Note 6 – Loans Held for Investment

The following table sets forth the composition of our loan portfolio in dollar amounts at the dates indicated:

	March 31, 2014			December 31, 2013			March 31, 2013
	(in thousands)
Business loans:
Commercial and industrial	$	271,877		$	187,035		$	140,592
Commercial owner occupied (1)	223,848			221,089			166,571
SBA	11,045			10,659			5,116
Warehouse facilities	81,033			87,517			138,935
Real estate loans:
Commercial non-owner occupied	333,490			333,544			256,015
Multi-family	223,200			233,689			139,100
One-to-four family (2)	141,469			145,235			87,109
Construction	29,857			13,040			—
Land	6,170			7,605			7,863
Other loans	3,480			3,839			4,690
Total gross loans (3)	1,325,469			1,243,252			945,991
Less loans held for sale, net	—			(3,147		)	(3,643		)
Total gross loans held for investment	1,325,469			1,240,105			942,348
Less:
Deferred loan origination costs (fees) and premiums (discounts), net	(97		)	18			(520		)
Allowance for loan losses	(8,685		)	(8,200		)	(7,994		)
Loans held for investment, net	$	1,316,687		$	1,231,923		$	933,834

(1) Majority secured by real estate.

(2) Includes second trust deeds.

(3) Total gross loans for March 31, 2014 are net of (i) the unaccreted mark-to-market discounts on Canyon National Bank (“Canyon National”) loans of $1.8 million, on Palm Desert National Bank (“Palm Desert National”) loans of $2.2 million, and on SDTB loans of $115,000 and (ii) the mark-to-market premium on FAB loans of $53,000.

From time to time, we may purchase or sell loans in order to manage concentrations, maximize interest income, change risk profiles, improve returns and generate liquidity.

The Company makes residential and commercial loans held for investment to customers located primarily in California. Consequently, the underlying collateral for our loans and a borrower’s ability to repay may be impacted unfavorably by adverse changes in the economy and real estate market in the region.

Under applicable laws and regulations, the Bank may not make secured loans to one borrower in excess of 25% of the Bank’s unimpaired capital plus surplus and likewise in excess of 15% for unsecured loans. These loans-to-one borrower limitations result in a dollar limitation of $50.3 million for secured loans and $30.2 million for unsecured loans at March 31, 2014. At March 31, 2014, the Bank’s largest aggregate outstanding balance of loans to one borrower was $34.5 million of secured credit.

Purchased Credit Impaired

The following table provides a summary of the Company’s investment in purchased credit impaired loans, acquired from Canyon National and Palm Desert National, as of the period indicated:

	March 31, 2014
	Canyon National		Palm Desert National		Total
	(in thousands)
Business loans:
Commercial and industrial	$	84	$	—	$	84
Commercial owner occupied	866		—		866
Real estate loans:
Commercial non-owner occupied	993		—		993
One-to-four family	—		14		14
Total purchase credit impaired	$	1,943	$	14	$	1,957

On the acquisition date, the amount by which the undiscounted expected cash flows of the purchased credit impaired loans exceed the estimated fair value of the loan is the “accretable yield.” The accretable yield is measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the purchased credit impaired loan. At March 31, 2014, the Company had $2.0 million of purchased credit impaired loans, of which $302,000 were placed on nonaccrual status.

The following table summarizes the accretable yield on the purchased credit impaired for the three months ended March 31, 2014:

	Three Months Ended
	March 31, 2014
	Canyon National			Palm Desert National		Total
	(in thousands)

Balance at the beginning of period	$	1,623		$	53	$	1,676
Accretion	(68		)	—		(68		)
Disposals and other	—			—		—
Change in accretable yield	—			—		—
Balance at the end of period	$	1,555		$	53	$	1,608

Impaired Loans

The following tables provide a summary of the Company’s investment in impaired loans as of the period indicated:

					Impaired Loans
	Contractual Unpaid Principal Balance		Recorded Investment		With Specific Allowance		Without Specific Allowance		Specific Allowance for Impaired Loans		Average Recorded Investment		Interest Income Recognized
	(in thousands)
March 31, 2014
Business loans:
Commercial and industrial	$	67	$	31	$	—	$	31	$	—	$	10	$	—
Commercial owner occupied	870		718		—		718		—		738		—
SBA	246		14		—		14		—		14		9
Real estate loans:
Commercial non-owner occupied	1,894		1,327		—		1,327		—		1,093		17
One-to-four family	639		593		274		319		104		602		17
Totals	$	3,716	$	2,683	$	274	$	2,409	$	104	$	2,457	$	43

					Impaired Loans
	Contractual Unpaid Principal Balance		Recorded Investment		With Specific Allowance		Without Specific Allowance		Specific Allowance for Impaired Loans		Average Recorded Investment		Interest Income Recognized
	(in thousands)
December 31, 2013
Business loans:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	255	$	17
Commercial owner occupied	872		747		—		747		—		177		66
SBA	246		14		—		14		—		70		28
Real estate loans:
Commercial non-owner occupied	1,202		983		28		955		1		984		68
Multi-family	—		—		—		—		—		108		2
One-to-four family	746		683		278		405		104		743		44
Totals	$	3,066	$	2,427	$	306	$	2,121	$	105	$	2,337	$	225

					Impaired Loans
	Contractual Unpaid Principal Balance		Recorded Investment		With Specific Allowance		Without Specific Allowance		Specific Allowance for Impaired Loans		Average Recorded Investment		Interest Income Recognized
	(in thousands)
March 31, 2013
Business loans:
Commercial and industrial	$	697	$	580	$	281	$	299	$	256	$	584	$	18
Commercial owner occupied	245		245		—		245		—		245		—
SBA	422		129		—		129		—		143		6
Real estate loans:
Commercial non-owner occupied	2,478		1,974		—		1,974		—		1,550		22
Multi-family	—		—		—		—		—		88		2
One-to-four family	849		824		502		322		360		858		26
Totals	$	4,691	$	3,752	$	783	$	2,969	$	616	$	3,468	$	74

The Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or it is determined that the likelihood of the Company receiving all scheduled payments, including interest, when due is remote. The Company has no commitments to lend additional funds to debtors whose loans have been impaired.

The Company reviews loans for impairment when the loan is classified as substandard or worse, delinquent 90 days, or determined by management to be collateral dependent, or when the borrower files bankruptcy or is granted a troubled debt restructuring (“TDR”). Measurement of impairment is based on the loan’s expected future cash flows discounted at the loan’s effective interest rate, measured by reference to an observable market value, if one exists, or the fair value of the collateral if the loan is deemed collateral dependent. All loans are generally charged-off at such time the loan is classified as a loss. Valuation allowances are determined on a loan-by-loan basis or by aggregating loans with similar risk characteristics.

The following table provides additional detail on the components of impaired loans at the period end indicated:

	March 31, 2014		December 31, 2013		March 31, 2013
	(in thousands)

Nonaccruing loans	$	2,497	$	2,239	$	3,055
Accruing loans	186		188		697
Total impaired loans	$	2,683	$	2,427	$	3,752

When loans are placed on nonaccrual status all accrued interest is reversed from earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is remote, the Company will recognize interest on a cash basis only. Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least three months of sustained repayment performance since the loan was placed on nonaccrual.

The Company does not accrue interest on loans 90 days or more past due or when, in the opinion of management, there is reasonable doubt as to the collection of interest. The Company had impaired loans on nonaccrual status of $2.5 million at March 31, 2014, $2.2 million at December 31, 2013, and $3.1 million at March 31, 2013. The Company had no loans 90 days or more past due and still accruing at March 31, 2014, December 31, 2013 or March 31, 2013.

The Company had no TDRs during the quarter ended March 31, 2014 and has an immaterial amount of TDRs related to one U.S. Small Business Administration (“SBA”) loan which was completed prior to 2011.

Concentration of Credit Risk

As of March 31, 2014, the Company’s loan portfolio was collateralized by various forms of real estate and business assets located principally in California. The Company’s loan portfolio contains concentrations of credit in multi-family real estate, commercial non-owner occupied real estate and commercial owner occupied business loans. The Bank maintains policies approved by the Bank’s Board of Directors (the “Bank Board”) that address these concentrations and continues to diversify its loan portfolio through loan originations, purchases and sales to meet approved concentration levels. While management believes that the collateral presently securing these loans is adequate, there can be no assurances that a significant deterioration in the California real estate market or economy would not expose the Company to significantly greater credit risk.

Credit Quality and Credit Risk Management

The Company’s credit quality is maintained and credit risk managed in two distinct areas. The first is the loan origination process, wherein the Bank underwrites credit quality and chooses which risks it is willing to accept. The second is in the ongoing oversight of the loan portfolio, where existing credit risk is measured and monitored, and where performance issues are dealt with in a timely and comprehensive fashion.

The Company maintains a comprehensive credit policy which sets forth minimum and maximum tolerances for key elements of loan risk. The policy identifies and sets forth specific guidelines for analyzing each of the loan products the Company offers from both an individual and portfolio wide basis. The credit policy is reviewed annually by the Bank Board. The Bank’s seasoned underwriters ensure all key risk factors are analyzed with nearly all underwriting including a comprehensive global cash flow analysis of the prospective borrowers. The credit approval process mandates multiple-signature approval by the management credit committee for every loan that requires any subjective credit analysis.

Credit risk is managed within the loan portfolio by the Company’s Portfolio Management department based on a comprehensive credit and investment review policy. This policy requires a program of financial data collection and analysis, comprehensive loan reviews, property and/or business inspections and monitoring of portfolio concentrations and trends. The Portfolio Management department also monitors asset-based lines of credit, loan covenants and other conditions associated with the Company’s business loans as a means to help identify potential credit risk. Individual loans, excluding the homogeneous loan portfolio, are reviewed at least biennially, and in most cases more often, including the assignment of a risk grade.

Risk grades are based on a six-grade Pass scale, along with Special Mention, Substandard, Doubtful and Loss classifications as such classifications are defined by the regulatory agencies. The assignment of risk grades allows the Company to, among other things, identify the risk associated with each credit in the portfolio, and to provide a basis for estimating credit losses inherent in the portfolio. Risk grades are reviewed regularly by the Company’s Credit and Investment Review committee, and are reviewed annually by an independent third-party, as well as by regulatory agencies during scheduled examinations.

The following provides brief definitions for risk grades assigned to loans in the portfolio:

· Pass classifications represent assets with a level of credit quality which contain no well-defined deficiency or weakness.

· Special Mention assets do not currently expose the Bank to a sufficient risk to warrant classification in one of the adverse categories, but possess correctable deficiency or potential weaknesses deserving management’s close attention.

· Substandard assets are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. These assets are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. OREO acquired from foreclosure is also classified as substandard.

· Doubtful credits have all the weaknesses inherent in substandard credits, 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.

· Loss assets are those that are considered uncollectible and of such little value that their continuance as assets is not warranted. Amounts classified as loss are promptly charged off.

The Portfolio Management department also manages loan performance risks, collections, workouts, bankruptcies and foreclosures. Loan performance risks are mitigated by our portfolio managers acting promptly and assertively to address problem credits when they are identified. Collection efforts are commenced immediately upon non-payment, and the portfolio managers seek to promptly determine the appropriate steps to minimize the Company’s risk of loss. When foreclosure will maximize the Company’s recovery for a non-performing loan, the portfolio managers will take appropriate action to initiate the foreclosure process.

When a loan is graded as special mention or substandard or doubtful, the Company obtains an updated valuation of the underlying collateral. If the credit in question is also identified as impaired, a valuation allowance, if necessary, is established against such loan or a loss is recognized by a charge to the allowance for loan losses (“ALLL”) if management believes that the full amount of the Company’s recorded investment in the loan is no longer collectable. The Company typically continues to obtain updated valuations of underlying collateral for special mention and classified loans on an annual basis in order to have the most current indication of fair value. Once a loan is identified as impaired, an analysis of the underlying collateral is performed at least quarterly, and corresponding changes in any related valuation allowance are made or balances deemed to be fully uncollectable are charged-off.

The following tables stratify the loan portfolio by the Company’s internal risk grading system as well as certain other information concerning the credit quality of the loan portfolio as of the periods indicated:

	Credit Risk Grades
			Special				Total Gross
	Pass		Mention		Substandard		Loans
March 31, 2014	(in thousands)
Business loans:
Commercial and industrial	$	270,024	$	—	$	1,853	$	271,877
Commercial owner occupied	212,663		272		10,913		223,848
SBA	11,031		—		14		11,045
Warehouse facilities	81,033		—		—		81,033
Real estate loans:
Commercial non-owner occupied	328,645		—		4,845		333,490
Multi-family	222,178		508		514		223,200
One-to-four family	140,453		—		1,016		141,469
Construction	29,857		—		—		29,857
Land	6,170		—		—		6,170
Other loans	3,478		—		2		3,480
Totals	$	1,305,532	$	780	$	19,157	$	1,325,469

	Credit Risk Grades
			Special				Total Gross
	Pass		Mention		Substandard		Loans
December 31, 2013	(in thousands)
Business loans:
Commercial and industrial	$	184,247	$	12	$	2,776	$	187,035
Commercial owner occupied	207,872		1,217		12,000		221,089
SBA	10,659		—		—		10,659
Warehouse facilities	87,517		—		—		87,517
Real estate loans:
Commercial non-owner occupied	329,538		352		3,654		333,544
Multi-family	232,661		511		517		233,689
One-to-four family	144,152		—		1,083		145,235
Construction	13,040		—		—		13,040
Land	7,605		—		—		7,605
Other loans	3,834		—		5		3,839
Totals	$	1,221,125	$	2,092	$	20,035	$	1,243,252

	Credit Risk Grades
			Special				Total Gross
	Pass		Mention		Substandard		Loans
March 31, 2013	(in thousands)
Business loans:
Commercial and industrial	$	136,947	$	96	$	3,549	$	140,592
Commercial owner occupied	149,787		2,792		13,992		166,571
SBA	5,063		—		53		5,116
Warehouse facilities	138,935		—		—		138,935
Real estate loans:
Commercial non-owner occupied	247,140		360		8,515		256,015
Multi-family	137,014		517		1,569		139,100
One-to-four family	85,849		—		1,260		87,109
Land	7,853		—		10		7,863
Other loans	4,678		—		12		4,690
Totals	$	913,266	$	3,765	$	28,960	$	945,991

The following tables set forth delinquencies in the Company’s loan portfolio at the dates indicated:

			Days Past Due								Non-
	Current		30-59		60-89		90+		Total		Accruing
March 31, 2014	(in thousands)
Business loans:
Commercial and industrial	$	271,845	$	—	$	32	$	—	$	271,877	$	31
Commercial owner occupied	223,402		—		—		446		223,848		864
SBA	10,985		46		—		14		11,045		14
Warehouse facilities	81,033		—		—		—		81,033		—
Real estate loans:
Commercial non-owner occupied	332,572		—		—		918		333,490		1,327
Multi-family	223,200		—		—		—		223,200		—
One-to-four family	141,348		72		—		49		141,469		438
Construction	29,857		—		—		—		29,857		—
Land	6,170		—		—		—		6,170		—
Other loans	3,480		—		—		—		3,480		—
Totals	$	1,323,892	$	118	$	32	$	1,427	$	1,325,469	$	2,674

			Days Past Due								Non-
	Current		30-59		60-89		90+		Total		Accruing
December 31, 2013	(in thousands)
Business loans:
Commercial and industrial	$	187,035	$	—	$	—	$	—	$	187,035	$	—
Commercial owner occupied	219,875		768		—		446		221,089		747
SBA	10,645		—		—		14		10,659		14
Warehouse facilities	87,517		—		—		—		87,517		—
Real estate loans:
Commercial non-owner occupied	332,984		—		—		560		333,544		983
Multi-family	233,689		—		—		—		233,689		—
One-to-four family	145,041		71		—		123		145,235		507
Construction	13,040		—		—		—		13,040		—
Land	7,605		—		—		—		7,605		—
Other loans	3,709		130		—		—		3,839		—
Totals	$	1,241,140	$	969	$	—	$	1,143	$	1,243,252	$	2,251

			Days Past Due								Non-
	Current		30-59		60-89		90+		Total		Accruing
March 31, 2013	(in thousands)
Business loans:
Commercial and industrial	$	140,365	$	9	$	—	$	218	$	140,592	$	333
Commercial owner occupied	166,326		—		—		245		166,571		245
SBA	5,044		—		—		72		5,116		121
Warehouse facilities	138,935		—		—		—		138,935		—
Real estate loans:
Commercial non-owner occupied	254,678		—		—		1,337		256,015		1,974
Multi-family	138,053		—		1,047		—		139,100		—
One-to-four family	87,021		49		30		9		87,109		429
Land	7,863		—		—		—		7,863		—
Other loans	4,690		—		—		—		4,690		—
Totals	$	942,975	$	58	$	1,077	$	1,881	$	945,991	$	3,102