Loans Held for Investment | Loans Held for Investment The following table sets forth the composition of our loan portfolio in dollar amounts at the dates indicated: September 30, 2016 December 31, 2015 (in thousands) Business loans: Commercial and industrial $ 537,809 $ 309,741 Franchise 431,618 328,925 Commercial owner occupied (1) 460,068 294,726 SBA 92,195 62,256 Warehouse facilities — 143,200 Real estate loans: Commercial non-owner occupied 527,412 421,583 Multi-family 689,813 429,003 One-to-four family (2) 101,377 80,050 Construction 231,098 169,748 Land 18,472 18,340 Other loans 5,678 5,111 Total gross loans (3) 3,095,540 2,262,683 Less Loans held for sale, net 9,009 8,565 Total gross loans held for investment 3,086,531 2,254,118 Plus (less): Deferred loan origination costs/(fees) and premiums/(discounts), net 4,308 197 Allowance for loan losses (21,843 ) (17,317 ) Loans held for investment, net $ 3,068,996 $ 2,236,998 ______________________________ (1) Secured by real estate. (2) Includes second trust deeds. (3) Total gross loans for September 30, 2016 are net of the unaccreted mark-to-market discounts of $9.1 million . From time to time, we may purchase or sell loans in order to manage concentrations, maximize interest income, change risk profiles, improve returns and generate liquidity. The Company makes residential and commercial loans held for investment to customers located primarily in California. Consequently, the underlying collateral for our loans and a borrower’s ability to repay may be impacted unfavorably by adverse changes in the economy and real estate market in the region. 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% for unsecured loans. These loans-to-one borrower limitations result in a dollar limitation of $131.5 million for secured loans and $78.9 million for unsecured loans at September 30, 2016 . At September 30, 2016 , the Bank’s largest aggregate outstanding balance of loans to one borrower was $32.0 million of secured credit. Purchased Credit Impaired The Company has purchased loans from Canyon National Bank, IDPK and SCAF, 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: September 30, 2016 Canyon National IDPK SCAF Total (in thousands) Business loans: Commercial and industrial $ 11 $ 406 $ 7,226 $ 7,643 Commercial owner occupied 281 — 1,013 1,294 Real estate loans: Commercial non-owner occupied 418 282 — 700 Other loans — — 378 378 Outstanding balance $ 710 $ 688 $ 8,617 $ 10,015 Carrying amount, net of allowance of $71, $25, and $5, respectively $ 1,450 $ 310 $ 5,708 $ 7,468 On the 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 September 30, 2016 , the Company had $10.0 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 nine months ended September 30, 2016 : Nine Months Ended September 30, 2016 Canyon National IDPK SCAF Total (in thousands) Balance at the beginning of period $ 1,130 $ 1,596 $ — $ 2,726 Additions — — 788 788 Accretion (33 ) (38 ) (594 ) (665 ) Disposals — — (27 ) (27 ) Reclassification from (to) nonaccretable difference (351 ) (1,068 ) 676 (743 ) Balance at the end of period $ 746 $ 490 $ 843 $ 2,079 Impaired Loans The following tables provide a summary of the Company’s investment in impaired loans as of the period indicated: Impaired Loans Contractual Unpaid Principal Balance Recorded Investment With Specific Allowance Without Specific Allowance Specific Allowance for Impaired Loans (in thousands) September 30, 2016 Business loans: Commercial and industrial $ 1,990 $ 1,990 $ 1,990 $ — $ 1,990 Commercial owner occupied 1,003 606 146 460 73 SBA 2,814 503 354 149 354 Real estate loans: Commercial non-owner occupied 2,491 2,487 — 2,487 — One-to-four family 178 131 — 131 — Land 36 17 — 17 — Totals $ 8,512 $ 5,734 $ 2,490 $ 3,244 $ 2,417 Impaired Loans Contractual Unpaid Principal Balance Recorded Investment With Specific Allowance Without Specific Allowance Specific Allowance for Impaired Loans Average Recorded Investment Interest Income Recognized (in thousands) December 31, 2015 Business loans: Commercial and industrial $ 578 $ 313 $ — $ 313 $ — $ 90 $ 29 Franchise 2,394 1,630 1,461 169 731 1,386 3 Commercial owner occupied 883 536 — 536 — 415 67 Real estate loans: Commercial non-owner occupied 329 214 — 214 — 430 19 One-to-four family 98 70 — 70 — 204 5 Land 37 21 — 21 — 13 — Totals $ 4,319 $ 2,784 $ 1,461 $ 1,323 $ 731 $ 2,538 $ 123 Impaired Loans Three Months Ended Nine Months Ended Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (in thousands) September 30, 2016 Business loans: Commercial and industrial $ 1,387 $ 16 $ 682 $ 28 Franchise 974 16 1,355 68 Commercial owner occupied 518 9 510 27 SBA 381 7 217 11 Real estate loans: Commercial non-owner occupied 2,487 42 877 44 One-to-four family 133 4 259 13 Land 17 1 18 2 Totals $ 5,897 $ 95 $ 3,918 $ 193 Impaired Loans Three Months Ended Nine Months Ended Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (in thousands) September 30, 2015 Business loans: Commercial and industrial $ — $ — $ 25 $ — Franchise 1,647 — 1,329 — Commercial owner occupied 364 23 373 15 Real estate loans: Commercial non-owner occupied 443 21 451 18 One-to-four family 221 13 226 9 Land 23 3 10 1 Totals $ 2,698 $ 60 $ 2,414 $ 43 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. All 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 table provides additional detail on the components of impaired loans at the period end indicated: September 30, 2016 December 31, 2015 (in thousands) Nonaccruing loans $ 5,734 $ 2,736 Accruing loans — 48 Total impaired loans $ 5,734 $ 2,784 When loans are placed on nonaccrual status all accrued 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 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 $5.7 million at September 30, 2016 and $2.7 million at December 31, 2015 . The Company had no loans 90 days or more past due and still accruing at September 30, 2016 and December 31, 2015 . The Company had no TDRs at September 30, 2016 and December 31, 2015 . In addition, the Company had no foreclosed residential real estate property or a recorded investment in consumer mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in process as of September 30, 2016 . Concentration of Credit Risk As of September 30, 2016 , 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 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. 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 system as well as certain other information concerning the credit quality of the loan portfolio as of the periods indicated: Credit Risk Grades Pass Special Mention Substandard Doubtful Total Gross Loans September 30, 2016 (in thousands) Business loans: Commercial and industrial $ 525,979 $ 4,034 $ 5,806 $ 1,990 $ 537,809 Franchise 430,934 684 — — 431,618 Commercial owner occupied 452,461 2,019 5,588 — 460,068 SBA 91,692 — 503 — 92,195 Real estate loans: Commercial non-owner occupied 523,837 — 3,575 — 527,412 Multi-family 687,396 — 2,417 — 689,813 One-to-four family 100,488 — 889 — 101,377 Construction 231,098 — — — 231,098 Land 18,455 — 17 — 18,472 Other loans 5,256 — 422 — 5,678 Totals $ 3,067,596 $ 6,737 $ 19,217 $ 1,990 $ 3,095,540 Credit Risk Grades Pass Special Substandard Doubtful Total Gross December 31, 2015 (in thousands) Business loans: Commercial and industrial $ 306,513 $ 73 $ 3,155 $ — $ 309,741 Franchise 327,295 — 169 1,461 328,925 Commercial owner occupied 286,270 627 7,829 — 294,726 SBA 62,256 — — — 62,256 Warehouse facilities 143,200 — — — 143,200 Real estate loans: Commercial non-owner occupied 418,917 — 2,666 — 421,583 Multi-family 425,616 — 3,387 — 429,003 One-to-four family 78,997 — 1,053 — 80,050 Construction 169,748 — — — 169,748 Land 18,319 — 21 — 18,340 Other loans 5,111 — — — 5,111 Totals $ 2,242,242 $ 700 $ 18,280 $ 1,461 $ 2,262,683 The following tables set forth delinquencies in the Company’s loan portfolio at the dates indicated: Days Past Due Non- Current 30-59 60-89 90+ Total Accruing September 30, 2016 (in thousands) Business loans: Commercial and industrial $ 535,709 $ 100 $ 1,990 $ 10 $ 537,809 $ 1,990 Franchise 431,618 — — — 431,618 — Commercial owner occupied 460,068 — — — 460,068 606 SBA 91,174 928 — 93 92,195 503 Real estate loans: Commercial non-owner occupied 524,925 — — 2,487 527,412 2,487 Multi-family 689,813 — — — 689,813 — One-to-four family 101,324 14 — 39 101,377 131 Construction 231,098 — — — 231,098 — Land 18,455 — — 17 18,472 17 Other loans 5,678 — — — 5,678 — Totals $ 3,089,862 $ 1,042 $ 1,990 $ 2,646 $ 3,095,540 $ 5,734 Days Past Due Non- Current 30-59 60-89 90+ Total Accruing December 31, 2015 (in thousands) Business loans: Commercial and industrial $ 309,464 $ 20 $ — $ 257 $ 309,741 $ 463 Franchise 327,295 — — 1,630 328,925 1,630 Commercial owner occupied 294,371 — 355 — 294,726 536 SBA 62,256 — — — 62,256 — Warehouse facilities 143,200 — — — 143,200 — Real estate loans: Commercial non-owner occupied 421,369 214 — — 421,583 1,164 Multi-family 429,003 — — — 429,003 — One-to-four family 79,915 89 — 46 80,050 155 Construction 169,748 — — — 169,748 — Land 18,319 — — 21 18,340 21 Other loans 5,111 — — — 5,111 1 Totals $ 2,260,051 $ 323 $ 355 $ 1,954 $ 2,262,683 $ 3,970 |