Loans Receivable and Allowance for Loan Losses

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



	June 30, 2016			December 31, 2015
	(In thousands)
Loan portfolio composition
Real estate loans:
Residential	$	39,403		$	33,797
Commercial & industrial	5,158,900			4,912,655
Construction	132,712			123,030
Total real estate loans	5,331,015			5,069,482
Commercial business	1,027,194			980,153
Trade finance	84,025			99,163
Consumer and other	145,182			102,573
Total loans outstanding	6,587,416			6,251,371
Less: deferred loan fees	(3,179		)	(3,030		)
Loans receivable	6,584,237			6,248,341
Less: allowance for loan losses	(76,425		)	(76,408		)
Loans receivable, net of allowance for loan losses	$	6,507,812		$	6,171,933

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 six months ended June 30, 2016 and 2015:



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(In thousands)
Balance at beginning of period	$	22,097		$	22,645		$	23,777		$	24,051
Additions due to acquisitions during the period	—			—			—			—
Accretion	(2,474		)	(3,096		)	(5,503		)	(6,232		)
Changes in expected cash flows	527			1,840			1,876			3,570
Balance at end of period	$	20,150		$	21,389		$	20,150		$	21,389

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 six months ended June 30, 2016 and 2015:




	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 June 30, 2016
Balance, beginning of period	$	42,115		$	19,048		$	2,085		$	768		$	12,626		$	154		$	—	$	60		$	76,856
Provision (credit) for loan losses	1,375			(798		)	364			123			187			(42		)	—		(9		)	1,200
Loans charged off	—			(2,005		)	—			(50		)	(207		)	(33		)	—		—			(2,295		)
Recoveries of charge offs	176			331			—			85			1			69			—		2			664
Balance, end of period	$	43,666		$	16,576		$	2,449		$	926		$	12,607		$	148		$	—	$	53		$	76,425
Six Months Ended June 30, 2016
Balance, beginning of period	$	42,829		$	16,332		$	3,592		$	556		$	12,823		$	214		$	—	$	62		$	76,408
Provision (credit) for loan losses	157			2,349			(1,143		)	399			105			(154		)	—		(13		)	1,700
Loans charged off	(19		)	(2,626		)	—			(115		)	(323		)	(33		)	—		—			(3,116		)
Recoveries of charge offs	699			521			—			86			2			121			—		4			1,433
Balance, end of period	$	43,666		$	16,576		$	2,449		$	926		$	12,607		$	148		$	—	$	53		$	76,425




	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 June 30, 2015
Balance, beginning of period	$	35,772		$	16,168		$	3,041		$	416		$	13,724		$	422		$	—	$	51		$	69,594
Provision (credit) for loan losses	1,224			(751		)	(522		)	521			280			240			—		8			1,000
Loans charged off	(61		)	(448		)	(759		)	—			(13		)	(170		)	—		—			(1,451		)
Recoveries of charge offs	61			809			—			92			—			8			—		5			975
Balance, end of period	$	36,996		$	15,778		$	1,760		$	1,029		$	13,991		$	500		$	—	$	64		$	70,118
Six Months Ended June 30, 2015
Balance, beginning of period	$	38,775		$	15,986		$	3,456		$	427		$	8,573		$	485		$	—	$	56		$	67,758
Provision (credit) for loan losses	(2,398		)	(773		)	(709		)	523			5,590			262			—		5			2,500
Loans charged off	(242		)	(899		)	(987		)	(15		)	(172		)	(257		)	—		(4		)	(2,576		)
Recoveries of charge offs	861			1,464			—			94			—			10			—		7			2,436
Balance, end of period	$	36,996		$	15,778		$	1,760		$	1,029		$	13,991		$	500		$	—	$	64		$	70,118

The following tables disaggregate the allowance for loan losses and the loans outstanding by impairment methodology at June 30, 2016 and December 31, 2015:



	June 30, 2016
	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	$	1,896	$	5,052	$	1,522	$	69	$	100	$	95	$	—	$	—	$	8,734
Collectively evaluated for impairment	41,770		11,524		927		857		558		53		—		53		55,742
ACILs	—		—		—		—		11,949		—		—		—		11,949
Total	$	43,666	$	16,576	$	2,449	$	926	$	12,607	$	148	$	—	$	53	$	76,425

Loans outstanding:
Individually evaluated for impairment	$	60,744	$	48,800	$	8,942	$	769	$	15,754	$	1,100	$	—	$	446	$	136,555
Collectively evaluated for impairment	5,051,436		946,106		75,083		107,537		138,260		14,028		—		18,615		6,351,065
ACILs	—		—		—		—		64,821		17,160		—		17,815		99,796
Total	$	5,112,180	$	994,906	$	84,025	$	108,306	$	218,835	$	32,288	$	—	$	36,876	$	6,587,416



	December 31, 2015
	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	$	1,663	$	4,188	$	2,603	$	—	$	225	$	128	$	—	$	—	$	8,807
Collectively evaluated for impairment	41,166		12,144		989		556		616		86		—		62		55,619
ACILs	—		—		—		—		11,982		—		—		—		11,982
Total	$	42,829	$	16,332	$	3,592	$	556	$	12,823	$	214	$	—	$	62	$	76,408

Loans outstanding:
Individually evaluated for impairment	$	63,376	$	40,352	$	12,548	$	812	$	19,109	$	1,235	$	—	$	658	$	138,090
Collectively evaluated for impairment	4,717,300		896,041		86,615		60,570		200,753		22,660		—		20,533		6,004,472
ACILs	—		—		—		—		68,944		19,865		—		20,000		108,809
Total	$	4,780,676	$	936,393	$	99,163	$	61,382	$	288,806	$	43,760	$	—	$	41,191	$	6,251,371

As of June 30, 2016 and December 31, 2015, the liability for unfunded commitments was $1.5 million and $2.0 million, respectively. For the three months ended June 30, 2016 and 2015, the recognized credit for losses related to unfunded commitments was $109 thousand and $95 thousand, respectively. For the six months ended June 30, 2016 and 2015,

the recognized benefit provision for credit losses related to unfunded commitments was $461 thousand and $146 thousand,

respectively.

The recorded investment in individually impaired loans was as follows:



	June 30, 2016			December 31, 2015
	(In thousands)
With allocated allowance
Without charge off	$	65,372		$	77,922
With charge off	260			155
With no allocated allowance
Without charge off	67,169			57,585
With charge off	3,754			2,428
Allowance on impaired loans	(8,734		)	(8,807		)
Impaired loans, net of allowance	$	127,821		$	129,283

The following tables detail impaired loans (Legacy and APLs that became impaired subsequent to being acquired) as of June 30, 2016 and December 31, 2015, for the three and six months ended June 30, 2016 and 2015, and for the year ended December 31, 2015. Loans with no related allowance for loan losses are believed by management to have adequate collateral securing their carrying value.



	As of June 30, 2016						For the Six Months Ended June 30, 2016				For the Three Months Ended June 30, 2016
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	1,419		1,562		73		1,614		—		1,486		—
Hotel & motel	1,324		1,324		125		3,515		32		2,925		16
Gas station & car wash	1,058		1,067		311		1,052		19		794		9
Mixed use	209		735		5		445		3		386		2
Industrial & warehouse	547		547		—		555		12		552		6
Other	24,191		24,437		1,481		24,372		550		24,257		274
Real estate—construction	—		—		—		—		—		—		—
Commercial business	31,697		32,396		5,148		34,393		481		35,826		271
Trade finance	4,491		4,509		1,522		8,373		57		6,286		16
Consumer and other	696		696		69		317		17		408		10
	$	65,632	$	67,273	$	8,734	$	74,636	$	1,171	$	72,920	$	604
With no related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	9,152		9,813		—		10,454		160		10,029		79
Hotel & motel	9,738		13,782		—		8,479		98		8,922		49
Gas station & car wash	4,960		8,861		—		4,763		50		5,268		25
Mixed use	2,316		2,576		—		2,348		24		2,331		12
Industrial & warehouse	11,106		12,585		—		10,294		179		10,957		89
Other	9,178		10,553		—		11,534		85		10,676		43
Real estate—construction	1,300		1,441		—		1,337		—		1,321		—
Commercial business	18,203		21,152		—		12,034		281		13,022		140
Trade finance	4,451		4,451		—		1,484		109		2,225		56
Consumer and other	519		576		—		991		1		820		—
	$	70,923	$	85,790	$	—	$	63,718	$	987	$	65,571	$	493
Total	$	136,555	$	153,063	$	8,734	$	138,354	$	2,158	$	138,491	$	1,097


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



	For the Six Months Ended June 30, 2015				For the Three Months Ended June 30, 2015
Total Impaired Loans	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	4,411		88		4,165		44
Hotel & motel	12,134		258		11,500		129
Gas station & car wash	1,479		29		1,266		15
Mixed use	481		—		481		—
Industrial & warehouse	4,489		84		5,678		42
Other	8,823		176		8,344		88
Real estate—construction	—		—		—		—
Commercial business	32,453		579		30,030		286
Trade finance	4,678		108		4,990		54
Consumer and other	209		—		314		—
	$	69,157	$	1,322	$	66,768	$	658
With no related allowance:
Real estate—residential	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	10,260		167		9,536		84
Hotel & motel	6,122		7		6,187		3
Gas station & car wash	3,391		22		3,739		11
Mixed use	2,356		21		2,740		10
Industrial & warehouse	11,033		154		9,362		77
Other	8,730		77		9,554		40
Real estate—construction	1,000		—		740		—
Commercial business	8,104		81		9,502		41
Trade finance	1,643		—		1,524		—
Consumer and other	1,064		13		1,066		7
	$	53,703	$	542	$	53,950	$	273
Total	$	122,860	$	1,864	$	120,718	$	931


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



	As of June 30, 2016						For the Six Months Ended June 30, 2016				For the Three Months Ended June 30, 2016
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	1,037		1,140		65		1,125		—		1,103		—
Hotel & motel	—		—		—		—		—		—		—
Gas station & car wash	—		—		—		339		—		—		—
Mixed use	139		139		2		375		3		316		2
Industrial & warehouse	—		—		—		—		—		—		—
Other	346		350		33		318		9		324		4
Real estate—construction	—		—		—		—		—		—		—
Commercial business	426		489		96		526		6		506		3
Trade finance	—		—		—		—		—		—		—
Consumer and other	159		159		—		53		4		80		2
	$	2,107	$	2,277	$	196	$	2,736	$	22	$	2,329	$	11
With no related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	2,483		2,638		—		2,542		52		2,491		26
Hotel & motel	5,055		7,335		—		6,273		7		5,903		3
Gas station & car wash	1,592		1,836		—		1,458		50		1,593		25
Mixed use	271		282		—		272		5		271		3
Industrial & warehouse	1,085		1,325		—		1,103		5		1,090		2
Other	3,746		4,575		—		3,799		26		3,761		13
Real estate—construction	—		—		—		—		—		—		—
Commercial business	674		981		—		673		17		675		8
Trade finance	—		—		—		—		—		—		—
Consumer and other	286		335		—		467		1		371		—
	$	15,192	$	19,307	$	—	$	16,587	$	163	$	16,155	$	80
Total	$	17,299	$	21,584	$	196	$	19,323	$	185	$	18,484	$	91


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



	For the Six Months Ended June 30, 2015				For the Three Months Ended June 30, 2015
Impaired APLs	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	2,278		74		2,591		37
Hotel & motel	—		—		—		—
Gas station & car wash	1,398		29		1,215		15
Mixed use	352		—		352		—
Industrial & warehouse	120		—		180		—
Other	1,123		8		803		4
Real estate—construction	—		—		—		—
Commercial business	721		9		697		4
Trade finance	—		—		—		—
Consumer and other	1		—		1		—
	$	5,993	$	120	$	5,839	$	60
With no related allowance:
Real estate—residential	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	2,037		7		1,476		3
Hotel & motel	5,613		7		5,624		3
Gas station & car wash	347		—		516		—
Mixed use	167		2		251		1
Industrial & warehouse	1,362		2		1,174		1
Other	4,287		21		4,426		10
Real estate—construction	—		—		—		—
Commercial business	982		33		968		17
Trade finance	—		—		—		—
Consumer and other	606		4		611		2
	$	15,401	$	76	$	15,046	$	37
Total	$	21,394	$	196	$	20,885	$	97


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



	As of December 31, 2015						For the Year Ended December 31, 2015
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	1,871		1,984		230		3,388		—
Hotel & motel	4,697		4,707		158		10,512		230
Gas station & car wash	1,569		1,625		47		1,542		59
Mixed use	564		1,087		13		498		9
Industrial & warehouse	563		563		—		3,686		25
Other	24,603		24,851		1,440		12,585		1,110
Real estate—construction	—		—		—		—		—
Commercial business	31,527		31,832		4,316		31,790		998
Trade finance	12,548		12,548		2,603		6,209		527
Consumer and other	135		135		—		153		7
	$	78,077	$	79,332	$	8,807	$	70,363	$	2,965
With no related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	11,305		12,051		—		10,779		464
Hotel & motel	7,592		10,180		—		6,455		93
Gas station & car wash	3,754		6,435		—		3,685		107
Mixed use	2,382		2,604		—		2,375		51
Industrial & warehouse	8,967		10,608		—		10,186		254
Other	13,250		14,234		—		9,355		362
Real estate—construction	1,369		1,470		—		1,153		—
Commercial business	10,059		12,063		—		8,722		345
Trade finance	—		—		—		986		—
Consumer and other	1,335		1,431		—		1,177		26
	$	60,013	$	71,076	$	—	$	54,873	$	1,702
Total	$	138,090	$	150,408	$	8,807	$	125,236	$	4,667


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



	As of December 31, 2015						For the Year Ended December 31, 2015
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	1,171		1,173		197		1,835		—
Hotel & motel	—		—		—		—		—
Gas station & car wash	1,017		1,062		6		1,246		59
Mixed use	494		491		5		380		9
Industrial & warehouse	—		—		—		72		—
Other	306		306		17		797		16
Real estate—construction	—		—		—		—		—
Commercial business	566		645		128		671		15
Trade finance	—		—		—		—		—
Consumer and other	—		—		—		—		—
	$	3,554	$	3,677	$	353	$	5,001	$	99
With no related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	2,642		2,756		—		2,301		105
Hotel & motel	7,014		9,303		—		5,889		73
Gas station & car wash	1,188		1,299		—		651		64
Mixed use	273		282		—		210		13
Industrial & warehouse	1,127		1,298		—		1,275		9
Other	3,876		4,615		—		4,162		53
Real estate—construction	—		—		—		—		—
Commercial business	668		1,039		—		892		55
Trade finance	—		—		—		—		—
Consumer and other	658		748		—		629		7
	$	17,446	$	21,340	$	—	$	16,009	$	379
Total	$	21,000	$	25,017	$	353	$	21,010	$	478


*	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 June 30, 2016 and December 31, 2015 by class of loans:



	As of June 30, 2016
	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	449		427		—		876		2,460		3,336
Hotel & motel	—		—		—		—		1,118		1,118
Gas station & car wash	—		—		—		—		3,591		3,591
Mixed use	—		—		—		—		1,352		1,352
Industrial & warehouse	107		—		—		107		2,178		2,285
Other	220		844		—		1,064		3,035		4,099
Real estate—construction	—		—		—		—		1,300		1,300
Commercial business	1,974		126		—		2,100		12,992		15,092
Trade finance	29		—		29		58		2,886		2,944
Consumer and other	141		30		118		289		356		645
Subtotal	$	2,920	$	1,427	$	147	$	4,494	$	31,268	$	35,762
Acquired Loans: ⁽¹⁾
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	1,220		—		—		1,220		1,850		3,070
Hotel & motel	—		—		—		—		4,785		4,785
Gas station & car wash	1,009		—		—		1,009		—		1,009
Mixed use	—		—		—		—		62		62
Industrial & warehouse	—		—		—		—		950		950
Other	328		—		—		328		2,625		2,953
Real estate—construction	—		—		—		—		—		—
Commercial business	178		32		—		210		393		603
Trade finance	—		—		—		—		—		—
Consumer and other	—		313		—		313		465		778
Subtotal	$	2,735	$	345	$	—	$	3,080	$	11,130	$	14,210
TOTAL	$	5,655	$	1,772	$	147	$	7,574	$	42,398	$	49,972


⁽¹⁾	The Acquired Loans exclude ACILs.


⁽²⁾	Nonaccrual loans exclude the guaranteed portion of delinquent SBA loans that are in liquidation totaling $15.5 million.



	As of December 31, 2015
	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	574		—		—		574		2,383		2,957
Hotel & motel	854		—		—		854		318		1,172
Gas station & car wash	—		640		330		970		2,418		3,388
Mixed use	—		—		—		—		1,407		1,407
Industrial & warehouse	—		110		—		110		2,275		2,385
Other	—		—		—		—		2,930		2,930
Real estate—construction	—		—		—		—		1,369		1,369
Commercial business	905		770		—		1,675		13,393		15,068
Trade finance	—		—		—		—		1,731		1,731
Consumer and other	770		158		45		973		245		1,218
Subtotal	$	3,103	$	1,678	$	375	$	5,156	$	28,469	$	33,625
Acquired Loans: ⁽¹⁾
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	2,572		—		—		2,572		2,113		4,685
Hotel & motel	—		—		—		—		5,072		5,072
Gas station & car wash	—		—		—		—		—		—
Mixed use	—		—		—		—		415		415
Industrial & warehouse	—		—		—		—		990		990
Other	—		—		—		—		2,684		2,684
Real estate—construction	—		—		—		—		—		—
Commercial business	310		39		—		349		476		825
Trade finance	—		—		—		—		—		—
Consumer and other	287		—		—		287		582		869
Subtotal	$	3,169	$	39	$	—	$	3,208	$	12,332	$	15,540
TOTAL	$	6,272	$	1,717	$	375	$	8,364	$	40,801	$	49,165


⁽¹⁾	The Acquired Loans exclude ACILs.


⁽²⁾	Nonaccrual loans exclude guaranteed portion of delinquent SBA loans that are in liquidation totaling $18.7 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 June 30, 2016 and December 31, 2015 by class of loans:



	As of June 30, 2016
	Pass		Special Mention		Substandard		Doubtful/Loss		Total
	(In thousands)
Legacy Loans:
Real estate—residential	$	38,400	$	459	$	—	$	—	$	38,859
Real estate—commercial
Retail	1,262,782		11,126		12,769		—		1,286,677
Hotel & motel	1,110,109		6,900		7,320		—		1,124,329
Gas station & car wash	641,800		5,785		3,591		—		651,176
Mixed use	352,364		1,174		1,518		—		355,056
Industrial & warehouse	484,995		9,455		14,759		—		509,209
Other	960,608		23,423		30,131		—		1,014,162
Real estate—construction	120,196		11,216		1,300		—		132,712
Commercial business	939,420		8,792		46,586		108		994,906
Trade finance	71,552		2,454		10,019		—		84,025
Consumer and other	107,274		139		893		—		108,306
Subtotal	$	6,089,500	$	80,923	$	128,886	$	108	$	6,299,417
Acquired Loans:
Real estate—residential	$	269	$	276	$	—	$	—	$	545
Real estate—commercial
Retail	58,180		6,608		11,712		—		76,500
Hotel & motel	13,930		2,404		13,370		—		29,704
Gas station & car wash	21,123		353		5,977		—		27,453
Mixed use	13,642		6,299		3,410		8		23,359
Industrial & warehouse	23,337		953		3,929		358		28,577
Other	23,115		363		9,219		—		32,697
Real estate—construction	—		—		—		—		—
Commercial business	17,934		797		13,471		86		32,288
Trade finance	—		—		—		—		—
Consumer and other	27,160		1,394		6,172		2,150		36,876
Subtotal	$	198,690	$	19,447	$	67,260	$	2,602	$	287,999
Total	$	6,288,190	$	100,370	$	196,146	$	2,710	$	6,587,416



	As of December 31, 2015
	Pass		Special Mention		Substandard		Doubtful/Loss		Total
	(In thousands)
Legacy Loans:
Real estate—residential	$	32,543	$	465	$	—	$	—	$	33,008
Real estate—commercial
Retail	1,168,844		25,686		14,838		—		1,209,368
Hotel & motel	1,009,493		789		5,937		—		1,016,219
Gas station & car wash	610,749		6,192		3,758		—		620,699
Mixed use	326,902		1,191		2,610		—		330,703
Industrial & warehouse	461,938		10,099		11,966		—		484,003
Other	913,304		15,805		34,537		—		963,646
Real estate—construction	121,661		—		1,369		—		123,030
Commercial business	875,989		21,886		38,505		13		936,393
Trade finance	82,797		3,818		12,548		—		99,163
Consumer and other	60,549		14		812		7		61,382
Subtotal	$	5,664,769	$	85,945	$	126,880	$	20	$	5,877,614
Acquired Loans:
Real estate—residential	$	508	$	281	$	—	$	—	$	789
Real estate—commercial
Retail	91,076		2,364		14,926		—		108,366
Hotel & motel	21,306		4,339		13,835		—		39,480
Gas station & car wash	22,231		356		6,548		—		29,135
Mixed use	14,195		6,382		3,762		—		24,339
Industrial & warehouse	31,606		1,361		4,708		378		38,053
Other	38,311		366		9,967		—		48,644
Real estate—construction	—		—		—		—		—
Commercial business	27,413		1,149		14,835		363		43,760
Trade finance	—		—		—		—		—
Consumer and other	32,194		1,643		5,901		1,453		41,191
Subtotal	$	278,840	$	18,241	$	74,482	$	2,194	$	373,757
Total	$	5,943,609	$	104,186	$	201,362	$	2,214	$	6,251,371




	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Reclassification to held for sale	(In thousands)
Real estate - Commercial	$	—	$	235	$	—	$	685
Real estate - Construction	—		—		—		—
Commercial Business	—		—		—		—
Consumer	—		1,088		400		1,088
Total	$	—	$	1,323	$	400	$	1,773

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 June 30, 2016 and December 31, 2015:



	As of June 30, 2016
	Real Estate— Residential			Real Estate— Commercial			Real Estate— Construction			Commercial Business			Trade Finance			Consumer and Other			Total
	(In thousands)
Impaired loans (gross carrying value)	$	—		$	75,198		$	1,300		$	49,900		$	8,942		$	1,215		$	136,555
Specific allowance	$	—		$	1,995		$	—		$	5,148		$	1,522		$	69		$	8,734
Loss coverage ratio	N/A			2.7		%	0.0		%	10.3		%	17.0		%	5.7		%	6.4		%
Non-impaired loans	$	39,403		$	5,083,702		$	131,412		$	977,294		$	75,083		$	143,967		$	6,450,861
General allowance	$	136		$	52,983		$	1,159		$	11,576		$	927		$	910		$	67,691
Loss coverage ratio	0.3		%	1.0		%	0.9		%	1.2		%	1.2		%	0.6		%	1.0		%
Total loans	$	39,403		$	5,158,900		$	132,712		$	1,027,194		$	84,025		$	145,182		$	6,587,416
Total allowance for loan losses	$	136		$	54,978		$	1,159		$	16,724		$	2,449		$	979		$	76,425
Loss coverage ratio	0.3		%	1.1		%	0.9		%	1.6		%	2.9		%	0.7		%	1.2		%



	As of December 31, 2015
	Real Estate— Residential			Real Estate— Commercial			Real Estate— Construction			Commercial Business			Trade Finance			Consumer and Other			Total
	(In thousands)
Impaired loans (gross carrying value)	$	—		$	81,117		$	1,369		$	41,586		$	12,548		$	1,470		$	138,090
Specific allowance	$	—		$	1,888		$	—		$	4,316		$	2,603		$	—		$	8,807
Loss coverage ratio	N/A			2.3		%	0.0		%	10.4		%	20.7		%	0.0		%	6.4		%
Non-impaired loans	$	33,797		$	4,831,538		$	121,661		$	938,567		$	86,615		$	101,103		$	6,113,281
General allowance	$	230		$	52,617		$	917		$	12,231		$	989		$	617		$	67,601
Loss coverage ratio	0.7		%	1.1		%	0.8		%	1.3		%	1.1		%	0.6		%	1.1		%
Total loans	$	33,797		$	4,912,655		$	123,030		$	980,153		$	99,163		$	102,573		$	6,251,371
Total allowance for loan losses	$	230		$	54,505		$	917		$	16,547		$	3,592		$	617		$	76,408
Loss coverage ratio	0.7		%	1.1		%	0.7		%	1.7		%	3.6		%	0.6		%	1.2		%

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 June 30, 2016, total modified loans were $75.9 million, compared to $72.2 million at December 31, 2015. 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 June 30, 2016 and December 31, 2015 is presented below:



	As of June 30, 2016
	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	$	11,386	$	39	$	—	$	11,425	$	3,689	$	1,812	$	—	$	5,501	$	16,926
Maturity / amortization concession	3,477		20,659		6,632		30,768		1,952		7,847		3,217		13,016		43,784
Rate concession	6,650		1,847		147		8,644		5,920		431		160		6,511		15,155
Principal forgiveness	—		—		—		—		—		—				—		—
	$	21,513	$	22,545	$	6,779	$	50,837	$	11,561	$	10,090	$	3,377	$	25,028	$	75,865



	As of December 31, 2015
	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	$	11,604	$	375	$	—	$	11,979	$	3,891	$	2,410	$	—	$	6,301	$	18,280
Maturity / amortization concession	4,009		18,192		5,311		27,512		1,583		6,818		2,297		10,698		38,210
Rate concession	7,215		1,278		—		8,493		6,445		641		166		7,252		15,745
Principal forgiveness	—		—		—		—		—		—		—		—		—
	$	22,828	$	19,845	$	5,311	$	47,984	$	11,919	$	9,869	$	2,463	$	24,251	$	72,235

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 June 30, 2016 were comprised of 22 commercial real estate loans totaling $21.5 million, 24 commercial business loans totaling $22.5 million, and 7 other loans totaling $6.8 million. TDRs on accrual status at December 31, 2015 were comprised of 24 commercial real estate loans totaling $22.8 million, 28 commercial business loans totaling $19.8 million and 4 consumer and other loans totaling $5.3 million. The Company expects that the TDRs on accrual status as of June 30, 2016, 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 $7.4 million and $5.7 million of specific reserves to TDRs as of June 30, 2016 and December 31, 2015, respectively.

The following table presents loans by class modified as TDRs that occurred during the three and six months ended June 30, 2016:



	Three Months Ended June 30, 2016					Six Months Ended June 30, 2016
	Number of Loans	Pre- Modification		Post- Modification		Number of Loans	Pre- Modification		Post- Modification
	(Dollars in thousands)
Legacy Loans:
Real estate—commercial
Retail	—	$	—	$	—	—	$	—	$	—
Hotel & motel	—	—		—		—	—		—
Gas station & car wash	—	—		—		—	—		—
Mixed use	—	—		—		—	—		—
Industrial & warehouse	—	—		—		—	—		—
Other	—	—		—		—	—		—
Real estate - construction	—	—		—		—	—		—
Commercial business	2	113		114		8	11,201		7,755
Trade finance	—	—		—		1	2,199		1,458
Consumer and other	1	—		111		1	—		111
Subtotal	3	$	113	$	225	10	$	13,400	$	9,324
Acquired Loans:
Real estate—commercial
Retail	—	$	—	$	—	—	$	—	$	—
Hotel & motel	—	—		—		—	—		—
Gas station & car wash	—	—		—		—	—		—
Mixed use	—	—		—		—	—		—
Industrial & warehouse	—	—		—		—	—		—
Other	—	—		—		—	—		—
Real estate—construction	—	—		—		—	—		—
Commercial business	—	—		—		—	—		—
Trade finance	—	—		—		—	—		—
Consumer and other	—	—		—		1	30		27
Subtotal	—	$	—	$	—	1	$	30	$	27
Total	3	$	113	$	225	11	$	13,430	$	9,351

The specific reserves for the TDRs that occurred during the three and six months ended June 30, 2016 totaled $69 thousand and $2.7 million, respectively, and there were no charge offs for the three and six months ended June 30, 2016, 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 six months ended June 30, 2016:



	Three Months Ended June 30, 2016			Six Months Ended June 30, 2016
	Number of Loans	Balance		Number of Loans	Balance
	(Dollars In thousands)
Legacy Loans:
Real estate—commercial
Retail	1	$	489	1	$	489
Gas station & car wash	—	—		—	—
Industrial & warehouse	—	—		—	—
Other	—	—		—	—
Commercial business	8	5,210		8	5,210
Trade finance	1	2,886		1	2,886
Consumer and other	—	—		—	—
Subtotal	10	$	8,585	10	$	8,585
Acquired Loans:
Real estate—commercial
Retail	—	$	—	—	$	—
Gas station & car wash	—	—		—	—
Hotel & motel	—	—		—	—
Mixed Use	—	—		—	—
Industrial & warehouse	—	—		—	—
Other	—	—		—	—
Commercial business	—	—		—	—
Trade finance	—	—		—	—
Consumer and other	1	27		1	27
Subtotal	1	$	27	1	$	27
	11	$	8,612	11	$	8,612

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. As of June 30, 2016, the specific reserves totaled $2.5 million and $2.5 million for the TDRs that had payment defaults during the three and six months ended June 30, 2016. The total charge offs for the TDRs that had payment defaults during the three and six months ended June 30, 2016 were $30 thousand and $30 thousand, respectively.

There were ten Legacy Loans that subsequently defaulted during the three and six months ended June 30, 2016 that were modified as follows: four Commercial Business loans totaling $496 thousand were modified through payment concessions, four Commercial Business loans totaling $4.7 million were modified through maturity concessions, one Commercial Real Estate loan totaling $489 thousand was modified through maturity concession, and one Trade Finance loan totaling $2.9 million was modified through maturity concession.

There was one Acquired Loan totaling $27 thousand that defaulted during the three and six months ended June 30, 2016 that 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. These agreements provide for the sharing of losses and recoveries on the covered assets. The loss sharing provisions of the agreements expired on June 30, 2015, however, the Company will continue to reimburse the FDIC for recoveries on its covered assets until June 30, 2018.

Covered nonperforming assets totaled $2.2 million and $1.3 million at June 30, 2016 and December 31, 2015, respectively. These covered nonperforming assets are subject to the loss sharing agreements with the FDIC. The covered nonperforming assets at June 30, 2016 and December 31, 2015 were as follows:



	June 30, 2016		December 31, 2015
	(In thousands)
Covered loans on nonaccrual status	$	1,252	$	1,118
Covered OREO	915		220
Total covered nonperforming assets	$	2,167	$	1,338

Acquired covered loans	$	20,813	$	22,989

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 June 30, 2016 and December 31, 2015, and the outstanding principal balance as of June 30, 2016 and December 31, 2015 was $3.7 million and $3.8 million, respectively.