Loans

12 Months Ended

Dec. 31, 2019

The following table presents the composition of the loan portfolio as of the dates indicated:



	December 31,
	2019			2018
	(dollars in thousands)
Business loans:
Commercial and industrial	$	1,265,185		$	1,364,423
Franchise	916,875			765,416
Commercial owner occupied ⁽¹⁾	1,674,092			1,679,122
SBA	175,815			193,882
Agribusiness	127,834			138,519
Total business loans	4,159,801			4,141,362
Real estate loans:
Commercial non-owner occupied	2,072,374			2,003,174
Multi-family	1,576,870			1,535,289
One-to-four family ⁽²⁾	254,779			356,264
Construction	410,065			523,643
Farmland	175,997			150,502
Land	31,090			46,628
Total real estate loans	4,521,175			4,615,500
Consumer loans:
Consumer loans	50,922			89,424
Gross loans held for investment ⁽³⁾	8,731,898			8,846,286
Deferred loan origination fees and discounts, net	(9,587		)	(9,468		)
Loans held for investment	8,722,311			8,836,818
Allowance for loan losses	(35,698		)	(36,072		)
Loans held for investment, net	$	8,686,613		$	8,800,746

Loans held for sale, at lower of cost or fair value	$	1,672		$	5,719

______________________________

⁽¹⁾ Secured by real estate.

⁽²⁾ Includes second trust deeds.

⁽³⁾ Total gross loans held for investment for December 31, 2019 and December 31, 2018 net of the unaccreted fair value net purchase discounts of $40.7 million and $61.0 million, respectively.

The Company originates SBA loans with the intent to sell the guaranteed portion of the loan prior to maturity and, therefore, designates them as held for sale. From time to time, the Company may purchase or sell other types of loans in order to manage concentrations, maximize interest income, change risk profiles, improve returns and generate liquidity.

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 and subsequently accounted for at the lower of cost or market value. At December 31, 2019 and 2018, the servicing asset total $7.7 million and $8.5 million, respectively, and was included in other assets on the Company’s consolidated balance sheets. 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. The fair value of retained servicing rights is generally evaluated at the loan level using a discounted cash flow analysis utilizing current market assumptions derived from the secondary market. Key modeling assumptions include interest rates, prepayment assumptions, discount rate and estimated cash flows. At December 31, 2019, and 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 $633.8 million at December 31, 2019 and $635.3 million at December 31, 2018, including SBA participations serviced for others totaling $475.3 million at December 31, 2019 and $519.8 million at December 31, 2018.

Concentration of Credit Risk

As of December 31, 2019, the Company’s loan portfolio was primarily collateralized by various forms of real estate and business assets located principally in California, as well as in certain markets in the states of Arizona, Texas, Nevada, Oregon and Washington where we also have depository offices. The Company’s loan portfolio contains concentrations of credit in commercial non-owner occupied real estate, multi-family real estate, commercial owner occupied business loans and commercial and industrial business loans. The Company maintains policies approved by the Bank’s Board of Directors that address these concentrations and diversifies its loan portfolio through loan originations, purchases and sales of loans to meet approved concentration levels. While management believes that the collateral presently securing these loans is adequate, there can be no assurances that 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 $563.4 million for secured loans and $338.0 million for unsecured loans at December 31, 2019. In order to manage concentration risk, the Bank maintains a house lending limit well below these statutory maximums. At December 31, 2019, the Bank’s largest aggregate outstanding balance of loans to one borrower was $126.3 million comprised of $101.5 million and $24.8 million of secured and unsecured credit, respectively.

Credit Quality and Credit Risk

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 and chooses which risks it is willing to accept. 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 and portfolio managers ensure all key risk factors are analyzed with most loan underwriting including a comprehensive global cash flow analysis of the prospective borrowers.

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. Credit risk is monitored and 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 federal banking 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 probable incurred 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 an acceptable level of credit quality that contains no well-defined deficiencies or weaknesses.


•	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.


•	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 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 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 or biannual 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 rating, including loans held for sale, as of the periods indicated:



	Credit Risk Grades
	Pass		Special Mention		Substandard		Doubtful		Total Gross Loans
December 31, 2019	(dollars in thousands)
Business loans
Commercial and industrial	$	1,236,073	$	13,226	$	15,886	$	—	$	1,265,185
Franchise	898,191		7,851		10,833		—		916,875
Commercial owner occupied	1,659,391		11,167		3,534		—		1,674,092
SBA	166,011		3,255		8,221		—		177,487
Agribusiness	123,338		—		4,496		—		127,834
Real estate loans
Commercial non-owner occupied	2,070,068		1,178		1,128		—		2,072,374
Multi-family	1,576,654		—		216		—		1,576,870
One-to-four family	254,218		—		561		—		254,779
Construction	410,065		—		—		—		410,065
Farmland	175,997		—		—		—		175,997
Land	31,073		—		17		—		31,090
Consumer loans
Consumer loans	50,868		—		54		—		50,922
Totals	$	8,651,947	$	36,677	$	44,946	$	—	$	8,733,570

	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
Warehouse facilities	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 present the aging of loan portfolio, including loans held for sale, by type of loans as of the periods indicated:



			Days Past Due
	Current		30-59		60-89		90+		Total Gross Loans		Non-accruing
December 31, 2019	(dollars in thousands)
Business loans
Commercial and industrial	$	1,260,940	$	422	$	826	$	2,997	$	1,265,185	$	4,637
Franchise	907,733		—		9,142		—		916,875		—
Commercial owner occupied	1,673,761		331		—		—		1,674,092		—
SBA	174,271		169		613		2,434		177,487		2,519
Agribusiness	127,834		—		—		—		127,834		—
Real estate loans
Commercial non-owner occupied	2,070,067		1,179		—		1,128		2,072,374		1,128
Multi-family	1,576,870		—		—		—		1,576,870		—
One-to-four family	254,779		—		—		—		254,779		366
Construction	410,065		—		—		—		410,065		—
Farmland	175,997		—		—		—		175,997		—
Land	31,090		—		—		—		31,090		—
Consumer loans
Consumer loans	50,914		5		2		1		50,922		—
Totals	$	8,714,321	$	2,106	$	10,583	$	6,560	$	8,733,570	$	8,650

			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
Warehouse facilities	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 following tables provide a summary of the Company’s investment in impaired loans as of and for the periods indicated:



	Recorded Investment		Unpaid Principal Balance		With Specific Allowance		Without Specific Allowance		Specific Allowance for Impaired Loans		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
December 31, 2019
Business loans
Commercial and industrial	$	7,529	$	7,755	$	—	$	7,529	$	—	$	3,649	$	22
Franchise	10,834		10,835		—		10,834		—		3,079		151
Commercial owner occupied	—		—		—		—		—		683		—
SBA	3,132		4,070		—		3,132		—		2,996		16
Agribusiness	—		—		—		—		—		6,602		363
Real estate loans
Commercial non-owner occupied	1,128		1,184		—		1,128		—		411		—
One-to-four family	366		412		—		366		—		379		—
Land	—		—		—		—		—		120		—
Consumer loans
Consumer	—		—		—		—		—		19		—
Totals	$	22,989	$	24,256	$	—	$	22,989	$	—	$	17,938	$	552
December 31, 2018
Business loans
Commercial and industrial	$	1,023	$	1,071	$	550	$	473	$	118	$	1,173	$	1
Franchise	189		190		—		189		—		119		—
Commercial owner occupied	599		628		—		599		—		1,549		—
SBA	2,739		7,598		488		2,251		466		1,814		—
Agribusiness	7,500		7,500		—		7,500		—		625		35
Real estate loans
Commercial non-owner occupied	—		—		—		—		—		538		—
Multi-family	—		—		—		—		—		500		—
One-to-four family	408		453		—		408		—		1,206		—
Land	—		—		—		—		—		5		—
Consumer loans
Consumer	—		—		—		—		—		33		—
Totals	$	12,458	$	17,440	$	1,038	$	11,420	$	584	$	7,562	$	36
December 31, 2017
Business loans
Commercial and industrial	$	1,160	$	1,585	$	—	$	1,160	$	—	$	441	$	—
Commercial owner occupied	97		98		97		—		55		153		—
SBA	1,201		4,329		—		1,201		—		434		—
Real estate loans
Commercial non-owner occupied	—		—		—		—		—		86		—
One-to-four family	817		849		—		817		—		166		—
Construction	—		—		—		—		—		1,017		—
Land	9		35		—		9		—		12		—
Totals	$	3,284	$	6,896	$	97	$	3,187	$	55	$	2,309	$	—

The Company considers a loan to be impaired when, based on current information and events, it is probable 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. 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 that 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.

We sometimes modify or restructure loans when the borrower is experiencing financial difficulties by making a concession to the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only payments and, in limited cases, concessions to the outstanding loan balances. These loans are classified as TDR and considered impaired loans. TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition or cash flows. A workout plan between us and the borrower is designed to provide a bridge for borrower cash flow shortfalls in the near term. A TDR loan may be returned to accrual status when the loan is brought current, has performed in accordance with the contractual restructured terms for a time frame of at least six months, and the ultimate collectability of the total contractual restructured principal and interest in no longer in doubt. At December 31, 2019, the Company had $3.0 million recorded investment in two TDR loans, with their terms being modified to extend the maturity date for 24 months or less, compared to no TDR loans at December 31, 2018. These two TDRs were both current and on accrual status as of December 31, 2019. The modification did not have an impact on the recorded investments.

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 collection of nterest. The Company had impaired loans on nonaccrual status of $8.7 million and $4.9 million at December 31, 2019 and 2018, respectively. The Company did not record income from the receipt of cash payments related to nonaccruing loans during the years ended December 31, 2019, 2018 and 2017. The Company had no loans 90 days or more past due and still accruing at December 31, 2019. 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. Income recognition for PCI loans is accounted for in accordance with ASC 310-30.

The Company had no consumer mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in process as of December 31, 2019 and 2018.