

	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

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.

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.

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

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.



	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



			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

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.



	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



	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.

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.

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.



	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