Loans | LOANS Our loan portfolio consists primarily of loans to borrowers within our principal market area which includes Los Angeles County, Orange County and San Diego County, California. Although we seek to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses, such as hospitality businesses, are among the principal industries in our market area and, as a result, our loan and collateral portfolios are, to some degree, concentrated in those industries. We also originate SBA loans either for sale to institutional investors or to hold in the loan portfolio. Loans identified as held for sale are carried at the lower of their net carrying value or market value and separately designated as such in the condensed consolidated financial statements. A portion of our revenues are from origination of loans guaranteed by the SBA under its various programs and sale of the guaranteed portions of the loans. Funding for these loans depends on annual appropriations by the U.S. Congress. As of September 30, 2019 , we had certain qualifying loans with an unpaid principal balance of $879.1 million pledged as collateral under a secured borrowing arrangement with the FHLB, and $226.9 million of loans with an unpaid principal balance pledged as collateral under a secured borrowing arrangement with the FRB. See Note 8 – Borrowing Arrangements for additional information regarding the FHLB and FRB secured lines of credit. The loans held for investment portfolio includes originated and acquired loans. The acquired loans includes: (i) loans that were not credit impaired on the date of acquisition; and (ii) purchased credit impaired ("PCI") loans, which are defined as loans with evidence of credit deterioration since their originations and for which it is probable that collection of all contractually required payments are unlikely as of the acquisition date. The following table presents loans held for investment, net by loan class at September 30, 2019 and December 31, 2018 : September 30, 2019 December 31, 2018 Loans PCI Loans Total Loans PCI Loans Total (dollars in thousands) Construction and land development $ 221,857 $ — $ 221,857 $ 184,177 $ — $ 184,177 Real estate: Residential 48,896 — 48,896 57,443 — 57,443 Commercial real estate - owner occupied 171,250 110 171,360 179,362 132 179,494 Commercial real estate - non-owner occupied 401,710 — 401,710 400,590 1,075 401,665 Commercial and industrial 310,699 506 311,205 281,121 597 281,718 SBA loans 161,044 564 161,608 145,622 840 146,462 Consumer 424 — 424 159 — 159 Loans held for investment, net of discounts 1,315,880 1,180 1,317,060 1,248,474 2,644 1,251,118 Net deferred origination fees (440 ) — (440 ) (137 ) — (137 ) Loans held for investment $ 1,315,440 $ 1,180 $ 1,316,620 $ 1,248,337 $ 2,644 $ 1,250,981 Allowance for loan losses (12,340 ) — (12,340 ) (11,056 ) — (11,056 ) Loans held for investment, net $ 1,303,100 $ 1,180 $ 1,304,280 $ 1,237,281 $ 2,644 $ 1,239,925 The following table presents the components of loans held for investment at September 30, 2019 and December 31, 2018 : September 30, December 31, (dollars in thousands) Gross loans (1) $ 1,328,031 $ 1,263,891 Unamortized net discounts (2) (10,971 ) (12,773 ) Net unamortized deferred origination fees (440 ) (137 ) Loans held for investment $ 1,316,620 $ 1,250,981 (1) Gross loans include the net carrying value of PCI loans of $1.2 million and $2.6 million at September 30, 2019 and December 31, 2018 . (2) Unamortized net discounts include discounts related to the retained portion of SBA loans and net discounts on Non-PCI acquired loans. At September 30, 2019 , net discounts related to loans acquired in the PCB acquisition totaled $7.6 million and are expected to be accreted into interest income over a weighted average life of 5.1 years . At December 31, 2018, net discounts related to loans acquired in the PCB acquisition totaled $9.5 million . The following table presents a summary of the changes in the allowance for loan losses 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, beginning of period $ 12,053 $ 10,376 $ 11,056 $ 10,497 Provision for loan losses 700 600 1,600 1,120 Charge-offs (437 ) (358 ) (561 ) (1,133 ) Recoveries 24 38 245 172 Net charge-offs (413 ) (320 ) (316 ) (961 ) Balance, end of period $ 12,340 $ 10,656 $ 12,340 $ 10,656 The following tables present the activity in the allowance for loan losses, the composition of the period end allowance, and the loans evaluated for impariment by loan class for the three and nine months ended September 30, 2019 and 2018 : Three Months Ended September 30, 2019 Real Estate Construction and Land Development Residential Commercial - Owner Occupied Commercial - Non-owner Occupied Commercial and Industrial SBA Loans Consumer Total (dollars in thousands) Balance, June 30, 2019 $ 1,892 $ 379 $ 905 $ 2,587 $ 4,502 $ 1,788 $ — $ 12,053 Provision for (reversal of) loan losses 247 (47 ) (107 ) (179 ) 384 399 3 700 Charge-offs — — — — (437 ) — — (437 ) Recoveries — — — — 24 — — 24 Net charge-offs — — — — (413 ) — — (413 ) Balance, September 30, 2019 $ 2,139 $ 332 $ 798 $ 2,408 $ 4,473 $ 2,187 $ 3 $ 12,340 Reserves: Specific $ — $ — $ — $ — $ — $ 624 $ — $ 624 General 2,139 332 798 2,408 4,473 1,563 3 11,716 $ 2,139 $ 332 $ 798 $ 2,408 $ 4,473 $ 2,187 $ 3 $ 12,340 Loans evaluated for impairment: Individually $ — $ — $ — $ — $ 730 $ 7,002 $ — $ 7,732 Collectively 221,857 48,896 171,250 401,710 309,969 154,042 424 1,308,148 PCI loans — — 110 — 506 564 — 1,180 $ 221,857 $ 48,896 $ 171,360 $ 401,710 $ 311,205 $ 161,608 $ 424 $ 1,317,060 Three Months Ended September 30, 2018 Real Estate Construction and Land Development Residential Commercial - Owner Occupied Commercial - Non-owner Occupied Commercial and Industrial SBA Loans Consumer Total (dollars in thousands) Balance, June 30, 2018 $ 1,603 $ 384 $ 637 $ 2,755 $ 3,288 $ 1,709 $ — $ 10,376 Provision for (reversal of) loan losses 295 28 141 70 (215 ) 281 — 600 Charge-offs — — — — (8 ) (350 ) — (358 ) Recoveries — — — — 38 — — 38 Net recoveries (charge-offs) — — — — 30 (350 ) — (320 ) Balance, September 30, 2018 $ 1,898 $ 412 $ 778 $ 2,825 $ 3,103 $ 1,640 $ — $ 10,656 Reserves: Specific $ — $ — $ — $ — $ — $ — $ — $ — General 1,898 412 778 2,825 3,103 1,640 — 10,656 $ 1,898 $ 412 $ 778 $ 2,825 $ 3,103 $ 1,640 $ — $ 10,656 Loans evaluated for impairment: Individually $ — $ — $ — $ — $ 95 $ 1,032 $ — $ 1,127 Collectively 172,938 60,570 180,985 391,536 269,921 145,440 — 1,221,390 PCI loans — — 104 1,383 645 887 — 3,019 $ 172,938 $ 60,570 $ 181,089 $ 392,919 $ 270,661 $ 147,359 $ — $ 1,225,536 Nine Months Ended September 30, 2019 Real Estate Construction and Land Development Residential Commercial - Owner Occupied Commercial - Non-owner Occupied Commercial and Industrial SBA Loans Consumer Total (dollars in thousands) Balance, December 31, 2018 $ 1,721 $ 422 $ 734 $ 2,686 $ 3,686 $ 1,807 $ — $ 11,056 Provision for (reversal of) loan losses 418 (90 ) 64 (278 ) 1,292 191 3 1,600 Charge-offs — — — — (561 ) — — (561 ) Recoveries — — — — 56 189 — 245 Net (charge-offs) recoveries — — — — (505 ) 189 — (316 ) Balance, September 30, 2019 $ 2,139 $ 332 $ 798 $ 2,408 $ 4,473 $ 2,187 $ 3 $ 12,340 Nine Months Ended September 30, 2018 Real Estate Construction and Land Development Residential Commercial - Owner Occupied Commercial - Non-owner Occupied Commercial and Industrial SBA Loans Consumer Total (dollars in thousands) Balance, December 31, 2017 $ 1,597 $ 375 $ 655 $ 3,136 $ 3,232 $ 1,494 $ 8 $ 10,497 Provision for (reversal of) loan losses 301 37 123 (311 ) 221 757 (8 ) 1,120 Charge-offs — — — — (522 ) (611 ) — (1,133 ) Recoveries — — — — 172 — — 172 Net charge-offs — — — — (350 ) (611 ) — (961 ) Balance, September 30, 2018 $ 1,898 $ 412 $ 778 $ 2,825 $ 3,103 $ 1,640 $ — $ 10,656 We categorize loans by risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. We use the following definitions for risk ratings: Pass - Loans classified as pass represent assets with a level of credit quality which contain no well-defined deficiency or weakness. Special Mention - Loans classified as special mention have a potential weakness that deserves 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 classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable and improbable. Loss - Loans classified loss are considered uncollectible and of such little value that their continuance as loans is not warranted. The following tables present loans held for investment, net of discounts by loan class and risk category, excluding PCI loans, as of September 30, 2019 and December 31, 2018 : September 30, 2019 Pass Special Mention Substandard (1) Total (dollars in thousands) Construction and land development $ 221,857 $ — $ — $ 221,857 Real estate: Residential 48,896 — — 48,896 Commercial real estate - owner occupied 166,085 — 5,165 171,250 Commercial real estate - non-owner occupied 400,862 — 848 401,710 Commercial and industrial 305,226 — 5,473 310,699 SBA loans 150,719 — 10,325 161,044 Consumer 424 — — 424 $ 1,294,069 $ — $ 21,811 $ 1,315,880 (1) At September 30, 2019 , substandard loans included $7.4 million of impaired loans. December 31, 2018 Pass Special Mention Substandard (1) Total (dollars in thousands) Construction and land development $ 184,177 $ — $ — $ 184,177 Real estate: Residential 57,443 — — 57,443 Commercial real estate - owner occupied 174,505 4,857 — 179,362 Commercial real estate - non-owner occupied 399,457 1,133 — 400,590 Commercial and industrial 269,640 8,341 3,140 281,121 SBA loans 137,740 6,065 1,817 145,622 Consumer 159 — — 159 $ 1,223,121 $ 20,396 $ 4,957 $ 1,248,474 (1) At December 31, 2018 , substandard loans included $1.7 million of impaired loans. The following tables present past due and nonaccrual loans, net of discounts by loan class, excluding PCI loans, at September 30, 2019 and December 31, 2018 : September 30, 2019 Still Accruing 30-59 Days Past Due 60-89 Days Past Due 90 Days or more Past Due Nonaccrual (dollars in thousands) Real estate - residential $ — $ — $ — $ — Commercial and industrial — 4 — 730 SBA loans — — — 6,678 Total $ — $ 4 $ — $ 7,408 December 31, 2018 Still Accruing 30-59 Days Past Due 60-89 Days Past Due 90 Days or more Nonaccrual (dollars in thousands) Real estate - residential $ 480 $ — $ — $ — Commercial and industrial 3 1 — 89 SBA loans — — — 1,633 Total $ 483 $ 1 $ — $ 1,722 A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Recorded investment represents unpaid principal balance, net of charge-offs, discounts and interest applied to principal on nonaccrual loans, if any. The following tables present impaired loans, excluding PCI loans, by loan class at September 30, 2019 and December 31, 2018 : September 30, 2019 Impaired Loans Unpaid Principal Balance Recorded Investment(1) Without Specific Reserve With Specific Reserve Related Allowance (dollars in thousands) Commercial and industrial $ 828 $ 730 $ 730 $ — $ — SBA loans 7,842 7,002 5,103 1,899 624 Total $ 8,670 $ 7,732 $ 5,833 $ 1,899 $ 624 (1) Includes troubled-debt restructurings (“TDRs”) on accrual of $324 thousand . December 31, 2018 Impaired Loans Unpaid Principal Balance Recorded Investment(1) Without Specific Reserve With Specific Reserve Related Allowance (dollars in thousands) Commercial and industrial $ 178 $ 89 $ 89 $ — $ — SBA loans 2,964 1,960 1,960 — — Total $ 3,142 $ 2,049 $ 2,049 $ — $ — (1) Includes TDRs on accrual of $327 thousand . The following tables present the average recorded investment in impaired loans, excluding PCI loans, and related interest income recognized by loan class for the three and nine months ended September 30, 2019 and 2018 : Three Months Ended September 30, 2019 2018 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (dollars in thousands) Commercial and industrial $ 732 $ — $ 98 $ — SBA loans 4,179 54 1,805 9 Total $ 4,911 $ 54 $ 1,903 $ 9 Nine Months Ended September 30, 2019 2018 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (dollars in thousands) Commercial and industrial $ 304 $ — $ 239 $ — SBA loans 2,563 71 1,459 19 Total $ 2,867 $ 71 $ 1,698 $ 19 At September 30, 2019 and December 31, 2018 , the total recorded investment for loans identified as a TDR was approximately $490 thousand and $922 thousand . There were no specific reserves allocated for these loans and we had not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs at September 30, 2019 . Loan modifications resulting in TDR status generally included one or a combination of the following: extensions of the maturity date, principal payment deferments or signed forbearance agreements with a payment plan. During the three and nine months ended September 30, 2019 and 2018 , there were no new loan modifications resulting in TDRs. A loan is considered to be in payment default once it is 90 days contractually past due under the modification. During the three and nine months ended September 30, 2019 and 2018 , there was one loan in each period totaling $92 thousand and $95 thousand classified as a TDR for which there was a payment default within twelve months following the modification. PCI Loans The following table summarizes the changes in the carrying amount and accretable yield of PCI loans for the three and nine months ended September 30, 2019 : Three Months Ended Nine Months Ended Carrying Amount Accretable Carrying Amount Accretable (dollars in thousands) Balance, beginning of period $ 2,281 $ 1,928 $ 2,644 $ 2,073 Accretion 1,635 (1,635 ) 1,950 (1,950 ) Payments received (2,780 ) — (3,447 ) — Increase in expected cash flows, net 44 814 33 984 Balance, end of period $ 1,180 $ 1,107 $ 1,180 $ 1,107 Loans Held for Sale At September 30, 2019 and December 31, 2018 , loans held for sale consisted of SBA 7(a) loans and totaled $11.9 million and $28.0 million. We account for loans held for sale at the lower of carrying value or market. The fair value of loans held for sale totaled $12.6 million and $29.2 million at September 30, 2019 and December 31, 2018 . |