Loans

The following table presents the composition of the loan portfolio as of the dates indicated:



	For the Years Ended December 31,
	2015			2014
	(in thousands)
Business loans:
Commercial and industrial	$	309,741		$	228,979
Franchise	328,925			199,228
Commercial owner occupied	294,726			210,995
SBA	62,256			28,404
Warehouse facilities	143,200			113,798
Real estate loans:
Commercial non-owner occupied	421,583			359,213
Multi-family	429,003			262,965
One-to-four family	80,050			122,795
Construction	169,748			89,682
Land	18,340			9,088
Other loans	5,111			3,298
Total gross loans	2,262,683			1,628,445
Less loans held for sale, net	8,565			—
Total gross loans held for investment	2,254,118			1,628,445
Plus (less):
Deferred loan origination costs and premiums, net	197			177
Allowance for loan losses	(17,317		)	(12,200		)
Loans held for investment, net	$	2,236,998		$	1,616,422

The Company originates SBA loans with the intent to sell the guaranteed portion of the loan prior to maturity and therefore designates them as held for sale. From time to time, the Company may purchase or sell other types of loans in order to manage concentrations, maximize interest income, change risk profiles, improve returns and generate liquidity.

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 $188 million at December 31, 2015 and $95.2 million at December 31, 2014.

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 $94.1 million for secured loans and $56.5 million for unsecured loans at December 31, 2015. At December 31, 2015, the Bank’s largest aggregate outstanding balance of loans-to-one borrower was $30.3 million of secured credit.

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, Palm Desert National Bank in 2012 and Independence Bank in 2015 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, 2015, and 2014 was as follows:



	For the Years Ended December 31,
	2015		2014
	(in thousands)
Business loans:
Commercial and industrial	$	289	$	94
Commercial owner occupied	884		546
Real estate loans:
Commercial non-owner occupied	2,088		956
One-to-four family	85		5
Total purchase credit impaired	$	3,346	$	1,601

The following table summarizes the accretable yield on the purchased credit impaired for the years ended December 31, 2015, 2014 and 2013:



	For the Years Ended December 31,
	2015			2014			2013
	(in thousands)
Balance at the beginning of period	$	1,403		$	1,676		$	2,276
Accretable yield at acquisition	602			—			—
Accretion	(385		)	(255		)	(557		)
Disposals and other	(249		)	(18		)	(648		)
Change in accretable yield	1,355			—			605
Balance at the end of period	$	2,726		$	1,403		$	1,676

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
	Recorded Investment		Unpaid Principal Balance		With Specific Allowance		Without Specific Allowance		Specific Allowance for Impaired Loans		Average Recorded Investment		Interest Income Recognized
	(in thousands)
December 31, 2015
Business loans:
Commercial and industrial	$	313	$	578	$	—	$	313	$	—	$	90	$	29
Franchise	1,630		2,394		1,461		169		731		1,386		3
Commercial owner occupied	536		883		—		536		—		415		67
Real estate loans:
Commercial non-owner occupied	214		329		—		214		—		430		19
One-to-four family	70		98		—		70		—		204		5
Land	21		37		—		21		—		13		—
Totals	$	2,784	$	4,319	$	1,461	$	1,323	$	731	$	2,538	$	123
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
Multi-family	—		—		—		—		—		—		—
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

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. 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.

We sometimes modify or restructure loans when the borrower is experiencing financial difficulties by making a concession to the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only payments and, in limited cases, concessions to the outstanding loan balances. These loans are classified as troubled debt restructurings (“TDRs”) and considered impaired loans. TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition or cash flows. A workout plan between us and the borrower is designed to provide a bridge for borrower cash flow shortfalls in the near term. A TDR loan may be returned to accrual status when the loan is brought current, has performed in accordance with the contractual restructured terms for a time frame of at least six months and the ultimate collectability of the total contractual restructured principal and interest in no longer in doubt. These loans, while no longer considered a TDR, are still considered impaired loans. The Company had no troubled debt restructures at December 31, 2015.

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 $4.0 million, $1.4 million and $2.3 million at December 31, 2015, 2014 and 2013, respectively. If such loans had been performing in accordance with their original terms, the Company would have recorded additional loan interest income of $279,000 in 2015, $151,000 in 2014, and $311,000 in 2013. The Company did not record income from the receipt of cash payments related to nonaccruing loans during the years ended December 31, 2015, 2014 and 2013. The Company had no loans 90 day or more past due and still accruing at December 31, 2015 or 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 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 deficiencies 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.


•	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, 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
	Pass		Special Mention		Substandard		Doubtful		Total Gross Loans
December 31, 2015	(in thousands)
Business loans:
Commercial and industrial	$	306,513	$	73	$	3,155	$	—	$	309,741
Franchise	327,295		—		169		1,461		328,925
Commercial owner occupied	286,270		627		7,829		—		294,726
SBA	62,256		—		—		—		62,256
Warehouse facilities	143,200		—		—		—		143,200
Real estate loans:
Commercial non-owner occupied	418,917		—		2,666		—		421,583
Multi-family	425,616		—		3,387		—		429,003
One-to-four family	78,997		—		1,053		—		80,050
Construction	169,748		—		—		—		169,748
Land	18,319		—		21		—		18,340
Other loans	5,111		—		—		—		5,111
Totals	$	2,242,242	$	700	$	18,280	$	1,461	$	2,262,683

	Pass		Special Mention		Substandard		Doubtful		Total Gross Loans
December 31, 2014	(in thousands)
Business loans:
Commercial and industrial	$	227,151	$	—	$	1,828	$	—	$	228,979
Franchise	199,228		—		—		—		199,228
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



			Days Past Due
	Current		30-59		60-89		90+		Total Gross Loans		Non-accruing
December 31, 2015	(in thousands)
Business loans:
Commercial and industrial	$	309,464	$	20	$	—	$	257	$	309,741	$	463
Franchise	327,295		—		—		1,630		328,925		1,630
Commercial owner occupied	294,371		—		355		—		294,726		536
SBA	62,256		—		—		—		62,256		—
Warehouse facilities	143,200		—		—		—		143,200		—
Real estate loans:
Commercial non-owner occupied	421,369		214		—		—		421,583		1,164
Multi-family	429,003		—		—		—		429,003		—
One-to-four family	79,915		89		—		46		80,050		155
Construction	169,748		—		—		—		169,748		—
Land	18,319		—		—		21		18,340		21
Other loans	5,111		—		—		—		5,111		1
Totals	$	2,260,051	$	323	$	355	$	1,954	$	2,262,683	$	3,970
			Days Past Due
	Current		30-59		60-89		90+		Total Gross Loans		Non-accruing
December 31, 2014
Business loans:
Commercial and industrial	$	228,955	$	—	$	24	$	—	$	228,979	$	—
Franchise	199,228		—		—		—		199,228		—
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