Toggle SGML Header (+)


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 September 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, 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. (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(a) 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 October 31, 2018, there were 128,777,134 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 - September 30, 2018 (Unaudited) and December 31, 2017
 
 
 
 
Consolidated Statements of Income (Unaudited) - Three and Nine Months Ended September 30, 2018 and 2017
 
 
 
 
Consolidated Statements of Comprehensive Income (Unaudited) - Three and Nine Months Ended September 30, 2018 and 2017
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) - Nine Months Ended September 30, 2018 and 2017
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 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,” “projects,” “forecasts,” “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 the Company’s 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)
 
 
 
September 30,
2018
 
December 31,
2017
ASSETS
(Dollars in thousands, except share data)
Cash and cash equivalents:
 
 
 
Cash and due from banks
$
172,572

 
$
185,527

Interest bearing cash in other banks
350,138

 
306,473

Total cash and cash equivalents
522,710

 
492,000

Interest bearing deposits in other financial institutions and other investments
80,316

 
53,366

Securities available for sale, at fair value
1,854,250

 
1,720,257

Loans held for sale, at the lower of cost or fair value
15,023

 
29,661

Loans receivable, net of allowance for loan losses of $90,629 and $84,541 at September 30, 2018 and December 31, 2017, respectively
11,836,553

 
11,018,034

Other real estate owned (“OREO”), net
8,981

 
10,787

Federal Home Loan Bank (“FHLB”) stock, at cost
25,927

 
29,776

Premises and equipment, net
55,178

 
56,714

Accrued interest receivable
33,338

 
29,979

Deferred tax assets, net
57,972

 
55,203

Customers’ liabilities on acceptances
1,259

 
1,691

Bank owned life insurance (“BOLI”)
76,081

 
74,915

Investments in affordable housing partnerships
95,506

 
81,009

Goodwill
464,450

 
464,450

Core deposit intangible assets, net
14,677

 
16,523

Servicing assets, net
24,354

 
24,710

Other assets
62,920

 
47,642

Total assets
$
15,229,495

 
$
14,206,717

 
 
 
 
(Continued)

4

Table of Contents


HOPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
 
 
 
 
(Unaudited)
 
 
 
September 30,
2018
 
December 31,
2017
LIABILITIES AND STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share data)
LIABILITIES:
 
 
 
Deposits:
 
 
 
Noninterest bearing
$
3,020,819

 
$
2,998,734

Interest bearing:
 
 
 
Money market and NOW accounts
3,247,420

 
3,332,703

Savings deposits
229,081

 
240,509

Time deposits
5,548,299

 
4,274,663

Total deposits
12,045,619

 
10,846,609

FHLB advances
836,637

 
1,157,693

Federal funds purchased

 
69,900

Convertible notes, net
193,332

 

Subordinated debentures
101,657


100,853

Accrued interest payable
31,717

 
15,961

Acceptances outstanding
1,259

 
1,691

Commitments to fund investments in affordable housing partnerships
57,701

 
38,467

Other liabilities
56,993

 
47,288

Total liabilities
13,324,915

 
12,278,462

STOCKHOLDERS’ EQUITY:
 
 
 
Common stock, $0.001 par value; authorized 150,000,000 shares at September 30, 2018 and December 31, 2017: issued and outstanding 135,639,799 and 130,074,103 shares, respectively, at September 30, 2018, and issued and outstanding 135,511,891 shares at December 31, 2017
136

 
136

Additional paid-in capital
1,422,685

 
1,405,014

Retained earnings
636,080

 
544,886

Treasury stock, at cost; 5,565,696 and 0 shares at September 30, 2018 and
   December 31, 2017, respectively
(100,000
)
 

Accumulated other comprehensive loss, net
(54,321
)
 
(21,781
)
Total stockholders’ equity
1,904,580

 
1,928,255

Total liabilities and stockholders’ equity
$
15,229,495

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands, except per share data)
INTEREST INCOME:
 
 
 
 
 
 
 
Interest and fees on loans
$
153,366

 
$
136,822

 
$
437,497

 
$
388,631

Interest on securities
11,957

 
9,540

 
32,957

 
26,394

Interest on federal funds sold and other investments
2,503

 
1,281

 
7,692

 
3,894

Total interest income
167,826

 
147,643

 
478,146

 
418,919

INTEREST EXPENSE:
 
 
 
 
 
 
 
Interest on deposits
37,022

 
20,376

 
92,481

 
53,001

Interest on FHLB advances
3,703

 
2,698

 
11,453

 
7,176

Interest on other borrowings and convertible notes
3,954

 
1,306

 
8,178

 
3,754

Total interest expense
44,679

 
24,380

 
112,112

 
63,931

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
123,147

 
123,263

 
366,034

 
354,988

PROVISION FOR LOAN LOSSES
7,300

 
5,400

 
12,100

 
13,760

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
115,847

 
117,863

 
353,934

 
341,228

NONINTEREST INCOME:
 
 
 
 
 
 
 
Service fees on deposit accounts
4,569

 
5,151

 
13,983

 
15,668

International service fees
1,220

 
1,107

 
3,452

 
3,334

Loan servicing fees, net
852

 
1,373

 
3,441

 
4,102

Wire transfer fees
1,227

 
1,287

 
3,684

 
3,816

Net gains on sales of SBA loans
2,331

 
3,631

 
9,261

 
10,148

Net gains on sales of other loans
477

 
847

 
2,104

 
1,619

Other income and fees
2,771

 
2,850

 
12,641

 
11,277

Total noninterest income
13,447

 
16,246

 
48,566

 
49,964

NONINTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
36,969

 
35,987

 
116,929

 
105,099

Occupancy
7,837

 
7,131

 
22,494

 
21,479

Furniture and equipment
3,710

 
3,642

 
11,454

 
10,611

Advertising and marketing
1,986

 
2,217

 
7,022

 
8,035

Data processing and communications
3,513

 
3,221

 
10,582

 
9,503

Professional fees
3,950

 
3,239

 
11,530

 
10,401

Investments in affordable housing partnerships expenses
3,357

 
2,803

 
8,600

 
8,019

FDIC assessments
1,788

 
1,262

 
5,166

 
3,276

Credit related expenses
658

 
(2,487
)
 
2,356


(491
)
OREO expense, net
(56
)
 
678

 
(115
)
 
2,863

Merger-related expenses

 
260

 
(7
)
 
1,769

Other
3,743

 
3,884

 
11,526

 
13,009

Total noninterest expense
67,455

 
61,837

 
207,537

 
193,573

INCOME BEFORE INCOME TAXES
61,839

 
72,272

 
194,963

 
197,619

INCOME TAX PROVISION
15,461

 
27,708

 
49,823

 
76,158

NET INCOME
$
46,378

 
$
44,564

 
$
145,140

 
$
121,461

EARNINGS PER COMMON SHARE
 
 
 
 
 
 
 
Basic
$
0.36

 
$
0.33

 
$
1.09

 
$
0.90

Diluted
$
0.36

 
$
0.33

 
$
1.09

 
$
0.90


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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Net income
$
46,378

 
$
44,564

 
$
145,140

 
$
121,461

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Change in unrealized net holding (losses) gains on securities available for sale
(13,113
)
 
(208
)
 
(47,013
)
 
7,741

Change in unrealized net holding (losses) gains on interest only strips
(1
)
 
(3
)
 
1

 
(44
)
Tax effect
3,915

 
89

 
14,191

 
(3,251
)
Other comprehensive (loss) income, net of tax
(9,199
)
 
(122
)
 
(32,821
)
 
4,446

Total comprehensive income
$
37,179

 
$
44,442

 
$
112,319

 
$
125,907



See accompanying Notes to Consolidated Financial Statements (Unaudited)

7

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
 
227,097

 
 
 
1,278

 
 
 
 
 
 
 
1,278

Stock-based compensation
 
 
 
 
 
1,818

 
 
 
 
 
 
 
1,818

Cash dividends declared on common stock
 
 
 
 
 
 
 
(50,045
)
 
 
 
 
 
(50,045
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
121,461

 
 
 
 
 
121,461

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
4,446

 
4,446

BALANCE, SEPTEMBER 30, 2017
 
135,467,176

 
$
135

 
$
1,403,586

 
$
540,921

 
$

 
$
(10,211
)
 
$
1,934,431

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
127,908

 
 
 
466

 
 
 
 
 
 
 
466

Stock-based compensation
 
 
 
 
 
2,160

 
 
 
 
 
 
 
2,160

Cash dividends declared on common stock
 
 
 
 
 
 
 
(53,477
)
 
 
 
 
 
(53,477
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 


Net income
 
 
 
 
 
 
 
145,140

 
 
 
 
 
145,140

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
(32,821
)
 
(32,821
)
Repurchase of treasury stock
 
(5,565,696
)
 
 
 
 
 
 
 
(100,000
)
 
 
 
(100,000
)
Equity component of convertible notes, net of taxes
 
 
 
 
 
15,045

 
 
 
 
 
 
 
15,045

BALANCE, SEPTEMBER 30, 2018
 
130,074,103

 
$
136

 
$
1,422,685

 
$
636,080

 
$
(100,000
)
 
$
(54,321
)
 
$
1,904,580



See accompanying Notes to Consolidated Financial Statements (Unaudited)

8

Table of Contents

HOPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
 
 
 
Nine Months Ended September 30,
 
2018
 
2017
 
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
145,140

 
$
121,461

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Discount accretion, net of depreciation and amortization
(2,915
)
 
(9,270
)
Stock-based compensation expense
2,924

 
2,298

Provision for loan losses
12,100

 
13,760

Credit for unfunded loan commitments
(100
)
 
(2,358
)
Valuation adjustment of premises held for sale

 
1,084

Valuation adjustment of OREO
323

 
2,001

Net gains on sales of SBA and other loans
(11,365
)
 
(11,767
)
Earnings on BOLI
(1,166
)
 
(818
)
Net change in fair value of derivatives
(15
)
 
46

Net losses (gains) on sale and disposal of premises and equipment
38

 
(277
)
Net gains on sales of OREO
(358
)
 
(34
)
Net change in fair value of equity investments with readily determinable fair value
(1,901
)
 

Losses on investments in affordable housing partnership
8,347

 
7,766

Net change in deferred income taxes
4,863

 
891

Proceeds from sales of loans held for sale
258,231

 
221,821

Originations of loans held for sale
(229,871
)
 
(200,951
)
Originations of servicing assets
(5,489
)
 
(4,096
)
Net change in accrued interest receivable
(3,359
)
 
(2,265
)
Net change in other assets
(20,594
)
 
(592
)
Net change in accrued interest payable
15,756

 
2,877

Net change in other liabilities
9,805

 
(3,259
)
Net cash provided by operating activities
180,394

 
138,318

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of interest bearing deposits in other financial institutions and other investments
(9,887
)
 
(28,615
)
Redemption of interest bearing deposits in other financial institutions and other investments
13,795

 
19,102

Purchase of securities available for sale
(375,710
)
 
(504,831
)
Proceeds from matured, called, or paid-down securities available for sale
166,746

 
193,320

Proceeds from sales of other loans held for sale
6,814

 
417

Net change in loans receivable
(812,748
)
 
(407,767
)
Proceeds from sales of OREO
5,552

 
7,542

Purchase of FHLB stock

 
(7,223
)
Redemption of FHLB stock
3,849

 
761

Purchase of premises and equipment
(5,516
)
 
(10,271
)
Proceeds from sales and disposals of premises and equipment held for sale

 
3,267

Investments in affordable housing partnerships
(10,835
)
 
(8,476
)
Net cash used in investing activities
(1,017,940
)
 
(742,774
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net change in deposits
1,199,011

 
356,185

Proceeds from FHLB advances

 
815,000

Repayment of FHLB advances
(320,000
)
 
(550,000
)
Repayment of federal funds purchased
(69,900
)
 

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

 

Purchase of treasury stock
(100,000
)
 

Cash dividends paid on common stock
(53,477
)
 
(50,045
)
Taxes paid in net settlement of restricted stock
(764
)
 

Issuance of additional stock pursuant to various stock plans
466

 
1,278

Net cash provided by financing activities
868,256

 
572,418

NET CHANGE IN CASH AND CASH EQUIVALENTS
30,710

 
(32,038
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
492,000

 
437,334

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
522,710

 
$
405,296

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
      Interest paid
$
94,778

 
$
66,416

      Income taxes paid
$
44,153

 
$
85,384

SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES
 
 
 
Transfer from loans receivable to OREO
$
3,340

 
$
7,173

Transfer from loans receivable to loans held for sale
$
6,680

 
$
429

Transfer from loans held for sale to loans receivable
$
1,566

 
$
1,829

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
$
30,097

 
$
26,500


See accompanying Notes to Consolidated Financial Statements (Unaudited)

9

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 September 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, Southern California, and Northern California, and a representative office in Seoul, South 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 September 30, 2018 and December 31, 2017 and the results of operations for the three and nine months ended September 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.

10

Table of Contents

Pending 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, ASU 2018-10, and ASU 2018-11 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 finance 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 expects to elect the transition option provided in ASU 2018-11 and the modified retrospective approach will be applied on January 1, 2019. The Company also expects to elect certain relief options offered in ASU 2016-02 including the package of practical expedients, the option not to separate lease and non-lease components and instead to account for them as a single lease component, and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less). The Company estimated that there are approximately 100 operating leases that will be accounted for under ASU 2016-02 at the adoption date, and thus, will be recognized on the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. 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. As of September 30, 2018, the Company has compiled a complete inventory of its leases which have been entered into the new lease accounting software. The preliminary evaluation of the impact of ASU 2016-02 indicates that adoption is expected to impact the Company’s consolidated statements of condition, along with the Company’s regulatory capital ratios. However, the Company does not expect the new guidance to have a material impact on the Company’s consolidated statements of income. The Company is currently assessing the actual expected impact of the new lease accounting guidance on its consolidated financial statements.
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.

11

Table of Contents

Recent Accounting Pronouncements
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 historically not issued share-based payments to nonemployees for goods and services.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. ASU 2018-13 removes the disclosure requirement detailing the amount of and reasons for transfers between Level 1 and Level 2 and the valuation processes for Level 3 fair value measurements will be removed. In addition, ASU 2018-13 modifies the disclosure requirement for investments in certain entities that calculate net asset value. Lastly, ASU 2018-13 adds a disclosure requirement for changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. ASU 2018-13 is effective annual periods in fiscal years beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted upon the issuance of ASU 2018-13. The removed and modified disclosures will be adopted on a retrospective basis, and the new disclosures will be adopted on a prospective basis. The adoption of ASU 2018-13 is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 250-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)”. ASU 2018-15 requires an entity in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted service, if any (generally as an “other asset”). The capitalized costs will be amortized over the term of the hosting arrangement, with the amortization expense being presented in the same income statement line item as the fees paid for the hosted service. ASU 2018-15 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted, including adoption in any interim period. The adoption of ASU 2018-15 is not expected to have a material impact on the Company’s consolidated financial statements.

12

Table of Contents

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 potentially 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 has 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, 1,110,696 shares were available for future grants as of September 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 nine months ended September 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
(57,198
)
 
7.88

 
 
 
 
Expired
(5,546
)
 
16.62

 
 
 
 
Forfeited
(24,000
)
 
17.18

 
 
 
 
Outstanding - September 30, 2018
988,679

 
$
15.41

 
6.69
 
$
1,335

Options exercisable - September 30, 2018
783,669

 
$
15.01

 
6.41
 
$
1,328



13

Table of Contents

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

 
$
16.42

Granted
273,725

 
16.27

Vested
(149,287
)
 
16.51

Forfeited
(20,666
)
 
16.04

Outstanding - September 30, 2018
483,191

 
$
16.39


The total fair value of restricted stock and performance units vested for the nine months ended September 30, 2018 and 2017 was $2.7 million and $2.6 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 three months ended September 30, 2018 and 2017 was $39 thousand and $18 thousand, respectively. The compensation expense for ESPP during the nine months ended September 30, 2018 and 2017 was $124 thousand and $18 thousand, respectively.
The amount charged against income related to stock-based payment arrangements, including ESPP, was $1.1 million and $792 thousand for the three months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, $2.9 million and $2.3 million, respectively, of stock-based payment arrangements were charged against income. The income tax benefit recognized was approximately $264 thousand and $304 thousand for the three months ended September 30, 2018 and 2017, respectively. The income tax benefit recognized for the nine months ended September 30, 2018 and 2017, was approximately $747 thousand and $886 thousand, respectively.
At September 30, 2018, the unrecognized compensation expense related to non-vested stock option grants was $551 thousand which is expected to be recognized over a weighted average vesting period of 2.75 years. Unrecognized compensation expense related to non-vested restricted stock and performance units was $5.3 million which is expected to be recognized over a weighted average vesting period of 2.64 years.

14

Table of Contents

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, convertible notes, 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 September 30, 2018 and 2017, stock options and restricted shares awards for 306,410 and 762,833 shares of common stock, respectively, were excluded in computing diluted earnings per common share because they were anti-dilutive. For the nine months ended September 30, 2018 and 2017, stock options and restricted shares awards for 296,357 and 484,426 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 20,845 shares and 20,238 shares of common stock were anti-dilutive and excluded for the three and nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 2018, the Company repurchased 5,565,696 shares of common stock totaling $100.0 million which were recorded as treasury stock and excluded from weighted average shares and weighted average diluted shares for the three and nine months ended September 30, 2018. On September 20, 2018, the Company’s Board of Directors approved another share repurchase program that authorized the Company to repurchase up to $50.0 million in common stock. There were no shares repurchased as part of the program as of September 30, 2018.
The following tables show the computation of basic and diluted EPS for the three and nine months ended September 30, 2018 and 2017.
 
Three Months Ended September 30,
 
2018

2017
 
Net Income
(Numerator)
 
Weighted-Average Shares
(Denominator)
 
Earnings
Per
Share
 
Net Income
(Numerator)
 
Weighted-Average Shares
(Denominator)
 
Earnings
Per
Share
 
(Dollars in thousands, except share and per share data)
Basic EPS - common stock
$
46,378

 
130,268,992

 
$
0.36

 
$
44,564

 
135,382,457

 
$
0.33

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options, restricted stock,
   and ESPP shares
 
 
256,482

 
 
 
 
 
248,455

 
 
Diluted EPS - common stock
$
46,378

 
130,525,474

 
$
0.36

 
$
44,564

 
135,630,912

 
$
0.33

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2018
 
2017
 
Net Income
(Numerator)
 
Weighted-Average Shares
(Denominator)
 
Earnings
Per
Share
 
Net Income
(Numerator)
 
Weighted-Average Shares
(Denominator)
 
Earnings
Per
Share
 
(In thousands, except share and per share data)
Basic EPS - common stock
$
145,140

 
132,930,437

 
$
1.09

 
$
121,461

 
135,296,332

 
$
0.90

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options, restricted stock,
   and ESPP shares
 
 
283,632

 
 
 
 
 
365,633

 
 
Diluted EPS - common stock
$
145,140

 
133,214,069

 
$
1.09

 
$
121,461

 
135,661,965

 
$
0.90



15

Table of Contents

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 to retained earnings on January 1, 2018. Equity investments with readily determinable fair value at September 30, 2018, consisted of mutual funds and equity stock in other institutions in the amount of $21.3 million and $2.6 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 nine months ended September 30, 2018 were recorded as other noninterest income as summarized in the table below:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
(Dollars in thousands)
Net change in fair value recorded during the period on equity
investment securities
$
(1,617
)
 
$
1,901

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
$
(1,617
)
 
$
1,901

 
 
 
 
At September 30, 2018, the Company also had equity investments without readily determinable fair value which are carried at cost less any determined impairment. The balance of these investments is adjusted for changes in subsequent observable prices. At September 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 $26.3 million, consisting of $370 thousand in correspondent bank stock, $1.0 million in Community Development Financial Institutions investments, and $24.9 million in Community Reinvestment Act investments. There was no impairment or subsequent observable price changes for investments without readily determinable fair values for the three and nine months ended September 30, 2018.

16

Table of Contents

6.    Securities Available for Sale
The following is a summary of securities available for sale at the dates indicated:
 
At September 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
$
948,536

 
$
10

 
$
(36,665
)
 
$
911,881

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
431,790

 
9

 
(19,091
)
 
412,708

Commercial
467,761

 

 
(19,435
)
 
448,326

Corporate securities
5,000

 

 
(651
)
 
4,349

Municipal securities
79,330

 
174

 
(2,518
)
 
76,986

Total investment securities available for sale
$
1,932,417

 
$
193

 
$
(78,360
)
 
$
1,854,250

 
 
 
 
 
 
 
 
 
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 September 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 September 30, 2018 and December 31, 2017, $55.5 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 September 30, 2018 and December 31, 2017, were unrealized losses on interest only strip net of taxes of $48 thousand and $41 thousand, respectively. There were no reclassifications out of accumulated other comprehensive loss into earnings during the three and nine months ended September 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 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 nine months ended September 30, 2018.

17

Table of Contents

The amortized cost and estimated fair value of investment securities at September 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. Collateralized mortgage obligations and mortgage-backed securities are not due at a single maturity date and their total balances are shown separately.
 
Amortized
Cost
 
Estimated
Fair Value
 
(Dollars in thousands)
Available for sale:
 
 
 
Due within one year
$
751

 
$
766

Due after one year through five years
17,393

 
17,374

Due after five years through ten years
28,861

 
28,379

Due after ten years
37,325

 
34,816

U.S. Government agency and U.S. Government sponsored enterprises:
 
 
 
Collateralized mortgage obligations
948,536

 
911,881

Mortgage-backed securities:
 
 
 
Residential
431,790

 
412,708

Commercial
467,761

 
448,326

Total
$
1,932,417

 
$
1,854,250


Securities with carrying values of approximately $353.8 million and $359.2 million at September 30, 2018 and December 31, 2017, respectively, were pledged to secure public deposits, 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 September 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*
 
20

 
$
209,673

 
$
(1,418
)
 
86

 
$
700,789

 
$
(35,247
)
 
106

 
$
910,462

 
$
(36,665
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential*
 
11

 
63,627

 
(1,280
)
 
41

 
347,316

 
(17,811
)
 
52

 
410,943

 
(19,091
)
Commercial*
 
18

 
195,427

 
(4,712
)
 
20

 
242,896

 
(14,723
)
 
38

 
438,323

 
(19,435
)
Corporate securities
 

 

 

 
1

 
4,349

 
(651
)
 
1

 
4,349

 
(651
)
Municipal securities
 
71

 
42,623

 
(753
)
 
5

 
20,713

 
(1,765
)
 
76

 
63,336

 
(2,518
)
Total
 
120

 
$
511,350

 
$
(8,163
)
 
153

 
$
1,316,063

 
$
(70,197
)
 
273

 
$
1,827,413

 
$
(78,360
)
__________________________________    
* Investments in U.S. Government agency and U.S. Government sponsored enterprises

18

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, management’s intention to sell, and/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, corporate securities, and municipal securities that were in a continuous unrealized loss position for twelve months or longer as of September 30, 2018. The collateralized mortgage obligations in a continuous loss position for twelve months or longer had unrealized losses of $35.2 million at September 30, 2018, and total mortgage backed securities in a continuous loss position for twelve months or longer had total unrealized losses of $32.5 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 agencies 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. Corporate securities that were in a continuous loss position for twelve months or longer had unrealized losses of $651 thousand at September 30, 2018. Municipal securities that were in a continuous loss position for twelve months or longer had unrealized losses of $1.8 million at September 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, corporate securities, and municipal securities that were in an unrealized loss position at September 30, 2018.
The Company considers the losses on the investments in unrealized loss positions at September 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.

19

Table of Contents

7.    Loans Receivable and Allowance for Loan Losses
The following is a summary of loans receivable by major category:
 
September 30, 2018
 
December 31, 2017
Loan portfolio composition
(Dollars in thousands)
Real estate loans:
 
 
 
Residential
$
49,602

 
$
49,774

Commercial
8,307,213

 
8,142,036

Construction
283,042

 
316,412

Total real estate loans
8,639,857

 
8,508,222

Commercial business
2,126,608

 
1,780,869

Trade finance
191,605

 
166,664

Consumer and other
969,835

 
647,102

Total loans outstanding
11,927,905

 
11,102,857

Deferred loan fees, net
(723
)
 
(282
)
Loans receivable
11,927,182

 
11,102,575

Allowance for loan losses
(90,629
)
 
(84,541
)
Loans receivable, net of allowance for loan losses
$
11,836,553

 
$
11,018,034


The loan portfolio is made up of four segments: real estate loans, commercial business, trade finance, and consumer and other. Real estate loans are extended for the purchase and refinance of commercial real estate and are generally secured by first deeds of trust and are collateralized by residential or commercial properties. Commercial business loans are loans provided to business for various purposes such as for working capital, purchasing inventory, debt refinancing, business acquisitions and other business related financing needs. Trade finance loans generally serves businesses involved in international trade activities. Consumer and other loans consist mostly of single family residential mortgage loans but also includes home equity, credit cards, and other personal loans.
The four 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 date of acquisition 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 PCI loans for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017

(Dollars in thousands)
Balance at beginning of period
$
53,573


$
53,657


$
55,002


$
43,611

Accretion
(5,239
)

(5,815
)

(16,970
)

(16,375
)
Reclassification from nonaccretable difference
7,889


6,696


18,191


27,302

Balance at end of period
$
56,223


$
54,538


$
56,223


$
54,538

On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of PCI loans is considered the “accretable yield.” The accretable yield is 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.

20

Table of Contents

The following tables detail the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 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 September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
48,235

 
$
22,031

 
$
983

 
$
4,799

 
$
12,816

 
$
991

 
$
3

 
$
23

 
$
89,881

Provision (credit) for loan losses
5,537

 
(856
)
 
(159
)
 
1,036

 
1,744

 
28

 
(3
)
 
(27
)
 
7,300

Loans charged off
(5,854
)
 
(292
)
 

 
(343
)
 
(191
)
 
(174
)
 

 
(13
)
 
(6,867
)
Recoveries of charge offs
41

 
188

 
17

 
1

 

 
32

 

 
36

 
315

Balance, end of period
$
47,959

 
$
21,071

 
$
841

 
$
5,493

 
$
14,369

 
$
877

 
$

 
$
19

 
$
90,629

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 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
7,792

 
2,920

 
(874
)
 
2,999

 
1,430

 
(2,114
)
 
(42
)
 
(11
)
 
12,100

Loans charged off
(6,061
)
 
(1,080
)
 

 
(919
)
 
(385
)
 
(740
)
 

 
(13
)
 
(9,198
)
Recoveries of charge offs
868

 
2,003

 
41

 
28

 
2

 
204

 

 
40

 
3,186

Balance, end of period
$
47,959

 
$
21,071

 
$
841

 
$
5,493

 
$
14,369

 
$
877

 
$

 
$
19

 
$
90,629


 
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 September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
40,478

 
$
21,495

 
$
1,000

 
$
2,282

 
$
13,411

 
$
1,291

 
$
106

 
$
11

 
$
80,074

Provision (credit) for loan losses
3,664

 
1,499

 
418

 
664

 
(1,312
)
 
395

 
56

 
16

 
5,400

Loans charged off
(175
)
 
(3,870
)
 

 
(218
)
 
(162
)
 
(471
)
 

 
(17
)
 
(4,913
)
Recoveries of charge offs
23

 
3,020

 
2

 

 

 
25

 

 
2

 
3,072

Balance, end of period
$
43,990

 
$
22,144

 
$
1,420

 
$
2,728

 
$
11,937

 
$
1,240

 
$
162

 
$
12

 
$
83,633

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 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
7,174

 
2,356

 
1,621

 
1,348

 
(406
)
 
1,517

 
162

 
(12
)
 
13,760

Loans charged off
(2,221
)
 
(7,485
)
 
(2,104
)
 
(738
)
 
(479
)
 
(596
)
 

 
(17
)
 
(13,640
)
Recoveries of charge offs
81

 
3,843

 
6

 
2

 
31

 
202