

$
973

$
454

$
372

$
1,541

$
15,442

Year ended December 31, 2015
 
 
 
 
 
 
 
 
 
Beginning balance
$
2,837

$
1,924

$
6,672

$
839

$
859

$
433

$
566

$
969

$
15,099

Provision (reversal)
(45
)
325

(517
)
724

48

(39
)
(123
)
127

500

Charge-offs
(5
)


(839
)


(20
)

(864
)
Recoveries
236


23


3


2


264

Ending balance
$
3,023

$
2,249

$
6,178

$
724

$
910

$
394

$
425

$
1,096

$
14,999

Allowance for Loan Losses and Recorded Investment In Loans
(dollars in thousands)
Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Construction

Home equity

Other residential

Installment and other consumer

Unallocated

Total

December 31, 2017
 
 
 
 
 
 
 
 
 
Ending ALLL related to loans collectively evaluated for impairment
$
3,604

$
2,106

$
6,316

$
674

$
1,025

$
535

$
276

$
718

$
15,254

Ending ALLL related to loans individually evaluated for impairment
50

188

159

7

6

1

102


513

Ending ALLL related to purchased credit-impaired loans









Ending balance
$
3,654

$
2,294

$
6,475

$
681

$
1,031

$
536

$
378

$
718

$
15,767

Recorded Investment:
 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment
$
233,605

$
292,798

$
820,023

$
60,859

$
131,620

$
94,378

$
26,689

$

$
1,659,972

Individually evaluated for impairment
2,165

6,999

2,171

2,969

753

1,148

721


16,926

Purchased credit-impaired
65

1,166

790


94




2,115

Total
$
235,835

$
300,963

$
822,984

$
63,828

$
132,467

$
95,526

$
27,410

$

$
1,679,013

Ratio of allowance for loan losses to total loans
1.55
%
0.76
%
0.79
%
1.07
%
0.78
%
0.56
%
1.38
%
NM

0.94
%
Allowance for loan losses to non-accrual loans
NM

NM

NM

NM

254
%
NM

NM

NM

3,883
%
NM - Not Meaningful
Allowance for Loan Losses and Recorded Investment In Loans
(dollars in thousands)
Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Construction

Home equity

Other residential

Installment and other consumer

Unallocated

Total

December 31, 2016
 
 
 
 
 
 
 
 
 
Ending ALLL related to loans collectively evaluated for impairment
$
2,963

$
1,590

$
5,945

$
773

$
966

$
399

$
274

$
1,541

$
14,451

Ending ALLL related to loans individually evaluated for impairment
285

163

375

8

7

55

98


991

Ending ALLL related to purchased credit-impaired loans









Ending balance
$
3,248

$
1,753

$
6,320

$
781

$
973

$
454

$
372

$
1,541

$
15,442

Loans outstanding:
 

 

 

 

 

 

 

Collectively evaluated for impairment
$
216,368

$
239,648

$
720,266

$
71,564

$
116,390

$
76,584

$
24,563

$

$
1,465,383

Individually evaluated for impairment
2,207

6,993

2,256

3,245

715

1,965

932


18,313

Purchased credit-impaired
40

1,072

1,706


102




2,920

Total
$
218,615

$
247,713

$
724,228

$
74,809

$
117,207

$
78,549

$
25,495

$

$
1,486,616

Ratio of allowance for loan losses to total loans
1.49
%
0.71
%
0.87
%
1.04
%
0.83
%
0.58
%
1.46
%
NM

1.04
%
Allowance for loan losses to non-accrual loans
NM

NM

NM

NM

1,071
%
NM

683
%
NM

10,650
%

NM - Not Meaningful

Purchased Credit-Impaired Loans
 
Acquired loans are considered credit-impaired if there is evidence of significant deterioration of credit quality since origination and it is probable, at the acquisition date, that we will be unable to collect all contractually required payments receivable. Management has determined certain loans purchased in our two bank acquisitions to be PCI loans based on credit indicators such as nonaccrual status, past due status, loan risk grade, loan-to-value ratio, etc. Revolving credit agreements (e.g., home equity lines of credit and revolving commercial loans) are not considered PCI loans as cash flows cannot be reasonably estimated.
 
The following table reflects the unpaid principal balance and related carrying value of PCI loans:
PCI Loans
December 31, 2017
December 31, 2016

(in thousands)
Unpaid Principal Balance

Carrying Value

Unpaid Principal Balance

Carrying Value

Commercial and industrial
$
276

$
65

$
45

$
40

Commercial real estate, owner occupied
1,297

1,166

1,344

1,072

Commercial real estate, investor
1,064

790

1,713

1,706

Construction




Home equity
231

94

248

102

Total purchased credit-impaired loans
$
2,868

$
2,115

$
3,350

$
2,920


 
The activities in the accretable yield, or income expected to be earned over the remaining lives of the PCI loans were as follows: 
Accretable Yield
Years ended
(in thousands)
December 31, 2017

December 31, 2016

December 31, 2015

Balance at beginning of period
$
1,476

$
2,618

$
4,027

Additions
109



Removals 1

(778
)
(914
)
Accretion
(331
)
(364
)
(495
)
Balance at end of period
$
1,254

$
1,476

$
2,618

1 Represents the accretable difference that is relieved when a loan exits the PCI population due to payoff, full charge-off, or transfer to repossessed assets, etc.


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 $887.9 million and $869.2 million at December 31, 2017 and 2016, respectively. In addition, we pledge a certain residential loan portfolio, which totaled $67.6 million and $54.6 million at December 31, 2017 and 2016, respectively, to secure our borrowing capacity with the Federal Reserve Bank of San Francisco (FRBSF). Also, see Note 7, 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. During the first and fourth quarters of 2017, two new directors joined our Board of Directors resulting in the reclassification of existing loans to those directors and their businesses as related party status.

An analysis of net loans to related parties for each of the three years ended December 31, 2017, 2016 and 2015 is as follows:
(in thousands)
2017

2016

2015

Balance at beginning of year
$
1,988

$
2,562

$
3,329

Additions
3,186



Advances
74


165

Repayments
(128
)
(574
)
(390
)
Reclassified due to a change in borrower status
6,732


(542
)
Balance at end of year
$
11,852

$
1,988

$
2,562



Undisbursed commitments to related parties totaled $9.1 million and $1.1 million as of December 31, 2017 and 2016, respectively.