Loans

Most of the Company’s business activity is in markets with a concentration of Chinese-American individuals and businesses located in Southern and Northern California; New York City; Houston and Dallas, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; Rockville, Maryland; Nevada; and Hong Kong. The Company has

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, 2018,

and

December 31, 2017,

were as follows:

	As of December 31,
	2018			2017
	(In thousands)
Type of Loans:
Commercial loans	$	2,741,965		$	2,461,266
Real estate construction loans		581,454			678,805
Commercial mortgage loans		6,724,200			6,482,695
Residential mortgage loans		3,693,853			3,062,050
Equity lines		249,967			180,304
Installment and other loans		4,349			5,170
Gross loans		13,995,788			12,870,290
Less:
Allowance for loan losses		(122,391	)		(123,279	)
Unamortized deferred loan fees		(1,565	)		(3,245	)
Total loans and leases, net	$	13,871,832		$	12,743,766
Loans held for sale	$	-		$	8,000

The Company pledged real estate loans of

$9.7

billion at

December 31, 2018,

and

$8.4

billion at

December 31, 2017,

to the Federal Home Loan Bank of San Francisco under its blanket lien pledging program. In addition, the Bank pledged

$21.2

million at

December 31, 2018,

and

$36.1

million at

December 31, 2017,

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, 2018,

totaled

$300.5

million and were comprised of

$103.2

million of residential mortgages,

$50.8

million of commercial real estate loans,

$105.9

million of construction loans, and

$40.6

million of commercial loans.

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”). All loans to Related Parties were current as of

December 31, 2018.

An analysis of the activity with respect to loans to Related Parties for the years indicated is as follows:

	December 31,
	2018			2017
	(In thousands)
Balance at beginning of year	$	66,593		$	51,327
Additional loans made		18,580			53,584
Payment received		(37,910	)		(38,318	)
Balance at end of year	$	47,263		$	66,593

December 31, 2018,

recorded investment in impaired loans totaled

$106.9

million and were comprised of nonaccrual loans, excluding loans held for sale, of

$41.8

million and accruing TDR’s of

$65.1

million. At

December 31, 2017,

recorded investment in impaired loans totaled

$117.4

million and were comprised of nonaccrual loans, excluding loans held for sale, of

$48.8

million and accruing TDR’s of

$68.6

million. The average balance of impaired loans was

$122.6

million in

2018

and

$127.1

million in

2017.

We considered all non-accrual loans and TDRs to be impaired. Interest recognized on impaired loans totaled

$3.2

million in

2018

and

$3.3

million in

2017.

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

9.3%

and

7.2%

of the contractual balances for impaired loans at

December 31, 2018

and

2017,

respectively.

The following table presents impaired loans and the related allowance as of the dates indicated:

	Impaired Loans
	As of December 31, 2018						As of December 31, 2017
	Unpaid Principal Balance		Recorded Investment		Allowance		Unpaid Principal Balance		Recorded Investment		Allowance
	(In thousands)
With no allocated allowance
Commercial loans	$	32,015	$	30,368	$	-	$	43,483	$	42,702	$	-
Real estate construction loans		5,776		4,873		-		8,821		8,185		-
Commercial mortgage loans		34,129		24,409		-		37,825		31,029		-
Residential mortgage and equity lines		5,685		5,665		-		1,301		1,301		-
Subtotal	$	77,605	$	65,315	$	-	$	91,430	$	83,217	$	-
With allocated allowance
Commercial loans	$	6,653	$	6,570	$	1,837	$	891	$	793	$	43
Commercial mortgage loans		27,099		27,063		877		21,733		21,635		1,738
Residential mortgage and equity lines		8,934		7,938		1,088		13,022		11,708		353
Subtotal	$	42,686	$	41,571	$	3,802	$	35,646	$	34,136	$	2,134
Total impaired loans	$	120,291	$	106,886	$	3,802	$	127,076	$	117,353	$	2,134

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

	For the year ended December 31,
	2018		2017		2016		2018		2017		2016
	Average Recorded Investment						Interest Income Recognized
	(In thousands)
Commercial loans	$	44,486	$	26,957	$	21,199	$	685	$	1,303	$	767
Real estate construction loans		6,835		26,695		10,362		-		-		-
Commercial mortgage loans		57,596		58,635		81,905		2,125		1,618		2,214
Residential mortgage and equity lines		13,679		14,780		17,553		356		381		481
Subtotal	$	122,596	$	127,067	$	131,019	$	3,166	$	3,302	$	3,462

The following is a summary of non-accrual loans as of

December 31, 2018,

2017,

and

2016

and the related net interest foregone for the years then ended:

	2018		2017		2016
	(In thousands)
Non-accrual portfolio loans	$	41,815	$	48,787	$	49,682
Non-accrual loans held-for-sale		-		8,000		7,500
Total non-accrual loans	$	41,815	$	56,787	$	57,182

Contractual interest due	$	1,618	$	3,254	$	1,573
Interest recognized		66		86		95
Net interest foregone	$	1,552	$	3,168	$	1,478

The following tables present the aging of the loan portfolio by type as of

December 31, 2018,

and

December 31, 2017:

	As of December 31, 2018
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Non-accrual Loans		Total Past Due		Loans Not Past Due		Total
Type of Loans:	(In thousands)
Commercial loans	$	25,494	$	2,454	$	514	$	18,805	$	47,267	$	2,694,698	$	2,741,965
Real estate construction loans		-		3,156		-		4,872		8,028		573,426		581,454
Commercial mortgage loans		10,797		8,545		3,259		10,611		33,212		6,690,988		6,724,200
Residential mortgage loans		9,687		336		-		7,527		17,550		3,926,270		3,943,820
Installment and other loans		-		-		-		-		-		4,349		4,349
Total loans	$	45,978	$	14,491	$	3,773	$	41,815	$	106,057	$	13,889,731	$	13,995,788

	As of December 31, 2017
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Non-accrual Loans		Total Past Due		Loans Not Past Due		Total
Type of Loans:	(In thousands)
Commercial loans	$	11,079	$	5,192	$	-	$	14,296	$	30,567	$	2,430,699	$	2,461,266
Real estate construction loans		3,028		-		-		8,185		11,213		667,592		678,805
Commercial mortgage loans		17,573		5,602		-		19,820		42,995		6,439,700		6,482,695
Residential mortgage loans		6,613		732		-		6,486		13,831		3,228,523		3,242,354
Installment and other loans		103		-		-		-		103		5,067		5,170
Total loans	$	38,396	$	11,526	$	-	$	48,787	$	98,709	$	12,771,581	$	12,870,290

The determination of the amount of the allowance for credit losses for problem 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 collectability 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 the Bank deems TDRs to be impaired loans. 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.

December 31, 2018,

accruing TDRs were

$65.1

million and non-accrual TDRs were

$24.2

million compared to accruing TDRs of

$68.6

million and non-accrual TDRs of

$33.4

million at

December 31, 2017.

The Company had allocated specific reserves of

$1.5

million to accruing TDRs and

$826,000

to non-accrual TDRs at

December 31, 2018,

and

$1.9

million to accruing TDRs and

$83,000

to non-accrual TDRs at

December 31, 2017.

The following table presents TDRs that were modified during

2018,

their specific reserve at

December 31, 2018,

and charge-offs during

2018:

	No. of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve		Charge-offs
	(Dollars in thousands)

Commercial loans		23	$	13,290	$	13,290	$	1,384	$	-
Commercial mortgage loans		7		14,626		14,626		111		-
Residential mortgage and equity lines		4		1,214		1,214		23		-
Total		34	$	29,130	$	29,130	$	1,518	$	-

The following table presents TDRs that were modified during

2017,

their specific reserve at

December 31, 2017,

and charge-offs during

2017:

	No. of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve		Charge-offs
	(Dollars in thousands)

Commercial loans		16	$	29,590	$	29,590	$	7	$	-
Real estate construction loans		2		27,683		27,683		-		-
Commercial mortgage loans		9		19,380		19,075		1,496		305
Residential mortgage and equity lines		4		1,088		1,088		53		-
Total		31	$	77,741	$	77,436	$	1,556	$	305

The following table presents TDRs that were modified during

2016,

their specific reserve at

December 31, 2016,

and charge-offs during

2016:

	No. of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve		Charge-off
	(Dollars in thousands)

Commercial loans		24	$	30,215	$	29,385	$	1,746	$	830
Commercial mortgage loans		4		4,153		4,153		34		-
Residential mortgage and equity lines		2		367		367		-		-
Total		30	$	34,735	$	33,905	$	1,780	$	830

A summary of TDRs by type of concession and by type of loans as of

December 31, 2018,

and

December 31, 2017,

are shown below:

	December 31, 2018
Accruing TDRs	Payment Deferral		Rate Reduction		Rate Reduction and Payment Deferral		Total
	(In thousands)
Commercial loans	$	18,135	$	-	$	-	$	18,135
Commercial mortgage loans		14,022		7,420		19,418		40,860
Residential mortgage loans		3,353		327		2,396		6,076
Total accruing TDRs	$	35,510	$	7,747	$	21,814	$	65,071

	December 31, 2018
Non-accrual TDRs	Payment Deferral		Rate Reduction		Rate Reduction and Payment Deferral		Total
	(In thousands)
Commercial loans	$	13,771	$	-	$	-	$	13,771
Commercial mortgage loans		3,682		-		4,884		8,566
Residential mortgage loans		1,741		-		111		1,852
Total non-accrual TDRs	$	19,194	$	-	$	4,995	$	24,189

	December 31, 2017
Accruing TDRs	Payment Deferral		Rate Reduction		Rate Reduction and Payment Deferral		Total
	(In thousands)
Commercial loans	$	29,199	$	-	$	-	$	29,199
Commercial mortgage loans		11,504		5,871		15,468		32,843
Residential mortgage loans		3,416		335		2,772		6,523
Total accruing TDRs	$	44,119	$	6,206	$	18,240	$	68,565

	December 31, 2017
Non-accrual TDRs	Payment Deferral		Rate Reduction		Rate Reduction and Payment Deferral		Total
	(In thousands)
Commercial loans	$	12,944	$	-	$	-	$	12,944
Commercial mortgage loans		6,231		1,677		11,113		19,021
Residential mortgage loans		1,297		-		154		1,451
Total non-accrual TDRs	$	20,472	$	1,677	$	11,267	$	33,416

The activity within our TDR loans for

2018,

2017,

and

2016

are shown below:

Accruing TDRs	2018			2017			2016
	(In thousands)
Beginning balance	$	68,565		$	65,393		$	81,680
New restructurings		26,114			73,426			26,965
Restructured loans restored to accrual status		2,896			-			10,303
Charge-offs		-			-			(88	)
Payments		(30,406	)		(54,095	)		(24,192	)
Restructured loans placed on non-accrual		(2,098	)		(13,919	)		(13,984	)
Expiration of loan concession		-			(2,240	)		(15,291	)
Ending balance	$	65,071		$	68,565		$	65,393

Non-accrual TDRs	2018			2017			2016
	(In thousands)
Beginning balance	$	33,416		$	29,722		$	39,923
New restructurings		3,015			4,009			6,940
Restructured loans placed on non-accrual		2,098			13,919			13,984
Charge-offs		(2,347	)		(1,650	)		(5,271	)
Payments		(9,097	)		(11,341	)		(15,551	)
Foreclosures		-			(1,243	)		-
Restructured loans restored to accrual status		(2,896	)		-			(10,303	)
Ending balance	$	24,189		$	33,416		$	29,722

A loan is considered to be in payment default once it is

days contractually past due under the modified terms. The Company did

not

have any loans that were modified as a TDR during the previous

twelve

months and which had subsequently defaulted as of

December 31, 2018.

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, 2018,

there were

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 sources of repayment, the borrower’s current financial and liquidity status and 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 loans as an active asset is no longer warranted.

The following tables present loan portfolio by risk rating as of

December 31, 2018,

and as of

December 31, 2017:

	As of December 31, 2018
	Pass/Watch		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Commercial loans	$	2,603,901	$	87,987	$	50,077	$	-	$	2,741,965
Real estate construction loans		514,406		62,175		4,873		-		581,454
Commercial mortgage loans		6,337,368		304,791		82,041		-		6,724,200
Residential mortgage and equity lines		3,934,762		-		9,058		-		3,943,820
Installment and other loans		4,349		-		-		-		4,349
Total gross loans	$	13,394,786	$	454,953	$	146,049	$	-	$	13,995,788

Loans held for sale	$	-	$	-	$	-	$	-	$	-

	As of December 31, 2017
	Pass/Watch		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Commercial loans	$	2,281,698	$	118,056	$	61,503	$	9	$	2,461,266
Real estate construction loans		616,411		54,209		8,185		-		678,805
Commercial mortgage loans		6,004,258		308,924		169,513		-		6,482,695
Residential mortgage and equity lines		3,232,606		-		9,748		-		3,242,354
Installment and other loans		5,170		-		-		-		5,170
Total gross loans	$	12,140,143	$	481,189	$	248,949	$	9	$	12,870,290

Loans held for sale	$	-	$	-	$	8,000	$	-	$	8,000

The following table presents the balance in the allowance for loan losses by portfolio segment and based on impairment method as of

December 31, 2018,

and as of

December 31, 2017.

			Real Estate		Commercial		Residential
	Commercial		Construction		Mortgage		Mortgage		Consumer
	Loans		Loans		Loans		and Equity Lines		and Other		Total
	(In thousands)
December 31, 2018
Loans individually evaluated for impairment
Allowance	$	1,837	$	-	$	877	$	1,088	$	-	$	3,802
Balance	$	36,940	$	4,873	$	51,471	$	13,602	$	-	$	106,886

Loans collectively evaluated for impairment
Allowance	$	53,141	$	19,626	$	32,610	$	13,194	$	18	$	118,589
Balance	$	2,705,025	$	576,581	$	6,672,729	$	3,930,218	$	4,349	$	13,888,902

Total allowance	$	54,978	$	19,626	$	33,487	$	14,282	$	18	$	122,391
Total balance	$	2,741,965	$	581,454	$	6,724,200	$	3,943,820	$	4,349	$	13,995,788

December 31, 2017
Loans individually evaluated for impairment
Allowance	$	43	$	-	$	1,738	$	353	$	-	$	2,134
Balance	$	43,495	$	8,185	$	52,664	$	13,009	$	-	$	117,353

Loans collectively evaluated for impairment
Allowance	$	49,753	$	24,838	$	35,872	$	10,660	$	22	$	121,145
Balance	$	2,417,771	$	670,620	$	6,430,031	$	3,229,345	$	5,170	$	12,752,937

Total allowance	$	49,796	$	24,838	$	37,610	$	11,013	$	22	$	123,279
Total balance	$	2,461,266	$	678,805	$	6,482,695	$	3,242,354	$	5,170	$	12,870,290

The following table details activity in the allowance for loan losses by portfolio segment for the years ended

December 31, 2018

and

2017.

Allocation of a portion of the allowance to

one

category of loans does

not

preclude its availability to absorb losses in other categories.

				Real Estate			Commercial			Residential			Installment
	Commercial			Construction			Mortgage			Mortgage			and Other
	Loans			Loans			Loans			and Equity Lines			Loans			Total
	(In thousands)
2017 Beginning Balance	$	49,203		$	23,268		$	34,864		$	11,620		$	11		$	118,966

Provision/(reversal) for loan losses		504			1,341			(3,723	)		(626	)		4			(2,500	)

Charge-offs		(3,313	)		-			(860	)		-			-			(4,173	)
Recoveries		3,402			229			7,329			19			7			10,986
Net Recoveries		89			229			6,469			19			7			6,813

2017 Ending Balance	$	49,796		$	24,838		$	37,610		$	11,013		$	22		$	123,279
Reserve for impaired loans	$	43		$	-		$	1,738		$	353		$	-		$	2,134
Reserve for non-impaired loans	$	49,753		$	24,838		$	35,872		$	10,660		$	22		$	121,145
Reserve for off-balance sheet credit commitments	$	2,919		$	1,360		$	114		$	190		$	5		$	4,588

2018 Beginning Balance	$	49,796		$	24,838		$	37,610		$	11,013		$	22		$	123,279

Provision/(reversal) for loan losses		3,936			(5,389	)		(6,289	)		3,246			(4	)		(4,500	)

Charge-offs		(629	)		-			(2,348	)		(229	)		-			(3,206	)
Recoveries		1,875			177			4,514			252			-			6,818
Net Recoveries		1,246			177			2,166			23			-			3,612

2018 Ending Balance	$	54,978		$	19,626		$	33,487		$	14,282		$	18		$	122,391
Reserve for impaired loans	$	1,837		$	-		$	877		$	1,088		$	-		$	3,802
Reserve for non-impaired loans	$	53,141		$	19,626		$	32,610		$	13,194		$	18		$	118,589
Reserve for off-balance sheet credit commitments	$	1,161		$	745		$	95		$	246		$	3		$	2,250

An analysis of the activity in the allowance for credit losses for the years ended

December 31, 2018,

2017,

and

2016

is as follows:

	For the year ended December 31,
	2018			2017			2016
Allowance for Loan Losses	(In thousands)
Balance at beginning of year	$	123,279		$	118,966		$	138,963
Reversal for credit losses		(4,500	)		(2,500	)		(15,650	)
Loans charged off		(3,206	)		(4,173	)		(18,903	)
Recoveries of charged off loans		6,818			10,986			14,556
Balance at end of year	$	122,391		$	123,279		$	118,966

Reserve for Off-balance Sheet Credit Commitments
Balance at beginning of year	$	4,588		$	3,224		$	1,494
(Reversal)/provision for credit losses and transfers		(2,338	)		1,364			1,730
Balance at end of year	$	2,250		$	4,588		$	3,224

Residential mortgage loans in process of formal foreclosure proceedings were

$862,000

December 31, 2018,

compared to

$3.5

million at

December 31, 2017.