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Section 1: 10-Q (10-Q)

Document


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

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From                      To                     
Commission File Number: 000-30421

 HANMI FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
 
95-4788120
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
3660 Wilshire Boulevard, Penthouse Suite A
Los Angeles, California
 
90010
(Address of Principal Executive Offices)
 
(Zip Code)
(213) 382-2200
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
x
Accelerated Filer
¨
Non-Accelerated Filer
 
¨ 
Smaller Reporting Company
¨
 
 
 
Emerging Growth Company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
As of November 5, 2018, there were 31,780,321 outstanding shares of the Registrant’s Common Stock.




Hanmi Financial Corporation and Subsidiaries
Quarterly Report on Form 10-Q
Three and Nine Months Ended September 30, 2018
Table of Contents
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 


2



Part I — Financial Information
Item 1. Financial Statements
Hanmi Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
 
 
(Unaudited) September 30, 2018
 
December 31, 2017
Assets
 
 
 
 
Cash and due from banks
 
$
159,617

 
$
153,826

Securities available for sale, at fair value (amortized cost of $588,097 as of September 30, 2018 and $581,992 as of December 31, 2017)
 
572,236

 
578,804

Loans held for sale, at the lower of cost or fair value
 
4,455

 
6,394

Loans and leases receivable, net of allowance for loan and lease losses of $31,676 as of September 30, 2018 and $31,043 as of December 31, 2017
 
4,551,207

 
4,273,415

Accrued interest receivable
 
13,646

 
12,770

Premises and equipment, net
 
28,552

 
26,655

Customers’ liability on acceptances
 
1,265

 
803

Servicing assets
 
8,878

 
10,218

Goodwill and other intangible assets, net
 
12,273

 
12,544

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

 
16,385

Bank-owned life insurance
 
51,372

 
50,554

Prepaid expenses and other assets
 
67,156

 
68,117

Total assets
 
$
5,487,042

 
$
5,210,485

Liabilities and stockholders’ equity
 
 
 
 
Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing
 
$
1,313,777

 
$
1,312,274

Interest-bearing
 
3,300,645

 
3,036,380

Total deposits
 
4,614,422

 
4,348,654

Accrued interest payable
 
8,153

 
5,309

Bank’s liability on acceptances
 
1,265

 
803

Borrowings
 
160,000

 
150,000

Subordinated debentures
 
117,670

 
117,270

Accrued expenses and other liabilities
 
17,784

 
25,972

Total liabilities
 
4,919,294

 
4,648,008

Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,188,833 shares (32,087,236 shares outstanding) as of September 30, 2018 and issued 33,083,133 shares (32,431,627 shares outstanding) as of December 31, 2017
 
33

 
33

Additional paid-in capital
 
568,861

 
565,627

Accumulated other comprehensive loss, net of tax benefit of $4,566 as of September 30, 2018 and $1,319 as of December 31, 2017
 
(11,295
)
 
(1,869
)
Retained earnings
 
93,768

 
70,575

Less: treasury stock, at cost; 1,101,597 shares as of September 30, 2018 and 651,506 shares as of December 31, 2017
 
(83,619
)
 
(71,889
)
Total stockholders’ equity
 
567,748

 
562,477

Total liabilities and stockholders’ equity
 
$
5,487,042

 
$
5,210,485


See Accompanying Notes to Consolidated Financial Statements (Unaudited)

3



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
(in thousands, except share and per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Interest and dividend income:
 
 
 
 
 
 
 
Interest and fees on loans and leases
$
56,361

 
$
50,265

 
$
161,643

 
$
143,614

Interest on securities
3,238

 
3,188

 
9,541

 
8,657

Dividends on FHLB stock
286

 
286

 
858

 
943

Interest on deposits in other banks
151

 
123

 
398

 
323

Total interest and dividend income
60,036

 
53,862

 
172,440

 
153,537

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
11,694

 
7,071

 
28,944

 
18,687

Interest on borrowings
1,264

 
198

 
2,959

 
714

Interest on subordinated debentures
1,749

 
1,667

 
5,170

 
3,677

Total interest expense
14,707

 
8,936

 
37,073

 
23,078

Net interest income before provision for loan and lease losses
45,329

 
44,926

 
135,367

 
130,459

Loan and lease loss provision
200

 
269

 
949

 
611

Net interest income after provision for loan and lease losses
45,129

 
44,657

 
134,418

 
129,848

Noninterest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
2,513

 
2,678

 
7,352

 
7,667

Trade finance and other service charges and fees
1,128

 
1,133

 
3,449

 
3,449

Gain on sales of Small Business Administration ("SBA") loans
1,114

 
2,546

 
3,970

 
6,678

Disposition gains on Purchased Credit Impaired ("PCI") loans
21

 
979

 
166

 
1,702

Net gain (loss) on sales of securities
19

 
267

 
(341
)
 
1,473

Other operating income
1,420

 
1,213

 
3,624

 
4,764

Total noninterest income
6,215

 
8,816

 
18,220

 
25,733

Noninterest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
17,436

 
16,947

 
53,590

 
50,674

Occupancy and equipment
3,685

 
3,883

 
11,839

 
11,743

Data processing
1,745

 
1,779

 
4,976

 
5,148

Professional fees
1,626

 
1,210

 
4,210

 
3,912

Supplies and communications
805

 
755

 
2,206

 
2,135

Advertising and promotion
814

 
1,147

 
2,724

 
2,964

Merger and integration costs (income)
466

 

 
846

 
(40
)
Other operating expenses
2,431

 
2,939

 
7,883

 
8,307

Total noninterest expense
29,008

 
28,660

 
88,274

 
84,843

Income before income tax expense
22,336

 
24,813

 
64,364

 
70,738

Income tax expense
6,255

 
9,890

 
17,880

 
27,576

Net income
$
16,081

 
$
14,923

 
$
46,484

 
$
43,162

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.50

 
$
0.46

 
$
1.44

 
$
1.34

Diluted earnings per share
$
0.50

 
$
0.46

 
$
1.43

 
$
1.33

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
32,155,132

 
32,095,286

 
32,171,558

 
32,058,705

Diluted
32,275,277

 
32,255,814

 
32,306,041

 
32,230,319


See Accompanying Notes to Consolidated Financial Statements (Unaudited)

4




Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
16,081

 
$
14,923

 
$
46,484

 
$
43,162

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Unrealized (loss) gain on securities:
 
 
 
 
 
 
 
Unrealized holding (loss) gain arising during period
(2,750
)
 
529

 
(13,115
)
 
6,059

Less: reclassification adjustment for net gain included in net income
(19
)
 
(267
)
 
(87
)
 
(1,473
)
Income tax benefit (expense) related to items of other comprehensive income
798

 
(109
)
 
3,793

 
(1,902
)
Other comprehensive (loss) income, net of tax
(1,971
)
 
153

 
(9,409
)
 
2,684

Comprehensive income
$
14,110

 
$
15,076

 
$
37,075

 
$
45,846


See Accompanying Notes to Consolidated Financial Statements (Unaudited)


5



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(in thousands, except share data)
 
Common Stock - Number of Shares
 
Stockholders’ Equity
 
Shares Issued
 
Treasury Shares
 
Shares Outstanding
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock, at Cost
 
Total Stockholders’ Equity
Balance at January 1, 2017
32,946,197

 
(615,450
)
 
32,330,747

 
$
33

 
$
562,446

 
$
(2,394
)
 
$
41,726

 
$
(70,786
)
 
$
531,025

Stock options exercised
22,125

 

 
22,125

 

 
270

 

 

 

 
270

Restricted stock awards, net of forfeitures
90,844

 

 
90,844

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 
2,071

 

 

 

 
2,071

Restricted stock surrendered due to employee tax liability

 
(30,634
)
 
(30,634
)
 

 

 

 

 
(935
)
 
(935
)
Cash dividends declared

 

 

 

 

 

 
(19,030
)
 

 
(19,030
)
Net income

 

 

 

 

 

 
43,162

 

 
43,162

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

 

 

 

 

 
2,684

 

 

 
2,684

Balance at September 30, 2017
33,059,166

 
(646,084
)
 
32,413,082

 
$
33

 
$
564,787

 
$
290

 
$
65,858

 
$
(71,721
)
 
$
559,247

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
33,083,133

 
(651,506
)
 
32,431,627

 
$
33

 
$
565,627

 
$
(1,869
)
 
$
70,575

 
$
(71,889
)
 
$
562,477

Adjustments related to adoption of new accounting standards:
 
 
 
 


 

 

 
 
 
 
 
 
 


ASU 2016-01
(See Notes 1 and 2)

 

 

 

 

 
382

 
(382
)
 

 

ASU 2018-02
(See Notes 1 and 5)

 

 

 

 

 
(399
)
 
399

 

 

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

 
(651,506
)
 
32,431,627

 
$
33

 
$
565,627

 
$
(1,886
)
 
$
70,592

 
$
(71,889
)
 
$
562,477

Stock options exercised
25,750

 

 
25,750

 

 
570

 

 

 

 
570

Restricted stock awards, net of forfeitures
79,950

 

 
79,950

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 
2,664

 

 

 

 
2,664

Restricted stock surrendered due to employee tax liability

 
(20,533
)
 
(20,533
)
 

 

 

 

 
(607
)
 
(607
)
Repurchase of common stock

 
(429,558
)
 
(429,558
)
 

 
 
 
 
 
 
 
(11,123
)
 
(11,123
)
Cash dividends declared

 

 

 

 

 

 
(23,308
)
 
 
 
(23,308
)
Net income

 

 

 

 

 

 
46,484

 

 
46,484

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

 

 

 

 

 
(9,409
)
 

 

 
(9,409
)
Balance at September 30, 2018
33,188,833

 
(1,101,597
)
 
32,087,236

 
$
33

 
$
568,861

 
$
(11,295
)
 
$
93,768

 
$
(83,619
)
 
$
567,748

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

6



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
46,484

 
$
43,162

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
8,510

 
9,353

Share-based compensation expense
2,664

 
2,071

Loan and lease loss provision
949

 
611

Loss (gain) on sales of securities
341

 
(1,473
)
Gain on sales of SBA loans
(3,970
)
 
(6,678
)
Disposition gains on PCI loans
(166
)
 
(1,702
)
Origination of SBA loans held for sale
(56,244
)
 
(81,716
)
Proceeds from sales of SBA loans
63,057

 
92,715

Change in accrued interest receivable
(876
)
 
(1,111
)
Change in bank-owned life insurance
(818
)
 
(828
)
Change in prepaid expenses and other assets
3,223

 
1,829

Change in accrued interest payable
2,844

 
1,504

Change in accrued expenses and other liabilities
(7,069
)
 
(1,914
)
Net cash provided by operating activities
58,929

 
55,823

Cash flows from investing activities:
 
 
 
Proceeds from matured, called and repayment of securities
79,309

 
51,117

Proceeds from sales of securities available for sale
34,751

 
70,333

Proceeds from sales of other real estate owned ("OREO")
1,902

 
5,710

Change in loans and leases receivable, excluding purchases
(214,670
)
 
(191,594
)
Purchases of securities
(124,964
)
 
(201,398
)
Purchases of premises and equipment
(3,800
)
 
(147
)
Purchases of loans receivable
(66,966
)
 
(161,253
)
Net cash used in investing activities
(294,438
)
 
(427,232
)
Cash flows from financing activities:
 
 
 
Change in deposits
265,768

 
489,273

Change in overnight FHLB borrowings
10,000

 
(205,000
)
Issuance of subordinated debentures

 
97,735

Proceeds from exercise of stock options
570

 
270

Cash paid for treasury shares acquired in respect of share-based compensation
(607
)
 
(935
)
Repurchase of common stock
(11,123
)
 

Cash dividends paid
(23,308
)
 
(19,030
)
Net cash provided by financing activities
241,300

 
362,313

Net increase (decrease) in cash and cash equivalents
5,791

 
(9,096
)
Cash and cash equivalents at beginning of year
153,826

 
147,235

Cash and cash equivalents at end of period
$
159,617

 
$
138,139

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid (received) during the period for:
 
 
 
Interest
$
34,229

 
$
23,078

Income taxes
$
13,553

 
$
25,146

Non-cash activities:
 
 
 
Transfer of loans receivable to other real estate owned
$
938

 
$
143

Income tax benefit (expense) related to items in other comprehensive income
$
3,793

 
$
(1,902
)
Change in unrealized loss (gain) in accumulated other comprehensive income
$
13,115

 
$
(6,059
)
Cash dividends declared
$
(23,308
)
 
$
(19,030
)
See Accompanying Notes to Consolidated Financial Statements (Unaudited)

7



Hanmi Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Nine Months Ended September 30, 2018 and 2017
Note 1 — Organization and Basis of Presentation

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

In August 2018, the Company's Board of Directors adopted a stock repurchase program. Under this repurchase program, the Company may repurchase up to 5% of its outstanding shares or approximately 1.6 million shares of its common stock. The program permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. These factors may also affect the timing and amount of share repurchases. The repurchase program does not obligate the Company to purchase any particular number of shares. During the three months ended September 30, 2018, the Company repurchased 429,558 shares of common stock at a cost of $11.1 million under this program.

In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial and its subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended September 30, 2018, but are not necessarily indicative of the results that will be reported for the entire year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The aforementioned unaudited consolidated financial statements are prepared in conformity with GAAP and in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 Annual Report on Form 10-K”).

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

Descriptions of our significant accounting policies are included in Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in our 2017 Annual Report on Form 10-K.

Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825) and ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). Summaries of ASU 2016-01 and 2018-02 and the impact of their adoption are included in Notes 2 and 5 to the Consolidated Financial Statements, respectively. In addition to other provisions, ASU 2016-01 requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Beginning with the quarter ended March 31, 2018, the Company measured the fair value of certain financial instruments, included in Note 10 to the Consolidated Financial Statements, using an exit price notion.

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


8



Note 2 — Securities

The following is a summary of securities available for sale as of September 30, 2018 and December 31, 2017: 
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
 
(in thousands)
September 30, 2018
 
 
 
 
 
 
 
Mortgage-backed securities (1)
$
308,054

 
$
51

 
$
9,719

 
$
298,386

Collateralized mortgage obligations (1)
121,541

 
6

 
3,892

 
117,655

U.S. government agency securities
7,499

 

 
147

 
7,352

Municipal bonds-tax exempt
111,328

 
9

 
2,059

 
109,278

U.S. treasury securities
39,675

 

 
110

 
39,565

Total securities available for sale
$
588,097

 
$
66

 
$
15,927

 
$
572,236

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

 
$
145

 
$
2,702

 
$
303,609

Collateralized mortgage obligations (1)
119,658

 
8

 
1,898

 
117,768

U.S. government agency securities
7,499

 

 
85

 
7,414

Municipal bonds-tax exempt
125,601

 
1,943

 
69

 
127,475

U.S. treasury securities
152

 

 

 
152

Mutual funds
22,916

 

 
530

 
22,386

Total securities available for sale
$
581,992

 
$
2,096

 
$
5,284

 
$
578,804


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

The amortized cost and estimated fair value of securities as of September 30, 2018, by contractual or expected maturity, are shown below. Collateralized mortgage obligations are included in the table shown below based on their expected maturities. All other securities are included based on their contractual maturities.
 
Available for Sale
 
Amortized Cost
 
Estimated Fair Value
 
(in thousands)
Within one year
$
18,067

 
$
18,027

Over one year through five years
116,744

 
114,401

Over five years through ten years
228,679

 
222,171

Over ten years
224,607

 
217,637

Total
$
588,097

 
$
572,236


9



Gross unrealized losses on securities available for sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of September 30, 2018 and December 31, 2017:
 
Holding Period
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Number of Securities
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Number of Securities
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Number of Securities
 
(in thousands, except number of securities)
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
2,484

 
$
109,384

 
44

 
$
7,235

 
$
183,568

 
72

 
$
9,719

 
$
292,952

 
116

Collateralized mortgage obligations
453

 
26,235

 
7

 
3,439

 
89,706

 
47

 
3,892


115,941


54

U.S. government agency securities

 

 

 
147

 
7,352

 
3

 
147


7,352


3

Municipal bonds-tax exempt
1,811

 
98,667

 
43

 
248

 
7,034

 
4

 
2,059


105,701


47

U.S. treasury securities
110

 
39,565

 
5

 

 

 

 
110

 
39,565

 
5

Total
$
4,858

 
$
273,851

 
99

 
$
11,069

 
$
287,660

 
126

 
$
15,927

 
$
561,511

 
225

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

 
$
197,621

 
66

 
$
847

 
$
56,998

 
25

 
$
2,702

 
$
254,619

 
91

Collateralized mortgage obligations
773

 
65,726

 
20

 
1,125

 
49,986

 
32

 
1,898

 
115,712

 
52

U.S. government agency securities
15

 
1,484

 
1

 
70

 
5,930

 
2

 
85

 
7,414

 
3

Municipal bonds-tax exempt
48

 
11,541

 
6

 
21

 
2,737

 
2

 
69

 
14,278

 
8

Mutual funds

 

 

 
530

 
22,382

 
6

 
530

 
22,382

 
6

Total
$
2,691

 
$
276,372

 
93

 
$
2,593

 
$
138,033

 
67

 
$
5,284

 
$
414,405

 
160


All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of September 30, 2018 and December 31, 2017 included securities with issuers which have not established any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

The Company does not intend to sell these securities and it is more likely than not that we will not be required to sell the securities before the recovery of their amortized cost basis. Interest payments have been made as scheduled, and management believes this will continue in the future and that the securities will be repaid in full as scheduled. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of September 30, 2018 and December 31, 2017 were not other-than-temporarily impaired, and therefore, no impairment charges as of September 30, 2018 and December 31, 2017 were warranted.

Realized gains and losses on sales of securities and proceeds from sales of securities were as follows for the periods indicated:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Gross realized gains on sales of securities
$
19

 
$
267

 
$
87

 
$
1,473

Gross realized losses on sales of securities

 

 
(957
)
 

Net realized (losses) gains on sales of securities
$
19

 
$
267

 
$
(870
)
 
$
1,473

 
 
 
 
 
 
 
 
Proceeds from sales of securities
$
3,426

 
$
17,644

 
$
34,751

 
$
70,333


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

10



required, in the first quarter of 2018. ASU 2016-01 requires the amounts reported in accumulated other comprehensive income for equity securities that exist as of the date of adoption previously classified as available-for-sale be reclassified to retained earnings. The Company reduced the balance of securities by $529,000 as of January 1, 2018, representing the loss related to all of our mutual fund equity securities, which resulted in a net reduction of retained earnings of $382,000 and an increase of $147,000 in net deferred tax assets based on the transition requirements of this standard.

For the three months ended September 30, 2018 and 2017, there was a $19,000 and $267,000 net gain in earnings resulting from the sale of securities, respectively. Net unrealized gains of $21,000 and $227,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period in 2018 and 2017, respectively.

During the nine months ended September 30, 2018, there was $87,000 in gains included in earnings resulting from sale of securities which had $116,000 in previously recorded unrealized gains in accumulated other comprehensive income. Additionally, during the nine months ended September 30, 2018, we sold all of our mutual fund equity securities with gross realized losses of $957,000. The Company recorded a $428,000 net loss in earnings resulting from the sale of these securities in the three months ended March 31, 2018. The remaining loss of $529,000 related to these sold securities was recorded as a transition adjustment upon adoption of ASU 2016-01 as of the beginning of the period as described in the preceding paragraph. There was a $1.5 million net gain in earnings resulting from sales of securities during the nine months ended September 30, 2017, that had previously been recorded as net unrealized gains of $971,000 in comprehensive income.

Securities available for sale with market values of $29.7 million and $130.1 million as of September 30, 2018 and December 31, 2017, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.



11



Note 3 — Loans and leases

Loans and Leases Receivable, Net

Loans and leases receivable consisted of the following as of the dates indicated:
 
September 30, 2018
 
December 31, 2017
 
(in thousands)
Real estate loans:
 
 
 
Commercial property
 
 
 
Retail
$
924,007

 
$
915,273

Hospitality
809,287

 
681,325

Other (1)
1,474,406

 
1,417,273

Total commercial property loans
3,207,700

 
3,013,871

Construction
67,682

 
55,190

Residential property
516,968

 
521,853

Total real estate loans
3,792,350

 
3,590,914

Commercial and industrial loans:
 
 
 
Commercial term
186,249

 
182,685

Commercial lines of credit
178,570

 
181,894

International loans
31,564

 
34,622

Total commercial and industrial loans
396,383

 
399,201

Leases receivable
379,455

 
297,284

Consumer loans (2)
14,695

 
17,059

Loans and leases receivable
4,582,883

 
4,304,458

Allowance for loan and lease losses
(31,676
)
 
(31,043
)
Loans and leases receivable, net
$
4,551,207

 
$
4,273,415


(1) 
Includes, among other types, mixed-use, apartment, office, industrial, gas stations, faith-based facilities and warehouse; all other property types represent less than one percent of total loans and leases receivable.
(2) 
Consumer loans include home equity lines of credit of $10.9 million and $14.2 million as of September 30, 2018 and December 31, 2017, respectively.

Accrued interest on loans and leases receivable was $11.2 million and $10.2 million at September 30, 2018 and December 31, 2017, respectively. At September 30, 2018 and December 31, 2017, loans receivable of $1.1 billion were pledged to secure borrowing facilities from the FHLB.


12



Loans Held for Sale

The following is the activity for SBA loans held for sale for the three months ended September 30, 2018 and 2017:
 
SBA Loans Held for Sale
 
Real Estate
 
Commercial and Industrial
 
Total
 
(in thousands)
September 30, 2018
 
 
 
 
 
Balance at beginning of period
$
2,785

 
$
2,564

 
$
5,349

Originations
5,408

 
13,469

 
18,877

Sales
(6,453
)
 
(13,299
)
 
(19,752
)
Principal payoffs and amortization
(3
)
 
(16
)
 
(19
)
Balance at end of period
$
1,737

 
$
2,718

 
$
4,455

 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
Balance at beginning of period
$
8,817

 
$
2,132

 
$
10,949

Originations
16,326

 
11,723

 
28,049

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

 
$
1,923

 
$
6,469


The following is the activity for SBA loans held for sale for the nine months ended September 30, 2018 and 2017:
 
SBA Loans Held for Sale
 
Real Estate
 
Commercial and Industrial
 
Total
 
(in thousands)
September 30, 2018
 
 
 
 
 
Balance at beginning of period
$
3,746

 
$
2,648

 
$
6,394

Originations
25,996

 
30,248

 
56,244

Sales
(28,000
)
 
(30,043
)
 
(58,043
)
Principal payoffs and amortization
(5
)
 
(135
)
 
(140
)
Balance at end of period
$
1,737

 
$
2,718

 
$
4,455

 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
Balance at beginning of period
$
7,410

 
$
1,906

 
$
9,316

Originations
51,090

 
30,626

 
81,716

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

 
$
1,923

 
$
6,469



13



Allowance for Loan and Lease Losses

Activity in the allowance for loan and lease losses was as follows for the periods indicated:
 
As of and for the Three Months Ended September 30,
 
As of and for the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Allowance for loan and lease losses:
 
 
 
 
 
 
 
Balance at beginning of period
$
31,818

 
$
33,758

 
$
31,043

 
$
32,429

 
 
 
 
 
 
 
 
Charge-offs
(1,246
)
 
(2,405
)
 
(3,535
)
 
$
(3,256
)
Recoveries on loans and leases previously charged off
904

 
871

 
3,219

 
$
2,709

Net charge-offs
(342
)
 
(1,534
)

(316
)
 
(547
)
 
 
 
 
 
 
 
 
Loan and lease loss provision
200

 
268

 
949

 
$
610

Balance at end of period
$
31,676

 
$
32,492

 
$
31,676

 
$
32,492


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

The following table details the information on the allowance for loan and lease losses by portfolio segment as of and for the three months ended September 30, 2018 and 2017:
 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
17,916

 
$
7,120

 
6,649

 
$
109

 
$
24

 
$
31,818

Charge-offs
(220
)
 
(232
)
 
(794
)
 

 

 
(1,246
)
Recoveries on loans and leases previously charged off
577

 
237

 
90

 

 

 
904

Loan and lease loss provision (income)
(184
)
 
(38
)
 
446

 

 
(24
)
 
200

Ending balance
$
18,089

 
$
7,087

 
$
6,391

 
$
109

 
$

 
$
31,676

Individually evaluated for impairment
$
2,428

 
$
631

 
$
1,763

 
$

 
$

 
$
4,822

Collectively evaluated for impairment
$
15,661

 
$
6,456

 
$
4,628

 
$
109

 
$

 
$
26,854

 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases receivable:
$
3,792,350

 
$
396,383

 
$
379,455

 
$
14,695

 
$

 
$
4,582,883

Individually evaluated for impairment
$
20,596

 
$
3,767

 
$
5,093

 
$
881

 
$

 
$
30,337

Collectively evaluated for impairment
$
3,771,754

 
$
392,616

 
$
374,362

 
$
13,814

 
$

 
$
4,552,546






14



 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
23,433

 
$
7,020

 
2,033

 
$
95

 
$
1,177

 
$
33,758

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

 

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

 
308

 
220

 

 

 
871

Loan and lease loss provision (income)
(3,293
)
 
1,183

 
2,867

 
(30
)
 
(459
)
 
268

Ending balance
$
20,337

 
$
6,535

 
$
4,837

 
$
65

 
$
718

 
$
32,492

Individually evaluated for impairment
$
3,882

 
$
531

 
$
2,008

 
$

 
$

 
$
6,421

Collectively evaluated for impairment
$
16,455

 
$
6,004

 
$
2,829

 
$
65

 
$
718

 
$
26,071

 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases receivable:
$
3,539,558

 
$
364,456

 
$
272,271

 
$
19,070

 
$

 
$
4,195,355

Individually evaluated for impairment
$
19,466

 
$
3,610

 
$
3,378

 
$
1,045

 
$

 
$
27,499

Collectively evaluated for impairment
$
3,520,092

 
$
360,846

 
$
268,893

 
$
18,025

 
$

 
$
4,167,856


The following table details the information on the allowance for loan and lease losses by portfolio segment as of and for the nine months ended September 30, 2018 and 2017:
 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
17,012

 
$
7,400

 
6,279

 
$
122

 
$
230

 
$
31,043

Charge-offs
(1,249
)
 
(597
)
 
(1,689
)
 

 

 
(3,535
)
Recoveries on loans and leases previously charged off
1,833

 
1,170

 
214

 
2

 

 
3,219

Loan and lease loss provision (income)
493

 
(886
)
 
1,587

 
(15
)
 
(230
)
 
949

Ending balance
$
18,089

 
$
7,087

 
$
6,391

 
$
109

 
$

 
$
31,676

Individually evaluated for impairment
$
2,428

 
$
631

 
$
1,763

 
$

 
$

 
$
4,822

Collectively evaluated for impairment
$
15,661

 
$
6,456

 
$
4,628

 
$
109

 
$

 
$
26,854

 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases receivable:
$
3,792,350

 
$
396,383

 
$
379,455

 
$
14,695

 
$

 
$
4,582,883

Individually evaluated for impairment
$
20,596

 
$
3,767

 
$
5,093

 
$
881

 
$

 
$
30,337

Collectively evaluated for impairment
$
3,771,754

 
$
392,616

 
$
374,362

 
$
13,814

 
$

 
$
4,552,546



15



 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
26,134

 
$
5,623

 
307

 
$
199

 
$
166

 
$
32,429

Charge-offs
(289
)
 
(2,017
)
 
(950
)
 

 

 
(3,256
)
Recoveries on loans and leases previously charged off
1,434

 
1,021

 
239

 
15

 

 
2,709

Loan and lease loss provision (income)
(6,942
)
 
1,908

 
5,241

 
(149
)
 
552

 
610

Ending balance
$
20,337

 
$
6,535

 
$
4,837

 
$
65

 
$
718

 
$
32,492

Individually evaluated for impairment
$
3,882

 
$
531

 
$
2,008

 
$

 
$

 
$
6,421

Collectively evaluated for impairment
$
16,455

 
$
6,004

 
$
2,829

 
$
65

 
$
718

 
$
26,071

 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases receivable:
$
3,539,558

 
$
364,456

 
$
272,271

 
$
19,070

 
$

 
$
4,195,355

Individually evaluated for impairment
$
19,466

 
$
3,610

 
$
3,378

 
$
1,045

 
$

 
$
27,499

Collectively evaluated for impairment
$
3,520,092

 
$
360,846

 
$
268,893

 
$
18,025

 
$

 
$
4,167,856



Loan and Lease Quality Indicators

As part of the on-going monitoring of the credit quality of our loan and lease portfolio, we utilize an internal loan and lease grading system to identify credit risk and assign an appropriate grade, from 0 to 8, for each loan or lease in our loan and lease portfolio. Third party loan reviews are performed throughout the year. Additional adjustments are made when determined to be necessary. The loan and lease grade definitions are as follows:
Pass and Pass-Watch: Pass and pass-watch loans and leases, grades 0-4, are in compliance in all respects with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or defined weaknesses as defined under Special Mention, Substandard or Doubtful. This category is the strongest level of the Bank’s loan and lease grading system. It incorporates all performing loans and leases with no credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans.
Special Mention: A special mention credit, grade 5, has potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses may result in deterioration of the repayment prospects of the debt and result in a Substandard classification. Loans and leases that have significant actual, not potential, weaknesses are considered more severely classified.
Substandard: A substandard credit, grade 6, has a well-defined weakness that jeopardizes the liquidation of the debt. A credit graded Substandard is not protected by the sound worth and paying capacity of the borrower, or of the value and type of collateral pledged. With a Substandard loan or lease, there is a distinct possibility that the Bank will sustain some loss if the weaknesses or deficiencies are not corrected.
Doubtful: A doubtful credit, grade 7, is one that has critical weaknesses that would make the collection or liquidation of the full amount due improbable. However, there may be pending events which may work to strengthen the credit, and therefore the amount or timing of a possible loss cannot be determined at the current time.
Loss: A loan or lease classified as loss, grade 8, is considered uncollectible and of such little value that its continuance as an active bank asset is not warranted. This classification does not mean that the loan or lease has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans and leases classified as loss are charged off in a timely manner.

16




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

     As of September 30, 2018 and December 31, 2017, pass/pass-watch, special mention and classified loans and leases, disaggregated by loan class, were as follows:
 
Pass/Pass-Watch
 
Special Mention
 
Classified
 
Total
 
(In thousands)
September 30, 2018
 
 
 
 
 
 
 
Real estate loans: