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Section 1: 10-Q (10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________ 
FORM 10-Q
______________________________________________ 

Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2018
Commission File Number: 000-50245
______________________________________________ 
HOPE BANCORP, INC.
(Exact name of registrant as specified in its charter)
______________________________________________ 
Delaware
 
95-4849715
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
3200 Wilshire Boulevard, Suite 1400,
Los Angeles, California
 
90010
(Address of principal executive offices)
 
(Zip Code)
(213) 639-1700
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if change 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  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
Emerging growth company
o
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(d) of the Exchange Act.   o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o   No  x
As of August 1, 2018, there were 129,976,852 outstanding shares of Hope Bancorp, Inc. common stock, $0.001 par value per share.




Table of Contents
 
 
 
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Statements of Financial Condition - June 30, 2018 (Unaudited) and December 31, 2017
 
 
 
 
Consolidated Statements of Income (Unaudited) - Three and Six Months Ended June 30, 2018 and 2017
 
 
 
 
Consolidated Statements of Comprehensive Income (Unaudited) - Three and Six Months Ended June 30, 2018 and 2017
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) - Six Months Ended June 30, 2018 and 2017
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 2018 and 2017
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
LEGAL PROCEEDINGS
 
 
 
Item 1A.
RISK FACTORS
 
 
 
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
 
Item 3.
DEFAULTS UPON SENIOR SECURITIES
 
 
 
Item 4.
MINE SAFETY DISCLOSURES
 
 
 
Item 5.
OTHER INFORMATION
 
 
 
Item 6.
EXHIBITS
 
 
 
 
 
 
INDEX TO EXHIBITS
 
 
 
SIGNATURES
 
 
 


2

Table of Contents

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to, among other things, expectations regarding the business environment in which we operate, projections of future performance, perceived opportunities in the market, and statements regarding our business strategies, objectives and vision. Forward-looking statements include, but are not limited to, statements preceded by, followed by or that include the words “will,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions. With respect to any such forward-looking statements, the Company claims the protection provided for in the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, trends, uncertainties, and factors that are beyond the Company’s control or ability to predict. Our actual results, performance or achievements may differ significantly from the results, performance or achievements expressed or implied in any forward-looking statements. The risks and uncertainties include: possible deterioration in economic conditions in our areas of operation; interest rate risk associated with volatile interest rates and related asset-liability matching risk; liquidity risks; risk of significant non-earning assets, and net credit losses that could occur, particularly in times of weak economic conditions or times of rising interest rates; and regulatory risks associated with current and future regulations. For additional information concerning these and other risk factors, see Part I, Item 1A. Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2017.
The Company does not undertake, and specifically disclaims any obligation, to update any forward looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.


3

Table of Contents

PART I
FINANCIAL INFORMATION

Item 1.
Financial Statements

HOPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
 
 
 
 
(Unaudited)
 
 
 
June 30,
2018
 
December 31,
2017
ASSETS
(Dollars in thousands, except share data)
Cash and cash equivalents:
 
 
 
Cash and due from banks
$
175,941

 
$
185,527

Interest bearing cash in other banks
290,423

 
306,473

Total cash and cash equivalents
466,364

 
492,000

Interest bearing deposits in other financial institutions and other investments
77,817

 
53,366

Securities available for sale, at fair value
1,835,106

 
1,720,257

Loans held for sale, at the lower of cost or fair value
26,866

 
29,661

Loans receivable, net of allowance for loan losses of $89,881 and $84,541 at June 30, 2018 and December 31, 2017, respectively
11,581,559

 
11,018,034

Other real estate owned (“OREO”), net
8,656

 
10,787

Federal Home Loan Bank (“FHLB”) stock, at cost
26,947

 
29,776

Premises and equipment, net
56,242

 
56,714

Accrued interest receivable
30,954

 
29,979

Deferred tax assets, net
54,510

 
55,203

Customers’ liabilities on acceptances
868

 
1,691

Bank owned life insurance (“BOLI”)
75,693

 
74,915

Investments in affordable housing partnerships
80,818

 
81,009

Goodwill
464,450

 
464,450

Core deposit intangible assets, net
15,292

 
16,523

Servicing assets, net
25,050

 
24,710

Other assets
42,816

 
47,642

Total assets
$
14,870,008

 
$
14,206,717

 
 
 
 
(Continued)

4

Table of Contents


HOPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
 
 
 
 
(Unaudited)
 
 
 
June 30,
2018
 
December 31,
2017
LIABILITIES AND STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share data)
LIABILITIES:
 
 
 
Deposits:
 
 
 
Noninterest bearing
$
3,038,265

 
$
2,998,734

Interest bearing:
 
 
 
Money market and NOW accounts
3,282,642

 
3,332,703

Savings deposits
229,746

 
240,509

Time deposits
5,183,942

 
4,274,663

Total deposits
11,734,595

 
10,846,609

FHLB advances
836,994

 
1,157,693

Federal funds purchased

 
69,900

Convertible notes, net
192,120

 

Subordinated debentures
101,386


100,853

Accrued interest payable
24,594

 
15,961

Acceptances outstanding
868

 
1,691

Commitments to fund investments in affordable housing partnerships
38,056

 
38,467

Other liabilities
35,719

 
47,288

Total liabilities
12,964,332

 
12,278,462

STOCKHOLDERS’ EQUITY:
 
 
 
Common stock, $0.001 par value; authorized 150,000,000 shares at June 30, 2018 and December 31, 2017: issued and outstanding 135,529,445 and 131,167,705 shares, respectively, at June 30, 2018, and issued and outstanding 135,511,891 shares at December 31, 2017
136

 
136

Additional paid-in capital
1,421,679

 
1,405,014

Retained earnings
607,944

 
544,886

Treasury stock, at cost; 4,361,740 and 0 shares at June 30, 2018 and
   December 31, 2017, respectively
(78,961
)
 

Accumulated other comprehensive loss, net
(45,122
)
 
(21,781
)
Total stockholders’ equity
1,905,676

 
1,928,255

Total liabilities and stockholders’ equity
$
14,870,008

 
$
14,206,717



See accompanying Notes to Consolidated Financial Statements (Unaudited)

5

Table of Contents

HOPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands, except per share data)
INTEREST INCOME:
 
 
 
 
 
 
 
Interest and fees on loans
$
146,188

 
$
128,515

 
$
284,131

 
$
251,809

Interest on securities
10,899

 
8,741

 
21,000

 
16,854

Interest on federal funds sold and other investments
2,823

 
1,277

 
5,189

 
2,613

Total interest income
159,910

 
138,533

 
310,320

 
271,276

INTEREST EXPENSE:
 
 
 
 
 
 
 
Interest on deposits
30,610

 
18,114

 
55,459

 
32,625

Interest on FHLB advances
3,681

 
2,338

 
7,750

 
4,477

Interest on other borrowings and convertible notes
2,800

 
1,261

 
4,224

 
2,449

Total interest expense
37,091

 
21,713

 
67,433

 
39,551

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
122,819

 
116,820

 
242,887

 
231,725

PROVISION FOR LOAN LOSSES
2,300

 
2,760

 
4,800

 
8,360

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
120,519

 
114,060

 
238,087

 
223,365

NONINTEREST INCOME:
 
 
 
 
 
 
 
Service fees on deposit accounts
4,613

 
5,179

 
9,414

 
10,517

International service fees
1,212

 
1,119

 
2,232

 
2,227

Loan servicing fees, net
1,010

 
1,291

 
2,589

 
2,729

Wire transfer fees
1,250

 
1,343

 
2,457

 
2,529

Net gains on sales of SBA loans
3,480

 
3,267

 
6,930

 
6,517

Net gains on sales of other loans
431

 
352

 
1,627

 
772

Other income and fees
3,273

 
3,564

 
9,870

 
8,427

Total noninterest income
15,269

 
16,115

 
35,119

 
33,718

NONINTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
40,575

 
34,946

 
79,960

 
69,112

Occupancy
7,418

 
7,154

 
14,657

 
14,348

Furniture and equipment
4,023

 
3,556

 
7,744

 
6,969

Advertising and marketing
2,737

 
2,394

 
5,036

 
5,818

Data processing and communications
3,574

 
2,676

 
7,069

 
6,282

Professional fees
4,474

 
3,260

 
7,580

 
7,162

Loss on investments in affordable housing partnerships
2,613

 
3,055

 
5,243

 
5,216

FDIC assessments
1,611

 
1,004

 
3,378

 
2,014

Credit related expenses
926

 
113

 
1,698


1,996

OREO expense, net
45

 
1,188

 
(59
)
 
2,185

Merger-related expenses

 
562

 
(7
)
 
1,509

Other
3,633

 
4,129

 
7,783

 
9,125

Total noninterest expense
71,629

 
64,037

 
140,082

 
131,736

INCOME BEFORE INCOME TAXES
64,159

 
66,138

 
133,124

 
125,347

INCOME TAX PROVISION
16,629

 
25,451

 
34,362

 
48,450

NET INCOME
$
47,530

 
$
40,687

 
$
98,762

 
$
76,897

EARNINGS PER COMMON SHARE
 
 
 
 
 
 
 
Basic
$
0.36

 
$
0.30

 
$
0.74

 
$
0.57

Diluted
$
0.36

 
$
0.30

 
$
0.73

 
$
0.57


See accompanying Notes to Consolidated Financial Statements (Unaudited)

6

Table of Contents



HOPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Net income
$
47,530

 
$
40,687

 
$
98,762

 
$
76,897

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Change in unrealized net holding (losses) gains on securities available for sale
(9,255
)
 
4,768

 
(33,900
)
 
7,949

Change in unrealized net holding gains (losses) on interest only strips
6

 
8

 
2

 
(41
)
Tax effect
2,767

 
(2,016
)
 
10,276

 
(3,340
)
Other comprehensive (loss) income, net of tax
(6,482
)
 
2,760

 
(23,622
)
 
4,568

Total comprehensive income
$
41,048

 
$
43,447

 
$
75,140

 
$
81,465



See accompanying Notes to Consolidated Financial Statements (Unaudited)

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Table of Contents


HOPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
Additional paid-in capital
 
Retained
earnings
 
Treasury stock
 
Accumulated other comprehensive loss, net
 
Total
stockholders’ equity
 
 
Shares
 
Amount
 
(Dollars in thousands, except share data)
BALANCE, JANUARY 1, 2017
 
135,240,079

 
$
135

 
$
1,400,490

 
$
469,505

 
$

 
$
(14,657
)
 
$
1,855,473

Issuance of shares pursuant to various stock plans
 
57,599

 
 
 
649

 
 
 
 
 
 
 
649

Stock-based compensation
 
 
 
 
 
1,164

 
 
 
 
 
 
 
1,164

Cash dividends declared on common stock
 
 
 
 
 
 
 
(32,457
)
 
 
 
 
 
(32,457
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
76,897

 
 
 
 
 
76,897

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
4,568

 
4,568

BALANCE, JUNE 30, 2017
 
135,297,678

 
$
135

 
$
1,402,303

 
$
513,945

 
$

 
$
(10,089
)
 
$
1,906,294

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JANUARY 1, 2018
 
135,511,891

 
$
136

 
$
1,405,014

 
$
544,886

 
$

 
$
(21,781
)
 
$
1,928,255

Reclassification of unrealized losses on equity investments to retained earnings - ASU 2016-01
 
 
 
 
 
 
 
(469
)
 
 
 
281

 
(188
)
Issuance of shares pursuant to various stock plans
 
17,554

 
 
 
209

 
 
 
 
 
 
 
209

Stock-based compensation
 
 
 
 
 
1,411

 
 
 
 
 
 
 
1,411

Cash dividends declared on common stock
 
 
 
 
 
 
 
(35,235
)
 
 
 
 
 
(35,235
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 


Net income
 
 
 
 
 
 
 
98,762

 
 
 
 
 
98,762

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
(23,622
)
 
(23,622
)
Repurchase of treasury stock
 
(4,361,740
)
 
 
 
 
 
 
 
(78,961
)
 
 
 
(78,961
)
Equity component of convertible notes, net of taxes
 
 
 
 
 
15,045

 
 
 
 
 
 
 
15,045

BALANCE, JUNE 30, 2018
 
131,167,705

 
$
136

 
$
1,421,679

 
$
607,944

 
$
(78,961
)
 
$
(45,122
)
 
$
1,905,676



See accompanying Notes to Consolidated Financial Statements (Unaudited)

8

Table of Contents

HOPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
 
 
 
Six Months Ended June 30,
 
2018
 
2017
 
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
98,762

 
$
76,897

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Discount accretion, net of depreciation and amortization
(3,318
)
 
(6,244
)
Stock-based compensation expense
1,868

 
1,506

Provision for loan losses
4,800

 
8,360

(Credit) provision for unfunded loan commitments
(50
)
 
442

Valuation adjustment of premises held for sale

 
1,084

Valuation adjustment of OREO
113

 
1,410

Net gains on sales of SBA and other loans
(8,557
)
 
(7,289
)
Earnings on BOLI
(778
)
 
(417
)
Net change in fair value of derivatives
15

 
65

Net losses (gains) on sale and disposal of premises and equipment
36

 
(338
)
Net gains on sales of OREO
(151
)
 
(82
)
Net change in fair value of equity investments with readily determinable fair value
(3,518
)
 

Losses on investments in affordable housing partnership
5,074

 
5,047

Net change in deferred income taxes
4,408

 
2,544

Proceeds from sales of loans held for sale
161,621

 
138,413

Originations of loans held for sale
(148,086
)
 
(111,742
)
Originations of servicing assets
(3,316
)
 
(2,612
)
Net change in accrued interest receivable
(975
)
 
1,240

Net change in other assets
2,102

 
(9,916
)
Net change in accrued interest payable
8,633

 
992

Net change in other liabilities
(13,134
)
 
(5,449
)
Net cash provided by operating activities
105,549

 
93,911

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of interest bearing deposits in other financial institutions and other investments
(4,611
)
 
(8,820
)
Redemption of interest bearing deposits in other financial institutions and other investments
5,635

 
9,060

Purchase of securities available for sale
(277,627
)
 
(245,198
)
Proceeds from matured or paid-down securities available for sale
102,950

 
124,381

Proceeds from sales of other loans held for sale
6,296

 
259

Net change in loans receivable
(557,761
)
 
(285,348
)
Proceeds from sales of OREO
4,350

 
3,606

Purchase of FHLB stock

 
(1,148
)
Redemption of FHLB stock
2,829

 
761

Purchase of premises and equipment
(4,329
)
 
(4,622
)
Proceeds from sales and disposals of premises and equipment held for sale

 
3,267

Investments in affordable housing partnerships
(5,480
)
 
(6,980
)
Net cash used in investing activities
(727,748
)
 
(410,782
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net change in deposits
887,987

 
317,760

Proceeds from FHLB advances

 
425,000

Repayment of FHLB advances
(320,000
)
 
(385,000
)
Repayment of federal funds purchased
(69,900
)
 

Proceeds from convertible notes, net of issuance fees
212,920

 

Purchase of treasury stock
(78,961
)
 

Cash dividends paid on common stock
(35,235
)
 
(32,457
)
Taxes paid in net settlement of restricted stock
(457
)
 

Issuance of additional stock pursuant to various stock plans
209

 
649

Net cash provided by financing activities
596,563

 
325,952

NET CHANGE IN CASH AND CASH EQUIVALENTS
(25,636
)
 
9,081

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
492,000

 
437,334

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
466,364

 
$
446,415

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
      Interest paid
$
58,348

 
$
43,620

      Income taxes paid
$
15,218

 
$
61,314

SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES
 
 
 
Transfer from loans receivable to OREO
$
1,876

 
$
7,173

Transfer from loans receivable to loans held for sale
$
6,155

 
$
14,590

Transfer from loans held for sale to loans receivable
$
478

 
$
394

Transfer from premises and equipment to premises held for sale
$

 
$
3,300

Transfer of available for sale securities to equity investments with adoption of ASU 2016-01
$
21,957

 
$

New commitments to fund affordable housing partnership investments
$
5,000

 
$
26,500


See accompanying Notes to Consolidated Financial Statements (Unaudited)

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Table of Contents
HOPE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)




1.
Hope Bancorp, Inc.
Hope Bancorp, Inc. (“Hope Bancorp” on a parent-only basis and the “Company” on a consolidated basis), headquartered in Los Angeles, California, is the holding company for Bank of Hope (the “Bank”). As of June 30, 2018, the Bank operated branches in California, Washington, Texas, Illinois, Alabama, Georgia, Virginia, New Jersey, and New York, loan production offices in Colorado, Texas, Oregon, Washington, Georgia, Virginia, Southern California, and Northern California, and a representative office in Seoul, Korea. The Company is a corporation organized under the laws of the state of Delaware and a bank holding company registered under the Bank Holding Company Act of 1956, as amended.

2.
Basis of Presentation
The consolidated financial statements included herein have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), except for the Consolidated Statement of Financial Condition as of December 31, 2017 which was from the audited financial statements included in the Company’s 2017 Annual Report on Form 10-K. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations.
The consolidated financial statements include the accounts of Hope Bancorp and its wholly owned subsidiaries, principally Bank of Hope. All intercompany transactions and balances have been eliminated in consolidation. The Company has made all adjustments, that in the opinion of management, are necessary to fairly present the Company’s financial position at June 30, 2018 and December 31, 2017 and the results of operations for the three and six months ended June 30, 2018 and 2017. Certain reclassifications have been made to prior period amounts to conform to the current year presentation. The results of operations for the interim periods are not necessarily indicative of results to be anticipated for the full year.
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 significantly from those estimates.
These unaudited consolidated financial statements should be read along with the audited consolidated financial statements and accompanying notes included in the Company’s 2017 Annual Report on Form 10-K.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. Subsequently in July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases” and ASU 2018-11, “Leases Topic 842, Targeted Improvements”, to provide additional clarification, implementation, and transition guidance on certain aspects of ASU 2016-02. ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 and ASU 2018-10 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Under ASU 2018-11, an additional transition option was provided that would allow entities to not apply the new guidance in the comparative periods they present in their financial statements in the year of adoption. Under this optional transition method, entities will be allowed to continue using and presenting leases under ASC 840 for prior years comparative periods and then prospectively adopt ASC 842 on January 1, 2019, recognizing a cumulative-effect adjustment to the opening balance of retained earnings. The Company estimated that there are approximately 100 operating leases that will be accounted for under ASU 2016-02 at the adoption date. The Company plans to elect the transition option to not reassess the following at adoption date: whether contracts are or contain leases, the lease classification for any expired or existing leases, and the evaluation of initial direct costs associated with existing leases. In July 2018, the Company engaged a new software vendor to assist the Company with the administration and accounting of leases under ASU 2016-02. The Company is currently in the process of evaluating the financial impact of the pending adoption of the new standard on its consolidated financial statements.

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In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, also referred to as “CECL”. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. ASU 2016-13 becomes effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. The Company has established a CECL committee to oversee the development and implementation of ASU 2016-13. The Company is collaborating with a third party advisory team and has completed a gap assessment, a full implementation road-map and a detailed project plan. The Company has also engaged a software vendor to assist the Company to build a model that is compliant with ASU 2016-13 by the effective date. Based on the Company’s initial assessment of the ASU 2016-13, the Company expects the new guidance will result in additional required allowance for loan losses which could potentially have a material impact on its consolidated financial statements and regulatory capital ratios.
In January 2017, the FASB issued ASU 2017-04, “Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment.” ASU 2017-04 will amend and simplify current goodwill impairment testing to eliminate Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the quantitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. ASU 2017-04 should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of ASU 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”. ASU 2017-08 was issued to amend the amortization period for certain callable debt securities held at a premium. ASU 2017-08 shortens the amortization period of premiums on certain purchased callable debt securities to the earliest call date. ASU 2017-08 affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). ASU 2017-08 does not impact securities purchased at a discount, which continue to be amortized to maturity. ASU 2017-08 is effective for annual period beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted in an interim period. If an entity chooses to adopt early, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. The adoption of ASU 2017-08 is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Payment Accounting”. ASU 2018-07 expands the scope of Topic 718 (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services.  As ASU 2018-07 becomes effective, the accounting for share-based payments for nonemployees and employees will be substantially the same.  The ASU supersedes Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. ASU 2018-07 is effective for annual period beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers.  The adoption of ASU 2018-07 is not expected to have a material impact on the Company’s consolidated financial statements as the Company has not historically issued share-based payments to nonemployees for goods and services.

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3.    Stock-Based Compensation
The Company has a stock-based incentive plan (the “2016 Plan”) to award equity as a form of compensation. The 2016 Plan, was approved by the Company’s stockholders on September 1, 2016. The 2016 Plan provides for grants of stock options, stock appreciation rights (“SARs”), restricted stock, performance shares, and performance units (sometimes referred to individually or collectively as “awards”) to non-employee directors, employees, and consultants of the Company. Stock options may be either incentive stock options (“ISOs”), as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or nonqualified stock options (“NQSOs”).
The 2016 Plan gives the Company flexibility to (i) attract and retain qualified non-employee directors, executives, other key employees, and consultants with appropriate equity-based awards to; (ii) motivate high levels of performance; (iii) recognize employee contributions to the Company’s success; and (iv) align the interests of the 2016 Plan participants with those of the Company’s stockholders. The plan initially had 2,400,000 shares available for grant to participants. The exercise price for shares under an ISO may not be less than 100% of fair market value on the date the award is granted under Code Section 422. Similarly, under the terms of the 2016 Plan, the exercise price for SARs and NQSOs may not be less than 100% of fair market value on the date of grant. Performance units are awarded to a participant at the market price of the Company’s common stock on the date of award (after the lapse of the restriction period and the attainment of the performance criteria). No minimum exercise price is prescribed for performance shares and restricted stock awarded under the 2016 Plan. All options not exercised generally expire 10 years after the date of grant.
ISOs, SARs and NQSOs have vesting periods of three to five years and have 10-year contractual terms. Restricted stock, performance shares, and performance units are granted with a restriction period of not less than one year from the grant date for performance-based awards and not more than three years from the grant date for time-based vesting of grants. Compensation expense for awards is recognized over the vesting period. 
The Company had another stock-based incentive plan, the 2007 Equity Incentive Plan (“2007 Plan”), which was approved by stockholders in May 2007. Under the terms of this plan, awards cannot be granted under the plan more than ten years after the plan adoption date. Therefore, subsequent to May 2017, equity awards were not issued from this plan.
Under the 2016 Plan, 1,113,746 shares were available for future grants as of June 30, 2018.
The total shares reserved for issuance will serve as the underlying value for all equity awards under the 2016 Plan. With the exception of the shares underlying stock options and restricted stock awards, the board of directors may choose to settle the awards by paying the equivalent cash value or by delivering the appropriate number of shares.
The following is a summary of stock option activity under the 2016 Plan for the six months ended June 30, 2018:
 
Number of
Shares
 
Weighted-
Average
Exercise
Price Per
Share
 
Weighted-
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
(Dollars in thousands)
Outstanding - January 1, 2018
1,075,423

 
$
15.06

 
 
 
 
Granted

 

 
 
 
 
Exercised
(16,742
)
 
11.76

 
 
 
 
Expired
(3,195
)
 
16.66

 
 
 
 
Forfeited
(24,000
)
 
17.18

 
 
 
 
Outstanding - June 30, 2018
1,031,486

 
$
15.06

 
6.82
 
$
2,861

Options exercisable - June 30, 2018
665,380

 
$
13.98

 
6.14
 
$
2,564



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The following is a summary of restricted stock and performance unit activity under the 2016 Plan for the six months ended June 30, 2018:
 
 
Number of
Shares
 
Weighted-
Average Grant Date
Fair Value
Outstanding - January 1, 2018
379,419

 
$
16.42

Granted
266,225

 
16.23

Vested
(63,105
)
 
15.51

Forfeited
(17,556
)
 
16.12

Outstanding - June 30, 2018
564,983

 
$
16.50


The total fair value of restricted stock and performance units vested for the six months ended June 30, 2018 and 2017 was $1.2 million and $1.3 million, respectively.
On August, 21, 2017 the Company adopted the Hope Employee Stock Purchase Plan (“ESPP”). The ESPP allows eligible employees to purchase the Company’s common shares through payroll deductions which build up between the offering date and the purchase date. At the purchase date, the Company uses the accumulated funds to purchase shares in the Company on behalf of the participating employees at a 10% discount to the closing price of the Company’s common shares. The closing price is the lower of either the closing price on the first day of the offering period or on the closing price on the purchase date. The dollar amount of common shares purchased under the ESPP must not exceed 20% of the participating employee’s base salary, subject to a cap of $25 thousand in stock value based on the grant date. The ESPP is considered compensatory under GAAP and compensation expense for the ESPP is recognized as part of the Company’s stock based compensation expenses. The compensation expense for ESPP during the six months ended June 30, 2018 and 2017 was $148 thousand and $0, respectively.
The amount charged against income related to stock-based payment arrangements, including ESPP, was $915 thousand and $760 thousand for the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, $1.9 million and $1.5 million, respectively, of stock-based payment arrangements were charged against income. The income tax benefit recognized was approximately $237 thousand and $292 thousand for the three months ended June 30, 2018 and 2017, respectively. The income tax benefit recognized for the six months ended June 30, 2018 and 2017, was approximately $482 thousand and $582 thousand, respectively.
At June 30, 2018, the unrecognized compensation expense related to non-vested stock option grants was $669 thousand which is expected to be recognized over a weighted average vesting period of 2.72 years. Unrecognized compensation expense related to non-vested restricted stock and performance units was $6.1 million which is expected to be recognized over a weighted average vesting period of 2.70 years.

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4.    Earnings Per Share (“EPS”)
Basic EPS does not reflect the possibility of dilution that could result from the issuance of additional shares of common stock upon exercise or conversion of outstanding equity awards or convertible notes, and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted to common stock that would then share in earnings. For the three months ended June 30, 2018 and 2017, stock options and restricted shares awards for 306,136 and 530,334 shares of common stock, respectively, were excluded in computing diluted earnings per common share because they were anti-dilutive. For the six months ended June 30, 2018 and 2017, stock options and restricted shares awards for 303,338 and 542,328 shares of common stock, respectively, were excluded in computing diluted earnings per common share because they were anti-dilutive. Additionally, warrants issued pursuant to the Company’s participation in the U.S. Treasury’s TARP Capital Purchase Plan, to purchase 20,673 shares and 20,087 shares of common stock were anti-dilutive and excluded for the three and six months ended June 30, 2018 and 2017, respectively.
During the second quarter of 2018, the Company issued $217.5 million in convertible notes. The convertible notes can be converted to the Company’s shares of common stock at an initial rate of 45.0760 shares per $1,000 principal amount of the notes (See footnote 10 “Subordinated Debentures and Convertible Notes” for additional information regarding convertible notes issued). For the three and six months ended June 30, 2018, shares related to the convertible notes issued were not included in the Company’s diluted EPS calculation. In accordance with the terms of the convertible notes and settlement options available to the Company, no shares would have been delivered to investors of the convertible notes upon assumed conversion based on the Company’s common stock price during the three and six months ended June 30, 2018.
On April 26, 2018, the Company’s Board of Directors approved a share repurchase program that authorized the Company to repurchase up to $100.0 million in common stock. During the second quarter of 2018, the Company repurchased 4.4 million shares of common stock totaling $79.0 million which were recorded as treasury stock and these shares were excluded from weighted average shares and weighted average diluted shares for the three and six months ended June 30, 2018 after they were repurchased.
The following tables show the computation of basic and diluted EPS for the three and six months ended June 30, 2018 and 2017.
 
Three Months Ended June 30,
 
2018

2017
 
Net Income
(Numerator)
 
Weighted-Average Shares
(Denominator)
 
Per
Share
(Amount)
 
Net Income
(Numerator)
 
Weighted-Average Shares
(Denominator)
 
Per
Share
(Amount)
 
(Dollars in thousands, except share and per share data)
Basic EPS - common stock
$
47,530

 
133,061,304

 
$
0.36

 
$
40,687

 
135,257,044

 
$
0.30

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options, restricted stock,
   and ESPP shares
 
 
291,537

 
 
 
 
 
356,137

 
 
Diluted EPS - common stock
$
47,530

 
133,352,841

 
$
0.36

 
$
40,687

 
135,613,181

 
$
0.30

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2018
 
2017
 
Net Income
(Numerator)
 
Weighted-Average Shares
(Denominator)
 
Per
Share
(Amount)
 
Net Income
(Numerator)
 
Weighted-Average Shares
(Denominator)
 
Per
Share
(Amount)
 
(In thousands, except share and per share data)
Basic EPS - common stock
$
98,762

 
134,283,216

 
$
0.74

 
$
76,897

 
135,252,556

 
$
0.57

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options, restricted stock,
   and ESPP shares
 
 
293,528

 
 
 
 
 
432,508

 
 
Diluted EPS - common stock
$
98,762

 
134,576,744

 
$
0.73

 
$
76,897

 
135,685,064

 
$
0.57



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5.    Equity Investments
On January 1, 2018, the Company adopted ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”. As a result of the adoption, the Company reclassified $469 thousand in net unrealized losses included in other comprehensive income and deferred tax assets as of December 31, 2017 to retained earnings on January 1, 2018. Equity investments with readily determinable fair value at June 30, 2018, consisted of mutual funds and equity stock in other institutions in the amount of $21.4 million and $4.1 million, respectively and is included in “Interest bearing deposits in other financial institutions and other investments” on the consolidated statements of financial condition.
In accordance with ASU 2016-01, the change in fair value for equity investments with readily determinable fair value for the three and six months ended June 30, 2018 were recorded as other noninterest income as summarized in the table below:
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
(Dollars in thousands)
Net change in fair value recorded during the period on equity
investment securities
$
(1
)
 
$
3,518

Net change in fair value recorded on equity investment securities
sold during the period

 

Net change in fair value on equity investment securities at end of period
$
(1
)
 
$
3,518

 
 
 
 
At June 30, 2018, the Company also had equity investment without readily determinable fair value which are carried at cost less any determined impairment. The balance of these investments are adjusted for changes in subsequent observable prices. At June 30, 2018 the total balance of equity investments without readily determinable fair values included in “Interest bearing deposits in other financial institutions and other investments” on the consolidated statements of financial condition was $18.2 million, consisting of $370 thousand in correspondent bank stock and community reinvestment act investments of $17.8 million. There was no impairment or subsequent observable price changes for investments without readily determinable fair values for the three and six month ended June 30, 2018.

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6.    Securities Available for Sale
The following is a summary of securities available for sale as of the dates indicated:
 
At June 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(Dollars in thousands)
Debt securities:
 
 
 
 
 
 
 
U.S. Government agency and U.S. Government sponsored enterprises:
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
928,000

 
$
104

 
$
(31,017
)
 
$
897,087

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
450,690

 
46

 
(16,141
)
 
434,595

Commercial
435,745

 
123

 
(15,597
)
 
420,271

Corporate securities
5,000

 

 
(595
)
 
4,405

Municipal securities
80,725

 
281

 
(2,258
)
 
78,748

Total investment securities available for sale
$
1,900,160

 
$
554

 
$
(65,608
)
 
$
1,835,106

 
 
 
 
 
 
 
 
 
At December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(Dollars in thousands)
Debt securities:
 
 
 
 
 
 
 
U.S. Government agency and U.S. Government sponsored enterprises:
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
856,193

 
$
58

 
$
(17,542
)
 
$
838,709

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
477,676

 
521

 
(6,983
)
 
471,214

Commercial
308,046

 

 
(6,681
)
 
301,365

Corporate securities
4,997

 

 
(522
)
 
4,475

Municipal securities
82,542

 
870

 
(875
)
 
82,537

Total debt securities
1,729,454

 
1,449

 
(32,603
)
 
1,698,300

Mutual funds
22,425

 
17

 
(485
)
 
21,957

Total investment securities available for sale
$
1,751,879

 
$
1,466

 
$
(33,088
)
 
$
1,720,257

 
As of June 30, 2018 and December 31, 2017, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.
At June 30, 2018 and December 31, 2017, $46.2 million and $19.0 million, respectively, in unrealized losses on securities available for sale net of taxes were included in accumulated other comprehensive loss. Also included in accumulated other comprehensive loss at June 30, 2018 and December 31, 2017, were unrealized losses on interest only strip net of taxes of $47 thousand and $41 thousand, respectively. There were no reclassifications out of accumulated other comprehensive loss into earnings during the three and six months ended June 30, 2018 or 2017.
On January 1, 2018, the Company adopted ASU 2016-01 “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. As a result of the adoption of ASU 2016-01, the Company no longer accounts for mutual funds as available-for-sale securities and accounts for these investments as equity investments with readily determinable fair value with changes in fair value recorded through earnings. In accordance with ASU 2016-01, the Company reclassified $469 thousand in net unrealized losses included in other comprehensive income and deferred tax assets as of December 31, 2017 to retained earnings on January 1, 2018. The subsequent changes to fair value for mutual funds were recorded as other noninterest income for the three and six months ended June 30, 2018.

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The amortized cost and estimated fair value of investment securities at June 30, 2018, by contractual maturity, is presented in the table below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
 
Amortized
Cost
 
Estimated
Fair Value
 
(Dollars in thousands)
Available for sale:
 
 
 
Due within one year
$

 
$

Due after one year through five years
12,168

 
12,274

Due after five years through ten years
33,467

 
33,184

Due after ten years
40,090

 
37,695

U.S. Government agency and U.S. Government sponsored enterprises:
 
 
 
Collateralized mortgage obligations
928,000

 
897,087

Mortgage-backed securities:
 
 
 
Residential
450,690

 
434,595

Commercial
435,745

 
420,271

Total
$
1,900,160

 
$
1,835,106


Securities with carrying values of approximately $356.8 million and $359.2 million at June 30, 2018 and December 31, 2017, respectively, were pledged to secure public deposits, pledged for various borrowings, and for other purposes as required or permitted by law.
The following tables show the Company’s investments’ gross unrealized losses and estimated fair values, aggregated by investment category and the length of time that the individual securities have been in a continuous unrealized loss position as of the dates indicated.    
 
 
As of June 30, 2018
 
 
Less than 12 months
 
12 months or longer
 
Total
Description of
Securities
 
Number 
of
Securities
 
Fair 
Value
 
Gross
Unrealized
Losses
 
Number 
of
Securities
 
Fair 
Value
 
Gross
Unrealized
Losses
 
Number 
of
Securities
 
Fair 
Value
 
Gross
Unrealized
Losses
 
 
 (Dollars in thousands)
Collateralized mortgage obligations*
 
41

 
$
399,114

 
$
(11,993
)
 
55

 
$
393,190

 
$
(19,024
)
 
96

 
$
792,304

 
$
(31,017
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential*
 
27

 
212,680

 
(6,103
)
 
22

 
198,956

 
(10,038
)
 
49

 
411,636

 
(16,141
)
Commercial*
 
21

 
243,579

 
(6,885
)
 
10

 
129,984

 
(8,712
)
 
31

 
373,563

 
(15,597
)
Corporate securities
 
1

 
4,405

 
(595
)
 

 

 

 
1

 
4,405

 
(595
)
Municipal securities
 
63

 
39,391

 
(694
)
 
3

 
20,090

 
(1,564
)
 
66

 
59,481

 
(2,258
)
Total
 
153

 
$
899,169

 
$
(26,270
)
 
90

 
$
742,220

 
$
(39,338
)
 
243

 
$
1,641,389

 
$
(65,608
)
__________________________________    
* Investments in U.S. Government agency and U.S. Government sponsored enterprises

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Table of Contents

 
 
As of December 31, 2017
 
 
Less than 12 months
 
12 months or longer
 
Total
Description of
Securities
 
Number 
of
Securities
 
Fair 
Value
 
Gross
Unrealized
Losses
 
Number 
of
Securities
 
Fair 
Value
 
Gross
Unrealized
Losses
 
Number 
of
Securities
 
Fair 
Value
 
Gross
Unrealized
Losses
 
 
 (Dollars in thousands)
Collateralized mortgage obligations
 
38

 
$
425,198

 
$
(5,954
)
 
53

 
$
408,526

 
$
(11,588
)
 
91

 
$
833,724

 
$
(17,542
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential*
 
20

 
195,086

 
(1,282
)
 
23

 
230,616

 
(5,701
)
 
43

 
425,702

 
(6,983
)
Commercial*
 
16

 
186,357

 
(1,614
)
 
8

 
115,008

 
(5,067
)
 
24

 
301,365

 
(6,681
)
Corporate securities
 
1

 
4,475

 
(522
)
 

 

 

 
1

 
4,475

 
(522
)
Municipal securities
 
18

 
9,295

 
(69
)
 
3

 
22,144

 
(806
)
 
21

 
31,439

 
(875
)
Mutual funds
 
1

 
8,899

 
(101
)
 
3

 
11,579

 
(384
)
 
4

 
20,478

 
(485
)
Total
 
94

 
$
829,310

 
$
(9,542
)
 
90

 
$
787,873

 
$
(23,546
)
 
184

 
$
1,617,183

 
$
(33,088
)
__________________________________
* Investments in U.S. Government agency and U.S. Government sponsored enterprises
The Company evaluates securities for other-than-temporary-impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and the extent to which the fair values of the securities have been less than the cost of the securities, and management’s intention to sell, or whether it is more likely than not that management will be required to sell the security in an unrealized loss position before recovery of its amortized cost basis. In analyzing an issuer’s financial condition, the Company considers, among other considerations, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
The Company had collateralized mortgage obligations, mortgage backed securities, and municipal securities that were in a continuous unrealized loss position for twelve months or longer as of June 30, 2018. The collateralized mortgage obligations in a continuous loss position for twelve months or longer had unrealized losses of $19.0 million at June 30, 2018 and total mortgage backed securities in a continuous loss position for twelve months or longer had total unrealized losses of $18.8 million. These securities were issued by U.S. Government agency and U.S. Government sponsored enterprises and have high credit ratings of “AA” grade or better. Interest on U.S. Government agency and U.S. Government sponsored enterprise investments have been paid as agreed, and management believes this will continue in the future and that the securities will be repaid in full as scheduled. Municipal securities that were in a continuous loss position for twelve months or longer had unrealized losses of $1.6 million at June 30, 2018. The market value declines for these securities were primarily due to movements in interest rates and are not reflective of management’s expectations of the Company’s ability to fully recover these investments, which may be at maturity. For these reasons, no OTTI was recognized on U.S. Government sponsored collateralized mortgage obligations and mortgage backed securities, and municipal securities that were in an unrealized loss position at June 30, 2018.
The Company considers the losses on the investments in unrealized loss positions at June 30, 2018 to be temporary based on: 1) the likelihood of recovery; 2) the information relative to the extent and duration of the decline in market value; and 3) the Company’s intention not to sell, and management’s determination that it is more likely than not that the Company will not be required to sell a security in an unrealized loss position before recovery of its amortized cost basis.

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Table of Contents

7.    Loans Receivable and Allowance for Loan Losses
The following is a summary of loans receivable by major category:
 
June 30, 2018
 
December 31, 2017
 
(Dollars in thousands)
Loan portfolio composition
 
 
 
Real estate loans:
 
 
 
Residential
$
45,383

 
$
49,774

Commercial
8,165,420

 
8,142,036

Construction
301,937

 
316,412

Total real estate loans
8,512,740

 
8,508,222

Commercial business
2,131,301

 
1,780,869

Trade finance
156,181

 
166,664

Consumer and other
872,562

 
647,102

Total loans outstanding
11,672,784

 
11,102,857

      Deferred loan fees, net
(1,344
)
 
(282
)
Loans receivable
11,671,440

 
11,102,575

      Allowance for loan losses
(89,881
)
 
(84,541
)
Loans receivable, net of allowance for loan losses
$
11,581,559

 
$
11,018,034


The loan portfolio is made up of four segments: real estate loans, commercial business, trade finance, and consumer and other. These segments are further segregated between loans accounted for under the amortized cost method (“Legacy Loans”) and previously acquired loans that were originally recorded at fair value with no carryover of the related pre-acquisition allowance for loan losses (“Acquired Loans”). Acquired Loans are further segregated between purchased credit impaired loans (loans with credit deterioration on the acquisition date and accounted for under ASC 310-30, or “PCI loans”) and Acquired Performing Loans (loans that were pass graded on the acquisition date and the fair value adjustment is amortized over the contractual life under ASC 310-20, or “non-PCI loans”).
The following table presents changes in the accretable discount on the PCI loans for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30,

Six Months Ended June 30,

2018

2017

2018

2017

(Dollars in thousands)
Balance at beginning of period
$
54,846


$
51,651


$
55,002


$
43,611

Accretion
(5,959
)

(5,212
)

(11,731
)

(10,560
)
Reclassification from nonaccretable difference
4,686


7,218


10,302


20,606

Balance at end of period
$
53,573


$
53,657


$
53,573


$
53,657

On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the PCI loans is the “accretable yield.” The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans. The accretable yield will change from period to period due to the following: 1) estimates of the remaining life of acquired loans will affect the amount of future interest income; 2) indices for variable rates of interest on PCI loans may change; and 3) estimates of the amount of the contractual principal and interest that will not be collected (nonaccretable difference) may change.

19

Table of Contents

The following tables detail the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2018 and 2017:
 
Legacy Loans
 
Acquired Loans
 
Total
 
Real
Estate
 
Commercial Business
 
Trade Finance
 
Consumer
and Other
 
Real
Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
 
(Dollars in thousands)
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
45,977

 
$
20,387

 
$
1,767

 
$
3,934

 
$
13,048

 
$
1,308

 
$
38

 
$
2

 
$
86,461

Provision (credit) for loan losses
1,776

 
487

 
(796
)
 
1,086

 
(141
)
 
(96
)
 
(35
)
 
19

 
2,300

Loans charged off
(144
)
 
(446
)
 

 
(229
)
 
(92
)
 
(352
)
 

 

 
(1,263
)
Recoveries of charge offs
626

 
1,603

 
12

 
8

 
1

 
131

 

 
2

 
2,383

Balance, end of period
$
48,235

 
$
22,031

 
$
983

 
$
4,799

 
$
12,816

 
$
991

 
$
3

 
$
23

 
$
89,881

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
45,360

 
$
17,228

 
$
1,674

 
$
3,385

 
$
13,322

 
$
3,527

 
$
42

 
$
3

 
$
84,541

Provision (credit) for loan losses
2,255

 
3,776

 
(715
)
 
1,963

 
(314
)
 
(2,142
)
 
(39
)
 
16

 
4,800

Loans charged off
(207
)
 
(788
)
 

 
(576
)
 
(194
)
 
(566
)
 

 

 
(2,331
)
Recoveries of charge offs
827

 
1,815

 
24

 
27

 
2

 
172

 

 
4

 
2,871

Balance, end of period
$
48,235

 
$
22,031

 
$
983

 
$
4,799

 
$
12,816

 
$
991

 
$
3

 
$
23

 
$
89,881


 
Legacy Loans
 
Acquired Loans
 
Total
 
Real
Estate
 
Commercial Business
 
Trade Finance
 
Consumer
and Other
 
Real
Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
 
(Dollars in thousands)
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
43,929

 
$
17,479

 
$
624

 
$
2,022

 
$
13,455

 
$
944

 
$
187

 
$
19

 
$
78,659

Provision (credit) for loan losses
(2,596
)
 
3,741

 
900

 
500

 
(69
)
 
374

 
(81
)
 
(9
)
 
2,760

Loans charged off
(892
)
 
(425
)
 
(528
)
 
(241
)
 
19

 
(55
)
 

 

 
(2,122
)
Recoveries of charge offs
37

 
700

 
4

 
1

 
6

 
28

 

 
1

 
777

Balance, end of period
$
40,478

 
$
21,495

 
$
1,000

 
$
2,282

 
$
13,411

 
$
1,291

 
$
106

 
$
11

 
$
80,074

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
38,956

 
$
23,430

 
$
1,897

 
$
2,116

 
$
12,791

 
$
117

 
$

 
$
36

 
$
79,343

Provision (credit) for loan losses
3,510

 
857

 
1,203

 
684

 
906

 
1,122

 
106

 
(28
)
 
8,360

Loans charged off
(2,046
)
 
(3,615
)
 
(2,104
)
 
(520
)
 
(317
)
 
(125
)
 

 

 
(8,727
)
Recoveries of charge offs
58

 
823

 
4

 
2

 
31

 
177

 

 
3

 
1,098

Balance, end of period
$
40,478

 
$
21,495

 
$
1,000

 
$
2,282