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Section 1: 10-Q (10-Q)

Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From                      To                     
Commission File Number: 000-30421

 HANMI FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
 
95-4788120
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
3660 Wilshire Boulevard, Penthouse Suite A
Los Angeles, California
 
90010
(Address of Principal Executive Offices)
 
(Zip Code)
(213) 382-2200
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
x
Accelerated Filer
¨
Non-Accelerated Filer
 
¨  (Do Not Check if a Smaller Reporting Company)
Smaller Reporting Company
¨
 
 
 
Emerging Growth Company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
As of August 4, 2017, there were 32,407,152 outstanding shares of the Registrant’s Common Stock.




Hanmi Financial Corporation and Subsidiaries
Quarterly Report on Form 10-Q
Three and Six Months Ended June 30, 2017
Table of Contents
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 


2



Part I — Financial Information
Item 1. Financial Statements
Hanmi Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
 
(Unaudited) June 30, 2017
 
December 31, 2016
Assets
 
 
 
Cash and due from banks
$
138,507

 
$
147,235

Securities available for sale, at fair value (amortized cost of $571,611 as of June 30, 2017 and $521,053 as of December 31, 2016)
571,846

 
516,964

Loans held for sale, at the lower of cost or fair value
10,949

 
9,316

Loans and leases receivable, net of allowance for loan and lease losses of $33,758 as of June 30, 2017 and $32,429 as of December 31, 2016
4,039,304

 
3,812,340

Accrued interest receivable
11,167

 
10,987

Premises and equipment, net
26,869

 
28,698

Other real estate owned ("OREO"), net
4,321

 
7,484

Customers’ liability on acceptances
1,481

 
978

Servicing assets
10,480

 
10,564

Goodwill and other intangible assets, net
12,712

 
12,889

Federal Home Loan Bank ("FHLB") stock, at cost
16,385

 
16,385

Income tax asset, net
50,286

 
48,047

Bank-owned life insurance
49,982

 
49,440

Prepaid expenses and other assets
29,057

 
30,019

Total assets
$
4,973,346

 
$
4,701,346

Liabilities and stockholders’ equity
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
1,260,929

 
$
1,203,240

Interest-bearing
2,998,244

 
2,606,497

Total deposits
4,259,173

 
3,809,737

Accrued interest payable
3,432

 
2,567

Bank’s liability on acceptances
1,481

 
978

FHLB advances
20,000

 
315,000

Subordinated debentures
117,011

 
18,978

Accrued expenses and other liabilities
22,109

 
23,061

Total liabilities
4,423,206

 
4,170,321

Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,039,034 shares (32,393,856 shares outstanding) as of June 30, 2017 and issued 32,946,197
shares (32,330,747 shares outstanding) as of December 31, 2016
33

 
33

Additional paid-in capital
563,948

 
562,446

Accumulated other comprehensive income (loss), net of tax expense of $98 as of June 30, 2017 and tax benefit of $1,696 as of December 31, 2016
137

 
(2,394
)
Retained earnings
57,717

 
41,726

Less: treasury stock, at cost; 645,178 shares as of June 30, 2017 and 615,450 shares as of December 31, 2016
(71,695
)
 
(70,786
)
Total stockholders’ equity
550,140

 
531,025

Total liabilities and stockholders’ equity
$
4,973,346

 
$
4,701,346


See Accompanying Notes to Consolidated Financial Statements (Unaudited)

3



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
(in thousands, except share and per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Interest and dividend income:
 
 
 
 
 
 
 
Interest and fees on loans and leases
$
47,971

 
$
40,645

 
$
93,349

 
$
79,712

Interest on securities
2,949

 
2,886

 
5,468

 
5,903

Dividends on Federal Reserve Bank ("FRB") and FHLB stock
283

 
579

 
657

 
1,121

Interest on deposits in other banks
123

 
49

 
200

 
97

Total interest and dividend income
51,326

 
44,159

 
99,674

 
86,833

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
6,463

 
3,684

 
11,617

 
7,410

Interest on FHLB advances
49

 
299

 
517

 
494

Interest on subordinated debentures
1,636

 
196

 
2,009

 
379

Total interest expense
8,148

 
4,179

 
14,143

 
8,283

Net interest income before provision for loan and lease losses
43,178

 
39,980

 
85,531

 
78,550

Loan and lease loss provision (income)
422

 
(1,515
)
 
342

 
(3,040
)
Net interest income after provision for loan and lease losses
42,756

 
41,495

 
85,189

 
81,590

Noninterest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
2,461

 
2,898

 
4,989

 
5,899

Trade finance and other service charges and fees
1,269

 
1,064

 
2,316

 
2,109

Gain on sales of Small Business Administration ("SBA") loans
2,668

 
1,774

 
4,132

 
2,632

Disposition gains on Purchased Credit Impaired ("PCI") loans
540

 
1,963

 
723

 
2,622

Net gain on sales of securities
938

 

 
1,206

 

Other operating income
1,826

 
1,674

 
3,551

 
3,072

Total noninterest income
9,702

 
9,373

 
16,917

 
16,334

Noninterest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
16,623

 
16,061

 
33,727

 
31,759

Occupancy and equipment
3,878

 
3,938

 
7,861

 
7,434

Data processing
1,738

 
1,454

 
3,369

 
2,889

Professional fees
1,554

 
1,509

 
2,702

 
2,974

Supplies and communications
745

 
709

 
1,379

 
1,445

Advertising and promotion
1,015

 
1,094

 
1,817

 
1,616

OREO expense (income)
519

 
183

 
418

 
648

Merger and integration costs (income)
(9
)
 

 
(40
)
 

Other operating expenses
2,881

 
2,915

 
4,948

 
5,167

Total noninterest expense
28,944

 
27,863

 
56,181

 
53,932

Income before income tax expense
23,514

 
23,005

 
45,925

 
43,992

Income tax expense
9,057

 
8,857

 
17,685

 
15,040

Net income
$
14,457

 
$
14,148

 
$
28,240

 
$
28,952

Basic earnings per share
$
0.45

 
$
0.44

 
$
0.88

 
$
0.90

Diluted earnings per share
$
0.45

 
$
0.44

 
$
0.87

 
$
0.90

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
32,078,038

 
31,882,489

 
32,040,113

 
31,864,427

Diluted
32,243,034

 
32,029,910

 
32,216,671

 
32,001,163


See Accompanying Notes to Consolidated Financial Statements (Unaudited)

4



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
14,457

 
$
14,148

 
$
28,240

 
$
28,952

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gain on securities:
 
 
 
 
 
 
 
Unrealized holding gain arising during period
3,910

 
6,424

 
5,530

 
16,147

Less: reclassification adjustment for net gain included in net income
(938
)
 

 
(1,206
)
 

Unrealized loss on interest-only strip of servicing assets

 
(9
)
 

 
(9
)
Income tax expense related to items of other comprehensive income
(1,232
)
 
(2,658
)
 
(1,793
)
 
(6,702
)
Other comprehensive income, net of tax
1,740

 
3,757

 
2,531

 
9,436

Comprehensive income
$
16,197

 
$
17,905

 
$
30,771

 
$
38,388


See Accompanying Notes to Consolidated Financial Statements (Unaudited)


5



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(in thousands, except share data)
 
Common Stock - Number of Shares
 
Stockholders’ Equity
 
Shares Issued
 
Treasury Shares
 
Shares Outstanding
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock, at Cost
 
Total Stockholders’ Equity
Balance at January 1, 2016
32,566,522

 
(592,163
)
 
31,974,359

 
$
257

 
$
557,761

 
$
(315
)
 
$
6,422

 
$
(70,207
)
 
$
493,918

Correction of accounting for the 2011 1-for-8 stock split

 

 

 
(224
)
 
224

 

 

 

 

Stock options exercised
40,209

 

 
40,209

 

 
562

 

 

 

 
562

Restricted stock awards, net of forfeitures
256,276

 

 
256,276

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 
1,542

 

 

 

 
1,542

Restricted stock surrendered due to employee tax liability

 
(10,524
)
 
(10,524
)
 

 

 

 

 
(247
)
 
(247
)
Cash dividends declared

 

 

 

 

 

 
(8,978
)
 

 
(8,978
)
Net income

 

 

 

 

 

 
28,952

 

 
28,952

Change in unrealized gain (loss) on securities available for sale, net of income taxes

 

 

 

 

 
9,436

 

 

 
9,436

Balance at June 30, 2016
32,863,007

 
(602,687
)
 
32,260,320

 
$
33

 
$
560,089

 
$
9,121

 
$
26,396

 
$
(70,454
)
 
$
525,185

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
32,946,197

 
(615,450
)
 
32,330,747

 
$
33

 
$
562,446

 
$
(2,394
)
 
$
41,726

 
$
(70,786
)
 
$
531,025

Stock options exercised
11,500

 

 
11,500

 

 
139

 

 

 

 
139

Restricted stock awards, net of forfeitures
81,337

 

 
81,337

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 
1,363

 

 

 

 
1,363

Restricted stock surrendered due to employee tax liability

 
(29,728
)
 
(29,728
)
 

 

 

 

 
(909
)
 
(909
)
Cash dividends declared

 

 

 

 

 

 
(12,249
)
 

 
(12,249
)
Net income

 

 

 

 

 

 
28,240

 

 
28,240

Change in unrealized gain (loss) on securities available for sale, net of income taxes

 

 

 

 

 
2,531

 

 

 
2,531

Balance at June 30, 2017
33,039,034

 
(645,178
)
 
32,393,856

 
$
33

 
$
563,948

 
$
137

 
$
57,717

 
$
(71,695
)
 
$
550,140

See Accompanying Notes to Consolidated Financial Statements (Unaudited)


6



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands) 
 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
28,240

 
$
28,952

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
7,081

 
7,595

Share-based compensation expense
1,363

 
1,542

Loan and lease loss provision (income)
342

 
(3,040
)
Gain on sales of securities
(1,206
)
 

Gain on sales of SBA loans
(4,132
)
 
(2,632
)
Loss (gain) on sale of premises and equipment
76

 
(35
)
Disposition gains on PCI loans
(723
)
 
(2,622
)
Gain on sales of OREO
(532
)
 

Valuation adjustment on OREO
949

 
648

Origination of SBA loans held for sale
(53,667
)
 
(42,559
)
Proceeds from sales of SBA loans
56,938

 
35,119

Change in accrued interest receivable
(180
)
 
(1,051
)
Change in bank-owned life insurance
(542
)
 
(511
)
Change in prepaid expenses and other assets
(508
)
 
882

Change in income tax assets
(4,032
)
 
(1,689
)
Change in accrued interest payable
865

 
(70
)
Change in FDIC loss sharing liability

 
(1,271
)
Change in accrued expenses and other liabilities
633

 
(8,366
)
Net cash provided by operating activities
30,965

 
10,892

Cash flows from investing activities:
 
 
 
Proceeds from matured, called and repayment of securities
33,665

 
74,063

Proceeds from sales of securities available for sale
52,688

 

Proceeds from sales of OREO
3,386

 
1,297

Change in loans and leases receivable, excluding purchases
(157,068
)
 
(171,240
)
Purchases of securities
(138,777
)
 

Purchases of premises and equipment
269

 
(1,393
)
Purchases of loans receivable
(73,008
)
 
(97,200
)
Purchases of FRB stock

 
(325
)
Net cash used in investing activities
(278,845
)
 
(194,798
)
Cash flows from financing activities:
 
 
 
Change in deposits
449,436

 
79,313

Change in overnight FHLB borrowings
(295,000
)
 
110,000

Issuance of subordinated debentures
97,735

 

Proceeds from exercise of stock options
139

 
562

Cash paid for treasury shares acquired in respect of share-based compensation
(909
)
 
(247
)
Cash dividends paid
(12,249
)
 
(13,454
)
Net cash provided by financing activities
239,152

 
176,174

Net decrease in cash and cash equivalents
(8,728
)
 
(7,732
)
Cash and cash equivalents at beginning of year
147,235

 
164,364

Cash and cash equivalents at end of period
$
138,507

 
$
156,632

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid (received) during the period for:
 
 
 
Interest
$
14,143

 
$
8,353

Income taxes
$
19,826

 
$
16,486

Non-cash activities:
 
 
 
Transfer of loans receivable to OREO
$
143

 
$
4,318

Income tax expense related to items in other comprehensive income
$
(1,793
)
 
$
(6,702
)
Change in unrealized gain in accumulated other comprehensive income
$
(5,530
)
 
$
(16,147
)
Cash dividends declared
$
(12,249
)
 
$
(8,978
)
See Accompanying Notes to Consolidated Financial Statements (Unaudited)


7



Hanmi Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2017 and 2016
Note 1 — Organization and Basis of Presentation

Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we,” “us” or “our”) is a bank holding company whose subsidiary is Hanmi Bank (the “Bank”). Our primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money through the operation of the Bank.

In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial and its subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended June 30, 2017, but are not necessarily indicative of the results that will be reported for the entire year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The aforementioned unaudited consolidated financial statements are in conformity with GAAP. Such interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “2016 Annual Report on Form 10-K”).

The preparation of interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates subject to change include, among other items, the determination of allowance for loan and lease losses and various other assets and liabilities measured at fair value.

Descriptions of our significant accounting policies are included in Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in our 2016 Annual Report on Form 10-K.



8



Note 2 — Securities

The following is a summary of securities available for sale as of June 30, 2017 and December 31, 2016: 
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
 
(in thousands)
June 30, 2017
 
 
 
 
 
 
 
Mortgage-backed securities (1) (2)
$
280,494

 
$
767

 
$
1,496

 
$
279,765

Collateralized mortgage obligations (1)
92,360

 
14

 
936

 
91,438

U.S. government agency securities
7,499

 

 
42

 
7,457

SBA loan pool securities
4,037

 

 
142

 
3,895

Municipal bonds-tax exempt
158,614

 
2,567

 
118

 
161,063

Municipal bonds-taxable
531

 
6

 

 
537

Corporate bonds
5,006

 
16

 

 
5,022

U.S. treasury securities
154

 

 

 
154

Mutual funds
22,916

 

 
401

 
22,515

Total securities available for sale
$
571,611

 
$
3,370

 
$
3,135

 
$
571,846

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Mortgage-backed securities (1) (2)
$
230,489

 
$
598

 
$
1,457

 
$
229,630

Collateralized mortgage obligations (1)
77,447

 
6

 
1,002

 
76,451

U.S. government agency securities
7,499

 

 
58

 
7,441

SBA loan pool securities
4,356

 

 
210

 
4,146

Municipal bonds-tax exempt
159,789

 
236

 
1,995

 
158,030

Municipal bonds-taxable
13,391

 
319

 
9

 
13,701

Corporate bonds
5,010

 
5

 

 
5,015

U.S. treasury securities
156

 

 

 
156

Mutual funds
22,916

 

 
522

 
22,394

Total securities available for sale
$
521,053

 
$
1,164

 
$
5,253

 
$
516,964

                              
(1) 
Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.
(2) 
Includes securities collateralized by home equity conversion mortgages with total estimated fair value of $9.1 million and $52.9 million as of June 30, 2017 and December 31, 2016, respectively.






9



The amortized cost and estimated fair value of securities as of June 30, 2017, by contractual or expected maturity, are shown below. Collateralized mortgage obligations are included in the table shown below based on their expected maturities. Mutual funds do not have contractual maturities. However, they are included in the table shown below as over ten years since the Company intends to hold these securities for at least this duration. All other securities are included based on their contractual maturities.
 
Available for Sale
 
Amortized Cost
 
Estimated Fair Value
 
(in thousands)
Within one year
$
15,692

 
$
15,648

Over one year through five years
59,465

 
59,365

Over five years through ten years
249,990

 
251,060

Over ten years
246,464

 
245,773

Total
$
571,611

 
$
571,846

Gross unrealized losses on securities available for sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of June 30, 2017 and December 31, 2016:
 
Holding Period
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Number of Securities
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Number of Securities
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Number of Securities
 
(in thousands, except number of securities)
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,432

 
$
189,400

 
62

 
$
64

 
$
6,868

 
2

 
$
1,496

 
$
196,268

 
64

Collateralized mortgage obligations
560

 
67,725

 
30

 
376

 
18,424

 
12

 
936


86,149


42

U.S. government agency securities
42

 
7,457

 
3

 

 

 

 
42


7,457


3

SBA loan pool securities

 

 

 
142

 
3,896

 
2

 
142


3,896


2

Municipal bonds-tax exempt
118

 
5,128

 
7

 

 

 

 
118


5,128


7

U.S. treasury securities

 
154

 
1

 

 

 

 


154


1

Mutual funds
290

 
21,596

 
3

 
111

 
914

 
3

 
401


22,510


6

Total
$
2,442

 
$
291,460

 
106

 
$
693

 
$
30,102

 
19

 
$
3,135

 
$
321,562

 
125

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,345

 
$
102,647

 
38

 
$
112

 
$
11,350

 
3

 
$
1,457

 
$
113,997

 
41

Collateralized mortgage obligations
676

 
60,786

 
27

 
326

 
10,579

 
7

 
1,002

 
71,365

 
34

U.S. government agency securities
58

 
7,441

 
3

 

 

 

 
58

 
7,441

 
3

SBA loan pool securities

 

 

 
210

 
4,146

 
2

 
210

 
4,146

 
2

Municipal bonds-tax exempt
1,995

 
125,004

 
54

 

 

 

 
1,995

 
125,004

 
54

Municipal bonds-taxable
9

 
2,904

 
2

 

 

 

 
9

 
2,904

 
2

Mutual funds
413

 
21,478

 
4

 
109

 
916

 
3

 
522

 
22,394

 
7

Total
$
4,496

 
$
320,260

 
128

 
$
757

 
$
26,991

 
15

 
$
5,253

 
$
347,251

 
143


All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of June 30, 2017 and December 31, 2016 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status as of June 30, 2017 and December 31, 2016. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.


10



The Company does not intend to sell these securities and it is more likely than not that we will not be required to sell the securities before the recovery of their amortized cost basis. Interest payments have been made as scheduled, and management believes this will continue in the future and that the bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of June 30, 2017 and December 31, 2016 were not other-than-temporarily impaired, and therefore, no impairment charges as of June 30, 2017 and December 31, 2016 were warranted.

Realized gains and losses on sales of securities and proceeds from sales of securities were as follows for the periods indicated:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Gross realized gains on sales of securities
$
938

 
$

 
$
1,206

 
$

Gross realized losses on sales of securities

 

 

 

Net realized gains on sales of securities
$
938

 
$

 
$
1,206

 
$

Proceeds from sales of securities
$
40,115

 
$

 
$
52,688

 
$


For the three months ended June 30, 2017, there was a $938,000 net gain in earnings resulting from the sale of securities. Net unrealized gains of $430,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period. There were no sales of securities during the three months ended June 30, 2016.

For the six months ended June 30, 2017, there was a $1.2 million net gain in earnings resulting from the sale of securities. Net unrealized gains of $744,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period. There were no sales of securities during the six months ended June 30, 2016.

Securities available for sale with market values of $132.3 million and $133.0 million as of June 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.



11



Note 3 — Loans and leases

Loans and Leases Receivable, Net

Loans and leases receivable consisted of the following as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
 
Non-PCI Loans and Leases
 
PCI Loans
 
Total
 
Non-PCI Loans and Leases
 
PCI Loans
 
Total
 
(in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
914,470

 
$
1,643

 
$
916,113

 
$
857,629

 
$
2,324

 
$
859,953

Hospitality
737,369

 
1,698

 
739,067

 
649,540

 
1,618

 
651,158

Gas station
247,566

 
2,363

 
249,929

 
260,187

 
2,692

 
262,879

Other (1)
1,102,084

 
2,016

 
1,104,100

 
1,107,589

 
2,067

 
1,109,656

Construction
58,159

 

 
58,159

 
55,962

 

 
55,962

Residential property
382,692

 
965

 
383,657

 
337,791

 
976

 
338,767

Total real estate loans
3,442,340

 
8,685

 
3,451,025

 
3,268,698

 
9,677

 
3,278,375

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial term
159,432

 
55

 
159,487

 
138,032

 
136

 
138,168

Commercial lines of credit
148,421

 

 
148,421

 
136,231

 

 
136,231

International loans
39,328

 

 
39,328

 
25,821

 

 
25,821

Total commercial and industrial loans
347,181

 
55

 
347,236

 
300,084

 
136

 
300,220

Leases receivable
257,525

 

 
257,525

 
243,294

 

 
243,294

Consumer loans (2)
17,232

 
44

 
17,276

 
22,830

 
50

 
22,880

Loans and leases receivable
4,064,278

 
8,784

 
4,073,062

 
3,834,906

 
9,863

 
3,844,769

Allowance for loan and lease losses
(33,038
)
 
(720
)
 
(33,758
)
 
(31,458
)
 
(971
)
 
(32,429
)
Loans and leases receivable, net
$
4,031,240

 
$
8,064

 
$
4,039,304

 
$
3,803,448

 
$
8,892

 
$
3,812,340

 

(1) 
The remaining other real estate categories represent less than one percent of total loans and leases, which, among other property types, include mixed-use, apartment, office, industrial, faith-based facilities and warehouse.
(2) 
Consumer loans include home equity lines of credit of $15.1 million and $17.7 million as of June 30, 2017 and December 31, 2016, respectively.

Accrued interest on loans and leases receivable was $8.3 million and $8.2 million at June 30, 2017 and December 31, 2016, respectively. At June 30, 2017 and December 31, 2016, loans receivable of $1.0 billion were pledged to secure borrowing facilities from the FHLB.


12



Loans Held for Sale

The following is the activity for SBA loans held for sale for the three months ended June 30, 2017 and 2016:
 
SBA Loans Held for Sale
 
Real Estate
 
Commercial and Industrial
 
Total
 
(in thousands)
June 30, 2017
 
 
 
 
 
Balance at beginning of period
$
7,789

 
$
1,060

 
$
8,849

Originations
22,130

 
12,344

 
34,474

Sales
(21,083
)
 
(11,271
)
 
(32,354
)
Principal payoffs and amortization
(19
)
 
(1
)
 
(20
)
Balance at end of period
$
8,817

 
$
2,132

 
$
10,949

 
 
 
 
 
 
June 30, 2016
 
 
 
 
 
Balance at beginning of period
$
1,824

 
$
759

 
$
2,583

Originations
22,376

 
8,031

 
30,407

Sales
(14,905
)
 
(5,247
)
 
(20,152
)
Principal payoffs and amortization
(1
)
 
(4
)
 
(5
)
Balance at end of period
$
9,294

 
$
3,539

 
$
12,833


The following is the activity for SBA loans held for sale for the six months ended June 30, 2017 and 2016:
 
SBA Loans Held for Sale
 
Real Estate
 
Commercial and Industrial
 
Total
 
(in thousands)
June 30, 2017
 
 
 
 
 
Balance at beginning of period
$
7,410

 
$
1,906

 
$
9,316

Originations
34,763

 
18,904

 
53,667

Sales
(33,337
)
 
(18,660
)
 
(51,997
)
Principal payoffs and amortization
(19
)
 
(18
)
 
(37
)
Balance at end of period
$
8,817

 
$
2,132

 
$
10,949

 
 
 
 
 
 
June 30, 2016
 
 
 
 
 
Balance at beginning of period
$
840

 
$
2,034

 
$
2,874

Originations
28,849

 
13,710

 
42,559

Sales
(20,393
)
 
(12,182
)
 
(32,575
)
Principal payoffs and amortization
(2
)
 
(23
)
 
(25
)
Balance at end of period
$
9,294

 
$
3,539

 
$
12,833














13



Allowance for Loan and Lease Losses

Activity in the allowance for loan and lease losses was as follows for the periods indicated:
 
As of and for the Three Months Ended
 
June 30, 2017
 
June 30, 2016
 
Non-PCI Loans and Leases
 
PCI Loans
 
Total
 
Non-PCI Loans and Leases
 
PCI Loans
 
Total
 
(in thousands)
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
32,261

 
$
891

 
$
33,152

 
$
35,381

 
$
5,645

 
$
41,026

Charge-offs
(665
)
 

 
(665
)
 
(662
)
 
(137
)
 
(799
)
Recoveries on loans and leases previously charged off
849

 

 
849

 
995

 

 
995

Net loan and lease (charge-offs) recoveries
184

 

 
184

 
333

 
(137
)
 
196

Loan and lease loss provision (income)
593

 
(171
)
 
422

 
(1,455
)
 
(60
)
 
(1,515
)
Balance at end of period
$
33,038

 
$
720

 
$
33,758

 
$
34,259

 
$
5,448

 
$
39,707


 
As of and for the Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
Non-PCI Loans and Leases
 
PCI Loans
 
Total
 
Non-PCI Loans and Leases
 
PCI Loans
 
Total
 
(in thousands)
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
31,458

 
$
971

 
$
32,429

 
$
37,494

 
$
5,441

 
$
42,935

Charge-offs
(851
)
 

 
(851
)
 
(1,299
)
 
(137
)
 
(1,436
)
Recoveries on loans and leases previously charged off
1,838

 

 
1,838

 
1,248

 

 
1,248

Net loan and lease (charge-offs) recoveries
987

 

 
987

 
(51
)
 
(137
)
 
(188
)
Loan and lease loss provision (income)
593

 
(251
)
 
342

 
(3,184
)
 
144

 
(3,040
)
Balance at end of period
$
33,038

 
$
720

 
$
33,758

 
$
34,259

 
$
5,448

 
$
39,707


Management believes the allowance for loan and lease losses is appropriate to provide for probable losses inherent in the loan and lease portfolio. However, the allowance is an estimate that is inherently uncertain and depends on the outcome of future events. Management’s estimates are based on previous loss experience; volume, growth and composition of the loan and lease portfolio; the value of collateral; and current economic conditions. Our lending is concentrated generally in real estate, commercial, SBA and trade finance lending to small and middle market businesses primarily in California, Texas and Illinois.

14



The following tables detail the information on the allowance for loan and lease losses by portfolio segment as of and for the three and six months ended June 30, 2017 and 2016:
 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on non-PCI loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
24,760

 
$
5,914

 
980

 
$
122

 
$
485

 
$
32,261

Charge-offs
(38
)
 

 
(627
)
 

 

 
(665
)
Recoveries on loans and leases previously charged off
447

 
367

 
20

 
15

 

 
849

Loan and lease loss provision (income)
(2,407
)
 
698

 
1,660

 
(50
)
 
692

 
593

Ending balance
$
22,762

 
$
6,979

 
$
2,033

 
$
87

 
$
1,177

 
$
33,038

Ending balance: individually evaluated for impairment
$
3,638

 
$
1,841

 
$

 
$

 
$

 
$
5,479

Ending balance: collectively evaluated for impairment
$
19,124

 
$
5,138

 
$
2,033

 
$
87

 
$
1,177

 
$
27,559

 
 
 
 
 
 
 
 
 
 
 
 
Non-PCI loans and leases receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
3,442,340

 
$
347,181

 
$
257,525

 
$
17,232

 
$

 
$
4,064,278

Ending balance: individually evaluated for impairment
$
19,695

 
$
5,275

 
$

 
$
1,224

 
$

 
$
26,194

Ending balance: collectively evaluated for impairment
$
3,422,645

 
$
341,906

 
$
257,525

 
$
16,008

 
$

 
$
4,038,084

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses on PCI loans:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
842

 
$
41

 
$

 
$
8

 
$

 
$
891

Charge-offs

 

 

 

 

 

Loan loss provision (income)
(171
)
 

 

 

 

 
(171
)
Ending balance
$
671

 
$
41

 
$

 
$
8

 
$

 
$
720

 
 
 
 
 
 
 
 
 
 
 
 
PCI loans receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance: acquired with deteriorated credit quality
$
8,685

 
$
55

 
$

 
$
44

 
$

 
$
8,784


15




 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Three Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on non-PCI loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
28,278

 
$
6,289

 

 
$
255

 
$
559

 
$
35,381

Charge-offs
(156
)
 
(506
)
 

 

 

 
(662
)
Recoveries on loans and leases previously charged off
97

 
845

 

 
53

 

 
995

Loan and lease loss provision (income)
(103
)
 
(1,126
)
 

 
(66
)
 
(160
)
 
(1,455
)
Ending balance
$
28,116

 
$
5,502

 
$

 
$
242

 
$
399

 
$
34,259

Ending balance: individually evaluated for impairment
$
2,589

 
$
422

 
$

 
$

 
$

 
$
3,011

Ending balance: collectively evaluated for impairment
$
25,527

 
$
5,080

 
$

$

$
242

 
$
399

 
$
31,248