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Loans and Allowance for Credit Losses on Loans
 3 Months Ended
Mar. 31, 2024
Receivables [Abstract]  
Loans and Allowance for Credit Losses on Loans Loans and Allowance for Credit Losses on Loans
Loans

The following table presents the composition of the loan portfolio as of March 31, 2024 and December 31, 2023:

($ in thousands)March 31, 2024December 31, 2023
Commercial real estate$905,534 $885,585 
SBA—real estate231,503 224,695 
SBA—non-real estate16,047 14,997 
C&I147,508 120,970 
Home mortgage502,995 518,024 
Consumer1,400 1,574 
Gross loans receivable1,804,987 1,765,845 
Allowance for credit losses(22,129)(21,993)
Loans receivable, net(1)
$1,782,858 $1,743,852 
(1)Includes net deferred loan costs and unamortized premiums of $108 thousand and $140 thousand as of March 31, 2024 and December 31, 2023, respectively.
No loans were outstanding to related parties as of March 31, 2024 and December 31, 2023.

Allowance for Credit Losses

The Company employs a modeled approach that takes into account current and future economic conditions to estimate lifetime expected losses on a collective basis. With the adoption of Current Expected Credit Losses, the Company
elected not to consider accrued interest receivable in its estimated credit losses because the Company writes off uncollectible accrued interest receivable in a timely manner. The Company considers writing off accrued interest amounts once the amounts become 90 days past due to be considered within a timely manner. The Company has elected to write off accrued interest receivable by reversing interest income. The Company uses transition matrices to develop the Probability of Default ("PD") and Loss Given Default ("LGD") approach, incorporating quantitative factors and qualitative considerations in the calculation of the allowance for credit losses for collectively assessed loans. The model provides forecasts of PD and LGD based on national unemployment rates using regression analysis. The Company incorporates future economic conditions using a weighted multiple scenario approach: baseline and adverse. The Company applies a reasonable and supportable period of one year for the baseline scenario and two years for the adverse scenario, after which loss assumptions revert to historical loss information through a one-year reversion period for the baseline scenario and a two-year reversion period for the adverse scenario. Additionally, the Company aggregated loan portfolio based on similar risk characteristics. The Company elected to use the Call Report codes and loan risk ratings for loan segmentation in allowance for credit losses.

In order to quantify the credit risk impact of other trends and changes within the loan portfolio, the Company utilizes qualitative adjustments to the modeled estimated loss approaches. Included in the qualitative portion of our analysis of the allowance for credit losses are key inputs including GDP, unemployment rates, interest rates, asset quality ratios, loan portfolio concentration, California house price index and commercial real estate price index. The parameters for making adjustments are established under a Credit Risk Matrix that provides different possible scenarios for each of the factors listed below. The Credit Risk Matrix and the possible scenarios enable the Bank to qualitatively adjust the loss rates. This matrix considers the following nine factors, which are patterned after the guidelines provided under the Federal Financial Institutions Examination Council Interagency Policy Statement on the Allowance for Credit Losses, updated to reflect the adoption of Current Expected Credit Losses:

•    Changes in lending policies and procedures, including changes in underwriting standards and practices for collection, charge-offs, and recoveries;
•    Actual and expected changes in national and local economic and business conditions and developments in which the institution operates that affect the collectivity of loans;
•    Changes in the nature and volume of the loan portfolio;
•    Changes in the experience, ability, and depth of lending management and staff;
•    Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans;
•    Changes in the quality of the credit review function;
•    Changes in the value of the underlying collateral for loans that are not collateral-dependent;
•    The existence, growth, and effect of any concentrations of credit, and
•    The effect of other external factors, such as the regulatory, legal and technological environments; competition; and events such as natural disasters.

The Company segments loans primarily by Call Report codes (collateral type) and loan risk ratings, considering that the same type of loans share considerable similar risk characteristics. For loans that do not share similar risk characteristics such as nonaccrual loans above $500 thousand, the Company evaluates these loans on an individual basis in accordance with ASC 326. Such nonaccrual loans are considered to have different risk profiles than performing loans and are therefore evaluated individually. The Company elected to collectively assess nonaccrual loans with balances below $500 thousand along with the performing and accrual loans, in order to reduce the operational burden of individually assessing small nonaccrual loans with immaterial balances. For individually assessed loans, the allowance for credit losses is measured using either 1) the present value of future cash flows discounted at the loan’s effective interest rate; or 2) the fair value of the collateral, if the loan is collateral-dependent. For the collateral-dependent loans, the Company obtains a new appraisal to determine the fair value of collateral. The appraisals are based on an “as-is” valuation. To ensure that appraised values remain current, the Company obtains updated appraisals every twelve months from a qualified independent appraiser. If the fair value of the collateral is less than the amortized balance of the loan, the Company recognizes an allowance for credit losses with a corresponding charge to the provision for credit losses.

The Company maintains a separate allowance for credit losses for its off-balance sheet commitments. The Company uses an estimated funding rate to allocate an allowance to undrawn exposures. This funding rate is used as a
credit conversion factor to capture how much undrawn lines of credit can potentially become drawn at any point. The funding rate is determined based on a look-back period of 8 quarters. Credit loss is not estimated for off-balance sheet commitments that are unconditionally cancellable by the Company.

The following table summarizes the activity in the allowance for credit losses on loans by portfolio segment for the three months ended March 31, 2024 and 2023:

($ in thousands)
Commercial
Real Estate
SBA—
Real Estate
SBA —Non-
Real Estate
C&I
Home
Mortgage
ConsumerTotal
Three Months Ended March 31, 2024
Beginning balance$7,915 $1,657 $147 $1,215 $11,045 $14 $21,993 
Provision for (reversal of) credit losses129 1,202 71 448 (1,652)(5)193 
Charge-offs— (66)— — (2)— (68)
Recoveries— — 11 — — — 11 
Ending balance$8,044 $2,793 $229 $1,663 $9,391 $9 $22,129 
Three Months Ended March 31, 2023
Beginning balance$6,951 $1,607 $207 $1,643 $8,826 $7 $19,241 
Impact of CECL adoption875 (238)(142)(320)1,753 (4)1,924 
Provision for (reversal of) credit losses(951)(140)(7)(53)893 — (258)
Charge-offs(91)(11)(14)— — — (116)
Recoveries— — 23 — — — 23 
Ending balance$6,784 $1,218 $67 $1,270 $11,472 $3 $20,814 

Collateral-dependent loans are loans where repayment is expected to be provided solely by the sale of the underlying collateral and there are no other available and reliable sources of repayment. The estimated credit losses for these loans are based on the collateral’s fair value less selling costs. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less selling costs at the time of foreclosure.

As of March 31, 2024 and December 31, 2023, there were $2.9 million and $5.2 million, respectively, of collateral-dependent loans which are primarily secured by commercial real estate. The allowance for credit losses allocated to these loans as of March 31, 2024 and December 31, 2023 was $360 thousand and $355, respectively.

The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2024 and December 31, 2023, for which repayment is expected to be obtained through the sale of the underlying collateral.

($ in thousands)Hotel / MotelSingle-Family ResidentialTotal
As of March 31, 2024
SBA—real estate$2,930 $— $2,930 
Total$2,930 $— $2,930 
As of December 31, 2023
SBA—real estate$2,923 $— $2,923 
Home mortgage— 2,241 2,241 
Total$2,923 $2,241 $5,164 
The following table presents the recorded investment in nonaccrual loans and loans past due 90 or more days and still accruing interest, by portfolio as of March 31, 2024 and December 31, 2023:

($ in thousands)Nonaccrual Loans with a Related Allowance for Credit LossesNonaccrual Loans without a Related Allowance for Credit LossesTotal Nonaccrual Loans
90 or More
Days
Past Due &
Still Accruing
Total(1)
As of March 31, 2024
Commercial real estate$319 $— $319 $— $319 
SBA—real estate2,489 1,140 3,629 — 3,629 
SBA—non-real estate178 — 178 — 178 
Home mortgage217 — 217 — 217 
Total$3,203 $1,140 $4,343 $— $4,343 
As of December 31, 2023
SBA—real estate$2,302 $1,136 $3,438 $— $3,438 
SBA—non-real estate154 — 154 — 154 
Home mortgage249 2,241 2,490 — 2,490 
Total$2,705 $3,377 $6,082 $— $6,082 
(1)    Excludes guaranteed portion of SBA loans of $3.1 million and $2.0 million as of March 31, 2024 and December 31, 2023, respectively.
Nonaccrual loans and loans past due 90 or more days and still accruing interest include both homogeneous loans that are collectively and individually evaluated for impairment and individually classified impaired loans.

The following table represents the aging analysis of the recorded investment in past due loans as of March 31, 2024 and December 31, 2023:

($ in thousands)
30-59
Days
Past Due
60-89
Days
Past Due
> 90 Days
Past Due
Total
Past Due(1)
Loans Not
Past Due
Total(2)
As of March 31, 2024
Commercial real estate$— $— $319 $319 $905,215 $905,534 
SBA—real estate801 70 1,838 2,709 228,794 231,503 
SBA—non-real estate— 175 — 175 15,872 16,047 
C&I— — — — 147,508 147,508 
Home mortgage217 2,893 — 3,110 499,885 502,995 
Consumer— — — — 1,400 1,400 
Total$1,018 $3,138 $2,157 $6,313 $1,798,674 $1,804,987 
As of December 31, 2023
Commercial real estate$— $— $— $— $885,585 $885,585 
SBA—real estate1,868 932 1,983 4,783 219,912 224,695 
SBA—non-real estate154 — — 154 14,843 14,997 
C&I— — — — 120,970 120,970 
Home mortgage4,076 2,730 2,491 9,297 508,727 518,024 
Consumer— — — — 1,574 1,574 
Total$6,098 $3,662 $4,474 $14,234 $1,751,611 $1,765,845 
(1)Excludes guaranteed portion of SBA loans of $2.6 million and $1.9 million as of March 31, 2024 and December 31, 2023, respectively.
(2)Excludes accrued interest receivables of $7.4 million and $7.3 million as of March 31, 2024 and December 31, 2023, respectively.
Loan Modifications to Borrowers Experiencing Financial Difficult: On January 1, 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”, which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty, unless those loans do not share the same risk characteristics with other loans in the portfolio. Provided that is not the case, these modifications are included in their respective cohort and the allowance for credit losses is estimated on a pooled basis consistent with the other loans with similar risk characteristics.

Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, other than insignificant payment deferrals, other than insignificant term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. No charge-offs of previously modified loans were recorded for the three months ended March 31, 2024 and 2023. No loan modifications were made to borrowers experiencing financial difficulty during the three months ended March 31, 2024 and 2023.
Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. For consumer loans, a credit grade is established at inception, and generally only adjusted based on performance. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.
Substandard—Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

The following table presents the loan portfolio's amortized cost by loan type, risk rating and year of origination as of March 31, 2024 and December 31, 2023:

March 31, 2024
Term Loans by Origination YearRevolving LoansRevolving Loans Converted to Term Loans
Total(1)
($ in thousands)20242023
2022
20212020Prior
Commercial real estate
Pass$46,808 $110,748 $265,976 $191,019 $93,290 $171,390 $21,012 $— $900,243 
Special mention— — — — — — — — — 
Substandard— 4,667 — — — 624 — — 5,291 
Doubtful— — — — — — — — — 
Subtotal$46,808 $115,415 $265,976 $191,019 $93,290 $172,014 $21,012 $— $905,534 
Current period charge-offs$— $— $— $— $— $— $— $— $— 
SBA— real estate
Pass$10,510 $31,940 $45,135 $25,844 $20,777 $88,829 $— $— $223,035 
Special mention— — — — — 1,415 — — 1,415 
Substandard— — 1,791 2,893 1,139 1,230 — — 7,053 
Doubtful— — — — — — — — — 
Subtotal$10,510 $31,940 $46,926 $28,737 $21,916 $91,474 $— $— $231,503 
Current period charge-offs$— $— $— $66 $— $— $— $— $66 
SBA—non-real estate
Pass$2,256 $5,161 $2,501 $187 $1,511 $3,753 $— $— $15,369 
Special mention— — — — — — — — — 
Substandard— — 555 — — 123 — — 678 
Doubtful— — — — — — — — — 
Subtotal$2,256 $5,161 $3,056 $187 $1,511 $3,876 $— $— $16,047 
Current period charge-offs$— $— $— $— $— $— $— $— $— 
C&I
Pass$1,667 $15,222 $17,719 $20,588 $4,204 $2,641 $82,992 $2,475 $147,508 
Special mention— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Subtotal$1,667 $15,222 $17,719 $20,588 $4,204 $2,641 $82,992 $2,475 $147,508 
Current period charge-offs$— $— $— $— $— $— $— $— $— 
Home mortgage
Pass$2,532 $69,406 $297,571 $76,970 $18,245 $38,054 $— $— $502,778 
Special mention— — — — — — — — — 
Substandard— — — — — 217 — — 217 
Doubtful— — — — — — — — — 
Subtotal$2,532 $69,406 $297,571 $76,970 $18,245 $38,271 $— $— $502,995 
Current period charge-offs$— $— $— $— $— $2 $— $— $2 
Consumer
Pass$8 $— $— $— $— $— $1,392 $— $1,400 
Special mention— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Subtotal$8 $— $— $— $— $— $1,392 $— $1,400 
Current period charge-offs$— $— $— $— $— $— $— $— $— 
Total loans
Pass$63,781 $232,477 $628,902 $314,608 $138,027 $304,667 $105,396 $2,475 $1,790,333 
Special mention— — — — — 1,415 — — 1,415 
Substandard— 4,667 2,346 2,893 1,139 2,194 — — 13,239 
Doubtful— — — — — — — — — 
Subtotal$63,781 $237,144 $631,248 $317,501 $139,166 $308,276 $105,396 $2,475 $1,804,987 
Current period charge-offs$— $— $— $66 $— $2 $— $— $68 
(1)Excludes accrued interest receivables of $7.4 million as of March 31, 2024.

December 31, 2023
Term Loans by Origination YearRevolving LoansRevolving Loans Converted to Term Loans
Total(1)
($ in thousands)2023
2022
202120202019Prior
Commercial real estate
Pass$97,114 $207,860 $154,872 $97,137 $138,908 $163,320 $21,059 $— $880,270 
Special mention— — — — — — — — — 
Substandard— 319 — — — 4,996 — — 5,315 
Doubtful— — — — — — — — — 
Subtotal$97,114 $208,179 $154,872 $97,137 $138,908 $168,316 $21,059 $— $885,585 
Current period charge-offs$— $457 $121 $— $91 $17 $— $— $686 
SBA— real estate
Pass$31,920 $44,504 $26,188 $22,732 $28,244 $64,442 $— $— $218,030 
Special mention— — — — — 1,428 — — 1,428 
Substandard— 1,787 1,079 1,136 — 1,235 — — 5,237 
Doubtful— — — — — — — — — 
Subtotal$31,920 $46,291 $27,267 $23,868 $28,244 $67,105 $— $— $224,695 
Current period charge-offs$— $— $46 $— $— $— $— $— $46 
SBA—non-real estate
Pass$5,408 $2,584 $200 $1,556 $950 $3,423 $— $— $14,121 
Special mention— — — — — — — — — 
Substandard— 591 — — — 187 — — 778 
Doubtful— — — — — 98 — — 98 
Subtotal$5,408 $3,175 $200 $1,556 $950 $3,708 $— $— $14,997 
Current period charge-offs$— $— $— $— $— $35 $— $— $35 
C&I
Pass$15,117 $17,939 $22,098 $4,695 $1,720 $1,734 $55,106 $2,561 $120,970 
Special mention— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Subtotal$15,117 $17,939 $22,098 $4,695 $1,720 $1,734 $55,106 $2,561 $120,970 
Current period charge-offs$17 $— $80 $— $— $— $— $— $97 
Home mortgage
Pass$72,182 $304,346 $79,585 $18,634 $8,939 $31,848 $— $— $515,534 
Special mention— — — — — — — — — 
Substandard— 2,241 249 — — — — — 2,490 
Doubtful— — — — — — — — — 
Subtotal$72,182 $306,587 $79,834 $18,634 $8,939 $31,848 $— $— $518,024 
Current period charge-offs$— $— $— $— $— $— $— $— $— 
Consumer
Pass$4 $— $— $— $77 $— $1,493 $— $1,574 
Special mention— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Subtotal$4 $— $— $— $77 $— $1,493 $— $1,574 
Current period charge-offs$— $— $— $— $— $— $— $— $— 
Total loans
Pass$221,745 $577,233 $282,943 $144,754 $178,838 $264,767 $77,658 $2,561 $1,750,499 
Special mention— — — — — 1,428 — — 1,428 
Substandard— 4,938 1,328 1,136 — 6,418 — — 13,820 
Doubtful— — — — — 98 — — 98 
Subtotal$221,745 $582,171 $284,271 $145,890 $178,838 $272,711 $77,658 $2,561 $1,765,845 
Current period charge-offs$17 $457 $247 $— $91 $52 $— $— $864 
(1)Excludes accrued interest receivables of $7.3 million as of December 31, 2023.