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: March 31, 2019 December 31, 2018 (dollars in thousands) Business loans Commercial and industrial $ 1,336,520 $ 1,364,423 Franchise 813,057 765,416 Commercial owner occupied (1) 1,648,762 1,679,122 SBA 188,757 193,882 Agribusiness 134,603 138,519 Total business loans 4,121,699 4,141,362 Real estate loans Commercial non-owner occupied 2,124,250 2,003,174 Multi-family 1,511,942 1,535,289 One-to-four family (2) 279,467 356,264 Construction 538,197 523,643 Farmland 167,345 150,502 Land 46,848 46,628 Total real estate loans 4,668,049 4,615,500 Consumer loans Consumer loans 85,302 89,424 Gross loans held for investment (3) 8,875,050 8,846,286 Deferred loan origination (fees)/costs and (discounts)/premiums, net (9,195 ) (9,468 ) Loans held for investment 8,865,855 8,836,818 Allowance for loan losses (37,856 ) (36,072 ) Loans held for investment, net $ 8,827,999 $ 8,800,746 Loans held for sale, at lower of cost or fair value $ 11,671 $ 5,719 ______________________________ (1) Secured by real estate. (2) Includes second trust deeds. (3) Total gross loans held for investment for March 31, 2019 and December 31, 2018 are net of the unaccreted fair value net purchase discounts of $57.2 million and $61.0 million , respectively. Loans Serviced for Others The Company generally retains the servicing rights of the guaranteed portion of Small Business Administration (“SBA”) loans sold, for which the Company records a servicing asset at fair value within its other assets category. At March 31, 2019 and December 31, 2018 , the servicing asset totaled $8.3 million and $8.5 million , respectively, 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, 2019 and December 31, 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 $676.7 million at March 31, 2019 and $635.3 million at December 31, 2018 , including SBA participations serviced for others totaling $516.4 million at March 31, 2019 and $519.8 million at December 31, 2018 . Concentration of Credit Risk As of March 31, 2019 , 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 diversifies 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 $536.2 million for secured loans and $321.7 million for unsecured loans at March 31, 2019 . At March 31, 2019 , the Bank’s largest aggregate outstanding balance of loans to one borrower was $94.1 million of secured credit. Credit Quality and Credit Risk Management The Company’s credit quality and credit risk is controlled 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 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 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 borrowing bases under 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 with the Company’s Credit and Portfolio Review Committee, and are reviewed annually by an independent loan review function, 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, in which no well-defined deficiency or weakness exists. • 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 Bank’s 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 commence 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, 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 some or all of the full amount of the Company’s recorded investment in the loan is no longer collectable. The Company typically obtains or confirms 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, 2019 (dollars in thousands) Business loans Commercial and industrial $ 1,323,301 $ 6,481 $ 6,738 $ — $ 1,336,520 Franchise 802,898 4,289 5,870 — 813,057 Commercial owner occupied 1,634,458 948 13,356 — 1,648,762 SBA 189,338 1,174 7,365 — 197,877 Agribusiness 120,753 — 13,850 — 134,603 Real estate loans Commercial non-owner occupied 2,125,422 — 1,379 — 2,126,801 Multi-family 1,507,242 4,039 661 — 1,511,942 One-to-four family 277,450 601 1,416 — 279,467 Construction 538,197 — — — 538,197 Farmland 167,228 — 117 — 167,345 Land 46,653 134 61 — 46,848 Consumer loans Consumer loans 85,175 — 127 — 85,302 Totals $ 8,818,115 $ 17,666 $ 50,940 $ — $ 8,886,721 Credit Risk Grades Pass Special Substandard Doubtful Total Gross 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 Agribusiness 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 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, 2019 (dollars in thousands) Business loans Commercial and industrial $ 1,333,664 $ 524 $ 1,439 $ 893 $ 1,336,520 $ 1,906 Franchise 807,187 — — 5,870 813,057 5,870 Commercial owner occupied 1,648,036 — — 726 1,648,762 564 SBA 192,818 965 103 3,991 197,877 4,104 Agribusiness 134,593 10 — — 134,603 — Real estate loans Commercial non-owner occupied 2,126,070 731 — — 2,126,801 — Multi-family 1,511,502 — 440 — 1,511,942 — One-to-four family 279,397 69 — 1 279,467 388 Construction 538,197 — — — 538,197 — Farmland 167,345 — — — 167,345 — Land 46,848 — — — 46,848 — Consumer loans Consumer loans 85,302 — — — 85,302 26 Totals $ 8,870,959 $ 2,299 $ 1,982 $ 11,481 $ 8,886,721 $ 12,858 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 Agribusiness 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 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, 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, 2019 Business loans Commercial and industrial $ 1,978 $ 1,906 $ 190 $ 1,717 $ 143 Franchise 5,870 5,870 5,680 190 1,569 Commercial owner occupied 564 564 — 564 — SBA 13,059 4,104 2,871 1,232 1,500 Agribusiness 7,500 7,500 — 7,500 — Real estate loans One-to-four family 428 388 — 388 — Consumer loans Consumer loans 27 26 — 26 — Totals $ 29,426 $ 20,358 $ 8,741 $ 11,617 $ 3,212 Impaired Loans Unpaid Principal Balance Recorded Investment With Specific Allowance Without Specific Allowance Specific Allowance for Impaired Loans (dollars in thousands) December 31, 2018 Business loans Commercial and industrial $ 1,071 $ 1,023 $ 550 $ 473 $ 118 Franchise 190 189 — 189 — Commercial owner occupied 628 599 — 599 — SBA 7,598 2,739 488 2,251 466 Agribusiness 7,500 7,500 — 7,500 — Real estate loans One-to-four family 453 408 — 408 — Totals $ 17,440 $ 12,458 $ 1,038 $ 11,420 $ 584 The following table presents information on impaired loans and leases, disaggregated by class, for the periods indicated: Impaired Loans Three Months Ended March 31, 2019 December 31, 2018 March 31, 2018 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 $ 2,003 $ — $ 1,210 $ 1 $ 1,181 $ — Franchise 3,976 — 196 — — — Commercial owner occupied 576 — 406 — 3,475 — SBA 3,279 2,741 — 1,241 — Agribusiness 7,500 89 2,500 35 — — Real estate loans Commercial non-owner occupied — — 430 — — — Multi-family — — — — 821 — One-to-four family 395 — 1,053 — 1,024 — Land — — 2 — 8 — Consumer loans Consumer loans 57 $ — 7 — 94 — Totals $ 17,786 $ 89 $ 8,545 $ 36 $ 7,844 $ — (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, 2019 December 31, 2018 (dollars in thousands) Nonaccrual loans $ 12,858 $ 4,857 Accruing loans 7,500 7,601 Total impaired loans $ 20,358 $ 12,458 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 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 timely collection of principal or interest. The Company had impaired loans on nonaccrual status of $12.9 million at March 31, 2019 and $4.9 million at December 31, 2018 . The Company had $162,000 in loans 90 days or more past due and still accruing at March 31, 2019 , all of which were PCI loans. Income recognition for PCI loans is accounted for in accordance with ASC Subtopic 310-30 Receivables- Loans and Debt Securities Acquired with Deteriorated Credit Quality. The Company had $213 thousand in loans 90 days or more past due and still accruing at December 31, 2018 . There were no TDRs at March 31, 2019 and December 31, 2018 . The Company had no consumer mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in process as of March 31, 2019 and December 31, 2018 . Purchased Credit Impaired Loans The Company has purchased loans that have experienced deterioration of credit quality between origination and acquisition and for which it was probable, at acquisition, that not all contractually required payments would be collected. The carrying amount of those loans is as follows: March 31, 2019 December 31, 2018 (dollars in thousands) Business loans Commercial and industrial $ — $ 10 Commercial owner occupied 582 632 SBA 1,228 1,265 Real estate loans Commercial non-owner occupied 280 275 Total purchased credit impaired $ 2,090 $ 2,182 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, 2019 , the Company had $2.1 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 month periods indicated. Three Months Ended March 31, December 31, March 31, 2019 2018 2018 (dollars in thousands) Balance at the beginning of period $ 411 $ 1,988 $ 3,019 Additions — — — Accretion (79 ) (262 ) (236 ) Payoffs — (47 ) (1,850 ) Sales — (1,293 ) — Reclassification from nonaccretable difference — 25 776 Balance at the end of period $ 332 $ 411 $ 1,709 |