Loans Held for Investment

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



	March 31, 2016			December 31, 2015			March 31, 2015
	(in thousands)
Business loans:
Commercial and industrial	$	491,112		$	309,741		$	276,321
Franchise	371,875			328,925			216,544
Commercial owner occupied (1)	424,289			294,726			279,704
SBA	78,350			62,256			49,855
Warehouse facilities	1,394			143,200			216,554
Real estate loans:
Commercial non-owner occupied	522,080			421,583			452,422
Multi-family	619,485			429,003			397,130
One-to-four family (2)	106,854			80,050			116,735
Construction	218,069			169,748			111,704
Land	18,222			18,340			7,243
Other loans	6,045			5,111			6,641
Total gross loans (3)	2,857,775			2,262,683			2,130,853
Less Loans held for sale, net	7,281			8,565			—
Total gross loans held for investment	2,850,494			2,254,118			2,130,853
Less:
Deferred loan origination costs/(fees) and premiums/(discounts), net	938			197			534
Allowance for loan losses	(18,455		)	(17,317		)	(13,646		)
Loans held for investment, net	$	2,832,977		$	2,236,998		$	2,117,741

______________________________

(1) Majority secured by real estate.

(2) Includes second trust deeds.

(3) Total gross loans for March 31, 2016 are net of the unaccreted mark-to-market discounts on Canyon National Bank (“Canyon National“) loans of $121,000, on Palm Desert National Bank (“Palm Desert National”) loans of $877,000, on First Associations Bank (“FAB”) loans of $4,000, on San Diego Trust Bank (“SDTB”) loans of $105,000, on Independence Bank (“IDPK”) loans of $3.3 million and on Security California Bancorp (“SCAF”) loans of $10.7 million.

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 $125.2 million for secured loans and $75.0 million for unsecured loans at March 31, 2016. At March 31, 2016, the Bank’s largest aggregate outstanding balance of loans to one borrower was $26.4 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 Bank, IDPK and SCAF as of the period indicated:



	March 31, 2016
	Canyon National		IDPK		SCAF		Total
	(in thousands)
Business loans:
Commercial and industrial	$	89	$	183	$	4,530	$	4,802
Commercial owner occupied	523		332		1,138		1,993
Real estate loans:
Commercial non-owner occupied	894		648		—		1,542
One-to-four family	—		—		817		817
Other loans	—		—		441		441
Total purchase credit impaired	$	1,506	$	1,163	$	6,926	$	9,595

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, 2016, the Company had $9.6 million of purchased credit impaired loans, of which $1.8 million were placed on nonaccrual status.

The following table summarizes the accretable yield on the purchased credit impaired loans for the three months ended March 31, 2016:



	Three Months Ended
	March 31, 2016
	Canyon National			IDPK			SCAF			Total
	(in thousands)
Balance at the beginning of period	$	1,130		$	1,596		$	—		$	2,726
Accretable yield at acquisition	—			—			788			788
Accretion	(49		)	(4		)	(76		)	(129		)
Disposals and other	—			(323		)	—			(323		)
Change in accretable yield	—			192			—			192
Balance at the end of period	1,081			1,461			712			3,254

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, 2016
Business loans:
Commercial and industrial	$	373	$	306	$	—	$	306	$	—	$	308	$	5
Franchise	2,394		1,630		1,461		169		731		1,629		27
Commercial owner occupied	870		507		—		507		—		518		9
SBA	414		69		—		69		—		23		—
Real estate loans:
Commercial non-owner occupied	—		—		—		—		—		143		2
One-to-four family	556		523		—		523		—		251		5
Land	37		19		—		19		—		20		1
Totals	$	4,644	$	3,054	$	1,461	$	1,593	$	731	$	2,892	$	49



					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, 2015
Business loans:
Commercial and industrial	$	578	$	313	$	—	$	313	$	—	$	90	$	29
Franchise	2,394		1,630		1,461		169		731		1,386		3
Commercial owner occupied	883		536		—		536		—		415		67
Real estate loans:
Commercial non-owner occupied	329		214		—		214		—		430		19
One-to-four family	98		70		—		70		—		204		5
Land	37		21		—		21		—		13		—
Totals	$	4,319	$	2,784	$	1,461	$	1,323	$	731	$	2,543	$	123



					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, 2015
Business loans:
Franchise	$	2,225	$	1,853	$	—	$	1,853	$	—	$	618	$	—
Commercial owner occupied	438		379		—		379		—		382		7
Real estate loans:
Commercial non-owner occupied	698		458		—		458		—		465		12
One-to-four family	254		232		—		232		—		234		5
Totals	$	3,615	$	2,922	$	—	$	2,922	$	—	$	1,699	$	24

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, 2016		December 31, 2015		March 31, 2015
	(in thousands)
Nonaccruing loans	$	3,054	$	2,736	$	2,742
Accruing loans	—		48		180
Total impaired loans	$	3,054	$	2,784	$	2,922

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 $3.1 million at March 31, 2016, $2.7 million at December 31, 2015, and $2.7 million at March 31, 2015. The Company had no loans 90 days or more past due and still accruing at March 31, 2016, December 31, 2015 or March 31, 2015.

The Company had no TDRs at March 31, 2016, December 31, 2015, or March 31, 2015. In addition, the Company had no foreclosed residential real estate property or a recorded investment in consumer mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in process as of March 31, 2016.

Concentration of Credit Risk

As of March 31, 2016, the Company’s loan portfolio was collateralized by various forms of real estate and business assets located predominately 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 Portfolio 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 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. 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 or confirm 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
	Pass		Special Mention		Substandard		Doubtful		Total Gross Loans
March 31, 2016	(in thousands)
Business loans:
Commercial and industrial	$	481,770	$	2,977	$	6,365	$	—	$	491,112
Franchise	370,245		—		169		1,461		371,875
Commercial owner occupied	413,627		2,029		8,633		—		424,289
SBA	78,280		—		70		—		78,350
Warehouse facilities	1,394		—		—		—		1,394
Real estate loans:									0
Commercial non-owner occupied	520,248		—		1,832		—		522,080
Multi-family	616,620		—		2,865		—		619,485
One-to-four family	104,608		—		2,246		—		106,854
Construction	218,069		—		—		—		218,069
Land	18,203		—		19		—		18,222
Other loans	5,604		—		441		—		6,045
Totals	$	2,828,668	$	5,006	$	22,640	$	1,461	$	2,857,775



	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



	Credit Risk Grades
	Pass		Special Mention		Substandard		Doubtful		Total Gross Loans
March 31, 2015	(in thousands)
Business loans:
Commercial and industrial	$	268,285	$	1,250	$	6,786	$	—	$	276,321
Franchise	214,690		—		1,854		—		216,544
Commercial owner occupied	268,038		—		11,666		—		279,704
SBA	49,855		—		—		—		49,855
Warehouse facilities	216,554		—		—		—		216,554
Real estate loans:
Commercial non-owner occupied	446,900		—		5,522		—		452,422
Multi-family	391,690		1,954		3,486		—		397,130
One-to-four family	115,780		—		955		—		116,735
Construction	111,469		—		235		—		111,704
Land	7,243		—		—		—		7,243
Other loans	6,641		—		—		—		6,641
Totals	$	2,097,145	$	3,204	$	30,504	$	—	$	2,130,853

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, 2016	(in thousands)
Business loans:
Commercial and industrial	$	490,796	$	—	$	—	$	316	$	491,112	$	498
Franchise	370,245		—		—		1,630		371,875		1,630
Commercial owner occupied	424,289		—		—		—		424,289		839
SBA	78,104		246		—		—		78,350		69
Warehouse facilities	1,394		—		—		—		1,394		—
Real estate loans:
Commercial non-owner occupied	522,080		—		—		—		522,080		428
Multi-family	619,485		—		—		—		619,485		—
One-to-four family	105,619		1		—		1,234		106,854		1,340
Construction	218,069		—		—		—		218,069		—
Land	18,203		—		—		19		18,222		19
Other loans	6,045		—		—		—		6,045		—
Totals	$	2,854,329	$	247	$	—	$	3,199	$	2,857,775	$	4,823



			Days Past Due								Non-
	Current		30-59		60-89		90+		Total		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								Non-
	Current		30-59		60-89		90+		Total		Accruing
March 31, 2015	(in thousands)
Business loans:
Commercial and industrial	$	275,850	$	146	$	—	$	325	$	276,321	$	601
Franchise	214,691		—		—		1,853		216,544		1,854
Commercial owner occupied	278,953		349		375		27		279,704		527
SBA	49,855		—		—		—		49,855		—
Warehouse facilities	216,554		—		—		—		216,554		—
Real estate loans:
Commercial non-owner occupied	452,422		—		—		—		452,422		1,602
Multi-family	397,130		—		—		—		397,130		—
One-to-four family	116,533		149		—		53		116,735		79
Construction	111,704		—		—		—		111,704		—
Land	7,243		—		—		—		7,243		—
Other loans	6,640		1		—		—		6,641		—
Totals	$	2,127,575	$	645	$	375	$	2,258	$	2,130,853	$	4,663