Loans Receivable and Allowance for Loan Losses | Loans Receivable and Allowance for Loan Losses The following is a summary of loans receivable by major category: September 30, 2019 December 31, 2018 Loan portfolio composition (Dollars in thousands) Real estate loans: Residential $ 46,919 $ 51,197 Commercial 8,235,839 8,395,327 Construction 305,185 275,076 Total real estate loans 8,587,943 8,721,600 Commercial business 2,482,817 2,127,630 Trade finance 161,019 197,190 Consumer and other 870,734 1,051,486 Total loans outstanding 12,102,513 12,097,906 Deferred loan costs, net 2,169 209 Loans receivable 12,104,682 12,098,115 Allowance for loan losses (93,882 ) (92,557 ) Loans receivable, net of allowance for loan losses $ 12,010,800 $ 12,005,558 The loan portfolio is made up of four segments: real estate loans, commercial business, trade finance, and consumer and other. Real estate loans are extended for the purchase and refinance of commercial real estate and are generally secured by first deeds of trust and are collateralized by residential or commercial properties. Commercial business loans are loans provided to businesses for various purposes such as for working capital, purchasing inventory, debt refinancing, business acquisitions and other business related financing needs. Trade finance loans generally serves businesses involved in international trade activities. Consumer and other loans consist mostly of single family residential mortgage loans but also includes home equity, credit cards, and other personal loans. The four segments are further segregated between loans accounted for under the amortized cost method (“Legacy Loans”), and previously acquired loans that were originally recorded at fair value with no carryover of the related pre-acquisition allowance for loan losses (“Acquired Loans”). Acquired Loans are further segregated between purchased credit impaired loans (loans with credit deterioration on the date of acquisition and accounted for under ASC 310-30, or “PCI loans”), and Acquired Performing Loans (loans that were pass graded on the acquisition date and the fair value adjustment is amortized over the contractual life under ASC 310-20, or “non-PCI loans”). The following table presents changes in the accretable discount on PCI loans for the three and nine months ended September 30, 2019 and 2018 : Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 (Dollars in thousands) Balance at beginning of period $ 43,362 $ 53,573 $ 49,697 $ 55,002 Accretion (5,234 ) (5,239 ) (17,916 ) (16,970 ) Reclassification from nonaccretable difference 1,893 7,889 8,240 18,191 Balance at end of period $ 40,021 $ 56,223 $ 40,021 $ 56,223 On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of PCI loans is considered 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 loans. The accretable yield will change from period to period due to the following: 1) estimates of the remaining life of acquired loans will affect the amount of future interest income; 2) indices for variable rates of interest on PCI loans may change; and 3) estimates of the amount of the contractual principal and interest that will not be collected (nonaccretable difference) may change. The following tables detail the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2019 and 2018 : Legacy Loans Acquired Loans Total Real Estate Commercial Business Trade Finance Consumer and Other Real Commercial Business Trade Finance Consumer and Other (Dollars in thousands) Three Months Ended September 30, 2019 Balance, beginning of period $ 47,154 $ 26,757 $ 1,009 $ 6,676 $ 6,930 $ 4,598 $ — $ 942 $ 94,066 Provision (credit) for loan losses 4 2,851 (485 ) (7 ) (91 ) (80 ) — (92 ) 2,100 Loans charged off (848 ) (1,105 ) — (281 ) (349 ) (19 ) — — (2,602 ) Recoveries of charge offs 158 377 — 6 88 151 — — 780 PCI allowance adjustment — — — — — — — (462 ) (462 ) Balance, end of period $ 46,468 $ 28,880 $ 524 $ 6,394 $ 6,578 $ 4,650 $ — $ 388 $ 93,882 Nine Months Ended September 30, 2019 Balance, beginning of period $ 49,446 $ 21,826 $ 719 $ 6,269 $ 7,321 $ 5,939 $ — $ 1,037 $ 92,557 Provision (credit) for loan losses (3,459 ) 9,655 (195 ) 945 (766 ) 233 — (113 ) 6,300 Loans charged off (1,064 ) (3,187 ) — (834 ) (375 ) (896 ) — (76 ) (6,432 ) Recoveries of charge offs 1,545 586 — 14 398 252 — 2 2,797 PCI allowance adjustment — — — — — (878 ) — (462 ) (1,340 ) Balance, end of period $ 46,468 $ 28,880 $ 524 $ 6,394 $ 6,578 $ 4,650 $ — $ 388 $ 93,882 Legacy Loans Acquired Loans Total Real Commercial Business Trade Finance Consumer and Other Real Commercial Business Trade Finance Consumer and Other (Dollars in thousands) Three Months Ended September 30, 2018 Balance, beginning of period $ 48,235 $ 22,031 $ 983 $ 4,799 $ 12,816 $ 991 $ 3 $ 23 $ 89,881 Provision (credit) for loan losses 5,537 (856 ) (159 ) 1,036 1,744 28 (3 ) (27 ) 7,300 Loans charged off (5,854 ) (292 ) — (343 ) (191 ) (174 ) — (13 ) (6,867 ) Recoveries of charge offs 41 188 17 1 — 32 — 36 315 Balance, end of period $ 47,959 $ 21,071 $ 841 $ 5,493 $ 14,369 $ 877 $ — $ 19 $ 90,629 Nine Months Ended September 30, 2018 Balance, beginning of period $ 45,360 $ 17,228 $ 1,674 $ 3,385 $ 13,322 $ 3,527 $ 42 $ 3 $ 84,541 Provision (credit) for loan losses 7,792 2,920 (874 ) 2,999 1,430 (2,114 ) (42 ) (11 ) 12,100 Loans charged off (6,061 ) (1,080 ) — (919 ) (385 ) (740 ) — (13 ) (9,198 ) Recoveries of charge offs 868 2,003 41 28 2 204 — 40 3,186 Balance, end of period $ 47,959 $ 21,071 $ 841 $ 5,493 $ 14,369 $ 877 $ — $ 19 $ 90,629 The following tables break out the allowance for loan losses and the recorded investment of loans outstanding (not including accrued interest receivable and net deferred loan costs or fees) by individually impaired, general valuation, and PCI impairment, by portfolio segment at September 30, 2019 and December 31, 2018 : September 30, 2019 Legacy Loans Acquired Loans Total Real Commercial Business Trade Finance Consumer and Other Real Commercial Business Trade Finance Consumer and Other (Dollars in thousands) Allowance for loan losses: Individually evaluated for impairment $ 117 $ 2,435 $ — $ 12 $ 142 $ 941 $ — $ 1 $ 3,648 Collectively evaluated for impairment 46,351 26,445 524 6,382 1,752 387 — 17 81,858 PCI loans — — — — 4,684 3,322 — 370 8,376 Total $ 46,468 $ 28,880 $ 524 $ 6,394 $ 6,578 $ 4,650 $ — $ 388 $ 93,882 Loans outstanding: Individually evaluated for impairment $ 34,366 $ 20,592 $ — $ 2,379 $ 15,216 $ 3,914 $ — $ 797 $ 77,264 Collectively evaluated for impairment 7,272,943 2,397,490 161,019 756,102 1,164,527 53,183 — 108,130 11,913,394 PCI loans — — — — 100,891 7,638 — 3,326 111,855 Total $ 7,307,309 $ 2,418,082 $ 161,019 $ 758,481 $ 1,280,634 $ 64,735 $ — $ 112,253 $ 12,102,513 December 31, 2018 Legacy Loans Acquired Loans Total Real Commercial Business Trade Finance Consumer and Other Real Commercial Business Trade Finance Consumer and Other (Dollars in thousands) Allowance for loan losses: Individually evaluated for impairment $ 176 $ 4,221 $ — $ 3 $ 261 $ 130 $ — $ — $ 4,791 Collectively evaluated for impairment 49,270 17,605 719 6,266 1,264 460 — 19 75,603 PCI loans — — — — 5,796 5,349 — 1,018 12,163 Total $ 49,446 $ 21,826 $ 719 $ 6,269 $ 7,321 $ 5,939 $ — $ 1,037 $ 92,557 Loans outstanding: Individually evaluated for impairment $ 39,976 $ 29,624 $ 5,887 $ 441 $ 18,080 $ 5,734 $ 3,124 $ 1,141 $ 104,007 Collectively evaluated for impairment 7,037,392 1,988,067 188,179 910,292 1,507,858 80,916 — 133,942 11,846,646 PCI loans — — — — 118,294 23,289 — 5,670 147,253 Total $ 7,077,368 $ 2,017,691 $ 194,066 $ 910,733 $ 1,644,232 $ 109,939 $ 3,124 $ 140,753 $ 12,097,906 At September 30, 2019 and December 31, 2018 , the balance of PCI loans that had credit deterioration subsequent to acquisition was $19.7 million and $57.9 million , respectively. PCI loans with subsequent credit deterioration had an allowance for loan losses balance of $8.4 million and $12.2 million at September 30, 2019 and December 31, 2018 , respectively. As of September 30, 2019 and December 31, 2018 , the reserve for unfunded loan commitments recorded in other liabilities was $636 thousand and $736 thousand , respectively . For the three months ended September 30, 2019 and 2018 , the Company recorded reductions to reserves for unfunded commitments recorded in credit related expenses totaling $100 thousand and $50 thousand , respectively. For the nine months ended September 30, 2019 , the Company recorded a reduction to reserves for unfunded commitments totaling $100 thousand , and recorded a reduction to reserves for unfunded loan commitment for the nine months ended September 30, 2018 totaling $100 thousand . The recorded investment of individually impaired loans and the total impaired loans net of specific allowance is presented in the following table for the dates indicated: September 30, 2019 December 31, 2018 (Dollars in thousands) With allocated specific allowance Without charge off $ 30,473 $ 35,365 With charge off 3,763 681 With no allocated specific allowance Without charge off 31,884 59,607 With charge off 11,144 8,354 Specific allowance on impaired loans (3,648 ) (4,791 ) Impaired loans, net of specific allowance $ 73,616 $ 99,216 The following tables detail the recorded investment of impaired loans (Legacy Loans and Acquired Loans that became impaired subsequent to being originated and acquired, respectfully) as of September 30, 2019 and December 31, 2018 , and the average recorded investment and interest income recognized for the three and nine months ended September 30, 2019 and 2018 . Impaired loans with no related allowance are believed by management to be adequately collateralized. As of September 30, 2019 As of December 31, 2018 Total Impaired Loans (1) Recorded Investment (2) Unpaid Contractual Principal Balance Related Allowance Recorded Investment (2) Unpaid Contractual Principal Balance Related Allowance (Dollars in thousands) With related allowance: Real estate – residential $ — $ — $ — $ — $ — $ — Real estate – commercial Retail 2,292 2,563 75 1,375 1,487 156 Hotel & motel 1,166 6,398 8 1,949 2,310 119 Gas station & car wash 61 1,967 3 — — — Mixed use 629 720 16 881 947 43 Industrial & warehouse 8,354 10,621 144 1,305 2,139 93 Other 1,098 1,819 13 7,759 8,174 26 Real estate – construction — — — — — — Commercial business 19,572 21,558 3,376 22,203 23,928 4,351 Trade finance — — — — — — Consumer and other 1,064 1,094 13 575 575 3 Subtotal $ 34,236 $ 46,740 $ 3,648 $ 36,047 $ 39,560 $ 4,791 With no related allowance: Real estate – residential $ — $ — $ — $ — $ — $ — Real estate – commercial Retail 5,108 5,973 — 8,005 11,234 — Hotel & motel 9,790 17,841 — 10,877 22,590 — Gas station & car wash 415 938 — 545 3,653 — Mixed use 3,253 3,268 — 7,048 7,058 — Industrial & warehouse 8,744 12,519 — 12,343 13,467 — Other 8,672 13,295 — 5,969 7,122 — Real estate – construction — — — — — — Commercial business 4,934 10,310 — 13,155 17,850 — Trade finance — — — 9,011 9,011 — Consumer and other 2,112 2,198 — 1,007 1,156 — Subtotal $ 43,028 $ 66,342 $ — $ 67,960 $ 93,141 $ — Total $ 77,264 $ 113,082 $ 3,648 $ 104,007 $ 132,701 $ 4,791 __________________________________ (1) Impaired loans exclude acquired PCI loans (2) Unpaid contractual principal balance less charge offs, interest collected applied to principal if on nonaccrual and purchase discounts. For the Three Months Ended September 30, For the Nine Months Ended September 30, 2019 2018 2019 2018 Total Impaired Loans (1) Average Recorded Investment (2) Interest Income Recognized During Impairment Average Recorded Investment (2) Interest Income Recognized During Impairment Average Recorded Investment (2) Interest Income Recognized During Impairment Average Recorded Investment (2) Interest Income Recognized During Impairment (Dollars in thousands) With related allowance: Real estate – residential $ — $ — $ 125 $ — $ — $ — $ 63 $ — Real estate – commercial Retail 2,257 9 4,740 8 1,983 29 4,099 22 Hotel & motel 1,478 — 2,897 — 1,684 — 2,888 — Gas station & car wash 61 — — — 31 — — — Mixed use 733 1 3,004 40 801 4 2,320 115 Industrial & warehouse 7,631 91 1,721 6 6,039 261 1,648 22 Other 968 5 4,322 33 3,513 16 5,608 133 Real estate – construction — — — — — — — — Commercial business 20,666 173 22,159 138 22,453 545 23,381 408 Trade finance 1,413 — 2,128 2 732 — 2,678 4 Consumer and other 1,011 1 981 6 887 2 744 12 Subtotal $ 36,218 $ 280 $ 42,077 $ 233 $ 38,123 $ 857 $ 43,429 $ 716 With no related allowance: Real estate – residential $ — $ — $ — $ — $ — $ — $ — $ — Real estate – commercial Retail 8,071 39 7,901 36 12,182 110 10,390 107 Hotel & motel 9,963 — 6,834 — 10,140 — 4,887 — Gas station & car wash 436 4 358 — 487 13 514 — Mixed use 3,363 50 3,886 49 5,247 152 2,494 149 Industrial & warehouse 10,344 52 12,209 86 10,771 155 11,364 249 Other 12,668 66 12,559 80 11,422 199 14,892 230 Real estate – construction — — — — — — 650 — Commercial business 6,780 17 20,320 129 9,810 55 19,262 360 Trade finance 1,659 — 5,785 120 5,159 — 4,503 354 Consumer and other 2,116 — 1,541 — 1,505 — 1,569 — Subtotal $ 55,400 $ 228 $ 71,393 $ 500 $ 66,723 $ 684 $ 70,525 $ 1,449 Total $ 91,618 $ 508 $ 113,470 $ 733 $ 104,846 $ 1,541 $ 113,954 $ 2,165 __________________________________ (1) Impaired loans exclude acquired PCI loans (2) Unpaid contractual principal balance less charge offs, interest collected applied to principal if on nonaccrual and purchase discounts. As of September 30, 2019 As of December 31, 2018 Impaired Acquired Loans (1) Recorded Investment (2) Unpaid Contractual Principal Balance Related Allowance Recorded Investment (2) Unpaid Contractual Principal Balance Related Allowance (Dollars in thousands) With related allowance: Real estate – residential $ — $ — $ — $ — $ — $ — Real estate – commercial Retail 888 922 36 198 220 118 Hotel & motel 54 345 2 72 345 4 Gas station & car wash 61 1,967 3 — — — Mixed use 283 289 14 312 312 38 Industrial & warehouse 325 1,910 87 230 1,050 88 Other — — — 3,454 3,454 13 Real estate – construction — — — — — — Commercial business 3,815 4,442 941 4,064 5,041 130 Trade finance — — — — — — Consumer and other 124 — 1 144 144 — Subtotal $ 5,550 $ 9,875 $ 1,084 $ 8,474 $ 10,566 $ 391 With no related allowance: Real estate – residential $ — $ — $ — $ — $ — $ — Real estate – commercial Retail 2,957 3,187 — 3,285 4,151 — Hotel & motel 5,261 6,687 — 5,428 6,874 — Gas station & car wash 182 705 — 247 2,673 — Mixed use — — — 3,722 3,726 — Industrial & warehouse — — — 119 894 — Other 5,205 9,306 — 1,013 1,326 — Real estate – construction — — — — — — Commercial business 99 1,041 — 1,670 2,681 — Trade finance — — — 3,124 3,124 — Consumer and other 673 139 — 997 1,144 — Subtotal $ 14,377 $ 21,065 $ — $ 19,605 $ 26,593 $ — Total $ 19,927 $ 30,940 $ 1,084 $ 28,079 $ 37,159 $ 391 __________________________________ (1) Impaired loans exclude acquired PCI loans (2) Unpaid contractual principal balance less charge offs, interest collected applied to principal if on nonaccrual and purchase discounts. For the Three Months Ended September 30, For the Nine Months Ended September 30, 2019 2018 2019 2018 Impaired Acquired Loans (1) Average Recorded Investment (2) Interest Income Recognized During Impairment Average Recorded Investment (2) Interest Income Recognized During Impairment Average Recorded Investment (2) Interest Income Recognized During Impairment Average Recorded Investment (2) Interest Income Recognized During Impairment (Dollars in thousands) With related allowance: Real estate – residential $ — $ — $ 125 $ — $ — $ — $ 63 $ — Real estate – commercial Retail 849 4 793 — 617 12 588 — Hotel & motel 63 — 73 — 68 — 79 — Gas station & car wash 61 — — — 31 — — — Mixed use 288 1 2,833 40 298 4 2,189 115 Industrial & warehouse 326 — 258 — 279 — 250 1 Other — — 788 3 999 — 1,802 10 Real estate – construction — — — — — — — — Commercial business 2,918 53 4,506 41 3,469 166 5,709 121 Trade finance — — — — — — — — Consumer and other 128 — 150 2 134 — 75 4 Subtotal $ 4,633 $ 58 $ 9,526 $ 86 $ 5,895 $ 182 $ 10,755 $ 251 With no related allowance: Real estate – residential $ — $ — $ — $ — $ — $ — $ — $ — Real estate – commercial Retail 5,056 34 3,008 31 5,233 94 3,181 92 Hotel & motel 5,306 — 3,516 — 5,358 — 2,000 — Gas station & car wash 183 — 218 — 214 — 159 — Mixed use 97 — 36 — 1,955 — 56 — Industrial & warehouse — — 119 — 53 — 287 — Other 5,168 66 4,364 63 3,929 199 5,574 181 Real estate – construction — — — — — — — — Commercial business 1,153 — 6,894 27 1,262 — 5,405 65 Trade finance 1,659 — 3,097 48 2,377 — 3,136 138 Consumer and other 676 — 1,531 — 783 — 1,373 — Subtotal $ 19,298 $ 100 $ 22,783 $ 169 $ 21,164 $ 293 $ 21,171 $ 476 Total $ 23,931 $ 158 $ 32,309 $ 255 $ 27,059 $ 475 $ 31,926 $ 727 __________________________________ (1) Impaired loans exclude acquired PCI loans (2) Unpaid contractual principal balance less charge offs, interest collected applied to principal if on nonaccrual and purchase discounts. Generally, loans are placed on nonaccrual status if principal and/or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by regulatory requirements. Loans to customers whose financial condition has deteriorated are considered for nonaccrual status whether or not the loan is 90 days or more past due. Generally, payments received on nonaccrual loans are recorded as principal reductions. Loans are returned to accrual status only when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Company did not recognize any cash basis interest income for the three and nine months ended September 30, 2019 or 2018 . The following table represents the recorded investment of nonaccrual loans and loans past due 90 or more days and still on accrual status by class of loans as of September 30, 2019 and December 31, 2018 . Nonaccrual Loans (1) Accruing Loans Past Due 90 or More Days September 30, 2019 December 31, 2018 September 30, 2019 December 31, 2018 (Dollars in thousands) Legacy Loans: Real estate – residential $ — $ — $ — $ — Real estate – commercial Retail 2,956 5,153 — — Hotel & motel 5,641 7,325 — — Gas station & car wash — 31 — — Mixed use 516 749 — — Industrial & warehouse 6,325 6,111 — — Other 4,226 5,940 — — Real estate – construction — — — — Commercial business 10,469 14,837 — — Trade finance — 1,661 — — Consumer and other 2,276 441 398 243 Subtotal $ 32,409 $ 42,248 $ 398 $ 243 Acquired Loans: (2) Real estate – residential $ — $ — $ — $ — Real estate – commercial Retail 920 829 — — Hotel & motel 5,315 5,500 — 1,286 Gas station & car wash 243 247 — — Mixed use 167 1,224 — — Industrial & warehouse 325 349 — — Other 1,286 259 — — Real estate – construction — — — — Commercial business 773 1,632 — — Trade finance — — — — Consumer and other 797 998 — — Subtotal $ 9,826 $ 11,038 $ — $ 1,286 Total $ 42,235 $ 53,286 $ 398 $ 1,529 __________________________________ (1) Total nonaccrual loans exclude guaranteed portion of delinquent SBA loans that are in liquidation totaling $37.3 million and $29.2 million , at September 30, 2019 and December 31, 2018 , respectively. (2) Acquired Loans exclude PCI loans. The following tables present the recorded investment of past due loans, including nonaccrual loans past due 30 or more days, by the number of days past due as of September 30, 2019 and December 31, 2018 by class of loans: As of September 30, 2019 As of December 31, 2018 30-59 Days Past Due 60-89 Days Past Due 90 or More Days Past Due Total Past Due 30-59 Days 60-89 Days 90 or More Days Past Due Total (Dollars in thousands) Legacy Loans: Real estate – residential $ — $ — $ — $ — $ — $ — $ — $ — Real estate – commercial Retail 1,238 — 1,107 2,345 733 — 809 1,542 Hotel & motel 945 334 2,120 3,399 153 — 5,215 5,368 Gas station & car wash 921 1,812 — 2,733 — — 31 31 Mixed use 169 634 — 803 — — — — Industrial & warehouse — 952 3,759 4,711 1,465 — 1,922 3,387 Other 3,334 — 2,363 5,697 1,837 — 2,405 4,242 Real estate – construction — — — — — — — — Commercial business 1,599 428 3,917 5,944 5,500 435 7,003 12,938 Trade finance 50 — — 50 1,036 — 1,661 2,697 Consumer and other 6,551 370 1,960 8,881 16,413 140 247 16,800 Subtotal $ 14,807 $ 4,530 $ 15,226 $ 34,563 $ 27,137 $ 575 $ 19,293 $ 47,005 Acquired Loans: (1) Real estate – residential $ — $ — $ — $ — $ — $ — $ — $ — Real estate – commercial Retail 96 — 620 716 347 — 602 949 Hotel & motel 411 — 3,973 4,384 — — 5,206 5,206 Gas station & car wash — — 221 221 154 — 221 375 Mixed use — — — — 107 — 1,034 1,141 Industrial & warehouse 625 75 93 793 142 — 119 261 Other — — 297 297 183 219 — 402 Real estate – construction 10,165 — — 10,165 — — — — Commercial business 266 17 140 423 397 613 253 1,263 Trade finance — — — — — — — — Consumer and other 117 280 268 665 — — 334 334 Subtotal $ 11,680 $ 372 $ 5,612 $ 17,664 $ 1,330 $ 832 $ 7,769 $ 9,931 Total Past Due $ 26,487 $ 4,902 $ 20,838 $ 52,227 $ 28,467 $ 1,407 $ 27,062 $ 56,936 __________________________________ (1) Acquired Loans exclude PCI loans. Loans accounted for under ASC 310-30 are generally considered accruing and performing and the accretable discount is accreted to interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, PCI loans that are contractually past due can still considered to be accruing and performing loans. The loans may be classified as nonaccrual if the timing and amount of future cash flows is not reasonably estimable. The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes all loans with the exception of homogeneous loans, or loans that are evaluated together in pools of similar loans (i.e., home mortgage loans, home equity lines of credit, overdraft loans, express business loans, and automobile loans). Homogeneous loans are not risk rated and credit risk is analyzed largely by the number of days past due. This analysis is performed at least on a quarterly basis. The definitions for risk ratings are as follows: • Pass: Loans that meet a preponderance or more of the Company’s underwriting criteria and evidence an acceptable level of risk. • Special Mention: Loans that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. • Substandard: Loans that are inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any. Loans in this classification have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. • Doubtful: Loans that have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The following tables present the recorded investment of risk ratings for Legacy and Acquired Loans as of September 30, 2019 and December 31, 2018 by class of loans: As of September 30, 2019 Pass/ Not Rated Special Mention Substandard Doubtful Total (Dollars in thousands) Legacy Loans: Real estate – residential $ 42,148 $ — $ 144 $ — $ 42,292 Real estate – commercial Retail 1,863,725 28,749 34,341 — 1,926,815 Hotel & motel 1,412,952 419 30,527 — 1,443,898 Gas station & car wash 790,464 3,858 4,588 — 798,910 Mixed use 575,998 1,496 9,180 — 586,674 Industrial & warehouse 752,813 1,459 34,685 — 788,957 Other 1,370,768 21,218 32,757 — 1,424,743 Real estate – construction 278,109 9,880 7,031 — 295,020 Commercial business 2,354,480 34,643 28,942 17 2,418,082 Trade finance 161,019 — — — 161,019 Consumer and other 755,988 170 2,323 — 758,481 Subtotal $ 10,358,464 $ 101,892 $ 184,518 $ 17 $ 10,644,891 Acquired Loans: Real estate – residential $ 3,919 $ 385 $ 323 $ — $ 4,627 Real estate – commercial Retail 348,739 6,489 12,650 — 367,878 Hotel & motel 151,908 159 11,766 — 163,833 Gas station & car wash 114,550 — 4,379 — 118,929 Mixed use 79,384 7,154 4,260 — 90,798 Industrial & warehouse 145,147 4,404 10,829 — 160,380 Other 331,772 8,564 23,688 — 364,024 Real estate – construction — 10,165 — — 10,165 Commercial business 50,333 623 13,779 — 64,735 Trade finance — — — — — Consumer and other 109,827 13 2,413 — 112,253 Subtotal $ 1,335,579 $ 37,956 $ 84,087 $ — $ 1,457,622 Total $ 11,694,043 $ 139,848 $ 268,605 $ 17 $ 12,102,513 As of December 31, 2018 Pass/ Special Mention Substandard Doubtful Total (Dollars in thousands) Legacy Loans: Real estate – residential $ 44,066 $ — $ 546 $ — $ 44,612 Real estate – commercial Retail 1,815,170 18,072 30,686 — 1,863,928 Hotel & motel 1,389,349 21,932 15,869 — 1,427,150 Gas station & car wash 814,291 2,810 2,464 — 819,565 Mixed use 510,021 12,480 13,292 — 535,793 Industrial & warehouse 711,236 1,665 38,332 — 751,233 Other 1,326,795 35,539 34,618 — 1,396,952 Real estate – construction 227,231 10,904 — — 238,135 Commercial business 1,944,783 18,220 54,688 — 2,017,691 Trade finance 191,508 — 2,558 — 194,066 Consumer and other 910,292 — 441 — 910,733 Subtotal $ 9,884,742 $ 121,622 $ 193,494 $ — $ 10,199,858 Acquired Loans: Real estate – residential $ 5,812 $ 393 $ 380 $ — $ 6,585 Real estate – commercial Retail 483,939 4,651 17,332 35 505,957 Hotel & motel 186,761 807 19,472 — 207,040 Gas station & car wash 148,702 274 6,032 — 155,008 Mixed use 77,100 3,986 8,151 — 89,237 Industrial & warehouse 171,574 9,451 18,071 223 199,319 Other 402,247 12,902 28,996 — 444,145 Real estate – construction 29,058 7,883 — — 36,941 Commercial business 89,611 1,083 19,237 8 109,939 Trade finance — — 3,124 — 3,124 Consumer and other 136,944 37 3,626 146 140,753 Subtotal $ 1,731,748 $ 41,467 $ 124,421 $ 412 $ 1,898,048 Total $ 11,616,490 $ 163,089 $ 317,915 $ 412 $ 12,097,906 The Company may reclassify loans held for investment to loans held for sale in the event that the Company plans to sell loans that were originated with the intent to hold to maturity. Loans transferred from held for investment to held for sale are carried at the lower of cost or fair value. The breakdown of loans by type that were reclassified from held for investment to held for sale for the three and nine months ended September 30, 2019 and 2018 is presented in the following table: Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 Transfer of loans held for investment to held for sale (Dollars in thousands) Real estate - commercial $ 25,988 $ — $ 25,988 $ — Consumer — 525 82,991 6,680 Total $ 25,988 $ 525 $ 108,979 $ 6,680 The adequacy of the allowance for loan losses is determined by management based upon an evaluation and review of the credit quality of the loan portfolio, consideration of historical loan loss experience, relevant internal and external factors that affect the collection of loans, and other pertinent factors. Migration analysis is a formula methodology derived from the Bank’s actual historical net charge off experience for each loan class (type) or pool and risk grade. The migration analysis is centered on the Bank’s internal credit risk rating system. Management’s internal loan review and externally contracted credit review examinations are used to determine and validate loan risk grades. This credit review system takes into consideration factors such as: borrower’s background and experience; historical and current financial conditions; credit history and payment performance; economic conditions and their impact on various industries; type, fair value, and valuation volatility of collateral; lien positions; and the financial strength of any guarantors. A general loan loss allowance is provided on loans that are not specifically identified as impaired (“non-impaired loans”). The Bank’s general loan loss allowance has two components: quantitative and qualitative risk factors. The quantitative risk factors are based on the migration analysis methodology described above. Loans are classified by class and risk grade, and the historical loss migration is tracked for the various classes. Loss experience is quantified for a specified period and then weighted to place more significance on the most recent losses. That loss experience is then applied to the stratified portfolio at the end of each quarter. The Company utilizes nineteen non-homogeneous loan pools in the quantitative analysis process. The non-impaired commercial real estate loan portfolio is stratified into fourteen different loan pools based on property types and the non-impaired commercial and industrial and consumer loans are stratified into five different loan pools based on loan type in order to allocate historic loss experience on a more granular basis. Additionally, in order to systematically quantify the credit risk impact of other trends and changes within the loan portfolio, the Bank utilizes qualitative adjustments to the migration analysis within established parameters. The parameters for making adjustments are established under a Credit Risk Matrix that provides different possible scenarios for each of the factors below. The Credit Risk Matrix and the possible scenarios enable the Bank to qualitatively adjust the Loss Migration Ratio by as much as 50 basis points for each loan type pool. This matrix considers the following nine factors, which are patterned after the guidelines provided under the Federal Financial Institutions Examination Council (“FFIEC”) Interagency Policy Statement on the Allowance for Loan and Lease Losses: • Changes in lending policies and procedures, including underwriting standards and collection, charge off, and recovery practices; • Changes in national and local economic and business conditions and developments, including the condition of various market segments; • Changes in the nature and volume of the loan portfolio; • Changes in the experience, ability, and depth of lending management and staff; • Changes in the trends of the volume and severity of past due loans, classified loans, nonaccrual loans, troubled debt restructurings, and other loan modifications; • Changes in the quality of the loan review system and the degree of oversight by the Directors; • Changes in the value of underlying collateral for collateral-dependent loans; • The existence and effect of any concentrations of credit and changes in the level of such concentrations; and • The effect of external factors, such as competition, legal requirements, and regulatory requirements on the level of estimated losses in the loan portfolio. The Company also establishes specific loss allowances for loans that have identified potential credit risk conditions or circumstances related to a specific individual credit. The specific allowance amounts are determined in accordance with ASC 310-10-35-22, “Measurement of Impairment.” The loans identified as impaired will be accounted for in accordance with one of the three acceptable valuation methods: 1) the present value of future cash flows discounted at the loan’s effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral, if the loan is collateral dependent. For the collateral dependent impaired loans, management obtains a new appraisal to determine the amount of impairment as of the date that the loan became impaired. The appraisals are based on an “as-is” valuation. To ensure that appraised values remain current, management either obtains updated appraisals every twelve months from a qualified independent appraiser or an internal evaluation of the collateral is performed by qualified personnel. If the third party market data indicates that the value of the collateral property has declined since the most recent valuation date, management adjusts the value of the property downward to reflec |