Loans and Lease Finance Receivables and Allowance for Loan Losses | 5. LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES The following table provides a summary of total loans and lease finance receivables by type. (Dollars in thousands) Commercial and industrial $ 960,761 $ 935,127 SBA 313,071 305,008 Real estate: Commercial real estate 5,347,925 5,374,617 Construction 128,045 116,925 SFR mortgage 278,743 283,468 Dairy & livestock and agribusiness 272,114 383,709 Municipal lease finance receivables 51,287 53,146 Consumer and other loans 114,206 116,319 Gross loans 7,466,152 7,568,319 Less: Deferred loan fees, net (1) - (3,742 ) Gross loans, net of deferred loan fees 7,466,152 7,564,577 Less: Allowance for credit (82,641 ) (68,660 ) Total loans and lease finance receivables $ 7,383,511 $ 7,495,917 (1) Beginning with March 31, 2020, gross loans are presented net of deferred loan fees by respective class of financing receivables. As of March 31, 2020, 77.08% of the Company’s total gross loan portfolio consisted of real estate loans, with commercial real estate loans representing 71.63% 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 March 31, 2020, $248.2 million, or 4.64% of the total commercial real estate loans included loans secured by farmland, compared to $241.8 million, or 4.50%, at December 31, 2019. The loans secured by farmland included $122.5 million for loans secured by dairy & livestock land and $125.7 million for loans secured by agricultural land at March 31, 2020, compared to $125.9 million for loans secured by dairy & livestock land and $115.9 million for loans secured by agricultural land at December 31, 2019. As of March 31, 2020, dairy & livestock and agribusiness loans of $272.1 million were comprised of $218.0 million for dairy & livestock loans and $54.1 million for agribusiness loans, compared to $323.5 million for dairy & livestock loans and $60.2 million for agribusiness loans at December 31, 2019. At March 31, 2020 and December 31, 2019, loans totaling $6.06 billion and $6.03 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 on an ongoing basis 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 and origination year, according to our internal risk ratings as of the date presented. Origination Year Revolving Revolving March 31, 2020 2020 2019 2018 2017 2016 Prior Total (Dollars in thousands) Commercial and industrial loans: Risk Rating: Pass $ 35,101 $ 160,551 $ 79,808 $ 74,291 $ 48,698 $ 85,803 $ 423,186 $ 8,849 $ 916,287 Special Mention 1,066 257 7,405 1,694 539 3,524 12,598 2,442 29,525 Substandard - 143 796 855 637 37 11,256 1,225 14,949 Doubtful & Loss - - - - - - - - - Total Commercial and industrial loans: $ 36,167 $ 160,951 $ 88,009 $ 76,840 $ 49,874 $ 89,364 $ 447,040 $ 12,516 $ 960,761 SBA: Risk Rating: Pass $ 26,599 $ 18,009 $ 48,416 $ 77,219 $ 27,922 $ 93,865 $ - $ - $ 292,030 Special Mention - - - 1,177 1,277 7,809 - - 10,263 Substandard - - 1,424 3,835 1,604 3,915 - - 10,778 Doubtful & Loss - - - - - - - - - Total SBA: $ 26,599 $ 18,009 $ 49,840 $ 82,231 $ 30,803 $ 105,589 $ - $ - $ 313,071 Commercial real estate loans: Risk Rating: Pass $ 153,366 $ 726,268 $ 743,909 $ 732,319 $ 626,561 $ 2,021,759 $ 197,335 $ 18,747 $ 5,220,264 Special Mention - 5,343 9,106 16,484 7,211 52,995 3,457 - 94,596 Substandard - - 5,155 5,813 1,315 18,819 250 1,713 33,065 Doubtful & Loss - - - - - - - - - Total Commercial real estate loans: $ 153,366 $ 731,611 $ 758,170 $ 754,616 $ 635,087 $ 2,093,573 $ 201,042 $ 20,460 $ 5,347,925 Construction loans: Risk Rating: Pass $ 550 $ 13,414 $ 13,300 $ 35,130 $ 10,592 $ 5 $ 49,591 $ 5,463 $ 128,045 Special Mention - - - - - - - - - Substandard - - - - - - - - - Doubtful & Loss - - - - - - - - - Total Construction loans: $ 550 $ 13,414 $ 13,300 $ 35,130 $ 10,592 $ 5 $ 49,591 $ 5,463 $ 128,045 SFR mortgage loans: Risk Rating: Pass $ 10,473 $ 66,680 $ 38,192 $ 26,819 $ 35,992 $ 96,795 $ - $ - $ 274,951 Special Mention - - - - - 1,942 - - 1,942 Substandard - - - 379 - 1,025 - 446 1,850 Doubtful & Loss - - - - - - - - - Total SFR mortgage loans: $ 10,473 $ 66,680 $ 38,192 $ 27,198 $ 35,992 $ 99,762 $ - $ 446 $ 278,743 Origination Year Revolving Revolving March 31, 2020 2020 2019 2018 2017 2016 Prior Total (Dollars in thousands) Dairy & livestock and agribusiness loans: Risk Rating: Pass $ 78 $ 2,945 $ 1,940 $ 8,109 $ 2,831 $ 14,655 $ 192,649 $ - $ 223,207 Special Mention - - 166 722 - - 22,150 3,686 26,724 Substandard - - 882 - 4,016 - 4,625 12,660 22,183 Doubtful & Loss - - - - - - - - - Total Dairy & livestock and agribusiness loans: $ 78 $ 2,945 $ 2,988 $ 8,831 $ 6,847 $ 14,655 $ 219,424 $ 16,346 $ 272,114 Municipal lease finance receivables loans: Risk Rating: Pass $ 147 $ - $ 3,081 $ 10,961 $ 7,912 $ 28,739 $ - $ - $ 50,840 Special Mention - - - - - 447 - - 447 Substandard - - - - - - - - - Doubtful & Loss - - - - - - - - - Total Municipal lease finance receivables loans: $ 147 $ - $ 3,081 $ 10,961 $ 7,912 $ 29,186 $ - $ - $ 51,287 Consumer and other loans: Risk Rating: Pass $ 1,647 $ 3,197 $ 1,160 $ 1,372 $ 2,094 $ 2,612 $ 98,953 $ 1,582 $ 112,617 Special Mention - - - - 80 148 609 - 837 Substandard - - 5 - - 179 148 420 752 Doubtful & Loss - - - - - - - - - Total Consumer and other loans: $ 1,647 $ 3,197 $ 1,165 $ 1,372 $ 2,174 $ 2,939 $ 99,710 $ 2,002 $ 114,206 Gross loans: Risk Rating: Pass $ 227,961 $ 991,064 $ 929,806 $ 966,220 $ 762,602 $ 2,344,233 $ 961,714 $ 34,641 $ 7,218,241 Special Mention 1,066 5,600 16,677 20,077 9,107 66,865 38,814 6,128 164,334 Substandard - 143 8,262 10,882 7,572 23,975 16,279 16,464 83,577 Doubtful & Loss - - - - - - - - - Total Gross loans: $ 229,027 $ 996,807 $ 954,745 $ 997,179 $ 779,281 $ 2,435,073 $ 1,016,807 $ 57,233 $ 7,466,152 The following table summarizes lo an December 31, 2019 Pass Special Substandard 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 Allowance for Credit Losses The allowance for credit losses for 2020 is based upon historical lifetime loss rate models segregated by three loan segments: Commercial and Industrial, Commercial Real Estate, and Consumer Retail. Our methodology for assessing the appropriateness of the allowance is reviewed on a regular basis and considers overall risks in the Bank’s loan portfolio. Refer to Note 3 – Summary of Significant Accounting Policies During the second half of March 2020, the broader economy experienced a significant deterioration in the economic environment driven by the COVID-19 variables utilized in our modeling processes. For the quarter ended March 31, 2020, the Bank’s CECL methodology produced an ACL of $82.6 million, resulting in a provision for credit losses of $12.0 million. The ACL/Total Loan Coverage Ratio as of March 31, 2020 increased to 1.11%, compared to 0.93% as of January 1, 2020 due to the more severe economic forecast that resulted from the COVID-19 crisis. Our economic forecast is a blend of multiple forecasts produced by Moody’s. The resulting forecast assumes a decline in GDP for the second quarter of almost 20% and unemployment rising to more than 9% in the second quarter of 2020. GDP is forecasted to rebound to growth of approximately 10% in the third quarter of 2020, but unemployment continues to be inflated at more than 6% through the remainder of 2020. Management believes that the ACL was appropriate at March 31, 2020 and December 31, 2019. No assurance can be given that economic conditions that adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for credit losses in the future. The following tables present the balance and activity related to the allowance for credit losses for held-for-investment Three Months Ended March 31, 2020 Ending Balance, prior to adoption of ASU 2016-13 December 31, 2019 Impact of Provision for (Recapture of) Credit Losses Expense Charge-offs Recoveries Ending Balance (Dollars i Commercial and industrial $ 8,880 $ (2,442 ) $ 2,947 $ - $ 2 $ 9,387 SBA 1,453 1,818 675 - - 3,946 Real estate: Commercial real estate 48,629 3,547 6,251 - - 58,427 Construction 858 655 3,116 - 3 4,632 SFR mortgage 2,339 (2,043 ) (221 ) - 206 281 Dairy & livestock and agribusiness 5,255 (186 ) (803 ) - - 4,266 Municipal lease finance receivables 623 (416 ) 70 - - 277 Consumer and other loans 623 907 (35 ) (86 ) 16 1,425 Total allowance for credit losses $ 68,660 $ 1,840 $ 12,000 $ (86 ) $ 227 $ 82,641 Three Months Ended March 31, 2019 Ending Balance December 31, 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 receivabl es 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 The following table presents the recorded investment in loans held-for-investment ACL ACL March 31, 2019 Recorded Investment in Loans Allowance for Loan Losses Individually Collectively Acquired with Individually Collectively Acquired with (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 Past Due and Nonperforming Loans We seek to manage asset quality 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10- K for the year ended December 31, 2019, for additional discussion concerning the Bank’s policy for past due and nonperforming loans. The following table presents the recorded investment in, and the ag in ent March 31, 2020 30-59 60-89 Greater than 89 Days Total Past Loans Not Total Loans (Dollars in thousands) Commercial and industrial $ 347 $ 362 $ 1,487 $ 2,196 $ 958,565 $ 960,761 SBA 3,086 954 1,669 5,709 307,362 313,071 Real estate: Commercial real estate Owner occupied 154 310 250 714 2,069,646 2,070,360 Non-owner 210 - - 210 3,277,355 3,277,565 Construction Speculative (1) - - - - 116,143 116,143 Non-speculative - - - - 11,902 11,902 SFR mortgage 233 - 486 719 278,024 278,743 Dairy & livestock and agribusiness 166 - - 166 271,948 272,114 Municipal lease finance receivables - - - - 51,287 51,287 Consumer and other loans - - 93 93 114,113 114,206 Total gross loans $ 4,196 $ 1,626 $ 3,985 $ 9,807 $ 7,456,345 $ 7,466,152 (1) Speculative construction loans are generally for properties where there is no identified buyer or renter. Following the adoption of CECL on January 1, 2020, the definitions of impairment and related impaired loan disclosures were removed. Under CECL, amortized cost of our finance receivables and loans that are on nonaccrual status, including loans with no allowance, are presented as of March 31, 2020 by type of loan. March 31, 2020 Nonaccrual Total Loans Past Due (Dollars in thousands) Commercial and industrial $ 549 $ 1,703 $ - SBA 2,110 2,748 - Real estate: Commercial real estate Owner occupied 715 715 - Non-owner 232 232 - Construction Speculative (2) - - - Non-speculative - - - SFR mortgage 864 864 - Dairy & livestock and agribusiness - - - Municipal lease finance receivables - - - Consumer and other loans 166 166 - Total gross loans $ 4,636 $ 6,428 $ - (1) As of March 31, 2020, $982,000 of nonaccruing loans were current, $154,000 were 30-59 60-89 (2) Speculative construction loans are generally for properties where there is no identified buyer or renter. ( 3 Excludes $1.7 million of guaranteed portion of nonaccrual SBA loans that are in process of collection. The following table presents the recorded investment in, and the aging of, past due and nonaccrual loans, by type of loans as of the date presented. December 31, 2019 30-59 60-89 Days 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 occupied - - - 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 $ 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 ed ( 3 Excludes $2.0 million of guaranteed porti on Impaired Loans (prior to adoption of CECL) Following the adoption of CECL as of January 1, 2020, the definitions of impairment and related impaired loan disclosures were removed. As a result of the change, the following tables present information about our impaired loans and lease finance receivables, individually evaluated for impairment by type of loans, as of March 31, 2019 and December 31, 2019, prior to the date of adoption of the amendments to the credit loss standard. Three Months Ended Recorded Unpaid Related Average Interest (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 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 - - - - - 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 December 31, 2019 Recorded Unpaid Related (Dollars in thousands) With no related allowance recorded: Commercial and industrial $ 1,091 $ 1,261 $ - SBA 2,243 2,734 - Real estate: Commercial real estate Owner occupied 479 613 - Non-owner 642 643 - Construction Speculative - - - Non-speculative - - - SFR mortgage 2,979 3,310 - Dairy & livestock and agribusiness - - - Municipal lease finance receivables - - - Consumer and other loans 377 514 - Total 7,811 9,075 - With a related allowance recorded: Commercial and industrial 253 347 251 SBA 325 324 257 Real estate: Commercial real estate Owner occupied - - - Non-owner ied - - - Construction Speculative - - - Non-speculative - - - SFR mortgage - - - Dairy & livestock and agribusiness - - - Municipal lease finance receivables - - - Consumer and other loans - - - Total 578 671 508 Total impaired loans $ 8,389 $ 9,746 $ 508 Collateral Dependent Loans A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the recorded investment in collateral-dependent loans by type of loans as of the date presented. March 31, 2020 Number of Loans Real Estate Business Assets Other (Dollars in thousands) Commercial and industrial $ 112 $ 1,652 $ 8 12 SBA 1,852 2,524 8 19 Real estate: Commercial real estate 1,324 - - 5 Construction - - - - SFR mortgage 864 - - 3 Dairy & livestock and agribusiness - - - - Municipal lease finance receivables - - - - Consumer and other loans 84 - 22 4 Total collateral-dependent loans $ 4,236 $ 4,176 $ 38 43 Reserve for Unfunded Loan Commitments The allowance for off-balance off-balance 2016-13, included a transition adjustment of as January 1, Troubled Debt Restructurings (“TDRs”) Loans that are reported as TDRs are considered nonperforming charge-off – Summary of Significant Accounting Policies, 10-K As of March 31, 2020, there were $2.8 million of loans classified as a TDR, of which $2.8 million were performing and none were nonperforming. 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, 2020, performing TDRs were comprised of seven SFR mortgage loans of $1.8 million, one SBA loan of $524,000, one commercial real estate loan of $377,000, and two commercial and industrial loans of $68,000. 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 no . The following table provides a summary of the activity related to TDRs for the periods presented. Three Months Ended March 31, 2020 2019 (Dollars in thousands) Performing TDRs: Beginning balance $ 3,112 $ 3,594 New modifications - - Payoffs/payments, net and other (299 ) (295 ) TDRs returned to accrual status - - TDRs placed on nonaccrual status - - Ending balance $ 2,813 $ 3,299 Nonperforming TDRs: Beginning balance $ 244 $ 3,509 New modifications - - Charge-offs - (78 ) Transfer to OREO - (2,275 ) Payoffs/payments, net and other (244 ) (879 ) TDRs returned to accrual status - - TDRs placed on nonaccrual status - - Ending balance $ - $ 277 Total TDRs $ 2,813 $ 3,576 As of March 31, 2020 and 2019, there were no loans that were modified as TDRs dur ing 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, 2020 and 2019. In accordance with regulatory guidance, if borrowers are less than 30 days past due on their loans, upon implementation of the modification program, or as allowed under the CARES Act if borrowers are less than 30 days past due on their loans as of December 31, 2019, and enter into short-term loan modifications offered as a result of COVID-19, COVID-19, COVID-19, |