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 the Company’s total loans and lease finance receivables, excluding PCI loans, by type. March 31, 2019 December 31, 2018 (Dollars in thousands) Commercial and industrial $ 957,126 $ 1,002,209 SBA 337,957 350,043 Real estate: Commercial real estate 5,388,866 5,394,229 Construction 121,912 122,782 SFR mortgage 285,787 296,504 Dairy & livestock and agribusiness 322,321 393,843 Municipal lease finance receivables 61,249 64,186 Consumer and other loans 120,768 128,429 Gross loans, excluding PCI loans 7,595,986 7,752,225 Less: Deferred loan fees, net (4,479 ) (4,828 ) Gross loans, excluding PCI loans, net of deferred loan fees 7,591,507 7,747,397 Less: Allowance for loan losses (65,021 ) (63,409 ) Net loans, excluding PCI loans 7,526,486 7,683,988 PCI Loans 15,356 17,214 Discount on PCI loans - - Less: Allowance for loan losses (180 ) (204 ) PCI loans, net 15,176 17,010 Total loans and lease finance receivables $ 7,541,662 $ 7,700,998 As of March 31, 2019, 76.31% of the Company’s total gross loan portfolio (excluding PCI loans) consisted of real estate loans, 70.94% of which consisted of commercial real estate 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, 2019, $231.1 million, or 4.29% of the total commercial real estate loans included loans secured by farmland, compared to $229.8 million, or 4.26%, at December 31, 2018. The loans secured by farmland included $124.2 million for loans secured by dairy & livestock land and $106.9 million for loans secured by agricultural land at March 31, 2019, compared to $126.9 million for loans secured by dairy & livestock land and $102.9 million for loans secured by agricultural land at December 31, 2018. As of March 31, 2019, dairy & livestock and agribusiness loans of $322.3 million were comprised of $264.8 million for dairy & livestock loans and $57.6 million for agribusiness loans, compared to $340.5 million for dairy & livestock loans and $53.3 million for agribusiness loans at December 31, 2018. At March 31, 2019, the Company held approximately $3.79 billion of total fixed rate loans, including PCI loans. At March 31, 2019 and December 31, 2018, loans totaling $6.18 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 as of March 31, 2019 and December 31, 2018. 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, excluding PCI loans, according to our internal risk ratings for the periods presented. March 31, 2019 Pass Special Mention Substandard (1) Doubtful & Loss Total (Dollars in thousands) Commercial and industrial $ 913,059 $ 32,685 $ 11,382 $ - $ 957,126 SBA 322,393 7,704 7,860 - 337,957 Real estate: Commercial real estate Owner occupied 1,986,030 96,262 16,849 - 2,099,141 Non-owner occupied 3,279,696 9,290 739 - 3,289,725 Construction Speculative 120,801 - - - 120,801 Non-speculative 1,111 - - - 1,111 SFR mortgage 278,962 3,287 3,538 - 285,787 Dairy & livestock and agribusiness 261,438 50,451 10,432 - 322,321 Municipal lease finance receivables 60,745 504 - - 61,249 Consumer and other loans 118,596 1,215 957 - 120,768 Total gross loans, excluding PCI loans $ 7,342,831 $ 201,398 $ 51,757 $ - $ 7,595,986 (1) Includes $19.9 million of classified loans acquired from CB in the third quarter of 2018. December 31, 2018 Pass Special Mention Substandard (1) Doubtful & Loss 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 occupied 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, excluding PCI loans $ 7,519,101 $ 182,207 $ 50,917 $ - $ 7,752,225 (1) Includes $19.0 million of classified loans acquired from CB in the third quarter of 2018. Allowance for Loan Losses (“ALLL”) 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 of the 2018 Annual Report on Form 10-K for the year ended December 31, 2018 for a more detailed discussion concerning the allowance for loan losses. Management believes that the ALLL was appropriate at March 31, 2019 and December 31, 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 loans by type for the periods presented. For the Three Months Ended March 31, 2019 Ending Balance December 31, 2018 Charge-offs Recoveries Provision for (Recapture of) Loan Losses Ending Balance March 31, 2019 (Dollars in thousands) Commercial and industrial $ 7,520 $ - $ 110 $ (31 ) $ 7,599 SBA 1,062 (20 ) 5 232 1,279 Real estate: - - Commercial real estate 44,934 - - 1,144 46,078 Construction 981 - 3 (120 ) 864 SFR mortgage 2,196 - 68 (76 ) 2,188 Dairy & livestock and agribusiness 5,215 (78 ) - 562 5,699 Municipal lease finance receivables 775 - - (37 ) 738 Consumer and other loans 726 (1 ) 1 (150 ) 576 PCI loans 204 - - (24 ) 180 Total allowance for loan losses $ 63,613 $ (99 ) $ 187 $ 1,500 $ 65,201 For the Three Months Ended March 31, 2018 Ending Balance December 31, 2017 Charge-offs Recoveries Provision for (Recapture of) Loan Losses Ending Balance March 31, 2018 (Dollars in thousands) Commercial and industrial $ 7,280 $ - $ 10 $ 209 $ 7,499 SBA 869 - 5 10 884 Real estate: - - Commercial real estate 41,722 - - 141 41,863 Construction 984 - 1,334 (1,331 ) 987 SFR mortgage 2,112 - - 90 2,202 Dairy & livestock and agribusiness 4,647 - - 19 4,666 Municipal lease finance receivables 851 - - (17 ) 834 Consumer and other loans 753 (7 ) 8 (66 ) 688 PCI loans 367 - - (55 ) 312 Total allowance for loan losses $ 59,585 $ (7 ) $ 1,357 $ (1,000 ) $ 59,935 The following tables present the recorded investment in loans held-for-investment and the related allowance for loan losses by loan type, based on the Company’s methodology for determining the allowance for loan losses for the periods presented. Acquired loans are also supported by a credit discount established through the determination of fair value for the acquired loan portfolio. March 31, 2019 Recorded Investment in Loans Allowance for Loan Losses Individually Evaluated for Impairment Collectively Evaluated for Impairment Acquired with Deterioriated Credit Quality Individually Evaluated for Impairment Collectively Evaluated for Impairment Acquired with Deterioriated Credit Quality (Dollars in thousands) Commercial and industrial $ 8,512 $ 948,614 $ - $ 117 $ 7,482 $ - SBA 4,661 333,296 - 317 962 - Real estate: Commercial real estate 1,589 5,387,277 - - 46,078 - Construction - 121,912 - - 864 - SFR mortgage 5,051 280,736 - - 2,188 - Dairy & livestock and agribusiness - 322,321 - - 5,699 - Municipal lease finance receivables - 61,249 - - 738 - Consumer and other loans 477 120,291 - 1 575 - PCI loans - - 15,356 - - 180 Total $ 20,290 $ 7,575,696 $ 15,356 $ 435 $ 64,586 $ 180 March 31, 2018 Recorded Investment in Loans Allowance for Loan Losses Individually Evaluated for Impairment Collectively Evaluated for Impairment Acquired with Deterioriated Credit Quality Individually Evaluated for Impairment Collectively Evaluated for Impairment Acquired with Deterioriated Credit Quality (Dollars in thousands) Commercial and industrial $ 432 $ 513,797 $ - $ - $ 7,499 $ - SBA 1,201 122,231 - - 884 - Real estate: Commercial real estate 7,992 3,403,224 - - 41,863 - Construction - 79,898 - - 987 - SFR mortgage 3,576 234,042 - - 2,202 - Dairy & livestock and agribusiness 818 275,561 - - 4,666 - Municipal lease finance receivables - 67,892 - - 834 - Consumer and other loans 438 63,721 - - 688 - PCI loans - - 25,861 - - 312 Total $ 14,457 $ 4,760,366 $ 25,861 $ - $ 59,623 $ 312 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 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 one or more 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 carrying value of the loan. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan losses. 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, 2019 30-59 Days Past Due 60-89 Days Past Due Total Past Due and Accruing Nonaccrual (1) (3) Current Total Loans and Financing Receivables (Dollars in thousands) Commercial and industrial $ 339 $ 30 $ 369 $ 8,388 $ 948,369 $ 957,126 SBA 601 - 601 4,098 333,258 337,957 Real estate: Commercial real estate Owner occupied - - - 519 2,098,622 2,099,141 Non-owner occupied 124 - 124 615 3,288,986 3,289,725 Construction Speculative (2) - - - - 120,801 120,801 Non-speculative - - - - 1,111 1,111 SFR mortgage - - - 2,894 282,893 285,787 Dairy & livestock and agribusiness - - - - 322,321 322,321 Municipal lease finance receivables - - - - 61,249 61,249 Consumer and other loans 98 3 101 477 120,190 120,768 Total gross loans, excluding PCI loans $ 1,162 $ 33 $ 1,195 $ 16,991 $ 7,577,800 $ 7,595,986 (1) As of March 31, 2019, $ 1.4 2.1 $ 13.5 (2) Speculative construction loans are generally for properties where there is no identified buyer or renter. (3) Includes $ 13.7 December 31, 2018 30-59 Days Past Due 60-89 Days Past Due Total Past Due and Accruing Nonaccrual (1) (3) Current Total Loans and Financing Receivables (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 occupied - - - 5,479 3,270,760 3,276,239 Construction Speculative (2) - - - - 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) As of December 31, 2018, $ 2.3 33,000 57,000 17.6 (2) Speculative construction loans are generally for properties where there is no identified buyer or renter. (3) Includes $ 12.3 Impaired Loans At March 31, 2019, the Company had impaired loans, excluding PCI loans, of $20.3 $8.4 $2.9 $4.1 $477,000 $3.6 $277,000 $3.3 $435,000 $23.5 million with a related allowance of $561,000. 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, 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 $ 8,208 $ 12,317 $ - $ 8,230 $ 2 SBA 3,400 5,779 - 3,511 11 Real estate: Commercial real estate Owner occupied 519 618 - 521 - Non-owner occupied 1,070 1,231 - 1,084 7 Construction Speculative - - - - - Non-speculative - - - - - SFR mortgage 5,051 5,865 - 5,082 21 Dairy & livestock and agribusiness - - - - - Municipal lease finance receivables - - - - - Consumer and other loans 476 625 - 482 - Total 18,724 26,435 - 18,910 41 With a related allowance recorded: Commercial and industrial 304 309 117 323 - SBA 1,261 1,236 317 1,261 - 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 1 1 1 1 - Total 1,566 1,546 435 1,585 - Total impaired loans $ 20,290 $ 27,981 $ 435 $ 20,495 $ 41 As of and For the Three Months Ended March 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized (Dollars in thousands) With no related allowance recorded: Commercial and industrial $ 432 $ 986 $ — $ 461 $ 2 SBA 1,201 1,327 — 1,220 12 Real estate: Commercial real estate Owner occupied 4,332 4,755 — 4,348 — Non-owner occupied 3,660 5,033 — 3,715 22 Construction Speculative — — — — — Non-speculative — — — — — SFR mortgage 3,576 4,236 — 3,599 25 Dairy & livestock and agribusiness 818 1,091 — 826 — Municipal lease finance receivables — — — — — Consumer and other loans 438 640 — 519 — Total 14,457 18,068 — 14,688 61 With a related allowance recorded: Commercial and industrial — — — — — SBA — — — — — 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 — — — — — Total — — — — — Total impaired loans $ 14,457 $ 18,068 $ — $ 14,688 $ 61 As of December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance (Dollars in thousands) With no related allowance recorded: Commercial and industrial $ 7,436 $ 11,457 $ — SBA 3,467 5,746 — Real estate: Commercial real estate Owner occupied 589 705 — Non-owner occupied 2,808 4,324 — Construction Speculative — — — Non-speculative — — — SFR mortgage 5,349 6,270 — Dairy & livestock and agribusiness — — — Municipal lease finance receivables — — — Consumer and other loans 418 526 — Total 20,067 29,028 — With a related allowance recorded: Commercial and industrial 189 191 3 SBA — — — Real estate: Commercial real estate Owner occupied — — — Non-owner occupied 3,143 3,144 478 Construction Speculative — — — Non-speculative — — — SFR mortgage — — — Dairy & livestock and agribusiness 78 78 12 Municipal lease finance receivables — — — Consumer and other loans 68 100 68 Total 3,478 3,513 561 Total impaired loans $ 23,545 $ 32,541 $ 561 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, 2019, December 31, 2018 and March 31, 2018 have already been written down to the estimated net realizable value. An allowance is recorded on impaired loans for the following: nonaccrual loans where a charge-off is not yet processed, nonaccrual SFR mortgage 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, 2019, and 2018. The acquisition of CB resulted in $2.9 million in reserve for unfunded loan commitments at fair value in the third quarter of 2018. As of March 31, 2019 and December 31, 2018, the balance in this reserve was $0.0 million and $9.0 million, respectively, 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 , included in our Annual Report on Form 10-K for the year ended December 31, 2018 for a more detailed discussion regarding TDRs. As of March 31, 2019, there were $0.0 million of loans classified as a TDR, of which $0.0 million were nonperforming and $0.0 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, 2019, performing TDRs were comprised of ten SFR mortgage loans of $0.0 million, one SBA loan of $0,000, one commercial real estate loan of $0,000, and two commercial and industrial loans of $0,000. 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 $0,000 and $490,000 of specific allowance to TDRs as of March 31, 2019 and December 31, 2018, respectively. The following table provides a summary of the activity related to TDRs for the periods presented. For the Three Months Ended March 31, 2019 2018 (Dollars in thousands) Performing TDRs: Beginning balance $ 3,594 $ 4,809 New modifications - - Payoffs/payments, net and other (295 ) (524 ) TDRs returned to accrual status - - TDRs placed on nonaccrual status - - Ending balance $ 3,299 $ 4,285 Nonperforming TDRs: Beginning balance $ 3,509 $ 4,200 New modifications - - Charge-offs (78 ) - Transfer to OREO (2,275 ) - Payoffs/payments, net and other (879 ) (291 ) TDRs returned to accrual status - - TDRs placed on nonaccrual status - - Ending balance $ 277 $ 3,909 Total TDRs $ 3,576 $ 8,194 There were no loans that were modified as TDRs during the three months ended March 31, 2019 and 2018. As of March 31, 2019 and 2018, 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, 2019 and 2018, respectively. |