5. Loans

Most of the Company's business activity is predominately with Asian customers located in Southern and Northern California; New York City; Houston and Dallas, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; and Hong Kong. The Company has no specific industry concentration, and generally its loans are collateralized with real property or other pledged collateral of the borrowers. Loans are generally expected to be paid off from the operating profits of the borrowers, refinancing by another lender, or through sale by the borrowers of the secured collateral.

The components of loans in the Consolidated Balance Sheets as of December 31, 2011, and December 31, 2010, were as follows:


	2011			2010
	(In thousands)
Type of Loans:
Commercial loans	$	1,868,275		$	1,441,167
Real estate construction loans		237,372			409,986
Commercial mortgage loans		3,748,897			3,940,061
Residential mortgage loans		972,262			852,454
Equity lines		214,707			208,876
Installment and other loans		17,699			16,077

Gross loans		7,059,212			6,868,621
Less:
Allowance for loan losses		(206,280	)		(245,231	)
Unamortized deferred loan fees		(8,449	)		(7,621	)

Total loans and leases, net	$	6,844,483		$	6,615,769

Loans held for sale	$	760		$	2,873

Loans held for sale of $760,000 at December 31, 2011, decreased $2.1 million from $2.9 million at December 31, 2010. In 2011, we added six new loans of $4.4 million, transferred one loan of $2.9 million to OREO, and sold four loans of $3.6 million for a net gain on sale of $88,000. At December 31, 2011, loans held for sale were comprised of a commercial construction loan of $500,000 and a residential mortgage loan of $260,000. In 2010, the Company sold six held for sale loans of $31.7 million with net gains of $779,000, transferred seven loans of $21.5 million to OREO, wrote down $2.9 million loans held for sale based on their market value, and added four new loans of $4.3 million which were sold subsequently. Proceeds from sale of loans held for sale during 2010 were $10.9 million in cash and a new loan of $20.8 million to one of the note purchasers.

The Company pledged real estate loans of $2.0 billion at December 31, 2011, and $2.4 billion at December 31, 2010, to the Federal Home Loan Bank of San Francisco under its specific pledge program. In addition, the Bank pledged $250.9 million at December 31, 2011, and $286.6 million at December 31, 2010, of its commercial loans to the Federal Reserve Bank's Discount Window under the Borrower-in-Custody program.

Loans serviced for others as of December 31, 2011, totaled $222.2 million and were comprised of $49.0 million of commercial loans, $111.8 million of commercial real estate loans, $0.6 million in construction loans, and $60.8 million of residential mortgages.

The Company has entered into transactions with its directors, executive officers, or principal holders of its equity securities, or the associates of such persons ("Related Parties"). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with customers who are not related parties. In management's opinion, these transactions did not involve more than normal credit risk or present other unfavorable features. All loans to Related Parties were current as of December 31, 2011. An analysis of the activity with respect to loans to Related Parties for the years indicated is as follows:


	December 31,
	2011			2010
	(In thousands)
Balance at beginning of year	$	134,161		$	139,194
Additional loans made		89,985			52,809
Payment received		(64,077	)		(57,842	)

Balance at end of year	$	160,069		$	134,161

At December 31, 2011, recorded investment in impaired loans totaled $322.0 million and was comprised of nonaccrual loans of $201.2 million, nonaccrual loans held for sale of $760,000, and accruing TDR's of $120.0 million. At December 31, 2010, recorded investment in impaired loans totaled $382.0 million and was comprised of nonaccrual loans of $242.3 million, nonaccrual loans held for sale of $2.9 million, and accruing TDR's of $136.8 million. The average balance of impaired loans was $361.4 million in 2011 and $370.6 million in 2010. We considered all non-accrual loans and troubled debt restructurings ("TDR") to be impaired. Interest recognized on impaired loans totaled $5.3 million in 2011 and $10.0 million in 2010. The Bank recognizes interest income on impaired loans based on its existing method of recognizing interest income on non-accrual loans except accruing TDRs. For impaired loans, the amounts previously charged off represent 25.6% at December 31, 2011, and 23.3% at December 31, 2010, of the contractual balances for impaired loans. The following table presents impaired loans and the related allowance and charge-off as of the dates indicated:


	Impaired Loans
	At December 31, 2011						At December 31, 2010
	Unpaid Principal Balance		Recorded Investment		Allowance		Unpaid Principal Balance		Recorded Investment		Allowance
	(Dollars in thousands)
With no allocated allowance
Commercial loans	$	46,671	$	38,194	$	—	$	41,233	$	27,775	$	—
Real estate construction loans		134,837		78,767		—		102,186		64,274		—
Commercial mortgage loans		187,580		149,034		—		211,717		156,305		—
Residential mortgage and equity lines		8,555		7,987		—		7,823		7,436		—

Subtotal	$	377,643	$	273,982	$	—	$	362,959	$	255,790	$	—

With allocated allowance
Commercial loans	$	11,795	$	7,587	$	3,336	$	13,930	$	7,748	$	2,925
Real estate construction loans		—		—		—		15,429		13,416		7,470
Commercial mortgage loans		29,722		28,023		2,969		98,593		96,449		3,812
Residential mortgage and equity lines.		13,813		12,381		1,249		9,811		8,589		978

Subtotal	$	55,330	$	47,991	$	7,554	$	137,763	$	126,202	$	15,185

Total impaired loans	$	432,973	$	321,973	$	7,554	$	500,722	$	381,992	$	15,185

The following table presents the average balance and interest income recognized related to impaired loans for the period indicated:


	For the year ended December 31,
	2011		2010		2011		2010
	Average Recorded Investment				Interest Income Recognized
	(In thousands)
Commercial loans	$	48,349	$	34,857	$	1,053	$	1,059
Real estate construction loans		82,529		92,859		940		1,665
Commercial mortgage loans		212,555		230,952		3,101		6,925
Residential mortgage and equity lines		17,920		11,970		236		340

Subtotal	$	361,353	$	370,638	$	5,330	$	9,989

The following is a summary of non-accrual loans as of December 31, 2011, 2010, and 2009 and the related net interest foregone for the years then ended:


	2011		2010		2009
	(In thousands)
Non-accrual portfolio loans	$	201,197	$	242,319	$	280,643
Non-accrual loans held-for-sale		760		2,873		54,826

Total non-accrual loans	$	201,957	$	245,192	$	335,469

Contractual interest due	$	13,049	$	17,304	$	23,746
Interest recognized		71		4,853		9,830

Net interest foregone	$	12,978	$	12,451	$	13,916

The following table presents the aging of the loan portfolio by type as of December 31, 2011 and as of December 31, 2010:


	As of December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Non-accrual Loans		Total Past Due		Loans Not Past Due		Total
Type of Loans:	(In thousands)
Commercial loans	$	1,683	$	—	$	—	$	30,661	$	32,344	$	1,835,931	$	1,868,275
Real estate construction loans		20,326		—		—		46,012		66,338		171,034		237,372
Commercial mortgage loans		13,627		20,277		6,726		107,784		148,414		3,600,483		3,748,897
Residential mortgage loans		5,871		—		—		16,740		22,611		1,164,358		1,186,969
Installment and other loans		—		—		—		—		—		17,699		17,699

Total loans	$	41,507	$	20,277	$	6,726	$	201,197	$	269,707	$	6,789,505	$	7,059,212


	As of December 31, 2010
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Non-accrual Loans		Total Past Due		Loans Not Past Due		Total
Type of Loans:	(In thousands)
Commercial loans	$	7,037	$	2,990	$	—	$	31,498	$	41,525	$	1,399,642	$	1,441,167
Real estate construction loans		14,634		15,425		4,175		53,937		88,171		321,815		409,986
Commercial mortgage loans		12,569		9,430		831		144,596		167,426		3,772,635		3,940,061
Residential mortgage loans		9,934		2,581		—		12,288		24,803		1,036,527		1,061,330
Installment and other loans		—		—		—		—		—		16,077		16,077

Total loans	$	44,174	$	30,426	$	5,006	$	242,319	$	321,925	$	6,546,696	$	6,868,621

The determination of the amount of the allowance for credit losses for impaired loans is based on management's current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that affect collectibility when determining the appropriate level for the allowance for credit losses. The nature of the process by which the Bank determines the appropriate allowance for credit losses requires the exercise of considerable judgment. This allowance evaluation process is also applied to TDRs since TDRs are considered to be impaired loans. As a result of adopting the amendments in ASU 2011-02, the Company reassessed all restructurings that occurred on or after January 1, 2011, for identification as TDRs.

At December 31, 2011, accruing TDRs were $120.0 million and non-accrual TDRs were $50.9 million compared to accruing TDRs of $136.8 million and non-accrual TDRs of $28.1 million at December 31, 2010. The Company has allocated specific reserves of $1.4 million to accruing TDRs and $1.6 million to non-accrual TDRs at December 31, 2011, and $3.6 million to accruing TDRs and $1.3 million to non-accrual TDRs at December 31, 2010. The following table presents TDRs that were modified during 2011, their specific reserve at December 31, 2011, and charge-off during 2011:


	No. of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve		Charge-off
	(Dollars in thousands)
Commercial loans		7	$	15,025	$	15,025	$	104	$	—
Real estate construction loans		3		33,669		21,522		—		12,147
Commercial mortgage loans		6		17,343		14,294		1		3,049
Residential mortgage and equity lines		3		1,574		1,574		114		—

Total		19	$	67,611	$	52,415	$	219	$	15,196

A summary of TDRs by type of concession and by type of loans is shown below:


	As of December 31, 2011
Accruing TDRs	Principal Deferral		Rate Reduction		Rate Reduction and Forgiveness of Principal		Rate Reduction and Payment Deferral		Total
	(In thousands)
Commercial loans	$	12,933	$	1,756	$	—	$	431	$	15,120
Real estate construction loans		16,820		9,659		—		5,776		32,255
Commercial mortgage loans		471		37,796		2,071		28,935		69,273
Residential mortgage loans		1,294		587		—		1,487		3,368

Total accruing TDRs	$	31,518	$	49,798	$	2,071	$	36,629	$	120,016


	As of December 31, 2011
Non-accrual TDRs	Interest Deferral		Principal Deferral		Rate Reduction		Rate Reduction and Forgiveness of Principal		Rate Reduction and Payment Deferral		Total
	(In thousands)
Commercial loans	$	—	$	616	$	1,859	$	1,506	$	—	$	3,981
Real estate construction loans		—		13,579		12,376		—		—		25,955
Commercial mortgage loans		2,633		9,727				—		5,076		17,436
Residential mortgage loans		311		2,427		449		—		311		3,498

Total non-accrual TDRs	$	2,944	$	26,349	$	14,684	$	1,506	$	5,387	$	50,870


	As of December 31, 2010
Accruing TDRs	Principal Deferral		Rate Reduction		Rate Reduction and Forgiveness of Principal		Rate Reduction and Payment Deferral		Total
	(In thousands)
Commercial loans	$	1,131	$	1,780	$	—	$	1,114	$	4,025
Commercial mortgage loans		17,338		87,411		3,459		20,831		129,039
Residential mortgage loans		2,658		599		—		479		3,736

Total accruing TDRs	$	21,127	$	89,790	$	3,459	$	22,424	$	136,800


	As of December 31, 2010
Non-accrual TDRs	Interest Deferral		Principal Deferral		Rate Reduction		Rate Reduction and Payment Deferral		Total
	(In thousands)
Commercial mortgage loans	$	1,239	$	21,156	$	2,310	$	1,113	$	25,818
Residential mortgage loans		340		1,037		—		951		2,328

Total non-accrual TDRs	$	1,579	$	22,193	$	2,310	$	2,064	$	28,146

Troubled debt restructurings on accrual status totaled $120.0 million at December 31, 2011, and were comprised of 32 loans, a decrease of $16.8 million, compared to 28 loans totaling $136.8 million at December 31, 2010. TDRs at December 31, 2011, were comprised of eleven retail shopping and commercial use building loans of $74.4 million, seven office and commercial use buildings loans of $23.8 million, one hotel loan of $7.9 million, ten single family residential loans of $13.3 million, one land loan of $635,000 and two commercial loans of $39,000. Troubled debt restructurings on accrual status totaled $136.8 million at December 31, 2010, and were comprised of 28 loans, an increase of $81.8 million, compared to 14 loans totaling $55.0 million at December 31, 2009. TDRs at December 31, 2010, were comprised of eight retail shopping and commercial use building loans of $64.4 million, six office and commercial use building loans of $20.8 million, three multi-family residential loans of $21.4 million, two hotel loans of $15.4 million, four single family residential loan of $10.5 million, three land loans of $2.5 million, and two commercial loans of $1.8 million.

The activity within our TDR loans for 2011 and 2010 are shown below:


Accruing TDRs	2011			2010
	(In thousands)
Beginning balance	$	136,800		$	54,992
New restructurings		60,863			55,815
Restructured loans restored to accrual status		709			53,432
Charge-offs		(2,341	)		—
Payments		(46,313	)		(8,205	)
Restructured loans placed on nonaccrual		(28,969	)		(18,371	)
Expiration of loan concession		(733	)		(863	)

Ending balance	$	120,016		$	136,800


Non-accrual TDRs	2011			2010
	(In thousands)
Beginning balance	$	28,146		$	41,609
New restructurings		13,269			74,543
Restructured loans placed on nonaccrual		28,969			18,371
Charge-offs		(7,303	)		(21,293	)
Payments		(3,355	)		(8,035	)
Foreclosures		(8,147	)		(23,617	)
Restructured loans restored to accrual status		(709	)		(53,432	)

Ending balance	$	50,870		$	28,146

A loan is considered to be in payment default once it is 60 to 90 days contractually past due under the modified terms. Two commercial TDRs of $930,000 and one commercial real estate TDR of $26,000 had payments defaults within the previous twelve months ended December 31, 2011. The TDRs that subsequently defaulted incurred no charge-off during 2011.

Under the Company's internal underwriting policy, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification in order to determine whether a borrower is experiencing financial difficulty. As of December 31, 2011, there were no commitments to lend additional funds to those borrowers whose loans have been restructured, were considered impaired, or were on non-accrual status.

As part of the on-going monitoring of the credit quality of our loan portfolio, the Company utilizes a risk grading matrix to assign a risk grade to each loan. Loans are risk rated based on analysis of the current state of the borrower's credit quality. The analysis of credit quality includes a review of all sources of repayment, the borrower's current financial and liquidity status and all other relevant information. The risk rating categories can be generally described by the following grouping for non-homogeneous loans:

•

Pass/Watch – These loans range from minimal credit risk to lower than average, but still acceptable, credit risk.

•

Special Mention – Borrower is fundamentally sound and the loan is currently protected but adverse trends are apparent, that if not corrected, may affect ability to repay. Primary source of loan repayment remains viable but there is increasing reliance on collateral or guarantor support.

•

Substandard – These loans are inadequately protected by current sound worth, paying capacity or pledged collateral. Well-defined weaknesses exist that could jeopardize repayment of debt. Loss may not be imminent, but if weaknesses are not corrected, there is a good possibility of some loss.

•

Doubtful – The possibility of loss is extremely high, but due to identifiable and important pending events (which may strengthen the loan) a loss classification is deferred until the situation is better defined.

•

Loss – These loans are considered uncollectible and of such little value that to continue to carry the loan as an active asset is no longer warranted.

The following table presents loan portfolio by risk rating as of December 31, 2011, and as of December 31, 2010:


	As of December 31, 2011
	Pass/Watch		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Commercial loans	$	1,689,842	$	64,290	$	108,858	$	5,285	$	1,868,275
Real estate construction loans		115,538		23,555		90,132		8,147		237,372
Commercial mortgage loans		3,275,431		69,925		403,541		—		3,748,897
Residential mortgage and equity lines		1,149,225		4,439		33,160		145		1,186,969
Installment and other loans		17,636		63		—		—		17,699

Total gross loans	$	6,247,672	$	162,272	$	635,691	$	13,577		7,059,212

Loans held for sale		—	$	—	$	260	$	500	$	760


	As of December 31, 2010
	Pass/Watch		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Commercial loans	$	1,258,537	$	58,189	$	118,670	$	5,771	$	1,441,167
Real estate construction loans		191,455		53,172		153,857		11,502		409,986
Commercial mortgage loans		3,365,040		143,974		431,047		—		3,940,061
Residential mortgage and equity lines		1,026,216		6,109		28,846		159		1,061,330
Installment and other loans		15,535		542		—		—		16,077

Total gross loans		5,856,783	$	261,986	$	732,420	$	17,432		6,868,621

Loans held for sale		—	$	—	$	2,873	$	—	$	2,873

The allowance for loan losses and the reserve for off-balance sheet credit commitments are significant estimates that can and do change based on management's process in analyzing the loan portfolio and on management's assumptions about specific borrowers, underlying collateral, and applicable economic and environmental conditions, among other factors.

The following table presents the balance in the allowance for loan losses by portfolio segment and based on impairment method as of December 31, 2011, and as of December 31, 2010.


	Commercial Loans		Real Estate Construction Loans		Commercial Mortgage Loans		Residential mortgage and equity line		Consumer and Other		Total
	(In thousands)
December 31, 2011
Loans individually evaluated for impairment
Allowance	$	3,336	$	—	$	2,969	$	1,247	$	—	$	7,552
Balance	$	45,781	$	78,766	$	177,058	$	20,368	$	—	$	321,973
Loans collectively evaluated for impairment
Allowance	$	62,322	$	21,749	$	105,052	$	9,548	$	57	$	198,728
Balance	$	1,822,494	$	158,606	$	3,571,839	$	1,166,601	$	17,699	$	6,737,239

Total allowance	$	65,658	$	21,749	$	108,021	$	10,795	$	57	$	206,280
Total balance	$	1,868,275	$	237,372	$	3,748,897	$	1,186,969	$	17,699	$	7,059,212
December 31, 2010
Loans individually evaluated for impairment
Allowance	$	2,540	$	7,470	$	3,106	$	—	$	—	$	13,116
Balance	$	33,555	$	77,691	$	248,059	$	7,435	$	—	$	366,740
Loans collectively evaluated for impairment
Allowance	$	61,379	$	35,791	$	125,241	$	9,668	$	36	$	232,115
Balance	$	1,407,612	$	332,295	$	3,692,002	$	1,053,895	$	16,077	$	6,501,881

Total allowance	$	63,919	$	43,261	$	128,347	$	9,668	$	36	$	245,231
Total balance	$	1,441,167	$	409,986	$	3,940,061	$	1,061,330	$	16,077	$	6,868,621

The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2011 and 2010. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


	Commercial Loans			Real Estate Construction Loans			Commercial Mortgage Loans			Residential mortgage and equity line			Installment and Other Loans			Total
	(In thousands)
2010 Beginning Balance	$	57,814		$	45,087		$	100,495		$	8,480		$	13		$	211,889

Provision for possible loan losses		23,001			37,495			96,217			3,048			9			159,770
Charge-offs		(21,609	)		(45,321	)		(69,891	)		(1,934	)		—			(138,755	)
Recoveries		4,712			6,001			1,527			74			13			12,327

Net Charge-offs		(16,897	)		(39,320	)		(68,364	)		(1,860	)		13			(126,428	)

2010 Ending Balance	$	63,918		$	43,262		$	128,348		$	9,668		$	35		$	245,231

Reserve to impaired loans	$	2,925		$	7,470		$	3,812		$	979		$	—		$	15,186
Reserve to non-impaired loans	$	60,994		$	35,791		$	124,535		$	8,690		$	35		$	230,045
Reserve for off-balance sheet credit commitments	$	691		$	1,505		$	103		$	36		$	2		$	2,337
2011 Beginning Balance	$	63,918		$	43,262		$	128,348		$	9,668		$	35		$	245,231

Provision for possible loan losses		11,711			11,514			1,454			2,392			197			27,268
Charge-offs		(11,745	)		(37,500	)		(26,750	)		(1,456	)		(175	)		(77,626	)
Recoveries		1,774			4,473			4,969			191			—			11,407

Net Charge-offs		(9,971	)		(33,027	)		(21,781	)		(1,265	)		(175	)		(66,219	)
2011 Ending Balance	$	65,658		$	21,749		$	108,021		$	10,795		$	57		$	206,280
Reserve to impaired loans	$	3,336		$	—		$	2,969		$	1,247		$	—		$	7,552
Reserve to non-impaired loans	$	62,322		$	21,749		$	105,052		$	9,548		$	57		$	198,728
Reserve for off-balance sheet credit commitments	$	816		$	1,103		$	113		$	34		$	3		$	2,069

An analysis of the activity in the allowance for credit losses for the year ended 2011, 2010, and 2009 is as follows:


	December 31,
	2011			2010			2009
	(In thousands)
Allowance for Loan Losses
Balance at beginning of year	$	245,231		$	211,889		$	122,093
Provision for credit losses		27,000			156,900			307,000
Transfers from reserve for off-balance sheet credit commitments.		268			2,870			2,125
Loans charged off		(77,626	)		(138,755	)		(222,547	)
Recoveries of charged off loans		11,407			12,327			3,218

Balance at end of year	$	206,280		$	245,231		$	211,889

Reserve for Off-balance Sheet Credit Commitments
Balance at beginning of year	$	2,337		$	5,207		$	7,332
Provision for credit losses/transfers		(268	)		(2,870	)		(2,125	)

Balance at end of year	$	2,069		$	2,337		$	5,207