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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 September 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 November 4, 2017, there were 32,409,174 outstanding shares of the Registrant’s Common Stock.




Hanmi Financial Corporation and Subsidiaries
Quarterly Report on Form 10-Q
Three and Nine Months Ended September 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) September 30, 2017
 
December 31, 2016
Assets
 
 
 
Cash and due from banks
$
138,139

 
$
147,235

Securities available for sale, at fair value (amortized cost of $597,944 as of September 30, 2017 and $521,053 as of December 31, 2016)
598,440

 
516,964

Loans held for sale, at the lower of cost or fair value
6,469

 
9,316

Loans and leases receivable, net of allowance for loan and lease losses of $32,492 as of September 30, 2017 and $32,429 as of December 31, 2016
4,162,863

 
3,812,340

Accrued interest receivable
12,098

 
10,987

Premises and equipment, net
26,648

 
28,698

Other real estate owned ("OREO"), net
1,946

 
7,484

Customers’ liability on acceptances
647

 
978

Servicing assets
10,428

 
10,564

Goodwill and other intangible assets, net
12,628

 
12,889

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

 
16,385

Income tax asset, net
46,210

 
48,047

Bank-owned life insurance
50,268

 
49,440

Prepaid expenses and other assets
28,227

 
30,019

Total assets
$
5,111,396

 
$
4,701,346

Liabilities and stockholders’ equity
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
1,293,538

 
$
1,203,240

Interest-bearing
3,005,472

 
2,606,497

Total deposits
4,299,010

 
3,809,737

Accrued interest payable
4,071

 
2,567

Bank’s liability on acceptances
657

 
978

FHLB advances
110,000

 
315,000

Subordinated debentures
117,140

 
18,978

Accrued expenses and other liabilities
21,271

 
23,061

Total liabilities
4,552,149

 
4,170,321

Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,059,166 shares (32,413,082 shares outstanding) as of September 30, 2017 and issued 32,946,197 shares (32,330,747 shares outstanding) as of December 31, 2016
33

 
33

Additional paid-in capital
564,787

 
562,446

Accumulated other comprehensive income (loss), net of tax expense of $207 as of September 30, 2017 and tax benefit of $1,696 as of December 31, 2016
290

 
(2,394
)
Retained earnings
65,858

 
41,726

Less: treasury stock, at cost; 646,084 shares as of September 30, 2017 and 615,450 shares as of December 31, 2016
(71,721
)
 
(70,786
)
Total stockholders’ equity
559,247

 
531,025

Total liabilities and stockholders’ equity
$
5,111,396

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Interest and dividend income:
 
 
 
 
 
 
 
Interest and fees on loans and leases
$
50,265

 
$
41,150

 
$
143,614

 
$
120,862

Interest on securities
3,188

 
2,701

 
8,657

 
8,604

Dividends on Federal Reserve Bank ("FRB") and FHLB stock
286

 
419

 
943

 
1,540

Interest on deposits in other banks
123

 
55

 
323

 
152

Total interest and dividend income
53,862

 
44,325

 
153,537

 
131,158

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
7,071

 
4,358

 
18,687

 
11,769

Interest on FHLB advances
198

 
179

 
714

 
673

Interest on subordinated debentures
1,667

 
206

 
3,677

 
584

Total interest expense
8,936

 
4,743

 
23,078

 
13,026

Net interest income before provision for loan and lease losses
44,926

 
39,582

 
130,459

 
118,132

Loan and lease loss provision (income)
269

 
(1,450
)
 
611

 
(4,490
)
Net interest income after provision for loan and lease losses
44,657

 
41,032

 
129,848

 
122,622

Noninterest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
2,678

 
2,883

 
7,667

 
8,782

Trade finance and other service charges and fees
1,133

 
992

 
3,449

 
3,099

Gain on sales of Small Business Administration ("SBA") loans
2,546

 
1,616

 
6,678

 
4,247

Disposition gains on Purchased Credit Impaired ("PCI") loans
979

 
789

 
1,702

 
3,411

Net gain on sales of securities
267

 
46

 
1,473

 
46

Other operating income
1,213

 
2,348

 
4,764

 
5,423

Total noninterest income
8,816

 
8,674

 
25,733

 
25,008

Noninterest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
16,947

 
15,950

 
50,674

 
47,710

Occupancy and equipment
3,883

 
3,917

 
11,743

 
11,351

Data processing
1,779

 
1,330

 
5,148

 
4,219

Professional fees
1,210

 
1,090

 
3,912

 
4,063

Supplies and communications
755

 
821

 
2,135

 
2,266

Advertising and promotion
1,147

 
1,153

 
2,964

 
2,769

OREO expense (income)
(16
)
 
73

 
402

 
721

Merger and integration costs (income)

 

 
(40
)
 

Other operating expenses
2,955

 
4,003

 
7,905

 
9,170

Total noninterest expense
28,660

 
28,337

 
84,843

 
82,269

Income before income tax expense
24,813

 
21,369

 
70,738

 
65,361

Income tax expense
9,890

 
8,248

 
27,576

 
23,288

Net income
$
14,923

 
$
13,121

 
$
43,162

 
$
42,073

Basic earnings per share
$
0.46

 
$
0.41

 
$
1.34

 
$
1.31

Diluted earnings per share
$
0.46

 
$
0.41

 
$
1.33

 
$
1.31

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
32,095,286

 
31,912,470

 
32,058,705

 
31,880,466

Diluted
32,255,814

 
32,088,233

 
32,230,319

 
32,031,295


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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
14,923

 
$
13,121

 
$
43,162

 
$
42,073

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gain on securities:
 
 
 
 
 
 
 
Unrealized holding gain (loss) arising during period
529

 
(2,629
)
 
6,059

 
13,518

Less: reclassification adjustment for net gain included in net income
(267
)
 
(46
)
 
(1,473
)
 
(46
)
Unrealized loss on interest-only strip of servicing assets

 

 

 
(9
)
Income tax expense related to items of other comprehensive income
(109
)
 
1,109

 
(1,902
)
 
(5,593
)
Other comprehensive income, net of tax
153

 
(1,566
)
 
2,684

 
7,870

Comprehensive income
$
15,076

 
$
11,555

 
$
45,846

 
$
49,943


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
42,584

 

 
42,584

 

 
592

 

 

 

 
592

Restricted stock awards, net of forfeitures
256,287

 

 
256,287

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 
2,329

 

 

 

 
2,329

Restricted stock surrendered due to employee tax liability

 
(20,456
)
 
(20,456
)
 

 

 

 

 
(502
)
 
(502
)
Cash dividends declared

 

 

 

 

 

 
(15,082
)
 

 
(15,082
)
Net income

 

 

 

 

 

 
42,073

 

 
42,073

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

 

 

 

 

 
7,870

 

 

 
7,870

Balance at September 30, 2016
32,865,393

 
(612,619
)
 
32,252,774

 
$
33

 
$
560,906

 
$
7,555

 
$
33,413

 
$
(70,709
)
 
$
531,198

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
22,125

 

 
22,125

 

 
270

 

 

 

 
270

Restricted stock awards, net of forfeitures
90,844

 

 
90,844

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 
2,071

 

 

 

 
2,071

Restricted stock surrendered due to employee tax liability

 
(30,634
)
 
(30,634
)
 

 

 

 

 
(935
)
 
(935
)
Cash dividends declared

 

 

 

 

 

 
(19,030
)
 

 
(19,030
)
Net income

 

 

 

 

 

 
43,162

 

 
43,162

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

 

 

 

 

 
2,684

 

 

 
2,684

Balance at September 30, 2017
33,059,166

 
(646,084
)
 
32,413,082

 
$
33

 
$
564,787

 
$
290

 
$
65,858

 
$
(71,721
)
 
$
559,247

See Accompanying Notes to Consolidated Financial Statements (Unaudited)


6



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
43,162

 
$
42,073

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
9,353

 
10,848

Share-based compensation expense
2,071

 
2,329

Loan and lease loss provision (income)
611

 
(4,490
)
Gain on sales of securities
(1,473
)
 
(46
)
Gain on sales of SBA loans
(6,678
)
 
(4,247
)
Loss (gain) on sale of premises and equipment

 
(1,053
)
Disposition gains on PCI loans
(1,702
)
 
(3,411
)
Gain on sales of OREO
(482
)
 

Valuation adjustment on OREO
884

 
721

Origination of SBA loans held for sale
(81,716
)
 
(60,248
)
Proceeds from sales of SBA loans
92,715

 
61,494

Change in accrued interest receivable
(1,111
)
 
(659
)
Change in bank-owned life insurance
(828
)
 
(809
)
Change in prepaid expenses and other assets
1,894

 
3,791

Change in income tax asset
(65
)
 
1,436

Change in accrued interest payable
1,504

 
(733
)
Change in accrued expenses and other liabilities
(2,316
)
 
(10,121
)
Net cash provided by operating activities
55,823

 
36,875

Cash flows from investing activities:
 
 
 
Proceeds from redemption of FRB stock

 
14,423

Proceeds from matured, called and repayment of securities
51,117

 
98,771

Proceeds from sales of securities available for sale
70,333

 
78,282

Proceeds from sales of OREO
5,710

 
2,306

Change in loans and leases receivable, excluding purchases
(191,594
)
 
(229,063
)
Purchases of securities
(201,398
)
 
(19,992
)
Purchases of premises and equipment
(147
)
 
982

Purchases of loans receivable
(161,253
)
 
(143,189
)
Purchases of FRB stock

 
(325
)
Net cash used in investing activities
(427,232
)
 
(197,805
)
Cash flows from financing activities:
 
 
 
Change in deposits
489,273

 
261,231

Change in overnight FHLB borrowings
(205,000
)
 
(115,000
)
Issuance of subordinated debentures
97,735

 

Proceeds from exercise of stock options
270

 
592

Cash paid for treasury shares acquired in respect of share-based compensation
(935
)
 
(502
)
Cash dividends paid
(19,030
)
 
(19,558
)
Net cash provided by financing activities
362,313

 
126,763

Net decrease in cash and cash equivalents
(9,096
)
 
(34,167
)
Cash and cash equivalents at beginning of year
147,235

 
164,364

Cash and cash equivalents at end of period
$
138,139

 
$
130,197

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid (received) during the period for:
 
 
 
Interest
$
23,078

 
$
13,759

Income taxes
$
25,146

 
$
21,654

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

 
$
4,318

Income tax expense related to items in other comprehensive income
$
(1,902
)
 
$
(5,593
)
Change in unrealized gain in accumulated other comprehensive income
$
(6,059
)
 
$
(13,518
)
Cash dividends declared
$
(19,030
)
 
$
(15,082
)
See Accompanying Notes to Consolidated Financial Statements (Unaudited)


7



Hanmi Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Nine Months Ended September 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 September 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 September 30, 2017 and December 31, 2016: 
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
 
(in thousands)
September 30, 2017
 
 
 
 
 
 
 
Mortgage-backed securities (1) (2)
$
310,111

 
$
793

 
$
1,154

 
$
309,750

Collateralized mortgage obligations (1)
107,052

 
16

 
944

 
106,124

U.S. government agency securities
7,499

 

 
42

 
7,457

SBA loan pool securities
4,036

 

 
140

 
3,896

Municipal bonds-tax exempt
146,177

 
2,424

 
77

 
148,524

U.S. treasury securities
153

 

 

 
153

Mutual funds
22,916

 

 
380

 
22,536

Total securities available for sale
$
597,944

 
$
3,233

 
$
2,737

 
$
598,440

 
 
 
 
 
 
 
 
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 an estimated fair value of $8.1 million and $52.9 million as of September 30, 2017 and December 31, 2016, respectively.






9



The amortized cost and estimated fair value of securities as of September 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
$
24,537

 
$
24,452

Over one year through five years
64,646

 
64,519

Over five years through ten years
256,367

 
257,279

Over ten years
252,394

 
252,190

Total
$
597,944

 
$
598,440

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 September 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)
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
787

 
$
171,919

 
53

 
$
367

 
$
21,430

 
9

 
$
1,154

 
$
193,349

 
62

Collateralized mortgage obligations
320

 
62,309

 
23

 
624

 
38,940

 
24

 
944


101,249


47

U.S. government agency securities
42

 
7,457

 
3

 

 

 

 
42


7,457


3

SBA loan pool securities

 

 

 
140

 
3,896

 
2

 
140


3,896


2

Municipal bonds-tax exempt
60

 
3,459

 
3

 
17

 
1,704

 
4

 
77


5,163


7

U.S. treasury securities

 

 

 

 

 

 





Mutual funds
254

 
20,632

 
2

 
126

 
1,899

 
4

 
380


22,531


6

Total
$
1,463

 
$
265,776

 
84

 
$
1,274

 
$
67,869

 
43

 
$
2,737

 
$
333,645

 
127

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 September 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 September 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 September 30, 2017 and December 31, 2016 were not other-than-temporarily impaired, and therefore, no impairment charges as of September 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Gross realized gains on sales of securities
$
267

 
$
396

 
$
1,473

 
$
396

Gross realized losses on sales of securities

 
(350
)
 

 
(350
)
Net realized gains on sales of securities
$
267

 
$
46

 
$
1,473

 
$
46

Proceeds from sales of securities
$
17,644

 
$
78,282

 
$
70,333

 
$
78,282


For the three months ended September 30, 2017, there was a $267,000 net gain in earnings resulting from sales of securities. Net unrealized gains of $227,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period. There was a $46,000 net gain in earnings resulting from sales of securities during the three months ended September 30, 2016, that had previously been recorded as net unrealized gains of $321,000 in comprehensive income.

For the nine months ended September 30, 2017, there was a $1.5 million net gain in earnings resulting from the sale of securities. Net unrealized gains of $971,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period. There was a $46,000 net gain in earnings resulting from sales of securities during the nine months ended September 30, 2016, that had previously been recorded as net unrealized gains of $314,000 in comprehensive income.

Securities available for sale with market values of $130.7 million and $133.0 million as of September 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:
 
September 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
$
916,236

 
$
1,587

 
$
917,823

 
$
857,629

 
$
2,324

 
$
859,953

Hospitality
731,562

 
1,664

 
733,226

 
649,540

 
1,618

 
651,158

Gas station
245,042

 
2,388

 
247,430

 
260,187

 
2,692

 
262,879

Other (1)
1,144,176

 
2,013

 
1,146,189

 
1,107,589

 
2,067

 
1,109,656

Construction
64,263

 

 
64,263

 
55,962

 

 
55,962

Residential property
429,669

 
958

 
430,627

 
337,791

 
976

 
338,767

Total real estate loans
3,530,948

 
8,610

 
3,539,558

 
3,268,698

 
9,677

 
3,278,375

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial term
170,891

 
51

 
170,942

 
138,032

 
136

 
138,168

Commercial lines of credit
149,937

 

 
149,937

 
136,231

 

 
136,231

International loans
43,577

 

 
43,577

 
25,821

 

 
25,821

Total commercial and industrial loans
364,405

 
51

 
364,456

 
300,084

 
136

 
300,220

Leases receivable
272,271

 

 
272,271

 
243,294

 

 
243,294

Consumer loans (2)
19,027

 
43

 
19,070

 
22,830

 
50

 
22,880

Loans and leases receivable
4,186,651

 
8,704

 
4,195,355

 
3,834,906

 
9,863

 
3,844,769

Allowance for loan and lease losses
(31,698
)
 
(794
)
 
(32,492
)
 
(31,458
)
 
(971
)
 
(32,429
)
Loans and leases receivable, net
$
4,154,953

 
$
7,910

 
$
4,162,863

 
$
3,803,448

 
$
8,892

 
$
3,812,340

 

(1) 
Includes other property types which individually represent less than one percent of loans and leases receivable; other property types include mixed-use, apartment, office, industrial, faith-based facilities and warehouse.
(2) 
Consumer loans include home equity lines of credit of $14.7 million and $17.7 million as of September 30, 2017 and December 31, 2016, respectively.

Accrued interest on loans and leases receivable was $9.5 million and $8.2 million at September 30, 2017 and December 31, 2016, respectively. At September 30, 2017 and December 31, 2016, loans receivable of $1.1 billion and $1.0 billion, respectively, 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 September 30, 2017 and 2016:
 
SBA Loans Held for Sale
 
Real Estate
 
Commercial and Industrial
 
Total
 
(in thousands)
September 30, 2017
 
 
 
 
 
Balance at beginning of period
$
8,817

 
$
2,132

 
$
10,949

Originations
16,326

 
11,723

 
28,049

Sales
(20,593
)
 
(11,926
)
 
(32,519
)
Principal payoffs and amortization
(4
)
 
(6
)
 
(10
)
Balance at end of period
$
4,546

 
$
1,923

 
$
6,469

 
 
 
 
 
 
September 30, 2016
 
 
 
 
 
Balance at beginning of period
$
9,293

 
$
3,540

 
$
12,833

Originations
11,272

 
6,417

 
17,689

Sales
(15,968
)
 
(8,122
)
 
(24,090
)
Principal payoffs and amortization
(2
)
 
(5
)
 
(7
)
Balance at end of period
$
4,595

 
$
1,830

 
$
6,425


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

 
$
1,906

 
$
9,316

Originations
51,090

 
30,626

 
81,716

Sales
(53,930
)
 
(30,586
)
 
(84,516
)
Principal payoffs and amortization
(24
)
 
(23
)
 
(47
)
Balance at end of period
$
4,546

 
$
1,923

 
$
6,469

 
 
 
 
 
 
September 30, 2016
 
 
 
 
 
Balance at beginning of period
$
840

 
$
2,034

 
$
2,874

Originations
40,120

 
20,128

 
60,248

Sales
(36,361
)
 
(20,304
)
 
(56,665
)
Principal payoffs and amortization
(4
)
 
(28
)
 
(32
)
Balance at end of period
$
4,595

 
$
1,830

 
$
6,425














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
 
September 30, 2017
 
September 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
$
33,038

 
$
720

 
$
33,758

 
$
34,259

 
$
5,448

 
$
39,707

Charge-offs
(2,405
)
 

 
(2,405
)
 
(111
)
 
(5
)
 
(116
)
Recoveries on loans and leases previously charged off
871

 

 
871

 
831

 

 
831

Net loan and lease (charge-offs) recoveries
(1,534
)
 

 
(1,534
)
 
720

 
(5
)
 
715

Loan and lease loss provision (income)
194

 
74

 
268

 
(1,540
)
 
90

 
(1,450
)
Balance at end of period
$
31,698

 
$
794

 
$
32,492

 
$
33,439

 
$
5,533

 
$
38,972


 
As of and for the Nine Months Ended
 
September 30, 2017
 
September 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
(3,256
)
 

 
(3,256
)
 
(1,410
)
 
(142
)
 
(1,552
)
Recoveries on loans and leases previously charged off
2,709

 

 
2,709

 
2,079

 

 
2,079

Net loan and lease (charge-offs) recoveries
(547
)
 

 
(547
)
 
669

 
(142
)
 
527

Loan and lease loss provision (income)
787

 
(177
)
 
610

 
(4,724
)
 
234

 
(4,490
)
Balance at end of period
$
31,698

 
$
794

 
$
32,492

 
$
33,439

 
$
5,533

 
$
38,972


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 nine months ended September 30, 2017 and 2016:
 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on non-PCI loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
22,762

 
$
6,979

 
2,033

 
$
87

 
$
1,177

 
$
33,038

Charge-offs
(146
)
 
(1,976
)
 
(283
)
 

 

 
(2,405
)
Recoveries on loans and leases previously charged off
343

 
308

 
220

 

 

 
871

Loan and lease loss provision (income)
(3,374
)
 
1,183

 
2,867

 
(23
)
 
(459
)
 
194

Ending balance
$
19,585

 
$
6,494

 
$
4,837

 
$
64

 
$
718

 
$
31,698

Ending balance: individually evaluated for impairment
$
3,882

 
$
531

 
$
2,008

 
$

 
$

 
$
6,421

Ending balance: collectively evaluated for impairment
$
15,703

 
$
5,963

 
$
2,829

 
$
64

 
$
718

 
$
25,277

 
 
 
 
 
 
 
 
 
 
 
 
Non-PCI loans and leases receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
3,530,948

 
$
364,405

 
$
272,271

 
$
19,027

 
$

 
$
4,186,651

Ending balance: individually evaluated for impairment
$
19,466

 
$
3,610

 
$
3,378

 
$
1,045

 
$

 
$
27,499

Ending balance: collectively evaluated for impairment
$
3,511,482

 
$
360,795

 
$
268,893

 
$
17,982

 
$

 
$
4,159,152

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses on PCI loans:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
671

 
$
41

 
$

 
$
8

 
$

 
$
720

Charge-offs

 

 

 

 

 

Loan loss provision (income)
81

 

 

 
(7
)
 

 
74

Ending balance
$
752

 
$
41

 
$

 
$
1

 
$

 
$
794

 
 
 
 
 
 
 
 
 
 
 
 
PCI loans receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance: acquired with deteriorated credit quality
$
8,610

 
$
51

 
$

 
$
43

 
$

 
$
8,704


15




 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on non-PCI loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
28,116

 
$
5,502

 

 
$
242

 
$
399

 
$
34,259

Charge-offs
(18
)
 
(93
)
 

 

 

 
(111
)
Recoveries on loans and leases previously charged off
337

 
494

 

 

 

 
831

Loan and lease loss provision (income)
(479
)
 
(622
)
 

 
(40
)
 
(399
)
 
(1,540
)
Ending balance
$
27,956

 
$
5,281

 
$

 
$
202

 
$

 
$
33,439

Ending balance: individually evaluated for impairment
$
2,723

 
$
495

 
$

 
$

 
$

 
$
3,218

Ending balance: collectively evaluated for impairment
$
25,233

 
$
4,786

 
$

$

$
202

 
$

 
$
30,221

 
 
 
 
 
 
 
 
 
 
 
 
Non-PCI loans and leases receivable: