Note 6 — Loans

The loan portfolio includes originated and purchased loans. Originated loans and purchased loans for which there was no evidence of credit deterioration at their acquisition date and it was probable that we would be able to collect all contractually required payments, are referred to collectively as non-purchased credit impaired loans, or “Non-PCI loans.” Purchased loans for which there was, at the acquisition date, evidence of credit deterioration since their origination and it was probable that we would be unable to collect all contractually required payments are referred to as purchased credit impaired loans, or “PCI loans”.

Non-PCI loans are carried at the principal amount outstanding, net of deferred fees and costs, and in the case of acquired loans, net of purchase discounts and premiums. Deferred fees and costs and purchase discounts and premiums on acquired non-impaired loans are recognized as an adjustment to interest income over the contractual life of the loans using the effective interest method or taken into income when the related loans are paid off or sold.

PCI loans are accounted for in accordance with ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” For PCI loans, at the time of acquisition, we (i) calculate the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”) and (ii) estimate the amount and timing of undiscounted expected principal and interest payments (the “undiscounted expected cash flows”). The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The difference between the undiscounted cash flows expected to be collected and the estimated fair value of the acquired loans is the accretable yield. The accretable yield is recorded as interest income over the estimated life of the loans using the effective yield method if the timing and amount of the future cash flows is reasonably estimable. PCI loans may be placed on nonaccrual status, including use of the cost recovery method or cash basis method of income recognition, if information is not available to reasonably estimate cash flows expected to be collected to compute its yield. The nonaccretable difference represents an estimate of the loss exposure of principal and interest related to PCI loans; such amount is subject to change over time based on the performance of such loans. The carrying value of PCI loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.

As part of the fair value process and the subsequent accounting, the Company aggregates PCI loans into pools having common credit risk characteristics such as type and risk rating. Increases in expected cash flows over those previously estimated increase the accretable yield and are recognized as interest income prospectively. Decreases in the amount and changes in the timing of expected cash flows compared to those previously estimated decrease the accretable yield and usually result in a provision for loan losses and the establishment of an allowance for loan losses. As the accretable yield increases or decreases from changes in cash flow expectations, the offset is a decrease or increase to the nonaccretable difference. The accretable yield is measured at each financial reporting date based on information then currently available and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans.

PCI loans that are contractually past due are still considered to be accruing and performing as long as there is an expectation that the estimated cash flows will be received. If the timing and amount of cash flows is not reasonably estimable, the loans may be classified as nonaccrual with interest income recognized on either a cash basis or as a reduction of the principal amount outstanding.

The Board of Directors and management review and approve the Bank’s loan policy and procedures on a regular basis to reflect issues such as regulatory and organizational structure changes, strategic planning revisions, concentrations of credit, loan delinquencies and nonperforming loans, problem loans, and policy adjustments.

Real estate loans are loans secured by liens or interest in real estate, to provide purchase, construction, and refinance on real estate properties. Commercial and industrial loans consist of commercial term loans, commercial lines of credit, and Small Business Administration (“SBA”) loans. Consumer loans consist of auto loans, credit cards, personal loans, and home equity lines of credit. We maintain management loan review and monitoring functions that review and monitor pass graded loans as well as problem loans to prevent further deterioration.

The majority of the Bank’s loan portfolio consists of commercial real estate and commercial and industrial loans. The Bank has been diversifying and monitoring commercial real estate loans based on property types, underwriting standards, and portfolio liquidity and management, and certain specified limits set forth in the Bank’s loan policy. To date, most of the Bank’s lending activity occurred within Southern California. With the acquisition of CBI, our lending activities in other areas of the country will increase.

 

Loans Receivable

Loans receivable consisted of the following as of the dates indicated:

 

		September 30, 2014												December 31,
		Non-PCI Loans				PCI Loans				Total				2013
		(In thousands)
Real estate loans:
Commercial property (1)
Retail		$	635,861			$	15,940			$	651,801			$	543,619
Hotel/Motel			452,405				14,206				466,611				322,927
Gas station			340,386				18,069				358,455				292,557
Other			805,696				15,715				821,411				731,617
Construction			4,146				—				4,146				—
Residential property			106,044				2,686				108,730				79,078
Total real estate loans			2,344,538				66,616				2,411,154				1,969,798
Commercial and industrial loans:
Commercial term			119,175				350				119,525				124,391
Commercial lines of credit			75,246				—				75,246				71,042
International loans			41,127				—				41,127				36,353
Total commercial and industrial loans			235,548				350				235,898				231,786
Consumer loans			28,849				58				28,907				32,505
Total gross loans			2,608,935				67,024				2,675,959				2,234,089
Allowance for loans losses			(51,179	)			—				(51,179	)			(57,555	)
Deferred loan costs			3,311				—				3,311				964
Loans receivable, net		$	2,561,067			$	67,024			$	2,628,091			$	2,177,498

 

(1)	Includes owner-occupied property loans of $1.10 billion and $957.3 million as of September 30, 2014 and December 31, 2013, respectively.

Accrued interest on loans receivable was $5.8 million and $5.4 million at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014 and December 31, 2013, loans receivable totaling $872.2 million and $568.7 million, respectively, were pledged to secure advances from the FHLB and the Federal Reserve Bank’s (“FRB”) federal discount window.

The following table details the information on the sales and reclassifications of loans receivable to loans held for sale (excluding PCI loans) by portfolio segment for the three months ended September 30, 2014 and 2013:

 

		Real Estate				Commercial and Industrial				Consumer				Total Non-PCI
		(In thousands)
September 30, 2014
Balance at beginning of period		$	2,568			$	1,274			$	—			$	3,842
Origination of loans held for sale			15,198				3,031				—				18,229
Sales of loans held for sale			(12,135	)			(2,133	)			—				(14,268	)
Principal payoffs and amortization			(20	)			(26	)			—				(46	)
Balance at end of period		$	5,611			$	2,146			$	—			$	7,757
September 30, 2013
Balance at beginning of period		$	2,137			$	416			$	—			$	2,553
Origination of loans held for sale			15,634				1,501				—				17,135
Reclassification from loans held for sale to loans receivable			(2,118	)			(416	)			—				(2,534	)
Sales of loans held for sale			(10,725	)			(1,181	)			—				(11,906	)
Principal payoffs and amortization			(20	)			—				—				(20	)
Balance at end of period		$	4,908			$	320			$	—			$	5,228

 

For the three months ended September 30, 2014, there was no reclassification of Non-PCI loans receivable as Non-PCI loans held for sale, and Non-PCI loans held for sale of $14.3 million were sold. In addition, there was no reclassification from Non-PCI loans held for sale to Non-PCI loans receivable. For the three months ended September 30, 2013, there was no reclassification of Non-PCI loans receivable as Non-PCI loans held for sale, and Non-PCI loans held for sale of $11.9 million were sold.

The following table details the information on the sales and reclassifications of loans receivable to loans held for sale (excluding PCI loans) by portfolio segment for the nine months ended September 30, 2014 and 2013:

 

		Real Estate				Commercial and Industrial				Consumer				Total Non-PCI
		(In thousands)
September 30, 2014
Balance at beginning of period		$	—			$	—			$	—			$	—
Origination of loans held for sale			29,591				5,207				—				34,798
Sales of loans held for sale			(23,953	)			(3,033	)			—				(26,986	)
Principal payoffs and amortization			(27	)			(28	)			—				(55	)
Balance at end of period		$	5,611			$	2,146			$	—			$	7,757
September 30, 2013
Balance at beginning of period		$	7,977			$	329			$	—			$	8,306
Origination of loans held for sale			58,725				4,387				—				63,112
Reclassification from loans receivable to loans held for sale			7,593				416				—				8,009
Reclassification from loans held for sale to loans receivable			(2,118	)			(416	)			—				(2,534	)
Sales of loans held for sale			(67,235	)			(4,391	)			—				(71,626	)
Principal payoffs and amortization			(34	)			(5	)			—				(39	)
Balance at end of period		$	4,908			$	320			$	—			$	5,228

For the nine months ended September 30, 2014, there was no reclassification of Non-PCI loans receivable as Non-PCI loans held for sale, and Non-PCI loans held for sale of $27.0 million were sold. In addition, there was no reclassification from Non-PCI loans held for sale to Non-PCI loans receivable. For the nine months ended September 30, 2013, Non-PCI loans receivable of $8.0 million were reclassified as Non-PCI loans held for sale, and Non-PCI loans held for sale of $71.6 million were sold.

Allowance for Loan Losses and Allowance for Off-Balance Sheet Items

Activity in the allowance for loan losses and allowance for off-balance sheet items was as follows for the periods indicated:

 

		As of and for the Three Months Ended								As of and for the Nine Months Ended
		September 30, 2014				September 30, 2013				September 30, 2014				September 30, 2013
		(In thousands)
Allowance for loan losses:
Balance at beginning of period		$	51,886			$	59,876			$	57,555			$	63,305
Charge-offs			(1,418	)			(4,610	)			(5,569	)			(11,124	)
Recoveries on loans previously charged off			663				2,383				6,656				4,964
Net loan (charge-offs) recoveries			(755	)			(2,227	)			1,087				(6,160	)
Provision (negative provision) charged to operating expense			48				(10	)			(7,463	)			494
Balance at end of period		$	51,179			$	57,639			$	51,179			$	57,639
Allowance for off-balance sheet items:
Balance at beginning of period		$	1,592			$	1,320			$	1,247			$	1,824
(Negative provision) provision charged to operating expense			(48	)			10				297				(494	)
Balance at end of period		$	1,544			$	1,330			$	1,544			$	1,330

 

There was no allowance for loan losses on our PCI loans as of September 30, 2014. The allowance for off-balance sheet items is maintained at a level believed to be sufficient to absorb estimated probable losses related to these unfunded credit facilities. The determination of the allowance adequacy is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. As of September 30, 2014 and 2013, the allowance for off-balance sheet items amounted to $1.5 million and $1.3 million, respectively. Net adjustments to the allowance for off-balance sheet items are included in the provision for credit losses.

The following table details the information on the allowance for loan losses by portfolio segment for the three months ended September 30, 2014 and 2013:

 

		Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		(In thousands)
September 30, 2014
Allowance for loan losses:
Beginning balance		$	40,303			$	9,738			$	540			$	1,305			$	51,886
Charge-offs			(884	)			(499	)			(35	)			—				(1,418	)
Recoveries on loans previously charged off			293				365				5				—				663
(Negative provision) provision			179				260				(186	)			(205	)			48
Ending balance		$	39,891			$	9,864			$	324			$	1,100			$	51,179
Ending balance: individually evaluated for impairment		$	2,027			$	3,757			$	—			$	—			$	5,784
Ending balance: collectively evaluated for impairment		$	37,864			$	6,107			$	324			$	1,100			$	45,395
Loans receivable:
Ending balance		$	2,411,154			$	235,898			$	28,907			$	—			$	2,675,959
Ending balance: individually evaluated for impairment		$	35,654			$	11,970			$	1,758			$	—			$	49,382
Ending balance: collectively evaluated for impairment		$	2,308,884			$	223,578			$	27,091			$	—			$	2,559,553
Ending balance: acquired with deteriorated credit quality		$	66,616			$	350			$	58			$	—			$	67,024

 

		Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		(In thousands)
September 30, 2013
Allowance for loan losses:
Beginning balance		$	46,396			$	11,118			$	1,884			$	478			$	59,876
Charge-offs			(1,017	)			(3,575	)			(18	)			—				(4,610	)
Recoveries on loans previously charged off			1,641				737				5				—				2,383
Provision (negative provision)			(1,795	)			388				(232	)			1,629				(10	)
Ending balance		$	45,225			$	8,668			$	1,639			$	2,107			$	57,639
Ending balance: individually evaluated for impairment		$	564			$	1,475			$	330			$	—			$	2,369
Ending balance: collectively evaluated for impairment		$	44,661			$	7,193			$	1,309			$	2,107			$	55,270
Loans receivable:
Ending balance		$	1,921,659			$	203,547			$	34,065			$	—			$	2,159,271
Ending balance: individually evaluated for impairment		$	29,424			$	12,468			$	1,574			$	—			$	43,466
Ending balance: collectively evaluated for impairment		$	1,892,235			$	191,079			$	32,491			$	—			$	2,115,805

 

The following table details the information on the allowance for loan losses by portfolio segment for the nine months ended September 30, 2014 and 2013:

 

		Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		(In thousands)
September 30, 2014
Allowance for loan losses:
Beginning balance		$	43,550			$	11,287			$	1,427			$	1,291			$	57,555
Charge-offs			(2,073	)			(3,394	)			(102	)			—				(5,569	)
Recoveries on loans previously charged off			3,298				3,338				20				—				6,656
(Negative provision) provision			(4,884	)			(1,367	)			(1,021	)			(191	)			(7,463	)
Ending balance		$	39,891			$	9,864			$	324			$	1,100			$	51,179
Ending balance: individually evaluated for impairment		$	2,027			$	3,757			$	—			$	—			$	5,784
Ending balance: collectively evaluated for impairment		$	37,864			$	6,107			$	324			$	1,100			$	45,395
Loans receivable:
Ending balance		$	2,411,154			$	235,898			$	28,907			$	—			$	2,675,959
Ending balance: individually evaluated for impairment		$	35,654			$	11,970			$	1,758			$	—			$	49,382
Ending balance: collectively evaluated for impairment		$	2,308,884			$	223,578			$	27,091			$	—			$	2,559,553
Ending balance: acquired with deteriorated credit quality		$	66,616			$	350			$	58			$	—			$	67,024

 

		Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		(In thousands)
September 30, 2013
Allowance for loan losses:
Beginning balance		$	49,472			$	10,636			$	2,280			$	917			$	63,305
Charge-offs			(4,592	)			(6,314	)			(218	)			—				(11,124	)
Recoveries on loans previously charged off			2,923				1,981				60				—				4,964
Provision (negative provision)			(2,578	)			2,365				(483	)			1,190				494
Ending balance		$	45,225			$	8,668			$	1,639			$	2,107			$	57,639
Ending balance: individually evaluated for impairment		$	564			$	1,475			$	330			$	—			$	2,369
Ending balance: collectively evaluated for impairment		$	44,661			$	7,193			$	1,309			$	2,107			$	55,270
Loans receivable:
Ending balance		$	1,921,659			$	203,547			$	34,065			$	—			$	2,159,271
Ending balance: individually evaluated for impairment		$	29,424			$	12,468			$	1,574			$	—			$	43,466
Ending balance: collectively evaluated for impairment		$	1,892,235			$	191,079			$	32,491			$	—			$	2,115,805

Credit Quality Indicators

As part of the on-going monitoring of the credit quality of our loan portfolio, we utilize an internal loan grading system to identify credit risk and assign an appropriate grade (from (0) to (8)) for each and every loan in our loan portfolio. A third party loan review is required on an annual basis. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:

Pass and Pass-Watch: Pass and Pass-Watch loans, grades (0-4), are in compliance in all respects with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or defined weaknesses as defined under “Special Mention,” “Substandard” or “Doubtful.” This category is the strongest level of the Bank’s loan grading system. It incorporates all performing loans with no credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans.

Special Mention: A Special Mention credit, grade (5), has potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses may result in deterioration of the repayment of the debt and result in a Substandard classification. Loans that have significant actual, not potential, weaknesses are considered more severely classified.

Substandard: A Substandard credit, grade (6), has a well-defined weakness that jeopardizes the liquidation of the debt. A credit graded Substandard is not protected by the sound worth and paying capacity of the borrower, or of the value and type of collateral pledged. With a Substandard loan, there is a distinct possibility that the Bank will sustain some loss if the weaknesses or deficiencies are not corrected.

 

Doubtful: A Doubtful credit, grade (7), is one that has critical weaknesses that would make the collection or liquidation of the full amount due improbable. However, there may be pending events which may work to strengthen the credit, and therefore the amount or timing of a possible loss cannot be determined at the current time.

Loss: A loan classified as Loss, grade (8), is considered uncollectible and of such little value that their continuance as active bank assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans classified as Loss will be charged off in a timely manner.

As of September 30, 2014 and December 31, 2013, pass/pass-watch (grade 0-4), criticized (grade 5) and classified (grade 6-7) loans (excluding PCI loans), disaggregated by loan class, were as follows:

 

		As of September 30, 2014
		Pass/Pass-Watch (Grade 0-4)				Criticized (Grade 5)				Classified (Grade 6-7)				Total
		(In thousands)
Real estate loans:
Commercial property
Retail		$	620,511			$	12,821			$	2,529			$	635,861
Hotel/Motel			399,006				48,995				4,404				452,405
Gas station			320,501				10,054				9,831				340,386
Other			780,400				13,599				11,697				805,696
Construction			4,146				—				—				4,146
Residential property			103,812				122				2,110				106,044
Commercial and industrial loans:
Commercial term			108,908				1,315				8,952				119,175
Commercial lines of credit			74,286				—				960				75,246
International loans			38,676				—				2,451				41,127
Consumer loans			26,626				140				2,083				28,849
Total Non-PCI loans		$	2,476,872			$	87,046			$	45,017			$	2,608,935

 

		As of December 31, 2013
		Pass/Pass-Watch (Grade 0-4)				Criticized (Grade 5)				Classified (Grade 6-7)				Total
		(In thousands)
Real estate loans:
Commercial property
Retail		$	531,014			$	5,309			$	7,296			$	543,619
Hotel/Motel			308,483				1,796				12,648				322,927
Gas station			279,636				3,104				9,817				292,557
Other			690,481				8,524				32,612				731,617
Residential property			77,422				—				1,656				79,078
Commercial and industrial loans:
Commercial term			107,712				2,007				14,672				124,391
Commercial lines of credit			69,823				—				1,219				71,042
International loans			35,777				576				—				36,353
Consumer loans			30,044				163				2,298				32,505
Total Non-PCI loans		$	2,130,392			$	21,479			$	82,218			$	2,234,089

 

The following is an aging analysis of past due loans (excluding PCI loans), disaggregated by loan class, as of the dates indicated:

 

		As of September 30, 2014
		30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due				Total Past Due				Current				Total				Accruing 90 Days or More Past Due
		(In thousands)
Real estate loans:
Commercial property
Retail		$	1,927			$	146			$	182			$	2,255			$	633,606			$	635,861			$	—
Hotel/Motel			52				733				1,203				1,988				450,417				452,405				—
Gas station			4,781				794				544				6,119				334,267				340,386				—
Other			1,867				67				380				2,314				803,382				805,696				15
Construction			—				—				—				—				4,146				4,146				—
Residential property			113				121				486				720				105,324				106,044				—
Commercial and industrial loans:
Commercial term			1,410				587				2,873				4,870				114,305				119,175				—
Commercial lines of credit			274				197				—				471				74,775				75,246				—
International loans			251				—				—				251				40,876				41,127				—
Consumer loans			—				—				248				248				28,601				28,849				—
Total Non-PCI loans		$	10,675			$	2,645			$	5,916			$	19,236			$	2,589,699			$	2,608,935			$	15

 

		As of December 31, 2013
		30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due				Total Past Due				Current				Total				Accruing 90 Days or More Past Due
		(In thousands)
Real estate loans:
Commercial property
Retail		$	202			$	426			$	2,196			$	2,824			$	540,794			$	543,618			$	—
Hotel/Motel			1,087				—				1,532				2,619				320,308				322,927				—
Gas station			141				410				153				704				291,853				292,557				—
Other			423				2,036				839				3,298				728,320				731,618				—
Residential property			—				122				279				401				78,677				79,078				—
Commercial and industrial loans:
Commercial term			1,443				886				3,269				5,598				118,793				124,391				—
Commercial lines of credit			—				150				250				400				70,642				71,042				—
International loans			—				—				—				—				36,353				36,353				—
Consumer loans			311				42				77				430				32,075				32,505				—
Total Non-PCI loans		$	3,607			$	4,072			$	8,595			$	16,274			$	2,217,815			$	2,234,089			$	—

Impaired Loans

Loans are considered impaired when nonaccrual and principal or interest payments have been contractually past due for 90 days or more, unless the loan is both well-collateralized and in the process of collection; or they are classified as Troubled Debt Restructuring (“TDR”) loans to offer terms not typically granted by the Bank; or when current information or events make it unlikely to collect in full according to the contractual terms of the loan agreements; or there is a deterioration in the borrower’s financial condition that raises uncertainty as to timely collection of either principal or interest; or full payment of both interest and principal is in doubt according to the original contractual terms.

We evaluate loan impairment in accordance with applicable GAAP. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific allocation will be established. Additionally, loans that are considered impaired are specifically excluded from the quarterly migration analysis when determining the amount of the allowance for loan losses required for the period.

The allowance for collateral-dependent loans is determined by calculating the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as nonperforming. We continue to monitor the collateral coverage, using recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.

 

The following tables provide information on impaired loans (excluding PCI loans), disaggregated by loan class, as of the dates indicated:

 

		Recorded Investment				Unpaid Principal Balance				With No Related Allowance Recorded				With an Allowance Recorded				Related Allowance
		(In thousands)
September 30, 2014
Real estate loans:
Commercial property
Retail		$	4,443			$	4,543			$	1,940			$	2,503			$	256
Hotel/Motel			4,042				4,855				4,042				—				1,261
Gas station			14,152				14,681				13,692				460				166
Other			9,856				11,266				8,518				1,338				344
Residential property			3,161				3,292				3,161				—				—
Commercial and industrial loans:
Commercial term			7,958				8,408				1,914				6,044				3,469
Commercial lines of credit			2,874				2,976				2,692				182				183
International loans			1,138				1,138				460				678				105
Consumer loans			1,758				1,910				1,758				—				—
Total Non-PCI loans		$	49,382			$	53,069			$	38,177			$	11,205			$	5,784
December 31, 2013
Real estate loans:
Commercial property
Retail		$	6,244			$	6,332			$	3,767			$	2,477			$	305
Hotel/Motel			6,200				6,940				4,668				1,532				1,183
Gas station			9,389				9,884				8,592				797				209
Other			11,451				12,882				9,555				1,896				351
Residential property			2,678				2,773				2,678				—				—
Commercial and industrial loans:
Commercial term			13,834				14,308				2,929				10,905				3,806
Commercial lines of credit			614				686				173				441				252
International loans			1,087				1,087				286				801				78
Consumer loans			1,569				1,671				644				925				284
Total Non-PCI loans		$	53,066			$	56,563			$	33,292			$	19,774			$	6,468

 

		Average Recorded Investment for the Three Months Ended				Interest Income Recognized for the Three Months Ended				Average Recorded Investment for the Nine Months Ended				Interest Income Recognized for the Nine Months Ended
		(In thousands)
September 30, 2014
Real estate loans:
Commercial property
Retail		$	4,456			$	36			$	5,682			$	215
Hotel/Motel			4,206				102				4,149				232
Gas station			14,181				218				12,023				587
Other			9,898				232				10,716				682
Residential property			3,173				30				2,853				87
Commercial and industrial loans:
Commercial term			8,118				126				10,007				443
Commercial lines of credit			2,884				36				1,447				61
International loans			1,146				—				1,136				—
Consumer loans			1,765				16				1,619				46
Total Non-PCI loans		$	49,827			$	796			$	49,632			$	2,353
September 30, 2013
Real estate loans:
Commercial property
Retail		$	2,723			$	27			$	3,703			$	105
Hotel/Motel			6,377				127				4,752				384
Gas station			8,777				229				8,775				569
Other			8,699				243				9,512				779
Residential property			2,992				33				3,026				92
Commercial and industrial loans:
Commercial term			10,581				191				12,751				692
Commercial lines of credit			840				23				1,137				47
International loans			1,197				—				1,342				—
Consumer loans			1,581				27				1,624				54
Total Non-PCI loans		$	43,767			$	900			$	46,622			$	2,722

The following is a summary of interest foregone on impaired loans (excluding PCI loans) for the periods indicated:

 

		Three Months Ended								Nine Months Ended
		September 30, 2014				September 30, 2013				September 30, 2014				September 30, 2013
		(In thousands)
Interest income that would have been recognized had impaired loans performed in accordance with their original terms		$	1,063			$	1,058			$	3,490			$	3,183
Less: Interest income recognized on impaired loans			(796	)			(900	)			(2,353	)			(2,722	)
Interest foregone on impaired loans		$	267			$	158			$	1,137			$	461

There were no commitments to lend additional funds to borrowers whose loans are included above.

Nonaccrual Loans

Loans are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on nonaccrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Nonaccrual loans may be restored to accrual status when principal and interest payments become current and full repayment is expected.

The following table details nonaccrual loans (excluding PCI loans), disaggregated by loan class, as of the dates indicated:

 

		September 30, 2014				December 31, 2013
		(In thousands)
Real estate loans:
Commercial property
Retail		$	2,062			$	2,946
Hotel/Motel			3,051				5,200
Gas station			5,208				2,492
Other			3,674				4,808
Residential property			1,516				1,365
Commercial and industrial loans:
Commercial term			6,060				7,146
Commercial lines of credit			674				423
Consumer loans			1,758				1,497
Total nonaccrual Non-PCI loans		$	24,003			$	25,877

The following table details nonperforming assets (excluding PCI loans) as of the dates indicated:

 

		September 30, 2014				December 31, 2013
		(In thousands)
Nonaccrual Non-PCI loans		$	24,003			$	25,877
Loans 90 days or more past due and still accruing			15				—
Total nonperforming Non-PCI loans			24,018				25,877
Other real estate owned			24,781				756
Total nonperforming assets		$	48,799			$	26,633

Loans on nonaccrual status, excluding loans held for sale, totaled $24.0 million as of September 30, 2014, compared to $25.9 million as of December 31, 2013, representing a 7.2 percent decrease. Delinquent loans (defined as 30 days or more past due), excluding loans held for sale, were $19.2 million as of September 30, 2014, compared to $16.3 million as of December 31, 2013, representing a 18.2 percent increase.

As of September 30, 2014, other real estate owned (“OREO”) consisted of forty properties, of which $20.2 million and $4.6 million were commercial and residential properties, respectively, with a combined carrying value of $24.8 million and no valuation adjustment. Of $24.8 million, $22.3 million was OREOs assumed in the CBI acquisition. As of December 31, 2013, there were three OREOs with a combined carrying value of $756,000 and a valuation adjustment of $56,000.

Troubled Debt Restructuring

In April 2011, the FASB issued ASU 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, which clarifies the guidance for evaluating whether a restructuring constitutes a TDR. This guidance is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For the purposes of measuring impairment of loans that are newly considered impaired, the guidance should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011.

As a result of the amendments in ASU 2011-02, we reassessed all restructurings that occurred on or after the beginning of the annual period and identified certain receivables as TDRs. Upon identifying those receivables as TDRs, we considered them impaired and applied the impairment measurement guidance prospectively for those receivables newly identified as impaired.

 

The following table details troubled debt restructurings (excluding PCI loans), disaggregated by concession type and by loan type, as of September 30, 2014 and December 31, 2013:

 

		Nonaccrual TDRs																				Accrual TDRs
		Deferral of Principal				Deferral of Principal and Interest				Reduction of Principal and Interest				Extension of Maturity				Total				Deferral of Principal				Deferral of Principal and Interest				Reduction of Principal and Interest				Extension of Maturity				Total
		(In thousands)
September 30, 2014
Real estate loans:
Commercial property
Retail		$	—			$	—			$	—			$	1,856			$	1,856			$	307			$	—			$	—			$	—			$	307
Hotel/Motel			1,158				727				—				—				1,885				991				—				—				—				991
Gas station			1,106				—				—				—				1,106				2,351				—				—				—				2,351
Other			—				1,532				465				59				2,056				3,310				—				792				1,378				5,480
Residential property			755				—				—				—				755				—				—				—				311				311
Commercial and industrial loans:
Commercial term			118				2				1,007				1,567				2,694				61				227				2,118				1,176				3,582
Commercial lines of credit			230				—				316				128				674				2,200				—				—				—				2,200
Consumer loans			—				—				135				—				135				—				—				—				—				—
Total Non-PCI loans		$	3,367			$	2,261			$	1,923			$	3,610			$	11,161			$	9,220			$	227			$	2,910			$	2,865			$	15,222
December 31, 2013
Real estate loans:
Commercial property
Retail		$	—			$	—			$	—			$	750			$	750			$	—			$	—			$	—			$	474			$	474
Hotel/Motel			1,272				758				—				—				2,030				1,000				—				—				—				1,000
Gas station			1,291				—				729				—				2,020				365				—				—				2,609				2,974
Other			403				1,279				555				—				2,237				2,956				—				1,253				2,027				6,236
Residential property			795				—				—				—				795				—				—				—				—				—
Commercial and industrial loans:
Commercial term			25				206				1,449				851				2,531				1,203				—				2,286				3,817				7,306
Commercial lines of credit			—				—				—				173				173				—				—				191				—				191
International loans			—				—				—				—				—				—				—				1,087				—				1,087
Consumer loans			—				—				—				—				—				—				—				149				—				149
Total Non-PCI loans		$	3,786			$	2,243			$	2,733			$	1,774			$	10,536			$	5,524			$	—			$	4,966			$	8,927			$	19,417

As of September 30, 2014 and December 31, 2013, total TDRs, excluding loans held for sale, were $26.4 million and $30.0 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered to the borrower, for economic or legal reasons related to the borrower’s financial difficulties. Loans are considered to be TDRs if they were restructured through payment structure modifications such as reducing the amount of principal and interest due monthly and/or allowing for interest only monthly payments for six months or less. All TDRs are impaired and are individually evaluated for specific impairment using one of these three criteria: (1) the present value of expected 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.

At September 30, 2014 and December 31, 2013, TDRs, excluding loans held for sale, were subjected to specific impairment analysis, and $3.7 million and $2.8 million, respectively, of reserves relating to these loans were included in the allowance for loan losses.

The following table details troubled debt restructurings (excluding PCI loans), disaggregated by loan class, for the three months ended September 30, 2014 and 2013:

 

		September 30, 2014												September 30, 2013
		Number of Loans				Pre- Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment				Number of Loans				Pre- Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment
		(In thousands, except number of loans)
Real estate loans:
Commercial property
Hotel/Motel (1)			—			$	—			$	—				1			$	1,000			$	1,000
Gas station (2)			1				2,014				1,991				1				107				91
Other (3)			1				395				385				2				1,011				1,014
Commercial and industrial loans:
Commercial term (4)			—				—				—				8				1,015				1,002
Commercial lines of credit (5)			1				2,092				2,200				—				—				—
Total Non-PCI loans			3			$	4,501			$	4,576				12			$	3,133			$	3,107

 

(1)	Includes a modification of $1.0 million through a payment deferral for the three months ended September 30, 2013.

(2)	Includes a modification of $2.0 million through a payment deferral for the three months ended September 30, 2014, and a modification of $91,000 through a payment deferral for the three months ended September 30, 2013.

(3)

Includes a modification of $385,000 through a payment deferral for the three months ended September 30, 2014, and modifications of $365,000 through a payment deferral and reduction of principal or accrued interest and $649,000 through an extension of maturity for the three months ended September 30, 2013.

(4)	Includes modifications of $381,000 through payment deferrals and $621,000 through extensions of maturity for the three months ended September 30, 2013.

(5)	Includes a modification of $2.2 million through a payment deferral for the three months ended September 30, 2014.

During the three months ended September 30, 2014, we restructured monthly payments on three loans, with a net carrying value of $4.6 million as of September 30, 2014, through temporary payment structure modifications or re-amortization. For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms are probable.

The following table details troubled debt restructurings (excluding PCI loans), disaggregated by loan class, for the nine months ended September 30, 2014 and 2013:

 

		September 30, 2014												September 30, 2013
		Number of Loans				Pre- Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment				Number of Loans				Pre- Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment
		(In thousands, except number of loans)
Real estate loans:
Commercial property
Retail (1)			1			$	2,002			$	1,856				—			$	—			$	—
Hotel/Motel (2)			—				—				—				1				1,000				1,000
Gas station (3)			1				2,040				1,991				1				113				91
Other (4)			3				1,422				1,386				3				1,176				1,144
Residential property (5)			1				317				311				—				—				—
Commercial and industrial loans:
Commercial term (6)			5				327				263				15				1,787				1,625
Commercial lines of credit (7)			3				2,366				2,563				—				—				—
International loans (8)			—				—				—				2				1,584				1,180
Consumer loans (9)			—				—				—				1				149				149
Total Non-PCI loans			14			$	8,474			$	8,370				23			$	5,809			$	5,189

 

(1)	Includes a modification of $1.9 million through an extension of maturity for the nine months ended September 30, 2014.

(2)	Includes a modification of $1.0 million through an extension of maturity for the nine months ended September 30, 2013.

(3)	Includes a modification of $2.0 million through a payment deferral for the nine months ended September 30, 2014, and a modification of $91,000 a payment deferral for the nine months ended September 30, 2013.

(4)

Includes modifications of $1.3 million through payment deferrals and $59,000 through an extension of maturity for the nine months ended September 30, 2014, and modifications of $356,000 through a payment deferral, $130,000 through a reduction of principal or accrued interests and $649,000 through an extension of maturity for the nine months ended September 30, 2013.

(5)	Includes a modification of $311,000 through an extension of maturity for the nine months ended September 30, 2014.

(6)

Includes modifications of $39,000 through a payment deferral, $51,000 through reductions of principal or accrued interest and $173,000 through an extension of maturity for the nine months ended September 30, 2014, and modifications of $388,000 through payment deferrals and $1.2 million through extensions of maturity for the nine months ended September 30, 2013.

(7)	Includes modifications of $2.4 million through payment deferrals and $134,000 through a reduction of principal or accrued interest for the nine months ended September 30, 2014.

(8)	Includes modifications of $1.2 million through reductions of principal or accrued interest for the nine months ended September 30, 2013.

(9)	Includes a modification of $149,000 through a reduction of principal or accrued interest for the nine months ended September 30, 2013.

During the nine months ended September 30, 2014, we restructured monthly payments on 14 loans, with a net carrying value of $8.4 million as of September 30, 2014, through temporary payment structure modifications or re-amortization. For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms are probable.

 

The following table details troubled debt restructurings, excluding PCI loans, that defaulted subsequent to the modifications occurring within the previous twelve months, disaggregated by loan class, for the three and nine months ended September 30, 2014 and 2013, respectively:

 

		Three Months Ended																Nine Months Ended
		September 30, 2014								September 30, 2013								September 30, 2014								September 30, 2013
		Number of Loans				Recorded Investment				Number of Loans				Recorded Investment				Number of Loans				Recorded Investment				Number of Loans				Recorded Investment
		(In thousands, except number of loans)
Real estate loans:
Commercial property
Retail			1			$	1,856				—			$	—				1			$	1,856				—			$	—
Other			—				—				1				130				—				—				1				130
Commercial and industrial loans:
Commercial term			2				47				—				—				2				47				1				29
Commercial lines of credit			2				412				—				—				3				546				—				—
Total Non-PCI loans			5			$	2,315				1			$	130				6			$	2,449				2			$	159

Purchased Credit Impaired Loans

As part of the CBI acquisition during the third quarter ended September 30, 2014, the Company purchased loans for which there was, at acquisition, evidence of deterioration of credit quality subsequent to origination and it was probable, at acquisition, that all contractually required payments would not be collected. The following table presents the outstanding balance and carrying amount of those PCI loans as of the dates indicated:

 

		Carrying Amount				Accretable Yield
		(In thousands)
Balance at January 1, 2014		$	—			$	—
Additions from CBI acquisition at August 31, 2014			75,878				(22,858	)
Accretion			491				491
Payment received			(5,892	)			—
Disposals/transfers to OREO			(3,453	)			212
Balance at September 30, 2014		$	67,024			$	(22,155	)

 

As of September 30, 2014, pass/pass-watch (grade 0-4), criticized (grade 5) and classified (grade 6-7) PCI loans, disaggregated by loan class, were as follows:

 

		As of September 30, 2014
		Pass/Pass-Watch (Grade 0-4)				Criticized (Grade 5)				Classified (Grade 6-7)				Total
Real estate loans:
Commercial property
Retail		$	2,939			$	215			$	12,786			$	15,940
Hotel/Motel			248				—				13,958				14,206
Gas station			10,200				1,205				6,664				18,069
Other			2,154				—				13,561				15,715
Residential property			—				—				2,686				2,686
Commercial and industrial loans:
Commercial term			—				—				350				350
Consumer loans			—				—				58				58
Total PCI loans		$	15,541			$	1,420			$	50,063			$	67,024

Servicing Assets

The changes in servicing assets for the nine months ended September 30, 2014 and 2013 were as follows:

 

		Nine Months Ended September 30,
		2014				2013
		(In thousands)
Balance at beginning of period		$	6,833			$	5,542
Additions from CBI acquisition			1,458				—
Addition related to sale of SBA loans			871				1,996
Amortization			(1,318	)			(1,152	)
Balance at end of period		$	7,844			$	6,386

At September 30, 2014 and 2013, we serviced loans sold to unaffiliated parties in the amounts of $341.6 million and $330.4 million, respectively. These represented loans that have been sold for which the Bank continues to provide servicing. These loans are maintained off balance sheet and are not included in the loans receivable balance. All of the loans being serviced were SBA loans.

FDIC Loss Sharing Asset

The FDIC loss sharing asset related to the assumption of Single Family and Commercial Shared-Loss Agreement (“SLAs”) between CBI and the FDIC arising from the CBI’s acquisition of Mutual Bank. The loss sharing asset was measured at its fair value as of August 31, 2014 in conjunction with the CBI acquisition. There is a three-year recovery period which begins at the expiration of the Commercial SLA. During this period, 80% of any recoveries of previously charged-off and reimbursed Commercial SLA loans need to be reimbursed to the FDIC. As of September 30, 2014, the FDIC loss sharing asset was related to $7.7 million net receivable from the FDIC. Single-family loans under the Single family SLA as of September 30, 2014 were $3.7 million.