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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 March 31, 2018
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 May 7, 2018, there were 32,496,604 outstanding shares of the Registrant’s Common Stock.




Hanmi Financial Corporation and Subsidiaries
Quarterly Report on Form 10-Q
Three Months Ended March 31, 2018
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) March 31, 2018
 
December 31, 2017
Assets
 
 
 
 
Cash and due from banks
 
$
151,611

 
$
153,826

Securities available for sale, at fair value (amortized cost of $581,874 as of March 31, 2018 and $581,992 as of December 31, 2017)
 
570,351

 
578,804

Loans held for sale, at the lower of cost or fair value
 
6,008

 
6,394

Loans and leases receivable, net of allowance for loan and lease losses of $31,777 as of March 31, 2018 and $31,043 as of December 31, 2017
 
4,381,780

 
4,273,415

Accrued interest receivable
 
12,751

 
12,770

Premises and equipment, net
 
26,465

 
26,655

Customers’ liability on acceptances
 
870

 
803

Servicing assets
 
9,867

 
10,218

Goodwill and other intangible assets, net
 
12,454

 
12,544

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

 
16,385

Bank-owned life insurance
 
50,831

 
50,554

Prepaid expenses and other assets
 
66,268

 
68,117

Total assets
 
$
5,305,641

 
$
5,210,485

Liabilities and stockholders’ equity
 
 
 
 
Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing
 
$
1,352,162

 
$
1,312,274

Interest-bearing
 
3,025,939

 
3,036,380

Total deposits
 
4,378,101

 
4,348,654

Accrued interest payable
 
5,931

 
5,309

Bank’s liability on acceptances
 
870

 
803

Borrowings
 
220,000

 
150,000

Subordinated debentures
 
117,400

 
117,270

Accrued expenses and other liabilities
 
19,061

 
25,972

Total liabilities
 
4,741,363

 
4,648,008

Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,167,768 shares (32,502,658 shares outstanding) as of March 31, 2018 and issued 33,083,133 shares (32,431,627 shares outstanding) as of December 31, 2017
 
33

 
33

Additional paid-in capital
 
567,081

 
565,627

Accumulated other comprehensive loss, net of tax benefit of $3,316 as of March 31, 2018 and $1,319 as of December 31, 2017
 
(8,207
)
 
(1,869
)
Retained earnings
 
77,691

 
70,575

Less: treasury stock, at cost; 665,110 shares as of March 31, 2018 and 651,506 shares as of December 31, 2017
 
(72,320
)
 
(71,889
)
Total stockholders’ equity
 
564,278

 
562,477

Total liabilities and stockholders’ equity
 
$
5,305,641

 
$
5,210,485


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 March 31,
 
2018
 
2017
Interest and dividend income:
 
 
 
Interest and fees on loans and leases
$
51,574

 
$
45,378

Interest on securities
3,105

 
2,520

Dividends on FHLB stock
289

 
374

Interest on deposits in other banks
114

 
77

Total interest and dividend income
55,082

 
48,349

Interest expense:
 
 
 
Interest on deposits
7,785

 
5,154

Interest on borrowings
679

 
468

Interest on subordinated debentures
1,694

 
373

Total interest expense
10,158

 
5,995

Net interest income before provision for loan and lease losses
44,924

 
42,354

Loan and lease loss provision (income)
649

 
(80
)
Net interest income after provision for loan and lease losses
44,275

 
42,434

Noninterest income:
 
 
 
Service charges on deposit accounts
2,511

 
2,528

Trade finance and other service charges and fees
1,173

 
1,047

Gain on sales of Small Business Administration ("SBA") loans
1,448

 
1,464

Disposition gains on Purchased Credit Impaired ("PCI") loans
133

 
183

Net (loss) gain on sales of securities
(428
)
 
269

Other operating income
1,224

 
1,726

Total noninterest income
6,061

 
7,217

Noninterest expense:
 
 
 
Salaries and employee benefits
18,702

 
17,104

Occupancy and equipment
4,072

 
3,982

Data processing
1,678

 
1,631

Professional fees
1,369

 
1,148

Supplies and communications
708

 
635

Advertising and promotion
876

 
802

Other operating expenses
2,352

 
1,938

Total noninterest expense
29,757

 
27,240

Income before income tax expense
20,579

 
22,411

Income tax expense
5,724

 
8,628

Net income
$
14,855

 
$
13,783

Basic earnings per share
$
0.46

 
$
0.43

Diluted earnings per share
$
0.46

 
$
0.43

Weighted-average shares outstanding:
 
 
 
Basic
32,145,214

 
32,001,766

Diluted
32,301,095

 
32,191,458


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 March 31,
 
2018
 
2017
Net income
$
14,855

 
$
13,783

Other comprehensive (loss) income, net of tax:
 
 
 
Unrealized gain (loss) on securities:
 
 
 
Unrealized holding (loss) gain arising during period
(8,864
)
 
1,620

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

 
(269
)
Income tax benefit (expense) related to items of other comprehensive income
2,543

 
(560
)
Other comprehensive (loss) income, net of tax
(6,321
)
 
791

Comprehensive income
$
8,534

 
$
14,574


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, 2017
32,946,197

 
(615,450
)
 
32,330,747

 
$
33

 
$
562,446

 
$
(2,394
)
 
$
41,726

 
$
(70,786
)
 
$
531,025

Stock options exercised
1,000

 

 
1,000

 

 
13

 

 

 

 
13

Restricted stock awards, net of forfeitures
81,411

 

 
81,411

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 
692

 

 

 

 
692

Restricted stock surrendered due to employee tax liability

 
(20,578
)
 
(20,578
)
 

 

 

 

 
(648
)
 
(648
)
Cash dividends declared

 

 

 

 

 

 
(6,114
)
 

 
(6,114
)
Net income

 

 

 

 

 

 
13,783

 

 
13,783

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

 

 

 

 

 
791

 

 

 
791

Balance at March 31, 2017
33,028,608

 
(636,028
)
 
32,392,580

 
$
33

 
$
563,151

 
$
(1,603
)
 
$
49,395

 
$
(71,434
)
 
$
539,542

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
33,083,133

 
(651,506
)
 
32,431,627

 
$
33

 
$
565,627

 
$
(1,869
)
 
$
70,575

 
$
(71,889
)
 
$
562,477

Adjustments related to adoption of new accounting standards:
 
 
 
 


 

 

 
 
 
 
 
 
 


ASU 2016-01
(See Notes 1 and 2)

 

 

 

 

 
382

 
(382
)
 

 

ASU 2018-02
(See Notes 1 and 5)

 

 

 

 

 
(399
)
 
399

 

 

Adjusted balance at January 1, 2018
33,083,133

 
(651,506
)
 
32,431,627

 
$
33

 
$
565,627

 
$
(1,886
)
 
$
70,592

 
$
(71,889
)
 
$
562,477

Stock options exercised
25,750

 

 
25,750

 

 
570

 

 

 

 
570

Restricted stock awards, net of forfeitures
58,885

 

 
58,885

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 
884

 

 

 

 
884

Restricted stock surrendered due to employee tax liability

 
(13,604
)
 
(13,604
)
 

 

 

 

 
(431
)
 
(431
)
Cash dividends declared

 

 

 

 

 

 
(7,756
)
 

 
(7,756
)
Net income

 

 

 

 

 

 
14,855

 

 
14,855

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

 

 

 

 

 
(6,321
)
 

 

 
(6,321
)
Balance at March 31, 2018
33,167,768

 
(665,110
)
 
32,502,658

 
$
33

 
$
567,081

 
$
(8,207
)
 
$
77,691

 
$
(72,320
)
 
$
564,278

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

6



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
14,855

 
$
13,783

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,757

 
3,885

Share-based compensation expense
884

 
692

Loan and lease loss provision (income)
649

 
(80
)
Gain (loss) on sales of securities
428

 
(269
)
Gain on sales of SBA loans
(1,448
)
 
(1,464
)
Disposition gains on PCI loans
(133
)
 
(183
)
Origination of SBA loans held for sale
(18,805
)
 
(19,192
)
Proceeds from sales of SBA loans
20,981

 
21,414

Change in accrued interest receivable
19

 
213

Change in bank-owned life insurance
(277
)
 
(282
)
Change in prepaid expenses and other assets
5,192

 
5,117

Change in accrued interest payable
622

 
52

Change in accrued expenses and other liabilities
(6,357
)
 
(3,569
)
Net cash provided by operating activities
18,367

 
20,117

Cash flows from investing activities:
 
 
 
Proceeds from matured, called and repayment of securities
22,495

 
17,404

Proceeds from sales of securities available for sale
21,958

 
12,573

Proceeds from sales of other real estate owned ("OREO")

 
3,349

Change in loans and leases receivable, excluding purchases
(70,838
)
 
(66,556
)
Purchases of securities
(46,641
)
 
(60,960
)
Purchases of premises and equipment
(481
)
 
(411
)
Purchases of loans receivable
(38,905
)
 
(33,573
)
Net cash used in investing activities
(112,412
)
 
(128,174
)
Cash flows from financing activities:
 
 
 
Change in deposits
29,447

 
273,428

Change in overnight FHLB borrowings
70,000

 
(265,000
)
Issuance of subordinated debentures

 
97,735

Proceeds from exercise of stock options
570

 
13

Cash paid for treasury shares acquired in respect of share-based compensation
(431
)
 
(648
)
Cash dividends paid
(7,756
)
 
(6,114
)
Net cash provided by financing activities
91,830

 
99,414

Net decrease in cash and cash equivalents
(2,215
)
 
(8,643
)
Cash and cash equivalents at beginning of year
153,826

 
147,235

Cash and cash equivalents at end of period
$
151,611

 
$
138,592

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid (received) during the period for:
 
 
 
Interest
$
9,536

 
$
5,943

Income taxes
$
39

 
$
(101
)
Non-cash activities:
 
 
 
Income tax benefit (expense) related to items in other comprehensive income
$
2,543

 
$
(560
)
Change in unrealized loss (gain) in accumulated other comprehensive income
$
8,864

 
$
(1,620
)
Cash dividends declared
$
(7,756
)
 
$
(6,114
)
See Accompanying Notes to Consolidated Financial Statements (Unaudited)

7



Hanmi Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Three Months Ended March 31, 2018 and 2017
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 March 31, 2018, 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, 2017 (the “2017 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. 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. Actual results could differ from those estimates.

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 2017 Annual Report on Form 10-K.

During the three months ended March 31, 2018, the Company adopted Accounting Standards Update ("ASU") 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825) and ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). Summaries of ASU 2016-01 and 2018-02 and the impact of their adoption are included in Notes 2 and 5 to the Consolidated Financial Statements, respectively. In addition to other provisions, ASU 2016-01 requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Beginning with the current quarter ended March 31, 2018, the Company measured the fair value of certain financial instruments, included in Note 10 to the Consolidated Financial Statements, using an exit price notion.

The Company also adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as of January 1, 2018, as required. ASU 2014-09 replaces existing revenue recognition guidance for contracts to provide goods or services to customers and amends existing guidance related to recognition of gains and losses on the sale of certain nonfinancial assets such as real estate.  See Note 14 to the Consolidated Financial Statements for the impact of the adoption of this new standard on the Company's consolidated financial statement.


8



Note 2 — Securities

The following is a summary of securities available for sale as of March 31, 2018 and December 31, 2017: 
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
 
(in thousands)
March 31, 2018
 
 
 
 
 
 
 
Mortgage-backed securities (1)
$
322,186

 
$
6

 
$
7,223

 
$
314,969

Collateralized mortgage obligations (1)
127,125

 
8

 
2,945

 
124,188

U.S. government agency securities
7,499

 

 
131

 
7,368

Municipal bonds-tax exempt
125,064

 
219

 
1,457

 
123,826

Total securities available for sale
$
581,874

 
$
233

 
$
11,756

 
$
570,351

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Mortgage-backed securities (1)
$
306,166

 
$
145

 
$
2,702

 
$
303,609

Collateralized mortgage obligations (1)
119,658

 
8

 
1,898

 
117,768

U.S. government agency securities
7,499

 

 
85

 
7,414

Municipal bonds-tax exempt
125,601

 
1,943

 
69

 
127,475

U.S. treasury securities
152

 

 

 
152

Mutual funds
22,916

 

 
530

 
22,386

Total securities available for sale
$
581,992

 
$
2,096

 
$
5,284

 
$
578,804


(1) 
Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.

The amortized cost and estimated fair value of securities as of March 31, 2018, by contractual or expected maturity, are shown below. Collateralized mortgage obligations are included in the table shown below based on their expected maturities. All other securities are included based on their contractual maturities.
 
Available for Sale
 
Amortized Cost
 
Estimated Fair Value
 
(in thousands)
Within one year
$
12,847

 
$
12,801

Over one year through five years
77,973

 
76,519

Over five years through ten years
251,941

 
247,151

Over ten years
239,113

 
233,880

Total
$
581,874

 
$
570,351


9



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 March 31, 2018 and December 31, 2017:
 
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)
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
5,777

 
$
243,061

 
83

 
$
1,446

 
$
54,871

 
28

 
$
7,223

 
$
297,932

 
111

Collateralized mortgage obligations
1,388

 
65,798

 
18

 
1,557

 
51,314

 
36

 
2,945


117,112


54

U.S. government agency securities
36

 
1,464

 
1

 
95

 
5,905

 
2

 
131


7,369


3

Municipal bonds-tax exempt
1,331

 
89,320

 
40

 
126

 
2,632

 
2

 
1,457


91,952


42

Total
$
8,532

 
$
399,643

 
142

 
$
3,224

 
$
114,722

 
68

 
$
11,756

 
$
514,365

 
210

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,855

 
$
197,621

 
66

 
$
847

 
$
56,998

 
25

 
$
2,702

 
$
254,619

 
91

Collateralized mortgage obligations
773

 
65,726

 
20

 
1,125

 
49,986

 
32

 
1,898

 
115,712

 
52

U.S. government agency securities
15

 
1,484

 
1

 
70

 
5,930

 
2

 
85

 
7,414

 
3

Municipal bonds-tax exempt
48

 
11,541

 
6

 
21

 
2,737

 
2

 
69

 
14,278

 
8

Municipal bonds-taxable

 

 

 

 

 

 

 

 

Mutual funds

 

 

 
530

 
22,382

 
6

 
530

 
22,382

 
6

Total
$
2,691

 
$
276,372

 
93

 
$
2,593

 
$
138,033

 
67

 
$
5,284

 
$
414,405

 
160


All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of March 31, 2018 and December 31, 2017 included securities with issuers which have not established any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

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 March 31, 2018 and December 31, 2017 were not other-than-temporarily impaired, and therefore, no impairment charges as of March 31, 2018 and December 31, 2017 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 
 March 31,
 
2018
 
2017
 
(in thousands)
Gross realized gains on sales of securities
$

 
$
269

Gross realized losses on sales of securities
(957
)
 

Net realized (losses) gains on sales of securities
$
(957
)
 
$
269

Proceeds from sales of securities
$
21,958

 
$
12,573


In January 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825). This new guidance, among other provisions, amends accounting related to the classification and measurement of investments in equity securities. We adopted this guidance, as required, in the first quarter of 2018. ASU 2016-01 requires the amounts reported in accumulated other comprehensive income

10



for equity securities that exist as of the date of adoption previously classified as available-for-sale to be reclassified to retained earnings. The Company reduced the balance of securities by $529,000 as of January 1, 2018, representing the loss related to all of our mutual fund equity securities, which resulted in a net reduction of retained earnings of $382,000 and an increase of $147,000 in net deferred tax assets based on the transition requirements of this standard.

During the three months ended March 31, 2018, we sold all of our mutual fund equity securities with gross realized losses of $957,000. The Company recorded a $428,000 net loss in earnings resulting from the sale these securities. The remaining loss of $529,000 related to these sold securities was recorded as a transition adjustment upon adoption of ASU 2016-01 as of the beginning of the period as described in the preceding paragraph. There was a $269,000 net gain in earnings resulting from sales of securities during the three months ended March 31, 2017, that had previously been recorded as net unrealized gains of $319,000 in comprehensive income.

Securities available for sale with market values of $130.8 million and $130.1 million as of March 31, 2018 and December 31, 2017, 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:
 
March 31, 2018
 
December 31, 2017
 
(in thousands)
Real estate loans:
 
 
 
Commercial property
 
 
 
Retail
$
909,414

 
$
915,273

Hospitality
731,531

 
681,325

Other (1)
1,423,903

 
1,417,273

Total commercial property loans
3,064,848

 
3,013,871

Construction
57,896

 
55,190

Residential property
545,053

 
521,853

Total real estate loans
3,667,797

 
3,590,914

Commercial and industrial loans:
 
 
 
Commercial term
184,083

 
182,685

Commercial lines of credit
190,255

 
181,894

International loans
35,042

 
34,622

Total commercial and industrial loans
409,380

 
399,201

Leases receivable
321,481

 
297,284

Consumer loans (2)
14,899

 
17,059

Loans and leases receivable
4,413,557

 
4,304,458

Allowance for loan and lease losses
(31,777
)
 
(31,043
)
Loans and leases receivable, net
$
4,381,780

 
$
4,273,415


(1) 
Includes, among other types, mixed-use, apartment, office, industrial, gas stations, faith-based facilities and warehouse; all other property types represent less than one percent of total loans and leases receivable.
(2) 
Consumer loans include home equity lines of credit of $12.7 million and $14.2 million as of March 31, 2018 and December 31, 2017, respectively.

Accrued interest on loans and leases receivable was $10.3 million and $10.2 million at March 31, 2018 and December 31, 2017, respectively. At March 31, 2018 and December 31, 2017, loans receivable of $1.1 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 March 31, 2018 and 2017:
 
SBA Loans Held for Sale
 
Real Estate
 
Commercial and Industrial
 
Total
 
(in thousands)
March 31, 2018
 
 
 
 
 
Balance at beginning of period
$
3,746

 
$
2,648

 
$
6,394

Originations
10,433

 
8,372

 
18,805

Sales
(12,028
)
 
(7,159
)
 
(19,187
)
Principal payoffs and amortization

 
(4
)
 
(4
)
Balance at end of period
$
2,151

 
$
3,857

 
$
6,008

 
 
 
 
 
 
March 31, 2017
 
 
 
 
 
Balance at beginning of period
$
7,410

 
$
1,906

 
$
9,316

Originations
12,633

 
6,559

 
19,192

Sales
(12,254
)
 
(7,389
)
 
(19,643
)
Principal payoffs and amortization

 
(16
)
 
(16
)
Balance at end of period
$
7,789

 
$
1,060

 
$
8,849


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
 
March 31, 2018
 
March 31, 2017
 
(in thousands)
Allowance for loan and lease losses:
 
 
 
Balance at beginning of period
$
31,043

 
$
32,429

Charge-offs
(1,632
)
 
(186
)
Recoveries on loans and leases previously charged off
1,717

 
989

Net recoveries
85

 
803

Loan and lease loss provision (income)
649

 
(80
)
Balance at end of period
$
31,777

 
$
33,152


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, Illinois, Virginia, New Jersey, New York, Colorado, Georgia and Washington State.

13



The following table details the information on the allowance for loan and lease losses by portfolio segment as of and for the three months ended March 31, 2018 and 2017:
 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
17,012

 
$
7,400

 
6,279

 
$
122

 
$
230

 
$
31,043

Charge-offs
(989
)
 
(279
)
 
(364
)
 

 

 
(1,632
)
Recoveries on loans and leases previously charged off
885

 
736

 
95

 
1

 

 
1,717

Loan and lease loss provision (income)
732

 
(967
)
 
1,100

 
2

 
(218
)
 
649

Ending balance
$
17,640

 
$
6,890

 
$
7,110

 
$
125

 
$
12

 
$
31,777

Individually evaluated for impairment
$
1,549

 
$
357

 
$
1,110

 
$

 
$

 
$
3,016

Collectively evaluated for impairment
$
16,091

 
$
6,533

 
$
6,000

 
$
125

 
$
12

 
$
28,761

 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases receivable
$
3,667,797

 
$
409,380

 
$
321,481

 
$
14,899

 
$

 
$
4,413,557

Individually evaluated for impairment
$
18,513

 
$
2,843

 
$
4,200

 
$
894

 
$

 
$
26,450

Collectively evaluated for impairment
$
3,649,284

 
$
406,537

 
$
317,281

 
$
14,005

 
$

 
$
4,387,107


As of and for the Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
26,134

 
$
5,623

 
307

 
$
199

 
$
166

 
$
32,429

Charge-offs
(104
)
 
(40
)
 
(42
)
 

 

 
(186
)
Recoveries on loans and leases previously charged off
712

 
277

 

 

 

 
989

Loan and lease loss provision (income)
(1,140
)
 
95

 
715

 
(69
)
 
319

 
(80
)
Ending balance
$
25,602

 
$
5,955

 
$
980

 
$
130

 
$
485

 
$
33,152

Individually evaluated for impairment
$
3,756

 
$
791

 
$

 
$

 
$

 
$
4,547

Collectively evaluated for impairment
$
21,846

 
$
5,164

 
$
980

$

$
130

 
$
485

 
$
28,605

 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases receivable
$
3,348,875

 
$
317,682

 
$
259,591

 
$
17,803

 
$

 
$
3,943,951

Individually evaluated for impairment
$
20,795

 
$
3,828

 
$

 
$
321

 
$

 
$
24,944

Collectively evaluated for impairment
$
3,328,080

 
$
313,854

 
$
259,591

 
$
17,482

 
$

 
$
3,919,007





    

14



Loan and Lease Quality Indicators

As part of the on-going monitoring of the credit quality of our loan and lease portfolio, we utilize an internal loan and lease grading system to identify credit risk and assign an appropriate grade, from 0 to 8, for each loan or lease in our loan and lease portfolio. Third party loan reviews are performed throughout the year. Additional adjustments are made when determined to be necessary. The loan and lease grade definitions are as follows:
Pass and Pass-Watch: Pass and pass-watch loans and leases, 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 and lease grading system. It incorporates all performing loans and leases 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 prospects of the debt and result in a Substandard classification. Loans and leases 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 or lease, 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 or lease classified as loss, grade 8, is considered uncollectible and of such little value that its continuance as an active bank asset is not warranted. This classification does not mean that the loan or lease 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 and leases classified as loss are charged off in a timely manner.

Under regulatory guidance, loans and leases graded special mention or worse are considered criticized loans and leases, and loans and leases graded substandard or worse are considered classified loans and leases.


15



     As of March 31, 2018 and December 31, 2017, pass/pass-watch, special mention and classified loans and leases, disaggregated by loan class, were as follows:
 
Pass/Pass-Watch
 
Special Mention
 
Classified
 
Total
 
(in thousands)
March 31, 2018
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
903,510

 
$
375

 
$
5,529

 
$
909,414

Hospitality
717,252

 
4,220

 
10,059

 
731,531

Other
1,407,438

 
9,040

 
7,425

 
1,423,903

Construction
57,896

 

 

 
57,896

Residential property
544,516

 
301

 
236

 
545,053

Total real estate loans
3,630,612

 
13,936

 
23,249

 
3,667,797

Commercial and industrial loans:
 
 
 
 
 
 

Commercial term
180,355

 
757

 
2,971

 
184,083

Commercial lines of credit
189,514

 
741

 

 
190,255

International loans
35,042

 

 

 
35,042

Total commercial and industrial loans
404,911

 
1,498

 
2,971

 
409,380

Leases receivable
317,281

 

 
4,200

 
321,481

Consumer loans
13,864

 
202

 
833

 
14,899

Total loans and leases
$
4,366,668

 
$
15,636

 
$
31,253

 
$
4,413,557

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
909,682

 
$
454

 
$
5,137

 
$
915,273

Hospitality
667,254

 
4,976

 
9,095

 
681,325

Other
1,397,658

 
11,045

 
8,570

 
1,417,273

Construction
55,190

 

 

 
55,190

Residential property
521,261

 
305

 
287

 
521,853

Total real estate loans
3,551,045

 
16,780

 
23,089

 
3,590,914

Commercial and industrial loans:
 
 
 
 
 
 
 
Commercial term
179,835

 
439

 
2,411

 
182,685

Commercial lines of credit
181,462

 
250

 
182

 
181,894

International loans
34,622

 

 

 
34,622

Total commercial and industrial loans
395,919

 
689

 
2,593

 
399,201

Leases receivable
292,832

 

 
4,452

 
297,284

Consumer loans
15,995

 

 
1,064

 
17,059

Total loans and leases
$
4,255,791

 
$
17,469

 
$
31,198

 
$
4,304,458

 

16



The following is an aging analysis of loans and leases, disaggregated by loan class, as of the dates indicated:
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due
 
Total Past Due
 
Current
 
Total
 
(in thousands)
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
295

 
$

 
$
689

 
$
984

 
$
908,430

 
$
909,414

Hospitality
5,585

 

 
819

 
6,404

 
725,127

 
731,531

Other
348

 

 
683

 
1,031

 
1,422,872

 
1,423,903

Construction

 

 

 

 
57,896

 
57,896

Residential property
1,715

 

 

 
1,715

 
543,338

 
545,053

Total real estate loans
7,943

 

 
2,191

 
10,134

 
3,657,663

 
3,667,797

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial term
496

 
406

 
259

 
1,161

 
182,922

 
184,083

Commercial lines of credit

 

 

 

 
190,255

 
190,255

International loans

 

 

 

 
35,042

 
35,042

Total commercial and industrial loans
496

 
406

 
259

 
1,161

 
408,219

 
409,380

Leases receivable
2,211

 
816

 
3,089

 
6,116

 
315,365

 
321,481

Consumer loans
6

 
2

 

 
8

 
14,891

 
14,899

Total loans and leases
$
10,656

 
$
1,224

 
$
5,539

 
$
17,419

 
$
4,396,138

 
$
4,413,557

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
96

 
$
15

 
$
630

 
$
741

 
$
914,532

 
$
915,273

Hospitality
3,421

 
168

 
398

 
3,987

 
677,338

 
681,325

Other
1,245

 
1,333

 
563

 
3,141

 
1,414,132

 
1,417,273

Construction

 

 

 

 
55,190

 
55,190

Residential property
609

 

 

 
609

 
521,244

 
521,853

Total real estate loans
5,371

 
1,516

 
1,591

 
8,478

 
3,582,436

 
3,590,914

Commercial and industrial loans:
 
 
 
 
 
 


 
 
 


Commercial term
430

 
567

 
829

 
1,826

 
180,859

 
182,685

Commercial lines of credit
250

 

 
182

 
432

 
181,462

 
181,894

International loans

 

 

 

 
34,622

 
34,622

Total commercial and industrial loans
680

 
567

 
1,011

 
2,258

 
396,943

 
399,201

Leases receivable
2,295

 
944

 
3,554

 
6,793

 
290,491

 
297,284

Consumer loans

 

 

 

 
17,059

 
17,059

Total loans and leases
$
8,346

 
$
3,027

 
$
6,156

 
$
17,529

 
$
4,286,929

 
$
4,304,458


There was $17,000 of loans that were 90 days or more past due and accruing interest as of March 31, 2018 and no loans that were 90 days or more past due and accruing interest as of December 31, 2017.

Impaired Loans and Leases

Loans and leases are considered impaired when the Bank will be unable to collect all interest and principal payments per the contractual terms of the loan and lease agreement, unless the loan is well-collateralized and in the process of collection; or they are classified as Troubled Debt Restructurings (“TDRs”) because, due to the financial difficulties of the borrowers, we have granted concessions to the borrowers we would not otherwise consider; or when current information or events make it unlikely to collect in full according to the contractual terms of the loan or lease 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 and lease impairment in accordance with applicable GAAP. Impaired loans and leases are measured based on the present value of expected future cash flows discounted at the receivable's effective interest rate or, as a practical

17



expedient, at the receivable's observable market price or the fair value of the collateral if the loan or lease is collateral dependent, less estimated costs to sell. If the measure of the impaired loan or lease is less than the recorded investment in the loan or lease, the deficiency is either charged off against the allowance for loan and lease losses or we establish a specific allocation in the allowance for loan and lease losses. Additionally, loans and leases that are considered impaired are specifically excluded from the quarterly migration analysis when determining the amount of the allowance for loan and lease 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 and leases, 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)
March 31, 2018
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
Retail
$
1,394

 
$
1,417

 
$
1,336

 
$
58

 
$
5

Hospitality
7,413

 
8,962

 
3,671

 
3,742

 
1,543

Other
7,255

 
7,778

 
7,140

 
116

 
1

Residential property
2,450

 
2,596

 
2,450

 

 

Total real estate loans
18,512

 
20,753

 
14,597

 
3,916

 
1,549

Commercial and industrial loans
2,843

 
2,934

 
1,344

 
1,499

 
357

Leases receivable
4,200

 
4,324

 
934

 
3,265

 
1,110

Consumer loans
894

 
1,087

 
895

 

 

Total loans and leases
$
26,449

 
$
29,098

 
$
17,770

 
$
8,680

 
$
3,016

 
 
 
 
 
 
 
 
 
 
December 31, 2017