Loans Held for Investment

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



	March 31, 2018			December 31, 2017
	(dollars in thousands)
Business loans
Commercial and industrial	$	1,062,385		$	1,086,659
Franchise	692,846			660,414
Commercial owner occupied (1)	1,268,869			1,289,213
SBA	182,626			185,514
Agribusiness	149,256			116,066
Total business loans	3,355,982			3,337,866
Real estate loans
Commercial non-owner occupied	1,227,693			1,243,115
Multi-family	817,963			794,384
One-to-four family (2)	266,324			270,894
Construction	319,610			282,811
Farmland	136,522			145,393
Land	34,452			31,233
Total real estate loans	2,802,564			2,767,830
Consumer loans
Consumer loans	86,206			92,931
Gross loans held for investment (3)	6,244,752			6,198,627
Deferred loan origination costs/(fees) and premiums/(discounts), net	(2,911		)	(2,159		)
Loans held for investment	6,241,841			6,196,468
Allowance for loan losses	(30,502		)	(28,936		)
Loans held for investment, net	$	6,211,339		$	6,167,532

Loans held for sale, at lower of cost or fair value	$	29,034		$	23,426

______________________________

(1) Secured by real estate.

(2) Includes second trust deeds.

(3) Total gross loans held for investment for March 31, 2018 and December 31, 2017 are net of the unaccreted fair value net purchase discounts of $24.5 million and $29.1 million, respectively.

Loans Serviced for Others

The Company generally retains the servicing rights of the guaranteed portion of SBA loans sold, for which the Company records a servicing asset at fair value within other assets. At March 31, 2018 and December 31, 2017, the servicing asset totaled $8.8 million 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 March 31, 2018 and December 31, 2017, 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 $621 million at March 31, 2018 and $635 million at December 31, 2017.

Concentration of Credit Risk

As of March 31, 2018, 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.

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 $345 million for secured loans and $207 million for unsecured loans at March 31, 2018. At March 31, 2018, the Bank’s largest aggregate outstanding balance of loans to one borrower was $45.0 million of secured credit.

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, 2018	(dollars in thousands)
Business loans
Commercial and industrial	$	1,041,457	$	8,172	$	12,756	$	—	$	1,062,385
Franchise	692,846		—		—		—		692,846
Commercial owner occupied	1,262,138		4,170		18,220		—		1,284,528
SBA	193,527		890		1,573		—		195,990
Agribusiness	136,139		—		13,117		—		149,256
Real estate loans
Commercial non-owner occupied	1,226,642		—		1,051		—		1,227,693
Multi-family	816,506		—		1,457		—		817,963
One-to-four family	264,574		145		1,605		—		266,324
Construction	318,923		687		—		—		319,610
Farmland	135,413		—		1,109		—		136,522
Land	34,221		—		231		—		34,452
Consumer loans
Consumer loans	86,071		—		135		—		86,206
Totals	$	6,208,457	$	14,064	$	51,254	$	—	$	6,273,775



	Credit Risk Grades
	Pass		Special Mention		Substandard		Doubtful		Total Gross Loans
December 31, 2017	(dollars in thousands)
Business loans
Commercial and industrial	$	1,063,452	$	8,163	$	15,044	$	—	$	1,086,659
Franchise	660,414		—		—		—		660,414
Commercial owner occupied	1,273,381		654		21,180		—		1,295,215
SBA	199,468		1		3,469		—		202,938
Agribusiness	108,143		4,079		3,844		—		116,066
Real estate loans
Commercial non-owner occupied	1,242,045		—		1,070		—		1,243,115
Multi-family	794,156		—		228		—		794,384
One-to-four family	268,776		154		1,964		—		270,894
Construction	282,294		517		—		—		282,811
Farmland	144,234		44		1,115		—		145,393
Land	30,979		—		254		—		31,233
Consumer loans
Consumer loans	92,794		—		137		—		92,931
Totals	$	6,160,136	$	13,612	$	48,305	$	—	$	6,222,053

The following tables set forth delinquencies in the Company’s loan portfolio at the dates indicated:



			Days Past Due
	Current		30-59		60-89		90+		Total Gross Loans		Non-accruing
March 31, 2018	(dollars in thousands)
Business loans
Commercial and industrial	$	1,056,886	$	5,241	$	93	$	165	$	1,062,385	$	1,067
Franchise	692,846		—		—		—		692,846		—
Commercial owner occupied	1,280,900		153		—		3,475		1,284,528		3,475
SBA	194,064		785		991		150		195,990		1,218
Agribusiness	149,256		—		—		—		149,256		—
Real estate loans
Commercial non-owner occupied	1,227,693		—		—		—		1,227,693		—
Multi-family	816,732		—		—		1,231		817,963		1,231
One-to-four family	265,943		345		—		36		266,324		1,134
Construction	319,610		—		—		—		319,610		—
Farmland	136,522		—		—		—		136,522		—
Land	34,363		81		—		8		34,452		8
Consumer loans
Consumer loans	86,206		—		—		—		86,206		16
Totals	$	6,261,021	$	6,605	$	1,084	$	5,065	$	6,273,775	$	8,149



			Days Past Due
	Current		30-59		60-89		90+		Total Gross Loans		Non-accruing
December 31, 2017	(dollars in thousands)
Business loans
Commercial and industrial	$	1,085,770	$	84	$	570	$	235	$	1,086,659	$	1,160
Franchise	660,414		—		—		—		660,414		—
Commercial owner occupied	1,291,255		3,474		486		—		1,295,215		97
SBA	200,821		177		—		1,940		202,938		1,201
Agribusiness	116,066		—		—		—		116,066		—
Real estate loans
Commercial non-owner occupied	1,243,115		—		—		—		1,243,115		—
Multi-family	792,603		1,781		—		—		794,384		—
One-to-four family	269,725		354		—		815		270,894		817
Construction	282,811		—		—		—		282,811		—
Farmland	145,393		—		—		—		145,393		—
Land	31,141		83		—		9		31,233		9
Consumer loans
Consumer loans	92,880		11		—		40		92,931		—
Totals	$	6,211,994	$	5,964	$	1,056	$	3,039	$	6,222,053	$	3,284

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, 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. 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 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)
March 31, 2018
Business loans
Commercial and industrial	$	1,520	$	1,067	$	—	$	1,067	$	—
Commercial owner occupied	3,598		3,475		—		3,475		—
SBA	4,575		1,218		—		1,218		—
Real estate loans
Commercial non-owner occupied	—		—		—		—		—
Multi-family	1,231		1,231		—		1,231		—
One-to-four family	1,178		1,134		—		1,134		—
Land	35		8		—		8		—
Consumer loans
Consumer loans	17		16		—		16		—
Totals	$	12,154	$	8,149	$	—	$	8,149	$	—



	Impaired Loans
	Unpaid Principal Balance		Recorded Investment		With Specific Allowance		Without Specific Allowance		Specific Allowance for Impaired Loans
	(dollars in thousands)
December 31, 2017
Business loans
Commercial and industrial	$	1,585	$	1,160	$	—	$	1,160	$	—
Commercial owner occupied	98		97		97		—		55
SBA	4,329		1,201		—		1,201		—
Real estate loans
One-to-four family	849		817		—		817		—
Land	35		9		—		9		—
Totals	$	6,896	$	3,284	$	97	$	3,187	$	55



	Impaired Loans
	Three Months Ended
	March 31, 2018				December 31, 2017				March 31, 2017
	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	$	1,181	$	—	$	1,112	$	—	$	200	$	5
Commercial owner occupied	3,475		—		125		—		192		3
SBA	1,241		—		1,123		—		307		5
Real estate loans
	821		—
One-to-four family	1,024		—		341		—		116		3
Construction	—		—		4,069		—		—		—
Land	8		—		9		—		14		1
Consumer loans
Consumer loans	$	94	$	—	—		—		—		—
Totals	$	7,844	$	—	$	6,779	$	—	$	829	$	17

(1) Cash basis and accrual basis is materially the same.

The following table provides additional detail on the components of impaired loans at the period end indicated:



	March 31, 2018		December 31, 2017
	(dollars in thousands)
Nonaccruing loans	$	8,149	$	3,284
Accruing loans	—		—
Total impaired loans	$	8,149	$	3,284

When loans are placed on nonaccrual status, all accrued interest and outstanding 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 $8.1 million at March 31, 2018 and $3.3 million at December 31, 2017. The Company had $73,000 in loans 90 days or more past due and still accruing at March 31, 2018, compared to $1.8 million at December 31, 2017.

There were no TDRs at March 31, 2018 and $97,000 at December 31, 2017. In addition, the Company had $14,000 in consumer mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in process as of March 31, 2018. This compares to $73,000 at December 31, 2017.

Purchased Credit Impaired Loans

The Company has purchased loans, 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, 2018		December 31, 2017
	(dollars in thousands)
Business loans
Commercial and industrial	$	3,134	$	3,310
Commercial owner occupied	1,016		1,262
SBA	69		1,802
Real estate loans
Commercial non-owner occupied	1,122		1,650
One-to-four family	—		255
Construction/Land	768		600
Consumer loans	10		10
Total purchase credit impaired	$	6,119	$	8,889

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 March 31, 2018, the Company had $6.1 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, 2018, December 31, 2017 and March 31, 2017.



	Three Months Ended
	March 31, 2018			December 31, 2017			March 31, 2017
	(dollars in thousands)
Balance at the beginning of period	$	3,019		$	3,148		$	3,747
Additions	—			1,066			—
Accretion	(236		)	(308		)	(629		)
Payoffs	(1,850		)	(2,164		)	—
Reclassification from (to) nonaccretable difference	776			1,277			483
Balance at the end of period	$	1,709		$	3,019		$	3,601