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Loans Held for Investment
6 Months Ended
Jun. 30, 2019
Receivables [Abstract]  
Loans Held for Investment Loans Held for Investment
 
The following table sets forth the composition of our loan portfolio in dollar amounts at the dates indicated:
 
June 30, 2019
 
December 31, 2018
 
(dollars in thousands)
Business loans
 
 
 
Commercial and industrial
$
1,300,083

 
$
1,364,423

Franchise
860,299

 
765,416

Commercial owner occupied (1)
1,667,912

 
1,679,122

SBA
180,363

 
193,882

Agribusiness
126,857

 
138,519

    Total business loans
4,135,514

 
4,141,362

Real estate loans
 

 
 
Commercial non-owner occupied
2,121,312

 
2,003,174

Multi-family
1,520,135

 
1,535,289

One-to-four family (2)
248,392

 
356,264

Construction
505,401

 
523,643

Farmland
169,724

 
150,502

Land
40,748

 
46,628

    Total real estate loans
4,605,712

 
4,615,500

Consumer loans
 
 
 
Consumer loans
40,680

 
89,424

Gross loans held for investment (3)
8,781,906

 
8,846,286

Deferred loan origination (fees)/costs and (discounts)/premiums, net
(9,968
)
 
(9,468
)
Loans held for investment
8,771,938

 
8,836,818

Allowance for loan losses
(35,026
)
 
(36,072
)
Loans held for investment, net
$
8,736,912

 
$
8,800,746

 
 
 
 
Loans held for sale, at lower of cost or fair value
$
8,529

 
$
5,719

______________________________
(1) Secured by real estate.
(2) Includes second trust deeds.
(3) Total gross loans held for investment for June 30, 2019 and December 31, 2018 are net of the unaccreted fair value net purchase discounts of $52.0 million and $61.0 million, respectively.


Loans Serviced for Others

The Company generally retains the servicing rights of the guaranteed portion of Small Business Administration (“SBA”) loans sold, for which the Company records a servicing asset at fair value within its other assets category. At June 30, 2019 and December 31, 2018, the servicing asset totaled $8.0 million and $8.5 million, respectively, and was included in other assets. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. Impairment is recognized through a valuation allowance, to the extent the fair value is less than the carrying amount. At June 30, 2019 and December 31, 2018, the Company determined that no valuation allowance was necessary.
        
    
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 $689.1 million at June 30, 2019 and $635.3 million at December 31, 2018, including SBA participations serviced for others totaling $493.9 million at June 30, 2019 and $519.8 million at December 31, 2018.

Concentration of Credit Risk
 
As of June 30, 2019, 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, commercial owner occupied real estate loans and commercial and industrial business loans. The Bank maintains policies approved by the Bank’s Board of Directors (the “Bank Board”) that address these concentrations and diversifies 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.

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% of the Bank’s unimpaired capital plus surplus for unsecured loans. These loans-to-one borrower limitations result in a dollar limitation of $547.0 million for secured loans and $328.2 million for unsecured loans at June 30, 2019. In order to manage concentration risk, the Bank maintains a house lending limit well below these statutory maximums. At June 30, 2019, the Bank’s largest aggregate outstanding balance of loans to one borrower was $94.1 million of secured credit.
 
Credit Quality and Credit Risk Management
 
The Company’s credit quality and credit risk are controlled 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 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’s Board. The Bank’s 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 borrowing bases under 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 or confirmation 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 with the Company’s Credit and Portfolio Review Committee, and the portfolio management and risk grading process is
reviewed on an ongoing basis by an independent loan review function, 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, in which no well-defined deficiency or weakness exists.
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 Bank’s portfolio managers also manage loan performance risks, collections, workouts, bankruptcies and foreclosures. A special department, whose portfolio managers have professional expertise in these areas, typically handles or advises on these types of matters. Loan performance risks are mitigated by our portfolio managers acting promptly and assertively to address problem credits when they are identified. Collection efforts commence 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, 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 some or all of the full amount of the Company’s recorded investment in the loan is no longer collectable. The Company typically obtains or confirms 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, including loans held for sale, by the Company’s internal risk grading as of the periods indicated:
 
 
Credit Risk Grades
 
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total Gross
Loans
June 30, 2019
 
(dollars in thousands)
Business loans
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
1,287,607

 
$
5,150

 
$
7,326

 
$

 
$
1,300,083

Franchise
 
845,659

 
13,630

 
1,010

 

 
860,299

Commercial owner occupied
 
1,659,772

 
953

 
7,187

 

 
1,667,912

SBA
 
179,488

 
1,131

 
6,911

 

 
187,530

Agribusiness
 
112,796

 
765

 
13,296

 

 
126,857

Real estate loans
 
 
 
 
 
 
 
 
 
 
Commercial non-owner occupied
 
2,122,431

 

 
243

 

 
2,122,674

Multi-family
 
1,515,897

 
4,019

 
219

 

 
1,520,135

One-to-four family
 
247,539

 

 
853

 

 
248,392

Construction
 
505,401

 

 

 

 
505,401

Farmland
 
163,687

 
5,923

 
114

 

 
169,724

Land
 
40,110

 

 
638

 

 
40,748

Consumer loans
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
40,623

 

 
57

 

 
40,680

     Totals
 
$
8,721,010

 
$
31,571

 
$
37,854

 
$

 
$
8,790,435


 
 
Credit Risk Grades
 
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total Gross
Loans
December 31, 2018
 
(dollars in thousands)
Business loans
 
 

 
 

 
 

 
 
 
 

Commercial and industrial
 
$
1,340,322

 
$
12,005

 
$
12,134

 
$

 
$
1,364,461

Franchise
 
760,795

 
4,431

 
190

 

 
765,416

Commercial owner occupied
 
1,660,994

 
1,580

 
16,548

 

 
1,679,122

SBA
 
189,006

 
2,289

 
6,906

 

 
198,201

Agribusiness
 
125,355

 

 
13,164

 

 
138,519

Real estate loans
 
 

 
 

 
 

 
 
 
 
Commercial non-owner occupied
 
1,998,118

 
731

 
5,687

 

 
2,004,536

Multi-family
 
1,530,567

 
4,060

 
662

 

 
1,535,289

One-to-four family
 
350,083

 
728

 
5,453

 

 
356,264

Construction
 
523,643

 

 

 

 
523,643

Farmland
 
150,381

 

 
121

 

 
150,502

Land
 
46,008

 
132

 
488

 

 
46,628

Consumer loans
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
89,321

 

 
103

 

 
89,424

Totals
 
$
8,764,593

 
$
25,956

 
$
61,456

 
$

 
$
8,852,005



The following tables set forth delinquencies in the Company’s loan portfolio, including loans held for sale, at the dates indicated:

 
 
 
 
Days Past Due
 
 
 
 
 
 
Current
 
30-59
 
60-89
 
90+
 
Total Gross Loans
 
Non-accruing
June 30, 2019
 
(dollars in thousands)
Business loans
 
 
 
 

 
 

 
 

 
 
 
 
Commercial and industrial
 
$
1,293,042

 
$
1,841

 
$
416

 
$
4,784

 
$
1,300,083

 
$
2,935

Franchise
 
859,289

 

 
313

 
697

 
860,299

 
697

Commercial owner occupied
 
1,666,135

 
1,054

 

 
723

 
1,667,912

 
564

SBA
 
184,613

 
511

 
72

 
2,334

 
187,530

 
2,338

  Agribusiness
 
126,857

 

 

 

 
126,857

 

Real estate loans
 
 

 
 

 
 

 
 

 
 

 
 

Commercial non-owner occupied
 
2,122,431

 

 

 
243

 
2,122,674

 
243

Multi-family
 
1,520,135

 

 

 

 
1,520,135

 

One-to-four family
 
248,392

 

 

 

 
248,392

 
380

Construction
 
505,401

 

 

 

 
505,401

 

Farmland
 
169,724

 

 

 

 
169,724

 

Land
 
40,268

 

 

 
480

 
40,748

 
480

Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
40,670

 
10

 

 

 
40,680

 

Totals
 
$
8,776,957

 
$
3,416

 
$
801

 
$
9,261

 
$
8,790,435

 
$
7,637


 
 
 

 
Days Past Due
 
 

 
 
 
 
Current
 
30-59
 
60-89
 
90+
 
Total Gross Loans
 
Non-accruing
December 31, 2018
 
(dollars in thousands)
Business loans
 
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 
$
1,362,017

 
$
309

 
$
1,204

 
$
931

 
$
1,364,461

 
$
931

Franchise
 
759,546

 
5,680

 

 
190

 
765,416

 
190

Commercial owner occupied
 
1,677,967

 
343

 

 
812

 
1,679,122

 
599

SBA
 
195,051

 
524

 

 
2,626

 
198,201

 
2,739

Agribusiness
 
138,519

 

 

 

 
138,519

 

Real estate loans
 
 

 
 

 
 

 
 

 
 

 
 

Commercial non-owner occupied
 
2,004,536

 

 

 

 
2,004,536

 

Multi-family
 
1,535,275

 
14

 

 

 
1,535,289

 

One-to-four family
 
356,219

 
30

 
9

 
6

 
356,264

 
398

Construction
 
523,643

 

 

 

 
523,643

 

Farmland
 
150,502

 

 

 

 
150,502

 

Land
 
46,628

 

 

 

 
46,628

 

Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
89,249

 
146

 
29

 

 
89,424

 

Totals
 
$
8,839,152

 
$
7,046

 
$
1,242

 
$
4,565

 
$
8,852,005

 
$
4,857




Impaired Loans

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, 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. Loans are generally charged-off at the 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 tables provide a summary of the Company’s investment in impaired loans as of the period indicated:

 
 
Impaired Loans
 
 
Unpaid Principal Balance
 
Recorded Investment
 
With Specific Allowance
 
Without Specific Allowance
 
Specific Allowance for Impaired Loans
 
 
(dollars in thousands)
June 30, 2019
 
 
 
 
 
 
 
 
 
 
Business loans
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
3,417

 
$
2,935

 
$

 
$
2,935

 
$

Franchise
 
697

 
697

 

 
697

 

Commercial owner occupied
 
564

 
564

 

 
564

 

SBA
 
9,059

 
2,338

 

 
2,338

 

Agribusiness
 
7,466

 
7,466

 

 
7,466

 

Real estate loans
 
 
 
 
 
 
 
 
 
 
Commercial non-owner occupied
 
3,654

 
243

 

 
243

 

One-to-four family
 
413

 
380

 

 
380

 

Land
 
480

 
480

 

 
480

 

Totals
 
$
25,750

 
$
15,103

 
$

 
$
15,103

 
$

  

 
 
Impaired Loans
 
 
Unpaid Principal Balance
 
Recorded Investment
 
With Specific Allowance
 
Without Specific Allowance
 
Specific Allowance for Impaired Loans
 
 
(dollars in thousands)
December 31, 2018
 
 

 
 

 
 

 
 

 
 

Business loans
 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 
$
1,071

 
$
1,023

 
$
550

 
$
473

 
$
118

Franchise
 
190

 
189

 

 
189

 

Commercial owner occupied
 
628

 
599

 

 
599

 

SBA
 
7,598

 
2,739

 
488

 
2,251

 
466

Agribusiness
 
7,500

 
7,500

 

 
7,500

 

Real estate loans
 
 

 
 

 
 

 
 

 
 

One-to-four family
 
453

 
408

 

 
408

 

Totals
 
$
17,440

 
$
12,458

 
$
1,038

 
$
11,420

 
$
584

  

The following table presents information on impaired loans and leases, disaggregated by class, for the periods indicated:

 
 
Impaired Loans
 
 
Three Months Ended
 
 
June 30, 2019
 
March 31, 2019
 
June 30, 2018
 
 
Average Recorded Investment
 
Interest Income Recognized (1)
 
Average Recorded Investment
 
Interest Income Recognized (1)
 
Average Recorded Investment
 
Interest Income Recognized (1)
 
 
(dollars in thousands)
Business loans
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
2,614

 
$

 
$
2,003

 
$

 
$
1,272

 
$

Franchise
 
4,047

 

 
3,976

 

 
70

 

Commercial owner occupied
 
564

 

 
576

 

 
2,317

 

SBA
 
3,139

 

 
3,279

 

 
1,360

 

Agribusiness
 
7,489

 
109

 
7,500

 
89

 

 

Real estate loans
 
 
 
 
 
 
 
 
 
 
 
 
Commercial non-owner occupied
 
162

 

 

 

 
430

 

Multi-family
 

 

 

 

 
589

 

One-to-four family
 
383

 

 
395

 

 
1,343

 

Land
 
160

 

 

 

 
6

 

Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
17

 
$

 
57

 

 
15

 

Totals
 
$
18,575

 
$
109

 
$
17,786

 
$
89

 
$
7,402

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Interest income recognized represents interest on accruing loans.
 
 
 
 
 
 
 
 
 
 
 
Impaired Loans
 
 
Six Months Ended
 
 
June 30,
 
 
2019
 
2018
 
 
Average Recorded Investment
 
Interest Income Recognized (1)
 
Average Recorded Investment
 
Interest Income Recognized (1)
 
 
(dollars in thousands)
Business loans:
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
2,309

 
$

 
$
1,226

 
$

Franchise
 
4,012

 

 
35

 

Commercial owner occupied
 
570

 

 
2,896

 

SBA
 
3,209

 

 
1,300

 

Agribusiness
 
$
7,494

 
$
199

 

 

Real estate loans:
 
 
 
 
 
 
 
 
Commercial non-owner occupied
 
81

 

 
215

 

Multi-family
 

 

 
705

 

One-to-four family
 
389

 

 
1,184

 

Land
 
80

 

 
7

 

Consumer loans:
 
 
 
 
 
 
 
 
Consumer loans
 
37

 

 
55

 

Totals
 
$
18,181

 
$
199

 
$
7,623

 
$

 
 
 
 
 
 
 
 
 
(1) Interest income recognized represents interest on accruing loans.

    
The following table provides additional detail on the components of impaired loans at the period end indicated: 
 
June 30, 2019
 
December 31, 2018
 
(dollars in thousands)
Nonaccrual loans
$
7,637

 
$
4,857

Accruing loans
7,466

 
7,601

Total impaired loans
$
15,103

 
$
12,458



When loans are placed on nonaccrual status, previously accrued but unpaid 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 typically 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 timely collection of principal or interest. The Company had impaired loans on nonaccrual status of $7.6 million at June 30, 2019 and $4.9 million at December 31, 2018. The Company had $3.6 million in loans 90 days or more past due and still accruing at June 30, 2019, comprised of a commercial and industrial loan for $3.4 million and a purchased credit impaired (“PCI”) loan for $159,000. Income recognition for PCI loans is accounted for in accordance with ASC Subtopic 310-30 Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. The Company had $213,000 in loans 90 days or more past due and still accruing at December 31, 2018, all of which were PCI loans.
 
There were no TDRs at June 30, 2019 and December 31, 2018. The Company had no consumer mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in process as of June 30, 2019 and December 31, 2018.
 
Purchased Credit Impaired Loans
 
The Company has purchased loans that have experienced deterioration of credit quality between origination and acquisition and for which it was probable, at acquisition, that not all contractually required payments would be collected. The carrying amount of those loans is as follows:
 
June 30, 2019
 
December 31, 2018
 
(dollars in thousands)
Business loans
 
 
 
Commercial and industrial
$

 
$
10

Commercial owner occupied
578

 
632

SBA
1,190

 
1,265

Real estate loans
 

 
 

Commercial non-owner occupied

 
275

Total purchased credit impaired
$
1,768

 
$
2,182



On each 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 June 30, 2019, the Company had $1.8 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 periods indicated.
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
 
2019
 
2019
 
2018
 
2019
 
2018
 
 
(dollars in thousands)
Balance at the beginning of period
 
$
332

 
$
411

 
$
1,709

 
$
411

 
$
3,019

Additions
 

 

 

 

 

Accretion
 
(45
)
 
(79
)
 
(270
)
 
(124
)
 
(506
)
Payoffs
 
(9
)
 

 
32

 
(9
)
 
(1,818
)
Sales
 

 

 

 
$

 
$

Reclassification from nonaccretable difference
 
18

 

 
2

 
18

 
778

Balance at the end of period
 
$
296

 
$
332

 
$
1,473

 
$
296

 
$
1,473