Loans Held for Investment

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



	March 31, 2017			December 31, 2016
	(dollars in thousands)
Business loans:
Commercial and industrial	$	593,457		$	563,169
Franchise	493,158			459,421
Commercial owner occupied (1)	482,295			454,918
SBA	107,233			96,705
Real estate loans:
Commercial non-owner occupied	612,787			586,975
Multi-family	682,237			690,955
One-to-four family (2)	100,423			100,451
Construction	298,279			269,159
Land	19,738			19,829
Other loans	3,930			4,112
Total gross loans (3)	3,393,537			3,245,694
Plus: Deferred loan origination costs/(fees) and premiums/(discounts), net	3,250			3,630
Total loans	3,396,787			3,249,324
Less: loans held for sale, at lower of cost or fair value	11,090			7,711
Loans held for investment	3,385,697			3,241,613
Allowance for loan losses	(23,075		)	(21,296		)
Loans held for investment, net	$	3,362,622		$	3,220,317

______________________________

(1) Secured by real estate.

(2) Includes second trust deeds.

(3) Total gross loans for March 31, 2017 are net of the unaccreted fair value purchase discounts of $6.4 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 $137.6 million for secured loans and $82.6 million for unsecured loans at March 31, 2017. At March 31, 2017, the Bank’s largest aggregate outstanding balance of loans to one borrower was $33.0 million of secured credit.

Purchased Credit Impaired

The Company has purchased loans as part of its acquisitions of Canyon National Bank in 2011, Palm Desert National Bank in 2012, Independence Bank in 2015 and Security Bank of California in 2016, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows:



	March 31, 2017		December 31, 2016
	(dollars in thousands)
Business loans:
Commercial and industrial	$	2,536	$	2,586
Commercial owner occupied	481		491
Real estate loans:
Commercial non-owner occupied	1,036		1,088
One-to-four family	—		1
Other loans	318		393
Total purchase credit impaired	$	4,371	$	4,559

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, 2017, the Company had $4.4 million of purchased credit impaired loans, of which none 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, 2017, December 31, 2016 and March 31, 2016:



		Three Months Ended
		March 31, 2017			December 31, 2016			March 31, 2016
	(dollars in thousands)
Balance at the beginning of period		$	3,747		$	3,254		$	2,726
Additions		—			—			788
Accretion		(629		)	(432		)	(129		)
Payoffs		—			(113		)	(323		)
Reclassification from (to) nonaccretable difference		483			1,038			192
Balance at the end of period		$	3,601		$	3,747		$	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
	(dollars in thousands)
March 31, 2017
Business loans:
Commercial owner occupied	$	118	$	86	$	—	$	86	$	—
SBA	2,442		298		—		298		—
Real estate loans:
One-to-four family	286		115		—		115		—
Land	36		14		—		14		—
Totals	$	2,882	$	513	$	—	$	513	$	—



	Impaired Loans
	Contractual Unpaid Principal Balance		Recorded Investment		With Specific Allowance		Without Specific Allowance		Specific Allowance for Impaired Loans
	(dollars in thousands)
December 31, 2016
Business loans:
Commercial and industrial	$	1,990	$	250	$	250	$	—	$	250
Commercial owner occupied	847		436		—		436		—
SBA	3,865		316		—		316		—
Real estate loans:
One-to-four family	291		124		—		124		—
Land	36		15		—		15		—
Totals	$	7,029	$	1,141	$	250	$	891	$	250



	Impaired Loans
	Three Months Ended
	March 31, 2017				December 31, 2016				March 31, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
Business loans:
Commercial and industrial	$	200	$	5	$	1,410	$	47	$	308	$	5
Franchise	—		—		—		—		1,629		27
Commercial owner occupied	192		3		493		10		518		9
SBA	307		5		672		13		23		—
Real estate loans:
Commercial non-owner occupied	—		—		1,658		49		143		2
One-to-four family	116		3		128		4		251		5
Land	14		1		16		1		20		1
Totals	$	829	$	17	$	4,377	$	124	$	2,892	$	49

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, 2017		December 31, 2016
	(dollars in thousands)
Nonaccruing loans	$	513	$	1,141
Accruing loans	—		—
Total impaired loans	$	513	$	1,141

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 $0.5 million at March 31, 2017 and $1.1 million at December 31, 2016. The Company had no loans 90 days or more past due and still accruing at March 31, 2017 and December 31, 2016.

The Company had no TDRs at March 31, 2017 and December 31, 2016. In addition, the Company had $41,000 in consumer mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in process as of March 31, 2017 and December 31, 2016.

Concentration of Credit Risk

As of March 31, 2017, the Company’s loan portfolio was primarily 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 real estate and 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 key risk factors are analyzed with nearly all underwriting including a comprehensive global cash flow analysis of the prospective borrowers.

Credit risk is managed within the loan portfolio by the Company’s portfolio managers based on a comprehensive credit and portfolio 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 managers also monitor 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 every two years 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 managers also manage 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 as of the periods indicated:



	Credit Risk Grades
	Pass		Special Mention		Substandard		Doubtful		Total Gross Loans
March 31, 2017	(dollars in thousands)
Business loans:
Commercial and industrial	$	579,569	$	9,365	$	4,523	$	—	$	593,457
Franchise	493,158		—		—		—		493,158
Commercial owner occupied	477,109		997		4,189		—		482,295
SBA	106,644		18		571		—		107,233
Real estate loans:
Commercial non-owner occupied	611,357		806		624		—		612,787
Multi-family	681,690		—		547		—		682,237
One-to-four family	99,992		—		431		—		100,423
Construction	298,279		—		—		—		298,279
Land	19,724		—		14		—		19,738
Other loans	3,607		—		323		—		3,930
Totals	$	3,371,129	$	11,186	$	11,222	$	—	$	3,393,537



	Credit Risk Grades
	Pass		Special Mention		Substandard		Doubtful		Total Gross Loans
December 31, 2016	(dollars in thousands)
Business loans:
Commercial and industrial	$	550,919	$	8,216	$	3,784	$	250	$	563,169
Franchise	459,421		—		—		—		459,421
Commercial owner occupied	450,416		281		4,221		—		454,918
SBA	96,190		53		462		—		96,705
Real estate loans:
Commercial non-owner occupied	585,093		810		1,072		—		586,975
Multi-family	681,942		6,610		2,403		—		690,955
One-to-four family	100,010		—		441		—		100,451
Construction	269,159		—		—		—		269,159
Land	19,814		—		15		—		19,829
Other loans	3,719		—		393		—		4,112
Totals	$	3,216,683	$	15,970	$	12,791	$	250	$	3,245,694

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, 2017	(dollars in thousands)
Business loans:
Commercial and industrial	$	593,375	$	82	$	—	$	—	$	593,457	$	—
Franchise	493,158		—		—		—		493,158		—
Commercial owner occupied	482,260		35		—		—		482,295		86
SBA	106,936		—		—		297		107,233		298
Real estate loans:
Commercial non-owner occupied	612,787		—		—		—		612,787		—
Multi-family	682,237		—		—		—		682,237		—
One-to-four family	100,374		—		—		49		100,423		115
Construction	298,279		—		—		—		298,279		—
Land	19,724		—		—		14		19,738		14
Other loans	3,930		—		—		—		3,930		—
Totals	$	3,393,060	$	117	$	—	$	360	$	3,393,537	$	513



			Days Past Due								Non-
	Current		30-59		60-89		90+		Total		Accruing
December 31, 2016	(dollars in thousands)
Business loans:
Commercial and industrial	$	562,805	$	104	$	—	$	260	$	563,169	$	250
Franchise	459,421		—		—		—		459,421		—
Commercial owner occupied	454,918		—		—		—		454,918		436
SBA	96,389		—		—		316		96,705		316
Real estate loans:
Commercial non-owner occupied	586,975		—		—		—		586,975		—
Multi-family	690,955		—		—		—		690,955		—
One-to-four family	100,314		18		71		48		100,451		124
Construction	269,159		—		—		—		269,159		—
Land	19,814		—		—		15		19,829		15
Other loans	4,112		—		—		—		4,112		—
Totals	$	3,244,862	$	122	$	71	$	639	$	3,245,694	$	1,141