Loans Receivable and Allowance for Loan Losses

The following is a summary of loans receivable by major category:



	September 30, 2014			December 31, 2013
	(In thousands)
Loan portfolio composition
Real estate loans:
Residential	$	19,203		$	10,039
Commercial & industrial	4,211,977			3,821,163
Construction	86,780			72,856
Total real estate loans	4,317,960			3,904,058
Commercial business	875,808			949,093
Trade finance	148,116			124,685
Consumer and other	92,362			98,507
Total loans outstanding	5,434,246			5,076,343
Less: deferred loan fees	(1,402		)	(2,167		)
Loans receivable	5,432,844			5,074,176
Less: allowance for loan losses	(68,232		)	(67,320		)
Loans receivable, net of allowance for loan losses	$	5,364,612		$	5,006,856

The loan portfolio is made up of four segments: real estate loans, commercial business, trade finance and consumer and other. These segments are further segregated between loans accounted for under the amortized cost method ("Legacy Loans") and 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 Acquired Credit Impaired Loans (loans with credit deterioration on the acquisition date and accounted for under ASC 310-30, or "ACILs") 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 "APLs").

The following table presents changes in the accretable discount on the ACILs for the three and nine months ended September 30, 2014 and 2013:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(In thousands)
Balance at beginning of period	$	28,284		$	37,090		$	47,398		$	18,651
Additions due to acquisitions during the period	—			14,928			—			19,873
Accretion	(3,790		)	(4,250		)	(12,854		)	(11,281		)
Changes in expected cash flows	2,191			5,689			(7,859		)	26,214
Balance at end of period	$	26,685		$	53,457		$	26,685		$	53,457

On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the ACILs is the “accretable yield.” The accretable yield is then 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 ACILs 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, 2014 and 2013:




	Legacy												Acquired											Total
	Real Estate			Commercial Business			Trade Finance			Consumer and Other			Real Estate			Commercial Business			Trade Finance		Consumer and Other			Total
	(In thousands)
Three Months Ended September 30, 2014
Balance, beginning of period	$	39,058		$	14,659		$	4,568		$	591		$	7,289		$	639		$	—	$	66		$	66,870
Provision (credit) for loan losses	3,553			191			793			(112		)	53			(214		)	—		(8		)	4,256
Loans charged off	(1,265		)	(1,580		)	(710		)	(1		)	10			(120		)	—		—			(3,666		)
Recoveries of charge offs	24			287			—			10			131			320			—		—			772
Balance, end of period	$	41,370		$	13,557		$	4,651		$	488		$	7,483		$	625		$	—	$	58		$	68,232
Nine Months Ended September 30, 2014
Balance, beginning of period	$	40,068		$	16,796		$	2,653		$	461		$	6,482		$	796		$	—	$	64		$	67,320
Provision (credit) for loan losses	3,206			2,402			2,765			(174		)	1,126			884			—		69			10,278
Loans charged off	(2,078		)	(7,099		)	(767		)	(20		)	(273		)	(1,385		)	—		(78		)	(11,700		)
Recoveries of charge offs	174			1,458			—			221			148			330			—		3			2,334
Balance, end of period	$	41,370		$	13,557		$	4,651		$	488		$	7,483		$	625		$	—	$	58		$	68,232




	Legacy												Acquired												Total
	Real Estate			Commercial Business			Trade Finance			Consumer and Other			Real Estate			Commercial Business			Trade Finance			Consumer and Other			Total
	(In thousands)
Three Months Ended September 30, 2013
Balance, beginning of period	$	41,932		$	16,520		$	2,335		$	528		$	9,632		$	654		$	—		$	74		$	71,675
Provision (credit) for loan losses	545			(2,085		)	178			52			1,221			830			—			3			744
Loans charged off	(528		)	(774		)	—			—			(5,668		)	(813		)	—			(7		)	(7,790		)
Recoveries of charge offs	62			958			—			50			5			10			—			1			1,086
Balance, end of period	$	42,011		$	14,619		$	2,513		$	630		$	5,190		$	681		$	—		$	71		$	65,715
Nine Months Ended September 30, 2013
Balance, beginning of period	$	41,505		$	16,490		$	2,349		$	658		$	4,718		$	1,115		$	3		$	103		$	66,941
Provision (credit) for loan losses	2,557			(1,004		)	190			(96		)	6,308			1,126			(3		)	(28		)	9,050
Loans charged off	(2,209		)	(2,370		)	(26		)	(9		)	(5,843		)	(1,621		)	—			(41		)	(12,119		)
Recoveries of charge offs	158			1,503			—			77			7			61			—			37			1,843
Balance, end of period	$	42,011		$	14,619		$	2,513		$	630		$	5,190		$	681		$	—		$	71		$	65,715

The following tables disaggregate the allowance for loan losses and the loans outstanding by impairment methodology at September 30, 2014 and December 31, 2013:



	September 30, 2014
	Legacy								Acquired								Total
	Real Estate		Commercial Business		Trade Finance		Consumer and Other		Real Estate		Commercial Business		Trade Finance		Consumer and Other		Total
	(In thousands)
Allowance for loan losses:
Individually evaluated for impairment	$	3,181	$	4,089	$	2,624	$	—	$	445	$	357	$	—	$	—	$	10,696
Collectively evaluated for impairment	38,189		9,468		2,027		488		852		268		—		58		51,350
ACILs	—		—		—		—		6,186		—		—		—		6,186
Total	$	41,370	$	13,557	$	4,651	$	488	$	7,483	$	625	$	—	$	58	$	68,232

Loans outstanding:
Individually evaluated for impairment	$	58,331	$	40,429	$	9,976	$	508	$	18,810	$	2,042	$	—	$	604	$	130,700
Collectively evaluated for impairment	3,687,642		747,506		138,140		37,065		442,451		48,587		—		27,207		5,128,598
ACILs	—		—		—		—		110,726		37,244		—		26,978		174,948
Total	$	3,745,973	$	787,935	$	148,116	$	37,573	$	571,987	$	87,873	$	—	$	54,789	$	5,434,246



	December 31, 2013
	Legacy								Acquired								Total
	Real Estate		Commercial Business		Trade Finance		Consumer and Other		Real Estate		Commercial Business		Trade Finance		Consumer and Other		Total
	(In thousands)
Allowance for loan losses:
Individually evaluated for impairment	$	5,578	$	5,183	$	159	$	32	$	1,092	$	622	$	—	$	—	$	12,666
Collectively evaluated for impairment	34,490		11,613		2,494		429		612		174		—		64		49,876
ACILs	—		—		—		—		4,778		—		—		—		4,778
Total	$	40,068	$	16,796	$	2,653	$	461	$	6,482	$	796	$	—	$	64	$	67,320

Loans outstanding:
Individually evaluated for impairment	$	49,177	$	37,314	$	5,692	$	535	$	19,992	$	2,792	$	—	$	767	$	116,269
Collectively evaluated for impairment	3,076,924		778,350		117,249		32,421		613,696		84,325		—		31,802		4,734,767
ACILs	—		—		—		—		144,269		46,312		1,744		32,982		225,307
Total	$	3,126,101	$	815,664	$	122,941	$	32,956	$	777,957	$	133,429	$	1,744	$	65,551	$	5,076,343

As of September 30, 2014 and December 31, 2013, the liability for unfunded commitments was $1.6 million and $885 thousand, respectively. For the three months ended September 30, 2014 and 2013, the recognized provision for credit losses related to unfunded commitments was $100 thousand and $0, respectively. For the nine months ended September 30, 2014 and 2013, the recognized provision for credit losses related to unfunded commitments was $688 thousand and $0, respectively.

The recorded investment in individually impaired loans was as follows:



	September 30, 2014			December 31, 2013
	(In thousands)
With allocated allowance
Without charge off	$	79,016		$	85,920
With charge off	1,932			851
With no allocated allowance
Without charge off	41,510			23,160
With charge off	8,242			6,338
Allowance on impaired loans	(10,696		)	(12,666		)
Impaired loans, net of allowance	$	120,004		$	103,603

The following tables detail impaired loans (Legacy and APLs that became impaired subsequent to being acquired) as of September 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013 and for the year ended December 31, 2013. Loans with no related allowance for loan losses are believed by management to have adequate collateral securing their carrying value.



	As of September 30, 2014						For the Nine Months Ended September 30, 2014				For the Three Months Ended September 30, 2014
Total Impaired Loans	Recorded Investment*		Unpaid Contractual Principal Balance		Related Allowance		Average Recorded Investment*		Interest Income Recognized during Impairment		Average Recorded Investment*		Interest Income Recognized during Impairment
	(In thousands)
With related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	5,406		6,707		526		5,280		116		4,735		37
Hotel & motel	11,552		11,552		1,623		11,716		400		11,601		134
Gas station & car wash	1,973		3,517		391		2,574		45		2,037		15
Mixed use	484		498		13		908		—		884		—
Industrial & warehouse	7,123		7,138		135		8,608		219		7,029		73
Other	10,708		10,802		938		9,691		353		9,246		118
Real estate—construction	—		—		—		—		—		—		—
Commercial business	34,065		34,405		4,446		31,672		1,138		32,076		368
Trade finance	9,601		16,831		2,624		7,295		—		9,100		—
Consumer and other	36		36		—		143		2		18		—
	$	80,948	$	91,486	$	10,696	$	77,887	$	2,273	$	76,726	$	745
With no related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	9,976		12,103		—		7,650		277		9,167		93
Hotel & motel	7,843		13,344		—		6,821		—		7,141		—
Gas station & car wash	3,541		5,542		—		4,500		33		4,251		11
Mixed use	2,058		2,166		—		1,372		30		1,672		10
Industrial & warehouse	9,597		13,203		—		8,045		248		9,466		73
Other	5,304		7,917		—		4,627		24		6,411		8
Real estate—construction	1,576		1,576		—		1,599		—		1,582		—
Commercial business	8,406		11,232		—		9,110		204		9,366		65
Trade finance	375		468		—		434		—		380		—
Consumer and other	1,076		1,126		—		1,195		21		1,267		7
	$	49,752	$	68,677	$	—	$	45,353	$	837	$	50,703	$	267
Total	$	130,700	$	160,163	$	10,696	$	123,240	$	3,110	$	127,429	$	1,012


*	Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.



	For the Nine Months Ended September 30, 2013				For the Three Months Ended September 30, 2013
Total Impaired Loans	Average Recorded Investment*		Interest Income Recognized during Impairment		Average Recorded Investment*		Interest Income Recognized during Impairment

With related allowance:
Real estate—residential	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	7,900		172		9,221		76
Hotel & motel	11,310		413		12,056		138
Gas station & car wash	1,826		46		2,017		15
Mixed use	1,152		33		1,378		10
Industrial & warehouse	8,770		171		10,940		44
Other	9,717		165		5,765		55
Real estate—construction	—		—		—		—
Commercial business	25,096		947		25,881		306
Trade finance	5,241		228		3,939		80
Consumer and other	302		17		548		6
	$	71,314	$	2,192	$	71,745	$	730
With no related allowance:
Real estate—residential	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	3,279		30		4,645		10
Hotel & motel	6,254		—		6,340		—
Gas station & car wash	3,543		104		4,105		35
Mixed use	660		—		430		—
Industrial & warehouse	3,996		8		3,374		3
Other	3,417		32		2,621		11
Real estate—construction	1,682		67		1,667		22
Commercial business	2,102		20		2,748		4
Trade finance	—		—		—		—
Consumer and other	1,142		—		1,012		—
	$	26,075	$	261	$	26,942	$	85
Total	$	97,389	$	2,453	$	98,687	$	815


*	Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.



	As of September 30, 2014						For the Nine Months Ended September 30, 2014				For the Three Months Ended September 30, 2014
Impaired APLs	Recorded Investment*		Unpaid Contractual Principal Balance		Related Allowance		Average Recorded Investment*		Interest Income Recognized during Impairment		Average Recorded Investment*		Interest Income Recognized during Impairment
	(In thousands)
With related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	1,744		2,743		46		634		71		1,020		24
Hotel & motel	—		—		—		—		—		—		—
Gas station & car wash	1,781		1,963		387		1,788		45		1,791		15
Mixed use	352		348		2		177		—		353		—
Industrial & warehouse	—		—		—		1,282		—		—		—
Other	748		836		10		977		7		568		2
Real estate—construction	—		—		—		—		—		—		—
Commercial business	961		1,115		357		1,170		10		873		3
Trade finance	—		—		—		—		—		—		—
Consumer and other	—		—		—		—		—		—		—
	$	5,586	$	7,005	$	802	$	6,028	$	133	$	4,605	$	44
With no related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	1,538		2,298		—		1,546		22		1,554		7
Hotel & motel	5,606		7,375		—		6,185		—		5,961		—
Gas station & car wash	9		297		—		774		—		472		—
Mixed use	455		465		—		344		—		455		—
Industrial & warehouse	1,784		1,989		—		2,907		29		1,601		10
Other	4,793		5,719		—		3,745		24		5,311		8
Real estate—construction	—		—		—		—		—		—		—
Commercial business	1,081		1,601		—		1,399		5		1,582		2
Trade finance	—		—		—		—		—		—		—
Consumer and other	604		655		—		816		6		773		2
	$	15,870	$	20,399	$	—	$	17,716	$	86	$	17,709	$	29
Total	$	21,456	$	27,404	$	802	$	23,744	$	219	$	22,314	$	73


*	Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.



	For the Nine Months Ended September 30, 2013				For the Three Months Ended September 30, 2013
Impaired APLs	Average Recorded Investment*		Interest Income Recognized during Impairment		Average Recorded Investment*		Interest Income Recognized during Impairment

With related allowance:
Real estate—residential	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	1,247		10		831		4
Hotel & motel	—		—		—		—
Gas station & car wash	544		—		816		—
Mixed use	—		—		—		—
Industrial & warehouse	8,551		—		7,690		—
Other	1,154		8		158		2
Real estate—construction	—		—		—		—
Commercial business	3,058		5		3,011		2
Trade finance	—		—		—		—
Consumer and other	—		—		—		—
	$	14,554	$	23	$	12,506	$	8
With no related allowance:
Real estate—residential	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	907		30		1,330		10
Hotel & motel	6,138		—		6,243		—
Gas station & car wash	1,481		46		1,293		16
Mixed use	—		—		—		—
Industrial & warehouse	2,445		8		1,968		3
Other	2,020		32		2,157		11
Real estate—construction	—		—		—		—
Commercial business	99		—		50		—
Trade finance	—		—		—		—
Consumer and other	776		—		772		—
	$	13,866	$	116	$	13,813	$	40
Total	$	28,420	$	139	$	26,319	$	48


*	Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.



	As of December 31, 2013						For the Year Ended December 31, 2013
Total Impaired Loans	Recorded Investment*		Unpaid Contractual Principal Balance		Related Allowance		Average Recorded Investment*		Interest Income Recognized during Impairment
	(In thousands)
With related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	7,318		7,451		827		7,783		181
Hotel & motel	11,920		12,744		2,841		11,432		550
Gas station & car wash	3,145		3,236		519		2,090		117
Mixed use	930		953		212		1,108		43
Industrial & warehouse	12,398		12,470		810		9,496		323
Other	10,262		10,351		1,461		9,826		405
Real estate—construction	—		—		—		—		—
Commercial business	34,663		36,472		5,805		27,010		1,572
Trade finance	5,600		5,628		159		5,313		41
Consumer and other	535		535		32		348		23
	$	86,771	$	89,840	$	12,666	$	74,406	$	3,255
With no related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	4,025		6,591		—		3,428		45
Hotel & motel	6,502		10,498		—		6,304		—
Gas station & car wash	4,845		8,273		—		3,803		139
Mixed use	845		912		—		697		—
Industrial & warehouse	3,806		7,204		—		3,958		10
Other	1,548		3,647		—		3,043		—
Real estate—construction	1,625		1,625		—		1,670		89
Commercial business	5,443		8,437		—		2,770		25
Trade finance	92		7,279		—		18		—
Consumer and other	767		831		—		1,067		—
	$	29,498	$	55,297	$	—	$	26,758	$	308
Total	$	116,269	$	145,137	$	12,666	$	101,164	$	3,563


*	Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.



	As of December 31, 2013						For the Year Ended December 31, 2013
Impaired APLs	Recorded Investment*		Unpaid Contractual Principal Balance		Related Allowance		Average Recorded Investment*		Interest Income Recognized during Impairment
	(In thousands)
With related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	391		397		15		1,084		14
Hotel & motel	—		—		—		—		—
Gas station & car wash	794		885		341		485		—
Mixed use	—		—		—		—		—
Industrial & warehouse	5,128		5,200		612		6,323		—
Other	1,362		1,412		124		1,819		43
Real estate—construction	—		—		—		—		—
Commercial business	1,984		3,354		622		2,827		5
Trade finance	—		—		—		—		—
Consumer and other	—		—		—		—		—
	$	9,659	$	11,248	$	1,714	$	12,538	$	62
With no related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	1,244		2,216		—		953		14
Hotel & motel	6,441		8,676		—		6,169		—
Gas station & car wash	1,614		2,109		—		1,366		62
Mixed use	—		—		—		—		—
Industrial & warehouse	1,883		3,446		—		2,482		10
Other	1,135		1,547		—		1,600		—
Real estate—construction	—		—		—		—		—
Commercial business	808		948		—		291		—
Trade finance	—		—		—		—		—
Consumer and other	767		831		—		779		—
	$	13,892	$	19,773	$	—	$	13,640	$	86
Total	$	23,551	$	31,021	$	1,714	$	26,178	$	148


*	Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.

Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due and/or management deems the collectibility of the principal and/or interest to be in question, as well as when required by regulatory requirements. Loans to a customer 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 when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following tables present the aging of past due loans as of September 30, 2014 and December 31, 2013 by class of loans:



	As of September 30, 2014
	Past Due and Accruing
	30-59 Days Past Due		60-89 Days Past Due		90 or More Days Past Due		Total		Nonaccrual Loans ⁽²⁾		Total Delinquent Loans
	(In thousands)
Legacy Loans:
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	128		721		—		849		4,224		5,073
Hotel & motel	755		—		—		755		2,237		2,992
Gas station & car wash	—		—		—		—		2,998		2,998
Mixed use	441		—		—		441		943		1,384
Industrial & warehouse	208		—		—		208		2,419		2,627
Other	130		385		—		515		519		1,034
Real estate—construction	—		—		—		—		1,576		1,576
Commercial business	2,043		178		—		2,221		5,575		7,796
Trade finance	—		—		—		—		2,217		2,217
Consumer and other	231		—		—		231		21		252
Subtotal	$	3,936	$	1,284	$	—	$	5,220	$	22,729	$	27,949
Acquired Loans: ⁽¹⁾
Real estate—residential	$	—	$	—			$	—	$	—	$	—
Real estate—commercial
Retail	137		170		—		307		1,244		1,551
Hotel & motel	—		—		—		—		5,606		5,606
Gas station & car wash	351		—		—		351		751		1,102
Mixed use	5,639		—		—		5,639		806		6,445
Industrial & warehouse	—		—		—		—		1,228		1,228
Other	—		—		—		—		4,450		4,450
Real estate—construction	—		—		—		—		—		—
Commercial business	771		113		—		884		1,694		2,578
Trade finance	—		—		—		—		—		—
Consumer and other	13		—		—		13		1,056		1,069
Subtotal	$	6,911	$	283	$	—	$	7,194	$	16,835	$	24,029
TOTAL	$	10,847	$	1,567	$	—	$	12,414	$	39,564	$	51,978


⁽¹⁾	The Acquired Loans exclude ACILs.


⁽²⁾	Nonaccrual loans exclude the guaranteed portion of delinquent SBA loans that are in liquidation totaling $28.1 million.



	As of December 31, 2013
	Past Due and Accruing
	30-59 Days Past Due		60-89 Days Past Due		90 or More Days Past Due		Total		Nonaccrual Loans ⁽²⁾		Total Delinquent Loans
	(In Thousands)
Legacy Loans:
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	122		—		—		122		4,363		4,485
Hotel & motel	—		—		—		—		121		121
Gas station & car wash	1,038		—		—		1,038		2,228		3,266
Mixed use	—		—		—		—		974		974
Industrial & warehouse	215		—		—		215		1,923		2,138
Other	—		—		—		—		1,398		1,398
Real estate—construction	—		—		—		—		—		—
Commercial business	780		244		—		1,024		6,402		7,426
Trade finance	—		—		—		—		1,031		1,031
Consumer and other	54		22		—		76		—		76
Subtotal	$	2,209	$	266	$	—	$	2,475	$	18,440	$	20,915
Acquired Loans: ⁽¹⁾
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	2,024		—		—		2,024		1,030		3,054
Hotel & motel	—		—		—		—		6,441		6,441
Gas station & car wash	1,068		—		—		1,068		1,339		2,407
Mixed use	576		—		—		576		—		576
Industrial & warehouse	121		—		—		121		6,890		7,011
Other	516		1,729		—		2,245		1,376		3,621
Real estate—construction	—		—		—		—		—		—
Commercial business	524		703		5		1,232		2,708		3,940
Trade finance	—		—		—		—		—		—
Consumer and other	284		74		—		358		930		1,288
Subtotal	$	5,113	$	2,506	$	5	$	7,624	$	20,714	$	28,338
TOTAL	$	7,322	$	2,772	$	5	$	10,099	$	39,154	$	49,253


⁽¹⁾	The Acquired Loans exclude ACILs.

⁽²⁾Nonaccrual loans exclude guaranteed portion of delinquent SBA loans that are in liquidation totaling $27.5 million.

Loans accounted for under ASC 310-30 are generally considered accruing and performing loans and the accretable discount is accreted to interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, ACILs that are contractually past due are 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 non-homogeneous loans. 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 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 that 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 repayment of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.


•	Doubtful/Loss: 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 risk rating for Legacy Loans and Acquired Loans as of September 30, 2014 and December 31, 2013 by class of loans:



	As of September 30, 2014
	Pass		Special Mention		Substandard		Doubtful/Loss		Total
	(In thousands)
Legacy Loans:
Real estate—residential	$	18,109	$	—	$	—	$	—	$	18,109
Real estate—commercial
Retail	984,921		20,455		14,536		—		1,019,912
Hotel & motel	741,380		283		7,686		—		749,349
Gas station & car wash	532,287		—		9,806		—		542,093
Mixed use	303,465		4,118		2,215		—		309,798
Industrial & warehouse	330,297		6,461		12,458		—		349,216
Other	646,929		10,716		13,071		—		670,716
Real estate—construction	85,204		—		1,576		—		86,780
Commercial business	726,547		20,691		40,227		470		787,935
Trade finance	110,774		25,580		11,762		—		148,116
Consumer and other	37,035		10		528		—		37,573
Subtotal	$	4,516,948	$	88,314	$	113,865	$	470	$	4,719,597
Acquired Loans:
Real estate—residential	$	801	$	293	$	—	$	—	$	1,094
Real estate—commercial
Retail	173,999		6,753		25,067		—		205,819
Hotel & motel	74,263		2,346		12,125		—		88,734
Gas station & car wash	28,520		353		8,899		256		38,028
Mixed use	31,731		1,472		3,624		—		36,827
Industrial & warehouse	78,613		1,069		14,521		—		94,203
Other	88,114		3,044		16,088		36		107,282
Real estate—construction	—		—		—		—		—
Commercial business	54,348		7,727		24,474		1,324		87,873
Trade finance	—		—		—		—		—
Consumer and other	41,746		2,024		9,549		1,470		54,789
Subtotal	$	572,135	$	25,081	$	114,347	$	3,086	$	714,649
Total	$	5,089,083	$	113,395	$	228,212	$	3,556	$	5,434,246



	As of December 31, 2013
	Pass		Special Mention		Substandard		Doubtful/Loss		Total
	(In thousands)
Legacy Loans:
Real estate—residential	$	8,070	$	—	$	—	$	—	$	8,070
Real estate—commercial
Retail	842,815		858		14,365		—		858,038
Hotel & motel	568,263		1,841		13,661		—		583,765
Gas station & car wash	455,205		—		10,854		—		466,059
Mixed use	259,788		360		3,324		—		263,472
Industrial & warehouse	251,993		4,116		12,056		—		268,165
Other	589,895		3,928		11,493		359		605,675
Real estate—construction	71,231		—		1,626		—		72,857
Commercial business	759,956		12,756		42,952		—		815,664
Trade finance	91,055		22,589		9,297		—		122,941
Consumer and other	32,389		32		535		—		32,956
Subtotal	$	3,930,660	$	46,480	$	120,163	$	359	$	4,097,662
Acquired Loans:
Real estate—residential	$	1,066	$	284	$	619	$	—	$	1,969
Real estate—commercial
Retail	237,325		9,319		28,128		94		274,866
Hotel & motel	109,138		7,134		14,836		179		131,287
Gas station & car wash	35,356		1,621		14,440		245		51,662
Mixed use	32,992		1,467		5,316		—		39,775
Industrial & warehouse	92,570		3,525		19,720		—		115,815
Other	133,752		6,698		21,573		560		162,583
Real estate—construction	—		—		—		—		—
Commercial business	94,854		10,266		26,245		2,064		133,429
Trade finance	1,744		—		—		—		1,744
Consumer and other	51,036		2,695		7,460		4,360		65,551
Subtotal	$	789,833	$	43,009	$	138,337	$	7,502	$	978,681
Total	$	4,720,493	$	89,489	$	258,500	$	7,861	$	5,076,343




	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Reclassification to held for sale	(In thousands)
Real estate - Commercial	$	2,320	$	—	$	2,353	$	—
Real estate - Construction	—		—		—		—
Commercial Business	258		—		258		—
Total	$	2,578	$	—	$	2,611	$	—

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 a loan, 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) pool and risk grade. The migration analysis ("Migration Analysis") is centered on the Bank's internal credit risk rating system. Management's internal loan review and external 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 condition; credit history and payment performance; economic conditions and their impact on various industries; type, fair value and volatility of the fair value of collateral; lien position; and the financial strength of any guarantors.

A general loan loss allowance is provided on loans 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 a migration analysis methodology described above. The 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 loss history. That loss experience is then applied to the stratified portfolio at each quarter end. For ACILs, a general loan loss allowance is provided to the extent that there has been credit deterioration since the date of acquisition.

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 seven possible scenarios for each of the factors below. The matrix allows for up to three positive (Major, Moderate, and Minor), three negative (Major, Moderate, and Minor), and one neutral credit risk scenarios within each factor for each loan type pool. However, if information exists to warrant adjustment to the Migration Analysis, changes are made in accordance with the established parameters supported by narrative and/or statistical analysis. The Credit Risk Matrix and the nine possible scenarios enable the Bank to qualitatively adjust the Loss Migration Ratio by as much as 50 basis points in either direction (positive or negative) for each loan type pool. This matrix considers the following nine factors, which are patterned after the guidelines provided under the 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 our 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 and legal and regulatory requirements, on the level of estimated losses in our 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 by a method prescribed by FASB 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 reflect current market conditions. If the fair value of the collateral is less than the recorded amount of the loan, management recognizes impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses. If an impaired loan is expected to be collected through liquidation of the underlying collateral, the loan is deemed to be collateral dependent and the amount of impairment is charged off against the allowance for loan losses.

The Company considers a loan to be impaired when it is probable that not all amounts due (principal and interest) will be collectible in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The significance of payment delays and payment shortfalls is determined on a case-by-case basis by taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed.

For commercial business loans, real estate loans and certain consumer loans, management bases the measurement of loan impairment on the present value of the expected future cash flows, discounted at the loan's effective interest rate or on the fair value of the loan's collateral if the loan is collateral dependent. Management evaluates most consumer loans for impairment on a collective basis because these loans generally have smaller balances and are homogeneous in the underwriting of terms and conditions and in the type of collateral.

For ACILs, the allowance for loan losses is based upon expected cash flows for these loans. To the extent that a deterioration in borrower credit quality results in a decrease in expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on an estimate of future credit losses over the remaining life of the loans.

The following table presents loans by portfolio segment and impairment method at September 30, 2014 and December 31, 2013:



	As of September 30, 2014
	Real Estate— Residential			Real Estate— Commercial			Real Estate— Construction			Commercial Business			Trade Finance			Consumer and Other			Total
	(In thousands)
Impaired loans (gross carrying value)	$	—		$	75,565		$	1,576		$	42,471		$	9,976		$	1,112		$	130,700
Specific allowance	$	—		$	3,626		$	—		$	4,446		$	2,624		$	—		$	10,696
Loss coverage ratio	0.0		%	4.8		%	0.0		%	10.5		%	26.3		%	0.0		%	8.2		%
Non-impaired loans	$	19,203		$	4,136,412		$	85,204		$	833,337		$	138,140		$	91,250		$	5,303,546
General allowance	$	131		$	44,650		$	446		$	9,736		$	2,027		$	546		$	57,536
Loss coverage ratio	0.7		%	1.1		%	0.5		%	1.2		%	1.5		%	0.6		%	1.1		%
Total loans	$	19,203		$	4,211,977		$	86,780		$	875,808		$	148,116		$	92,362		$	5,434,246
Total allowance for loan losses	$	131		$	48,276		$	446		$	14,182		$	4,651		$	546		$	68,232
Loss coverage ratio	0.7		%	1.1		%	0.5		%	1.6		%	3.1		%	0.6		%	1.3		%



	As of December 31, 2013
	Real Estate— Residential			Real Estate— Commercial			Real Estate— Construction			Commercial Business			Trade Finance			Consumer and Other			Total
	(In thousands)
Impaired loans (gross carrying value)	$	—		$	67,544		$	1,625		$	40,106		$	5,692		$	1,302		$	116,269
Specific allowance	$	—		$	6,670		$	—		$	5,805		$	159		$	32		$	12,666
Loss coverage ratio	0.0		%	9.9		%	0.0		%	14.5		%	2.8		%	2.5		%	10.9		%
Non-impaired loans	$	10,039		$	3,753,619		$	71,231		$	908,987		$	118,993		$	97,205		$	4,960,074
General allowance	$	25		$	39,227		$	628		$	11,787		$	2,494		$	493		$	54,654
Loss coverage ratio	0.2		%	1.0		%	0.9		%	1.3		%	2.1		%	0.5		%	1.1		%
Total loans	$	10,039		$	3,821,163		$	72,856		$	949,093		$	124,685		$	98,507		$	5,076,343
Total allowance for loan losses	$	25		$	45,897		$	628		$	17,592		$	2,653		$	525		$	67,320
Loss coverage ratio	0.2		%	1.2		%	0.9		%	1.9		%	2.1		%	0.5		%	1.3		%

Under certain circumstances, the Company provides borrowers relief through loan modifications. These modifications are either temporary in nature (“temporary modifications”) or are more substantive. At September 30, 2014, total modified loans were $77.7 million, compared to $58.9 million at December 31, 2013. The temporary modifications generally consist of interest only payments for a three to six month period, whereby principal payments are deferred. At the end of the modification period, the remaining principal balance is re-amortized based on the original maturity date. Loans subject to temporary modifications are generally downgraded to Special Mention or Substandard. At the end of the modification period, the loan either 1) returns to the original contractual terms; 2) is further modified and accounted for as a troubled debt restructuring in accordance with ASC 310-10-35; or 3) is disposed of through foreclosure or liquidation.

Troubled Debt Restructurings (“TDRs”) of loans are defined by ASC 310-40, “Troubled Debt Restructurings by Creditors” and ASC 470-60, “Troubled Debt Restructurings by Debtors” and evaluated for impairment in accordance with ASC 310-10-35. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the amount of principal amortization, forgiveness of a portion of a loan balance or accrued interest, or extension of the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed on the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank's internal underwriting policy.

A summary of TDRs on accrual and nonaccrual status by type of concession as of September 30, 2014 and December 31, 2013 is presented below:



	As of September 30, 2014
	TDRs on Accrual								TDRs on Nonaccrual								Total
	Real Estate— Commercial		Commercial Business		Other		Total		Real Estate— Commercial		Commercial Business		Other		Total		Total
	(In thousands)
Payment concession	$	12,345	$	601	$	—	$	12,946	$	3,986	$	660	$	—	$	4,646	$	17,592
Maturity / Amortization concession	1,788		22,016		690		24,494		1,471		5,265		243		6,979		31,473
Rate concession	13,480		5,141		—		18,621		9,714		45		179		9,938		28,559
Principal forgiveness	—		—		—		—		—		118		—		118		118
	$	27,613	$	27,758	$	690	$	56,061	$	15,171	$	6,088	$	422	$	21,681	$	77,742



	As of December 31, 2013
	TDRs on Accrual								TDRs on Nonaccrual								Total
	Real Estate— Commercial		Commercial Business		Other		Total		Real Estate— Commercial		Commercial Business		Other		Total		Total
	(In thousands)
Payment concession	$	7,437	$	1,057	$	—	$	8,494	$	9,489	$	1,279	$	767	$	11,535	$	20,029
Maturity / Amortization concession	765		6,565		535		7,865		1,653		3,656		—		5,309		13,174
Rate concession	13,055		4,490		—		17,545		8,107		—		—		8,107		25,652
Principal forgiveness	—		—		—		—		—		49		—		49		49
	$	21,257	$	12,112	$	535	$	33,904	$	19,249	$	4,984	$	767	$	25,000	$	58,904

TDRs on accrual status are comprised of loans that were accruing at the time of restructuring and for which the Bank anticipates full repayment of both principal and interest under the restructured terms. TDRs that are on nonaccrual status can be returned to accrual status after a period of sustained performance, generally determined to be six months of timely payments as modified. Sustained performance includes the periods prior to the modification if the prior performance met or exceeded the modified terms. TDRs on accrual status at September 30, 2014 were comprised of 21 commercial real estate loans totaling $27.6 million, 28 commercial business loans totaling $27.8 million, and 3 consumer loans totaling $690 thousand. TDRs on accrual status at December 31, 2013 were comprised of 15 commercial real estate loans totaling $21.3 million, 28 commercial business loans totaling $12.1 million and 2 consumer loans totaling $535 thousand. The Company expects that the TDRs on accrual status as of September 30, 2014, which were all performing in accordance with their restructured terms, to continue to comply with the restructured terms because of the reduced principal or interest payments on these loans. TDRs that were restructured at market interest rates and had sustained performance as agreed under the modified loan terms may be reclassified as non-TDRs after each year end but are reserved for under ASC 310-10.

The Company has allocated $6.1 million and $6.6 million of specific reserves to TDRs as of September 30, 2014 and December 31, 2013, respectively.

The following table presents loans by class modified as TDRs that occurred during the three and nine months ended September 30, 2014:



	Three Months Ended September 30, 2014					Nine Months Ended September 30, 2014
	Number of Loans	Pre- Modification		Post- Modification		Number of Loans	Pre- Modification		Post- Modification
	(Dollars in thousand)
Legacy Loans:
Real estate—commercial
Retail	—	$	—	$	—	1	$	523	$	514
Hotel & motel	—	—		—		—	—		—
Gas station & car wash	—	—		—		—	—		—
Mixed use	—	—		—		—	—		—
Industrial & warehouse	1	27		26		2	783		835
Other	1	87		116		2	327		355
Real estate - construction	—	—		—		—	—		—
Commercial business	7	11,866		11,060		14	17,759		16,935
Trade finance	1	2,629		2,759		2	2,721		3,559
Consumer and other	—	—		—		—	—		—
Subtotal	10	$	14,609	$	13,961	21	$	22,113	$	22,198
Acquired Loans:
Real estate—commercial
Retail	—	$	—	$	—	2	$	1,075	$	1,062
Hotel & motel	—	—		—		—	—		—
Gas station & car wash	—	—		—		1	794		756
Mixed use	—	—		—		—	—		—
Industrial & warehouse	1	75		74		1	75		74
Other	—	—		—		1	1,023		1,001
Real estate—construction	—	—		—		—	—		—
Commercial business	2	111		91		7	457		215
Trade finance	—	—		—		—	—		—
Consumer and other	—	$	—	$	—	1	$	195	$	187
Subtotal	3	$	186	$	165	13	$	3,619	$	3,295
	13	$	14,795	$	14,126	34	$	25,732	$	25,493

The specific reserves for the TDRs that occurred during the three and nine months ended September 30, 2014 totaled $233 thousand and $2.7 million, respectively, and there were $691 thousand and $709 thousand in charge offs for the three and nine months ended September 30, 2014, respectively.

The following table presents loans by class for TDRs that have been modified within the previous twelve months and have subsequently had a payment default during the three and nine months ended September 30, 2014:



	Three Months Ended September 30, 2014			Nine Months Ended September 30, 2014
	Number of Loans	Balance		Number of Loans	Balance
	(Dollars In thousands)
Legacy Loans:
Real estate—commercial
Retail	1	$	707	1	$	707
Gas station & car wash	—	—		—	—
Industrial & warehouse	—	—		—	—
Other	—	—		—	—
Commercial business	3	313		4	313
Subtotal	4	$	1,020	5	$	1,020
Acquired Loans:
Real estate—commercial
Retail	2	$	333	2	$	333
Gas station & car wash	—	—		—	—
Hotel & motel	—	—		—	—
Industrial & warehouse	—	—		—	—
Other	—	—		—	—
Commercial business	3	174		3	174
Subtotal	5	$	507	5	$	507
	9	$	1,527	10	$	1,527

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. As of September 30, 2014, the specific reserves totaled $352 thousand and $352 thousand for the TDRs that had payment defaults during the three and nine months ended September 30, 2014, respectively. The total charge offs for the TDRs that had payment defaults during the three and nine months ended September 30, 2014 were $0 thousand and $45 thousand.

There were four Legacy Loans that subsequently defaulted during the three months ended September 30, 2014. Three of the loans were Commercial Business loans that were modified as follows: one loan totaling $106 thousand was modified through payment concession, one loan totaling $107 thousand was modified through maturity concession, and one loan totaling $100 was modified through principal forgiveness. There was one Real Estate Commercial loan totaling $707 thousand that defaulted and was modified through rate concession.

There were five Acquired Loans that defaulted during the three months ended September 30, 2014 that were modified as follows: two Commercial Business loans totaling $154 thousand were modified through payment concessions, one Commercial Business loans totaling $20 thousand was modified through maturity concession, one Real Estate Commercial loan totaling $211 thousand was modified through payment concession and one Real Estate Commercial loan totaling $122 thousand was modified through rate concession.

There were five Legacy loan that defaulted during the nine months ended September 30, 2014, that were modified as follows: one Real Estate Commercial loan totaling $707 thousand was modified through rate concession, one Commercial Business loan totaling $106 thousand was modified through payment concession, one Commercial Business loan totaling $107 thousand was modified through maturity concession, one Commercial Business loan totaling $100 thousand was modified through debt forgiveness, and one Commercial Business loan was charged off during the nine-month period.

There were five Acquired Loans that defaulted during the nine months ended September 30, 2014 that were modified as follows: one Real Estate Commercial loan totaling $211 thousand was modified through payment concession, one Real Estate Commercial loan totaling $122 thousand was modified through rate concession, two Commercial Business loans totaling $154 thousand were modified through payment concessions, and one Commercial Business loan totaling $20 thousand was modified through maturity concession.

Covered Assets

On April 16, 2010, the Department of Financial Institutions closed Innovative Bank, California, and appointed the FDIC as its receiver. On the same date, the Bank assumed the banking operations of Innovative Bank from the FDIC under a purchase and assumption agreement and two related loss sharing agreements with the FDIC.

Covered nonperforming assets totaled $2.2 million and $826 thousand at September 30, 2014 and December 31, 2013, respectively. These covered nonperforming assets are subject to the loss sharing agreements with the FDIC. The covered nonperforming assets at September 30, 2014 and December 31, 2013 were as follows:



	September 30, 2014		December 31, 2013
	(In thousands)
Covered loans on nonaccrual status	$	1,873	$	236
Covered OREO	348		590
Total covered nonperforming assets	$	2,221	$	826

Acquired covered loans	$	41,732	$	55,088

Related Party Loans

In the ordinary course of business, the Company enters into loan transactions with certain of its directors or associates of such directors (“Related Parties”). The loans to Related Parties are on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated parties. In management’s opinion, these transactions did not involve more than normal credit risk or present other unfavorable features. All loans to Related Parties were current as of September 30, 2014 and December 31, 2013, and the outstanding principal balance as of September 30, 2014 and December 31, 2013 was $3.3 million and $3.9 million, respectively.