Loans and Lease Finance Receivables and Allowance for Loan Losses | 7. LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR LOAN LOSSES The following table provides a summary of total loans and lease finance receivables, excluding PCI loans, by type. March 31, 2016 December 31, 2015 (Dollars in thousands) Commercial and industrial $ 466,961 $ 434,099 SBA 113,703 106,867 Real estate: Commercial real estate 2,819,119 2,643,184 Construction 89,648 68,563 SFR mortgage 232,965 233,754 Dairy & livestock and agribusiness 227,710 305,509 Municipal lease finance receivables 73,098 74,135 Consumer and other loans 76,103 69,278 Gross loans, excluding PCI loans 4,099,307 3,935,389 Less: Deferred loan fees, net (7,748) (8,292) Gross loans, excluding PCI loans, net of deferred loan fees 4,091,559 3,927,097 Less: Allowance for loan losses (59,336) (59,156) Net loans, excluding PCI loans 4,032,223 3,867,941 PCI Loans 84,960 93,712 Discount on PCI loans (3,110) (3,872) PCI loans, net 81,850 89,840 Total loans and lease finance receivables $ 4,114,073 $ 3,957,781 As of March 31, 2016, 68.77% of the total gross loan portfolio (excluding PCI loans) consisted of commercial real estate loans and 2.19% of the total loan portfolio consisted of construction loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of March 31, 2016, $178.9 million, or 6.35% of the total commercial real estate loans included loans secured by farmland, compared to $173.0 million, or 6.54%, at December 31, 2015. The loans secured by farmland included $135.1 million for loans secured by dairy & livestock land and $43.8 million for loans secured by agricultural land at March 31, 2016, compared to $128.4 million for loans secured by dairy & livestock land and $44.6 million for loans secured by agricultural land at December 31, 2015. As of March 31, 2016, dairy & livestock and agribusiness loans of $227.7 million were comprised of $210.2 million for dairy & livestock loans and $17.5 million for agribusiness loans, compared to $287.0 million for dairy & livestock loans and $18.5 million for agribusiness loans at December 31, 2015. At March 31, 2016, the Company held approximately $2.03 billion of total fixed rate loans, including PCI loans. At March 31, 2016 and December 31, 2015, loans totaling $3.02 billion and $2.91 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank. Credit Quality Indicators Central to our 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 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 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 basically worthless asset even though partial recovery may be effected in the future. The following table summarizes each type of loans, excluding PCI loans, according to our internal risk ratings for the periods presented. March 31, 2016 Pass Special Substandard Doubtful & Total (Dollars in thousands) Commercial and industrial $ 428,824 $ 30,887 $ 7,211 $ 39 $ 466,961 SBA 94,609 12,729 6,127 238 113,703 Real estate: Commercial real estate Owner occupied 810,362 80,555 10,831 - 901,748 Non-owner occupied 1,861,506 22,715 33,150 - 1,917,371 Construction Speculative 48,091 - 7,651 - 55,742 Non-speculative 33,906 - - - 33,906 SFR mortgage 226,444 3,535 2,986 - 232,965 Dairy & livestock and agribusiness 173,056 48,009 6,645 - 227,710 Municipal lease finance receivables 68,157 4,941 - - 73,098 Consumer and other loans 71,424 1,839 2,753 87 76,103 Total gross loans, excluding PCI loans $ 3,816,379 $ 205,210 $ 77,354 $ 364 $ 4,099,307 December 31, 2015 Pass Special Substandard Doubtful & Total (Dollars in thousands) Commercial and industrial $ 398,651 $ 33,000 $ 2,403 $ 45 $ 434,099 SBA 87,441 13,169 4,854 1,403 106,867 Real estate: Commercial real estate Owner occupied 772,114 54,758 11,481 - 838,353 Non-owner occupied 1,741,615 26,170 37,046 - 1,804,831 Construction Speculative 38,186 - 7,651 - 45,837 Non-speculative 22,726 - - - 22,726 SFR mortgage 227,207 3,556 2,991 - 233,754 Dairy & livestock and agribusiness 285,647 19,862 - - 305,509 Municipal lease finance receivables 69,194 4,941 - - 74,135 Consumer and other loans 64,844 1,618 2,708 108 69,278 Total gross loans, excluding PCI loans $ 3,707,625 $ 157,074 $ 69,134 $ 1,556 $ 3,935,389 Allowance for Loan Losses The Company’s Credit Management Division is responsible for regularly reviewing the ALLL methodology, including loss factors and economic risk factors. The Bank’s Director Loan Committee provides Board oversight of the ALLL process and approves 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 March 31, 2016 and December 31, 2015. 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 loans, excluding PCI loans, by portfolio segment for the periods presented. For the Three Months Ended March 31, 2016 Ending Charge-offs Recoveries Provision for Ending (Dollars in thousands) Commercial and industrial $ 8,588 $ (61) $ 63 $ 141 $ 8,731 SBA 993 - 1 242 1,236 Real estate: Commercial real estate 36,995 - 139 1,152 38,286 Construction 2,389 - 9 (1,247) 1,151 SFR mortgage 2,103 (102) - 201 2,202 Dairy & livestock and agribusiness 6,029 - 99 (952) 5,176 Municipal lease finance receivables 1,153 - - 12 1,165 Consumer and other loans 906 - 32 451 1,389 Unallocated (1) - - - - - Total allowance for loan losses $ 59,156 $ (163) $ 343 $ - $ 59,336 For the Three Months Ended March 31, 2015 Ending Charge-offs Recoveries Provision for Ending (Dollars in thousands) Commercial and industrial $ 7,074 $ (134) $ 35 $ 527 $ 7,502 SBA 2,557 (33) 34 (362) 2,196 Real estate: Commercial real estate 33,373 - 857 618 34,848 Construction 988 - 9 46 1,043 SFR mortgage 2,344 - 185 (104) 2,425 Dairy & livestock and agribusiness 5,479 - 99 (1,832) 3,746 Municipal lease finance receivables 1,412 - - (382) 1,030 Consumer and other loans 1,262 (177) 9 (269) 825 Unallocated (1) 5,336 - - 1,758 7,094 Total allowance for loan losses $ 59,825 $ (344) $ 1,228 $ - $ 60,709 (1) Based upon changes to our ALLL methodology, as described in Note 3 — Summary of Significant Accounting Policies The following tables present the recorded investment in loans held-for-investment, excluding PCI loans, and the related allowance for loan losses by portfolio segment, based on the Company’s methodology for determining the allowance for loan losses for the periods presented. March 31, 2016 Recorded Investment in Loans Allowance for Loan Losses Individually Collectively Individually Collectively (Dollars in thousands) Commercial and industrial $ 1,477 $ 465,484 $ 575 $ 8,156 SBA 3,304 110,399 55 1,181 Real estate: Commercial real estate 35,577 2,783,542 - 38,286 Construction 7,651 81,997 48 1,103 SFR mortgage 5,874 227,091 16 2,186 Dairy & livestock and agribusiness 714 226,996 - 5,176 Municipal lease finance receivables - 73,098 - 1,165 Consumer and other loans 868 75,235 - 1,389 Unallocated (1) - - - - Total $ 55,465 $ 4,043,842 $ 694 $ 58,642 March 31, 2015 Recorded Investment in Loans Allowance for Loan Losses Individually Collectively Individually Collectively (Dollars in thousands) Commercial and industrial $ 1,611 $ 401,989 $ 592 $ 6,910 SBA 3,158 123,227 42 2,154 Real estate: Commercial real estate 41,886 2,457,297 154 34,694 Construction 7,651 47,695 - 1,043 SFR mortgage 5,913 199,219 - 2,425 Dairy & livestock and agribusiness 7,277 166,164 - 3,746 Municipal lease finance receivables - 76,220 - 1,030 Consumer and other loans 881 69,868 6 819 Unallocated (1) - - - 7,094 Total $ 68,377 $ 3,541,679 $ 794 $ 59,915 (1) Based upon changes to our ALLL methodology, as described in Note 3 — Summary of Significant Accounting Policies Past Due and Nonperforming Loans We seek to manage asset quality and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note 3 – Summary of Significant Accounting Policies, A loan is reported as a Troubled Debt Restructured (“TDR”) when the Bank grants a concession(s) to a borrower experiencing financial difficulties that the Bank would not otherwise consider. Examples of such concessions include a reduction in the interest rate, deferral of principal or accrued interest, extending the payment due dates or loan maturity date(s), or providing a lower interest rate than would be normally available for new debt of similar risk. As a result of these concessions, restructured loans are classified as impaired. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan losses. Generally, when loans are identified as impaired they are moved to our Special Assets Department. When we identify a loan as impaired, we measure the loan for potential impairment using discounted cash flows, unless the loan is determined to be collateral dependent. In these cases, we use the current fair value of collateral, less selling costs. Generally, the determination of fair value is established through obtaining external appraisals of the collateral. The following tables present the recorded investment in, and the aging of, past due and nonaccrual loans, excluding PCI loans, by type of loans for the periods presented. March 31, 2016 30-59 Days 60-89 Days Total Past Nonaccrual (1) Current Total Loans (Dollars in thousands) Commercial and industrial $ 111 $ - $ 111 $ 622 $ 466,228 466,961 SBA - - - 2,435 111,268 113,703 Real estate: Commercial real estate Owner occupied - - - 2,086 899,662 901,748 Non-owner occupied - - - 9,996 1,907,375 1,917,371 Construction Speculative (2) - - - - 55,742 55,742 Non-speculative - - - - 33,906 33,906 SFR mortgage 625 - 625 2,549 229,791 232,965 Dairy & livestock and agribusiness - - - - 227,710 227,710 Municipal lease finance receivables - - - - 73,098 73,098 Consumer and other loans 47 117 164 456 75,483 76,103 Total gross loans, excluding PCI Loans $ 783 $ 117 $ 900 $ 18,144 $ 4,080,263 $ 4,099,307 (1) As of March 31, 2016, $16.1 million of nonaccruing loans were current, $20,000 were 30-59 days past due, $836,000 were 60-89 days past due and $1.2 million were 90+ days past due. (2) Speculative construction loans are generally for properties where there is no identified buyer or renter. December 31, 2015 30-59 Days 60-89 Days Total Past Nonaccrual (1) Current Total Loans (Dollars in thousands) Commercial and industrial $ - $ - $ - $ 704 $ 433,395 $ 434,099 SBA - - - 2,567 104,300 106,867 Real estate: Commercial real estate Owner occupied - - - 4,174 834,179 838,353 Non-owner occupied 354 - 354 10,367 1,794,110 1,804,831 Construction Speculative (2) - - - - 45,837 45,837 Non-speculative - - - - 22,726 22,726 SFR mortgage 1,082 - 1,082 2,688 229,984 233,754 Dairy & livestock and agribusiness - - - - 305,509 305,509 Municipal lease finance receivables - - - - 74,135 74,135 Consumer and other loans - - - 519 68,759 69,278 Total gross loans, excluding PCI Loans $ 1,436 $ - $ 1,436 $ 21,019 $ 3,912,934 $ 3,935,389 (1) As of December 31, 2015, $7.9 million of nonaccruing loans were current, $456,000 were 30-59 days past due, $9.1 million were 60-89 days past due and $3.5 million were 90+ days past due. (2) Speculative construction loans are generally for properties where there is no identified buyer or renter. Impaired Loans At March 31, 2016, the Company had impaired loans, excluding PCI loans, of $55.5 million. Of this amount, there was $12.1 million of nonaccrual commercial real estate loans, $2.5 million of nonaccrual single-family residential (“SFR”) mortgage loans, $2.4 million of nonaccrual SBA loans, $622,000 of nonaccrual commercial and industrial loans, and $456,000 of nonaccrual consumer and other loans. These impaired loans included $49.7 million of loans whose terms were modified in a troubled debt restructuring, of which $12.4 million were classified as nonaccrual. The remaining balance of $37.3 million consisted of 35 loans performing according to the restructured terms. The impaired loans had a specific allowance of $694,000 at March 31, 2016. At December 31, 2015, the Company had classified as impaired, loans, excluding PCI loans, with a balance of $63.7 million with a related allowance of $669,000. The following tables present information for held-for-investment loans, excluding PCI loans, individually evaluated for impairment by type of loans, as and for the periods presented. As of and For the Three Months Ended March 31, 2016 Recorded Unpaid Related Average Interest (Dollars in thousands) With no related allowance recorded: Commercial and industrial $ 805 $ 1,677 $ - $ 831 $ 7 SBA 3,050 3,765 - 3,089 13 Real estate: Commercial real estate Owner occupied 5,315 6,507 - 5,095 51 Non-owner occupied 30,262 33,368 - 30,400 343 Construction Speculative - - - - - Non-speculative - - - - - SFR mortgage 5,499 6,406 - 5,512 27 Dairy & livestock and agribusiness 714 714 - 710 8 Municipal lease finance receivables - - - - - Consumer and other loans 868 1,420 - 888 4 Total 46,513 53,857 - 46,525 453 With a related allowance recorded: Commercial and industrial 672 741 575 687 3 SBA 254 274 55 254 2 Real estate: Commercial real estate Owner occupied - - - - - Non-owner occupied - - - - - Construction Speculative 7,651 7,651 48 7,651 97 Non-speculative - - - - - SFR mortgage 375 426 16 515 2 Dairy & livestock and agribusiness - - - - - Municipal lease finance receivables - - - - - Consumer and other loans - - - - - Total 8,952 9,092 694 9,107 104 Total impaired loans $ 55,465 $ 62,949 $ 694 $ 55,632 $ 557 As of and For the Three Months Ended March 31, 2015 Recorded Unpaid Related Average Interest (Dollars in thousands) With no related allowance recorded: Commercial and industrial $ 1,004 $ 1,819 $ - $ 1,017 $ 8 SBA 3,117 3,667 - 3,177 13 Real estate: Commercial real estate Owner occupied 6,117 7,167 - 6,185 64 Non-owner occupied 34,808 42,718 - 35,194 350 Construction Speculative 7,651 7,651 - 7,651 96 Non-speculative - - - - - SFR mortgage 5,913 6,642 - 5,940 27 Dairy & livestock and agribusiness 7,277 8,991 - 7,533 85 Municipal lease finance receivables - - - - - Consumer and other loans 783 1,289 - 836 4 Total 66,670 79,944 - 67,533 647 With a related allowance recorded: Commercial and industrial 607 680 592 617 - SBA 41 54 42 45 - Real estate: Commercial real estate Owner occupied - - - - - Non-owner occupied 961 1,278 154 973 - Construction Speculative - - - - - Non-speculative - - - - - SFR mortgage - - - - - Dairy & livestock and agribusiness - - - - - Municipal lease finance receivables - - - - - Consumer and other loans 98 107 6 99 - Total 1,707 2,119 794 1,734 - Total impaired loans $ 68,377 $ 82,063 $ 794 $ 69,267 $ 647 As of December 31, 2015 Recorded Unpaid Related (Dollars in thousands) With no related allowance recorded: Commercial and industrial $ 1,017 $ 1,894 $ - SBA 3,207 3,877 - Real estate: Commercial real estate Owner occupied 6,252 7,445 - Non-owner occupied 34,041 37,177 - Construction Speculative - - - Non-speculative - - - SFR mortgage 5,665 6,453 - Dairy & livestock and agribusiness 3,685 3,684 - Municipal lease finance receivables - - - Consumer and other loans 890 1,454 - Total 54,757 61,984 - With a related allowance recorded: Commercial and industrial 626 695 626 SBA 41 47 10 Real estate: Commercial real estate Owner occupied - - - Non-owner occupied - - - Construction Speculative 7,651 7,651 13 Non-speculative - - - SFR mortgage 588 640 20 Dairy & livestock and agribusiness - - - Municipal lease finance receivables - - - Consumer and other loans 43 45 - Total 8,949 9,078 669 Total impaired loans $ 63,706 $ 71,062 $ 669 The Company recognizes the charge-off of the impairment allowance on impaired loans in the period in which a loss is identified for collateral dependent loans. Therefore, the majority of the nonaccrual loans as of March 31, 2016 and December 31, 2015 have already been written down to the estimated net realizable value. The impaired loans with a related allowance recorded are on nonaccrual loans where a charge-off is not yet processed, on nonaccrual SFR loans where there is a potential modification in process, or on smaller balance non-collateral dependent 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 it evaluates credit risk associated with the loan and lease portfolio. There was no provision or recapture of provision for unfunded loan commitments for the three months ended March 31, 2016, compared with a recapture of provision for unfunded loan commitments of $500,000 for the same period of 2015. As of March 31, 2016 and December 31, 2015, the balance in this reserve was $7.2 million and was included in other liabilities. Troubled Debt Restructurings (“TDRs”) Loans that are reported as TDRs are considered impaired and charge-off amounts are taken on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal. Refer to Note 3 – Summary of Significant Accounting Policies As of March 31, 2016, there were $49.7 million of loans classified as a TDR, of which $12.4 million were nonperforming and $37.3 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 March 31, 2016, performing TDRs were comprised of 14 commercial real estate loans of $23.5 million, one construction loan of $7.7 million, one dairy & livestock and agribusiness loan of $714,000, 11 SFR mortgage loans of $3.3 million, five commercial and industrial loans of $855,000, one consumer loan of $412,000 and two SBA loans of $869,000. There were no loans removed from TDR classification during the three months ended March 31, 2016 and 2015. 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 $642,000 and $607,000 of specific allowance to TDRs as of March 31, 2016 and December 31, 2015, respectively. The following table provides a summary of the activity related to TDRs for the periods presented. For the Three Months Ended 2016 2015 (Dollars in thousands) Performing TDRs: Beginning balance $ 42,687 $ 53,589 New modifications 1,006 - Payoffs and payments, net (6,372) (8,729) TDRs returned to accrual status - 516 TDRs placed on nonaccrual status - - Ending balance $ 37,321 $ 45,376 Nonperforming TDRs: Beginning balance $ 12,622 $ 20,285 New modifications 82 - Charge-offs (38) - Payoffs and payments, net (306) (2,995) TDRs returned to accrual status - (516) TDRs placed on nonaccrual status - - Ending balance $ 12,360 $ 16,774 Total TDRs $ 49,681 $ 62,150 The following tables summarize loans modified as troubled debt restructurings for the periods presented. Modifications (1) For the Three Months Ended March 31, 2016 Number of Pre-Modification Investment Post-Modification Investment Outstanding Financial Effect (Dollars in thousands) SBA: Interest rate reduction - - - - - Change in amortization period or maturity 1 194 194 193 28 Real estate: Commercial real estate: Owner occupied Interest rate reduction - - - - - Change in amortization period or maturity 2 812 812 778 - Non-owner occupied Interest rate reduction - - - - - Change in amortization period or maturity - - - - - Consumer: Interest rate reduction - - - - - Change in amortization period or maturity 2 82 82 75 - Total loans 5 $ 1,088 $ 1,088 $ 1,046 $ 28 For the Three Months Ended March 31, 2015 Number of Pre-Modification Recorded Investment Post-Modification Recorded Investment Outstanding Recorded Investment at Financial Effect Resulting From (Dollars in thousands) SBA: 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 occupied Interest rate reduction - - - - - Change in amortization period or maturity - - - - - Consumer: Interest rate reduction - - - - - Change in amortization period or maturity - - - - - Total loans - $ - $ - $ - $ - (1) The tables above exclude modified loans that were paid off prior to the end of the period. (2) Financial effects resulting from modifications represent charge-offs and specific allowance recorded at modification date. As of March 31, 2016, there were no loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the three months ended March 31, 2016. |