4. Loans Held for Investment

Loans held for investment consisted of the following at December 31:

	2014			2013
	(in thousands)
Business loans:
Commercial and industrial	$	428,207		$	187,035
Commercial owner occupied	210,995			221,089
SBA	28,404			10,659
Warehouse facilities	113,798			87,517
Real estate loans:
Commercial non-owner occupied	359,213			333,544
Multi-family	262,965			233,689
One-to-four family	122,795			145,235
Construction	89,682			13,040
Land	9,088			7,605
Other loans	3,298			3,839
Total gross loans	1,628,445			1,243,252
Plus (less):
Loans held for sale	—			(3,147		)
Deferred loan origination fees-net	177			18
Allowance for estimated loan losses	(12,200		)	(8,200		)
Loans held for investment, net	$	1,616,422		$	1,231,923

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

The Company grants residential and commercial loans held for investment to customers located primarily in California. Consequently, the underlying collateral for the Company’s 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 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 $65.0 million for secured loans and $29.0 million for unsecured loans at December 31, 2014. At December 31, 2014, the Bank’s largest aggregate outstanding balance of loans-to-one borrower was $34.1 million of secured credit.

Loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balance of loans and participations serviced for others were $95.2 million at December 31, 2014 and $43.8 million at December 31, 2013.

Concentration of Credit Risk

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 commercial non-owner occupied real estate, multi-family real estate and commercial owner occupied business loans. The Company maintains policies approved by the Board of Directors that address these concentrations and continues to diversify its loan portfolio through loan originations and purchases and sales of loans to meet approved concentration levels. While management believes that the collateral presently securing these loans is adequate, there can be no assurances that further significant deterioration in the California real estate market and economy would not expose the Company to significantly greater credit risk.

Purchased Credit Impaired Loans

The Company acquired purchased loans as part of its acquisitions of Canyon National Bank in 2011 and Palm Desert National Bank in 2012 from the FDIC for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at the time of acquisition, that all contractually required payments would not be collected. The carrying amount of those loans at December 31, 2014, 2013 and 2012 was as follows:

	For the Years Ended December 31,
	2014		2013		2012
	(in thousands)
Business loans:
Commercial and industrial	$	94	$	80	$	308
Commercial owner occupied	546		870		1,221
Real estate loans:
Commercial non-owner occupied	956		1,009		2,447
One-to-four family	5		18		30
Land	—		—		2,313
Total purchase credit impaired	$	1,601	$	1,977	$	6,319

The following table summarizes the accretable yield on the purchased credit impaired for the years ended December 31, 2014, 2013 and 2012:

	For the Years Ended December 31,
	2014			2013			2012
	(in thousands)

Balance at the beginning of period	$	1,676		$	2,276		$	3,248
Accretable yield at acquisition	—			—			3,908
Accretion	(255		)	(557		)	(4,846		)
Disposals and other	(18		)	(648		)	(66		)
Change in accretable yield	—			605			32
Balance at the end of period	$	1,403		$	1,676		$	2,276

Impaired Loans

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

					Impaired Loans				Specific
	Recorded Investment		Unpaid Principal Balance		With Specific Allowance		Without Specific Allowance		Allowance for Impaired Loans		Average Recorded Investment		Interest Income Recognized
	(in thousands)
December 31, 2014
Business loans:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	11	$	—
Commercial owner occupied	388		440		—		388		—		514		46
SBA	—		—		—		—		—		5		—
Real estate loans:
Commercial non-owner occupied	848		1,217		—		848		—		908		85
One-to-four family	236		256		—		236		—		440		17
Totals	$	1,472	$	1,913	$	—	$	1,472	$	—	$	1,878	$	148

December 31, 2013
Business loans:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	255	$	17
Commercial owner occupied	747		872		—		747		—		177		66
SBA	14		246		—		14		—		70		28
Real estate loans:
Commercial non-owner occupied	983		1,202		28		955		1		984		68
Multi-family	—		—		—		—		—		108		2
One-to-four family	683		746		278		405		104		743		44
Totals	$	2,427	$	3,066	$	306	$	2,121	$	105	$	2,337	$	225

December 31, 2012
Business loans:
Commercial and industrial	$	593	$	707	$	287	$	306	$	270	$	203	$	29
Commercial owner occupied	—		—		—		—		—		444		—
SBA	259		810		—		259		—		468		21
Real estate loans:
Commercial non-owner occupied	670		746		—		670		—		1,031		59
Multi-family	266		315		—		266		—		1,123		22
One-to-four family	948		960		541		407		395		720		59
Totals	$	2,736	$	3,538	$	828	$	1,908	$	665	$	3,989	$	190

The Company considers a loan to be impaired when, based on current information and events, it is probable 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, determined by management to be collateral dependent, or when the borrower files bankruptcy or is granted a troubled debt restructure. 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 the time that 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.

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 six 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 loans on nonaccrual status of $1.4 million, $2.3 million and $2.2 million at December 31, 2014, 2013 and 2012, respectively. If such loans had been performing in accordance with their original terms, the Company would have recorded additional loan interest income of $151,000 in 2014, $154,000 in 2013, and $405,000 in 2012. The Company did not record income from the receipt of cash payments related to nonaccruing loans during the years ended December 31, 2014, 2013 and 2012. The Company had no loans 90 day or more past due and still accruing at December 31, 2014 or 2013. The Company has less than $10,000 in troubled debt restructures at December 31, 2014.

Credit Quality and Credit Risk

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 no less than annually by the Board of Directors. Seasoned underwriters ensure all key risk factors are analyzed with most loan underwriting including a comprehensive global cash flow analysis. The credit approval process mandates multiple-signature approval by either the management or Board credit committee for every loan which 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 to help ensure that the protections built into the loan approvals serve as the early warning and risk mitigation mechanisms. Individual loans, excluding the homogeneous loan portfolio, are reviewed at least biennially, or more frequently, if deemed necessary, and includes 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 federal banking 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 scrutinized by annual independent loan reviews performed by a 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 — Pass credits are well protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Such credits exhibit few weaknesses, if any, but may include credits with exposure to certain factors that may adversely impact the credit if they materialize. The Company has established six subcategories within the pass grade to stratify risk associated with pass loans. The Company maintains a subset of pass credits designated as “watch” loans which, for any of a variety of reasons, require the Company’s closer attention. Watch credits are more heavily scrutinized than other pass credits so that any potential weaknesses that may develop in such credits are more quickly identified, thereby serving to mitigate potential losses.

Special Mention — Loans graded special mention exhibit potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or the institution’s credit position. Special mention credits are not considered as part of the classified extensions of credit category and do not expose the Company to sufficient risk to warrant classification.

Substandard — Substandard credits are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. (The term “liquidation” as used here refers to the orderly repayment of the debt and not to a forced sale of the loan or its underlying collateral.) They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified substandard.

Doubtful — 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. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined.

Loss - 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, handling collections, workouts, bankruptcies and foreclosures. These risks are controlled by moving quickly and assertively when problems are identified. Collection efforts are immediate upon non-payment, and the portfolio managers seek to determine right away 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 prosecute the foreclosure process, including any associated judicial legal actions. When appropriate, the Company’s in-house counsel or outside legal advisors are consulted to ensure that legal risks are appropriately addressed in handling loan performance issues.

When a loan is graded as watch or worse, 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 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 watch, special mention and classified loans on an annual or biennial 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
	(in thousands)
December 31, 2014
Business loans:
Commercial and industrial	$	426,379	$	—	$	1,828	$	428,207
Commercial owner occupied	202,390		—		8,605		210,995
SBA	28,132		272		—		28,404
Warehouse facilities	113,798		—		—		113,798
Real estate loans:
Commercial non-owner occupied	355,274		—		3,939		359,213
Multi-family	261,956		501		508		262,965
One-to-four family	122,146		—		649		122,795
Construction	89,682		—		—		89,682
Land	9,088		—		—		9,088
Other loans	3,298		—		—		3,298
Totals	$	1,612,143	$	773	$	15,529	$	1,628,445

	Credit Risk Grades
			Special				Total Gross
	Pass		Mention		Substandard		Loans
	(in thousands)
December 31, 2013
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

			Days Past Due						Total Gross
	Current		30-59		60-89		90+		Loans		Non-accruing
	(in thousands)
December 31, 2014
Business loans:
Commercial and industrial	$	428,183	$	—	$	24	$	—	$	428,207	$	—
Commercial owner occupied	210,995		—		—		—		210,995		514
SBA	28,404		—		—		—		28,404		—
Warehouse facilities	113,798		—		—		—		113,798		—
Real estate loans:
Commercial non-owner occupied	359,213		—		—		—		359,213		848
Multi-family	262,965		—		—		—		262,965		—
One-to-four family	122,722		19		—		54		122,795		82
Construction	89,682		—		—		—		89,682		—
Land	9,088		—		—		—		9,088		—
Other loans	3,297		1		—		—		3,298		—
Totals	$	1,628,347	$	20	$	24	$	54	$	1,628,445	$	1,444

			Days Past Due						Total Gross
	Current		30-59		60-89		90+		Loans		Non-accruing
December 31, 2013
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