Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - HANMI FINANCIAL CORPexhibit3222017q1.htm
EX-32.1 - EXHIBIT 32.1 - HANMI FINANCIAL CORPexhibit3212017q1.htm
EX-31.2 - EXHIBIT 31.2 - HANMI FINANCIAL CORPexhibit3122017q1.htm
EX-31.1 - EXHIBIT 31.1 - HANMI FINANCIAL CORPexhibit3112017q1.htm


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

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From                      To                     
Commission File Number: 000-30421

 HANMI FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
 
95-4788120
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
3660 Wilshire Boulevard, Penthouse Suite A
Los Angeles, California
 
90010
(Address of Principal Executive Offices)
 
(Zip Code)
(213) 382-2200
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
x
Accelerated Filer
¨
Non-Accelerated Filer
 
¨  (Do Not Check if a Smaller Reporting Company)
Smaller Reporting Company
¨
 
 
 
Emerging Growth Company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
As of May 5, 2017, there were 32,399,560 outstanding shares of the Registrant’s Common Stock.




Hanmi Financial Corporation and Subsidiaries
Quarterly Report on Form 10-Q
Three Months Ended March 31, 2017
Table of Contents
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 


2



Part I — Financial Information
Item 1. Financial Statements
Hanmi Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
 
(Unaudited) March 31, 2017
 
December 31, 2016
Assets
 
 
 
Cash and due from banks
$
138,592

 
$
147,235

Securities available for sale, at fair value (amortized cost of $550,748 as of March 31, 2017 and $521,053 as of December 31, 2016)
548,010

 
516,964

Loans held for sale, at the lower of cost or fair value
8,849

 
9,316

Loans and leases receivable, net of allowance for loan and lease losses of $33,152 as of March 31, 2017 and $32,429 as of December 31, 2016
3,910,799

 
3,812,340

Accrued interest receivable
10,774

 
10,987

Premises and equipment, net
28,350

 
28,698

Other real estate owned ("OREO"), net
4,636

 
7,484

Customers’ liability on acceptances
932

 
978

Servicing assets
10,609

 
10,564

Goodwill and other intangible assets, net
12,797

 
12,889

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

 
16,385

Income tax asset, net
40,049

 
48,047

Bank-owned life insurance
49,722

 
49,440

Prepaid expenses and other assets
31,317

 
30,019

Total assets
$
4,811,821

 
$
4,701,346

Liabilities and stockholders’ equity
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
1,241,272

 
$
1,203,240

Interest-bearing
2,841,893

 
2,606,497

Total deposits
4,083,165

 
3,809,737

Accrued interest payable
2,619

 
2,567

Bank’s liability on acceptances
932

 
978

FHLB advances
50,000

 
315,000

Subordinated debentures
116,795

 
18,978

Accrued expenses and other liabilities
18,768

 
23,061

Total liabilities
4,272,279

 
4,170,321

Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,028,608 shares (32,392,580 shares outstanding) as of March 31, 2017 and issued 32,946,197
shares (32,330,747 shares outstanding) as of December 31, 2016
33

 
33

Additional paid-in capital
563,151

 
562,446

Accumulated other comprehensive income (loss), net of tax benefit of $1,135 as of March 31, 2017 and $1,695 as of December 31, 2016
(1,603
)
 
(2,394
)
Retained earnings
49,395

 
41,726

Less: treasury stock, at cost; 636,028 shares as of March 31, 2017 and 615,450 shares as of December 31, 2016
(71,434
)
 
(70,786
)
Total stockholders’ equity
539,542

 
531,025

Total liabilities and stockholders’ equity
$
4,811,821

 
$
4,701,346


See Accompanying Notes to Consolidated Financial Statements (Unaudited)

3



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
(in thousands, except share and per share data)
 
Three Months Ended March 31,
 
2017
 
2016
Interest and dividend income:
 
 
 
Interest and fees on loans and leases
$
45,378

 
$
39,067

Interest on securities
2,520

 
3,017

Dividends on Federal Reserve Bank ("FRB") and FHLB stock
374

 
542

Interest on deposits in other banks
77

 
48

Total interest and dividend income
48,349

 
42,674

Interest expense:
 
 
 
Interest on deposits
5,154

 
3,727

Interest on FHLB advances
468

 
195

Interest on subordinated debentures
373

 
183

Total interest expense
5,995

 
4,105

Net interest income before provision for loan and lease losses
42,354

 
38,569

Loan and lease loss provision (income)
(80
)
 
(1,525
)
Net interest income after provision for loan and lease losses
42,434

 
40,094

Noninterest income:
 
 
 
Service charges on deposit accounts
2,528

 
3,001

Trade finance and other service charges and fees
1,047

 
1,044

Gain on sales of Small Business Administration ("SBA") loans
1,464

 
858

Disposition gains on Purchased Credit Impaired ("PCI") loans
183

 
659

Net gain on sales of securities
269

 

Other operating income
1,726

 
1,399

Total noninterest income
7,217

 
6,961

Noninterest expense:
 
 
 
Salaries and employee benefits
17,104

 
15,698

Occupancy and equipment
3,982

 
3,496

Data processing
1,631

 
1,436

Professional fees
1,148

 
1,464

Supplies and communications
635

 
736

Advertising and promotion
802

 
522

OREO expense (income)
(101
)
 
465

Merger and integration costs (income)
(31
)
 

Other operating expenses
2,070

 
2,251

Total noninterest expense
27,240

 
26,068

Income before income tax expense
22,411

 
20,987

Income tax expense
8,628

 
6,183

Net income
$
13,783

 
$
14,804

Basic earnings per share
$
0.43

 
$
0.46

Diluted earnings per share
$
0.43

 
$
0.46

Weighted-average shares outstanding:
 
 
 
Basic
32,001,766

 
31,846,371

Diluted
32,191,458

 
31,928,103


See Accompanying Notes to Consolidated Financial Statements (Unaudited)

4



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
Net income
$
13,783

 
$
14,804

Other comprehensive income, net of tax:
 
 
 
Unrealized gain on securities:
 
 
 
Unrealized holding gain arising during period
1,620

 
9,723

Less: reclassification adjustment for net gain included in net income
(269
)
 

Income tax expense related to items of other comprehensive income
(560
)
 
(4,044
)
Other comprehensive income, net of tax
791

 
5,679

Comprehensive income
$
14,574

 
$
20,483


See Accompanying Notes to Consolidated Financial Statements (Unaudited)


5



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(in thousands, except share data)
 
Common Stock - Number of Shares
 
Stockholders’ Equity
 
Shares Issued
 
Treasury Shares
 
Shares Outstanding
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock, at Cost
 
Total Stockholders’ Equity
Balance at January 1, 2016
32,566,522

 
(592,163
)
 
31,974,359

 
$
257

 
$
557,761

 
$
(315
)
 
$
6,422

 
$
(70,207
)
 
$
493,918

Correction of accounting for the 2011 1-for-8 stock split

 

 

 
(224
)
 
224

 

 

 

 

Stock options exercised
22,209

 

 
22,209

 

 
341

 

 

 

 
341

Restricted stock awards, net of forfeitures
253,764

 

 
253,764

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 
619

 

 

 

 
619

Restricted stock surrendered due to employee tax liability

 
(820
)
 
(820
)
 

 

 

 

 
(17
)
 
(17
)
Cash dividends declared

 

 

 

 

 

 
(4,484
)
 

 
(4,484
)
Net income

 

 

 

 

 

 
14,804

 

 
14,804

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

 

 

 

 

 
5,679

 

 

 
5,679

Balance at March 31, 2016
32,842,495

 
(592,983
)
 
32,249,512

 
$
33

 
$
558,945

 
$
5,364

 
$
16,742

 
$
(70,224
)
 
$
510,860

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
32,946,197

 
(615,450
)
 
32,330,747

 
$
33

 
$
562,446

 
$
(2,394
)
 
$
41,726

 
$
(70,786
)
 
$
531,025

Stock options exercised
1,000

 

 
1,000

 

 
13

 

 

 

 
13

Restricted stock awards, net of forfeitures
81,411

 

 
81,411

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 
692

 

 

 

 
692

Restricted stock surrendered due to employee tax liability

 
(20,578
)
 
(20,578
)
 

 

 

 

 
(648
)
 
(648
)
Cash dividends declared

 

 

 

 

 

 
(6,114
)
 

 
(6,114
)
Net income

 

 

 

 

 

 
13,783

 

 
13,783

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

 

 

 

 

 
791

 

 

 
791

Balance at March 31, 2017
33,028,608

 
(636,028
)
 
32,392,580

 
$
33

 
$
563,151

 
$
(1,603
)
 
$
49,395

 
$
(71,434
)
 
$
539,542

See Accompanying Notes to Consolidated Financial Statements (Unaudited)


6



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands) 
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
13,783

 
$
14,804

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
3,885

 
3,982

Share-based compensation expense
692

 
619

Loan and lease loss provision (income)
(80
)
 
(1,525
)
Gain on sales of securities
(269
)
 

Gain on sales of SBA loans
(1,464
)
 
(858
)
Gain on sale of premises and equipment
(1
)
 
(35
)
Disposition gains on PCI loans
(183
)
 
(659
)
Valuation adjustment on OREO
(101
)
 
465

Origination of SBA loans held for sale
(19,192
)
 
(12,152
)
Proceeds from sales of SBA loans
21,414

 
13,662

Change in accrued interest receivable
213

 
(1,125
)
Change in bank-owned life insurance
(282
)
 
(272
)
Change in prepaid expenses and other assets
(2,219
)
 
(441
)
Change in income tax assets
7,438

 
(3,326
)
Change in accrued interest payable
52

 
72

Change in accrued expenses and other liabilities
(3,569
)
 
(7,377
)
Net cash provided by operating activities
20,117

 
5,834

Cash flows from investing activities:
 
 
 
Proceeds from matured, called and repayment of securities
17,404

 
30,884

Proceeds from sales of securities available for sale
12,573

 

Proceeds from sales of OREO
3,349

 
117

Change in loans and leases receivable, excluding purchases
(66,556
)
 
(93,113
)
Purchases of securities
(60,960
)
 

Purchases of premises and equipment
(411
)
 
(990
)
Purchases of loans receivable
(33,573
)
 
(30,687
)
Purchases of FRB stock

 
(325
)
Net cash used in investing activities
(128,174
)
 
(94,114
)
Cash flows from financing activities:
 
 
 
Change in deposits
273,428

 
(9,984
)
Change in overnight FHLB borrowings
(265,000
)
 
80,000

Issuance of subordinated debentures
97,735

 

Proceeds from exercise of stock options
13

 
341

Cash paid for treasury shares acquired in respect of share-based compensation
(648
)
 
(17
)
Cash dividends paid
(6,114
)
 
(8,960
)
Net cash provided by financing activities
99,414

 
61,380

Net decrease in cash and cash equivalents
(8,643
)
 
(26,900
)
Cash and cash equivalents at beginning of year
147,235

 
164,364

Cash and cash equivalents at end of period
$
138,592

 
$
137,464

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid (received) during the period for:
 
 
 
Interest
$
5,943

 
$
4,034

Income taxes
$
(101
)
 
$
9,887

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

 
$
676

Income tax expense related to items in other comprehensive income
$
(560
)
 
$
(4,044
)
Change in unrealized gain in accumulated other comprehensive income
$
(1,620
)
 
$
(9,723
)
Cash dividends declared
$
(6,114
)
 
$
(4,484
)
See Accompanying Notes to Consolidated Financial Statements (Unaudited)


7



Hanmi Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Three Months Ended March 31, 2017 and 2016
Note 1 — Organization and Basis of Presentation

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

In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial and its subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended March 31, 2017, but are not necessarily indicative of the results that will be reported for the entire year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The aforementioned unaudited consolidated financial statements are in conformity with GAAP. Such interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “2016 Annual Report on Form 10-K”).

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

Certain prior period amounts have been reclassified to conform to current period presentation. Descriptions of our significant accounting policies are included in Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in our 2016 Annual Report on Form 10-K.



8



Note 2 — Securities

The following is a summary of securities available for sale as of March 31, 2017 and December 31, 2016: 
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
Mortgage-backed securities (1) (2)
$
262,713

 
$
862

 
$
1,480

 
$
262,095

Collateralized mortgage obligations (1)
87,855

 
13

 
940

 
86,928

U.S. government agency securities
7,499

 

 
53

 
7,446

SBA loan pool securities
4,354

 

 
191

 
4,163

Municipal bonds-tax exempt
159,203

 
431

 
860

 
158,774

Municipal bonds-taxable
1,045

 

 
8

 
1,037

Corporate bonds
5,008

 
14

 


 
5,022

U.S. treasury securities
155

 

 

 
155

Mutual funds
22,916

 

 
526

 
22,390

Total securities available for sale
$
550,748

 
$
1,320

 
$
4,058

 
$
548,010

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Mortgage-backed securities (1) (2)
$
230,489

 
$
598

 
$
1,457

 
$
229,630

Collateralized mortgage obligations (1)
77,447

 
6

 
1,002

 
76,451

U.S. government agency securities
7,499

 

 
58

 
7,441

SBA loan pool securities
4,356

 

 
210

 
4,146

Municipal bonds-tax exempt
159,789

 
236

 
1,995

 
158,030

Municipal bonds-taxable
13,391

 
319

 
9

 
13,701

Corporate bonds
5,010

 
5

 

 
5,015

U.S. treasury securities
156

 

 

 
156

Mutual funds
22,916

 

 
522

 
22,394

Total securities available for sale
$
521,053

 
$
1,164

 
$
5,253

 
$
516,964

                              
(1) 
Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.
(2) 
Includes securities collateralized by home equity conversion mortgages with total estimated fair value of $50.5 million and $52.9 million as of March 31, 2017 and December 31, 2016, respectively.






9



The amortized cost and estimated fair value of securities as of March 31, 2017, by contractual or expected maturity, are shown below. Collateralized mortgage obligations are included in the table shown below based on their expected maturities. Mutual funds do not have contractual maturities. However, they are included in the table shown below as over ten years since the Company intends to hold these securities for at least this duration. All other securities are included based on their contractual maturities.
 
Available for Sale
 
Amortized Cost
 
Estimated Fair Value
 
(in thousands)
Within one year
$
5,485

 
$
5,443

Over one year through five years
64,510

 
64,393

Over five years through ten years
250,661

 
249,514

Over ten years
230,092

 
228,660

Total
$
550,748

 
$
548,010

Gross unrealized losses on securities available for sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of March 31, 2017 and December 31, 2016:
 
Holding Period
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Number of Securities
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Number of Securities
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Number of Securities
 
(in thousands, except number of securities)
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,418

 
$
149,993

 
51

 
$
62

 
$
7,096

 
2

 
$
1,480

 
$
157,089

 
53

Collateralized mortgage obligations
557

 
61,622

 
27

 
383

 
15,888

 
9

 
940


77,510


36

U.S. government agency securities
53

 
7,446

 
3

 

 

 

 
53


7,446


3

SBA loan pool securities

 

 

 
191

 
4,163

 
2

 
191


4,163


2

Municipal bonds-tax exempt
860

 
104,412

 
45

 

 

 

 
860


104,412


45

Municipal bonds-taxable
8

 
1,036

 
1

 

 

 

 
8


1,036


1

Mutual funds
413

 
21,478

 
4

 
113

 
914

 
3

 
526


22,392


7

Total
$
3,309

 
$
345,987

 
131

 
$
749

 
$
28,061

 
16

 
$
4,058

 
$
374,048

 
147

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,345

 
$
102,647

 
38

 
$
112

 
$
11,350

 
3

 
$
1,457

 
$
113,997

 
41

Collateralized mortgage obligations
676

 
60,786

 
27

 
326

 
10,579

 
7

 
1,002

 
71,365

 
34

U.S. government agency securities
58

 
7,441

 
3

 

 

 

 
58

 
7,441

 
3

SBA loan pool securities

 

 

 
210

 
4,146

 
2

 
210

 
4,146

 
2

Municipal bonds-tax exempt
1,995

 
125,004

 
54

 

 

 

 
1,995

 
125,004

 
54

Municipal bonds-taxable
9

 
2,904

 
2

 

 

 

 
9

 
2,904

 
2

Mutual funds
413

 
21,478

 
4

 
109

 
916

 
3

 
522

 
22,394

 
7

Total
$
4,496

 
$
320,260

 
128

 
$
757

 
$
26,991

 
15

 
$
5,253

 
$
347,251

 
143


All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of March 31, 2017 and December 31, 2016 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status as of March 31, 2017 and December 31, 2016. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.


10



The Company does not intend to sell these securities and it is more likely than not that we will not be required to sell the securities before the recovery of their amortized cost basis. Interest payments have been made as scheduled, and management believes this will continue in the future and that the bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of March 31, 2017 and December 31, 2016 were not other-than-temporarily impaired, and therefore, no impairment charges as of March 31, 2017 and December 31, 2016 were warranted.

Realized gains and losses on sales of securities and proceeds from sales of securities were as follows for the periods indicated:
 
Three Months Ended 
 March 31,
 
2017
 
2016
 
(in thousands)
Gross realized gains on sales of securities
$
269

 
$

Gross realized losses on sales of securities

 

Net realized gains on sales of securities
$
269

 
$

Proceeds from sales of securities
$
12,573

 
$


For the three months ended March 31, 2017, there was a $269,000 net gain in earnings resulting from the sale of securities. Net unrealized gains of $319,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period. There were no sales of securities during the three months ended March 31, 2016.

Securities available for sale with market values of $133.0 million and $133.0 million as of March 31, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.



11



Note 3 — Loans and leases

Loans and Leases Receivable, Net

Loans and leases receivable consisted of the following as of the dates indicated:
 
March 31, 2017
 
December 31, 2016
 
Non-PCI Loans and Leases
 
PCI Loans
 
Total
 
Non-PCI Loans and Leases
 
PCI Loans
 
Total
 
(in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
908,432

 
$
1,554

 
$
909,986

 
$
857,629

 
$
2,324

 
$
859,953

Hospitality
650,518

 
1,596

 
652,114

 
649,540

 
1,618

 
651,158

Gas station
253,437

 
2,623

 
256,060

 
260,187

 
2,692

 
262,879

Other (1)
1,113,851

 
2,047

 
1,115,898

 
1,107,589

 
2,067

 
1,109,656

Construction
56,072

 

 
56,072

 
55,962

 

 
55,962

Residential property
357,775

 
970

 
358,745

 
337,791

 
976

 
338,767

Total real estate loans
3,340,085

 
8,790

 
3,348,875

 
3,268,698

 
9,677

 
3,278,375

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial term
135,476

 
120

 
135,596

 
138,032

 
136

 
138,168

Commercial lines of credit
144,279

 

 
144,279

 
136,231

 

 
136,231

International loans
37,807

 

 
37,807

 
25,821

 

 
25,821

Total commercial and industrial loans
317,562

 
120

 
317,682

 
300,084

 
136

 
300,220

Leases receivable
259,591

 

 
259,591

 
243,294

 

 
243,294

Consumer loans (2)
17,753

 
50

 
17,803

 
22,830

 
50

 
22,880

Loans and leases receivable
3,934,991

 
8,960

 
3,943,951

 
3,834,906

 
9,863

 
3,844,769

Allowance for loan and lease losses
(32,261
)
 
(891
)
 
(33,152
)
 
(31,458
)
 
(971
)
 
(32,429
)
Loans and leases receivable, net
$
3,902,730

 
$
8,069

 
$
3,910,799

 
$
3,803,448

 
$
8,892

 
$
3,812,340

 

(1) 
The remaining other real estate categories represent less than one percent of total loans and leases, which, among other property types, include mixed-use, apartment, office, industrial, faith-based facilities and warehouse.
(2) 
Consumer loans include home equity lines of credit of $16.1 million and $17.7 million as of March 31, 2017 and December 31, 2016, respectively.

Accrued interest on loans and leases receivable was $8.2 million at March 31, 2017 and December 31, 2016. At March 31, 2017 and December 31, 2016, loans receivable of $1.0 billion were pledged to secure borrowing facilities from the FHLB.


12



Loans Held for Sale

The following is the activity for SBA loans held for sale for the three months ended March 31, 2017 and 2016:
 
SBA Loans Held for Sale
 
Real Estate
 
Commercial and Industrial
 
Total
 
(in thousands)
March 31, 2017
 
 
 
 
 
Balance at beginning of period
$
7,410

 
$
1,906

 
$
9,316

Originations
12,633

 
6,559

 
19,192

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

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

 
$
1,060

 
$
8,849

 
 
 
 
 
 
March 31, 2016
 
 
 
 
 
Balance at beginning of period
$
840

 
$
2,034

 
$
2,874

Originations
6,473

 
5,679

 
12,152

Sales
(5,488
)
 
(6,935
)
 
(12,423
)
Principal payoffs and amortization
(1
)
 
(19
)
 
(20
)
Balance at end of period
$
1,824

 
$
759

 
$
2,583



Allowance for Loan and Lease Losses

Activity in the allowance for loan and lease losses was as follows for the periods indicated:
 
As of and for the Three Months Ended
 
March 31, 2017
 
March 31, 2016
 
Non-PCI Loans and Leases
 
PCI Loans
 
Total
 
Non-PCI Loans and Leases
 
PCI Loans
 
Total
 
(in thousands)
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
31,458

 
$
971

 
$
32,429

 
$
37,494

 
$
5,441

 
$
42,935

Charge-offs
(186
)
 

 
(186
)
 
(637
)
 

 
(637
)
Recoveries on loans and leases previously charged off
989

 

 
989

 
253

 

 
253

Net loan and lease (charge-offs) recoveries
803

 

 
803

 
(384
)
 

 
(384
)
Loan and lease loss provision (income)

 
(80
)
 
(80
)
 
(1,729
)
 
204

 
(1,525
)
Balance at end of period
$
32,261

 
$
891

 
$
33,152

 
$
35,381

 
$
5,645

 
$
41,026


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

13



The following tables details the information on the allowance for loan and lease losses by portfolio segment as of and for the three months ended March 31, 2017 and 2016:
 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on non-PCI loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
25,212

 
$
5,582

 
307

 
$
191

 
$
166

 
$
31,458

Charge-offs
(104
)
 
(40
)
 
(42
)
 

 

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

 
277

 

 

 

 
989

Loan and lease loss provision (income)
(1,060
)
 
95

 
715

 
(69
)
 
319

 

Ending balance
$
24,760

 
$
5,914

 
$
980

 
$
122

 
$
485

 
$
32,261

Ending balance: individually evaluated for impairment
$
3,756

 
$
791

 
$

 
$

 
$

 
$
4,547

Ending balance: collectively evaluated for impairment
$
21,004

 
$
5,123

 
$
980

 
$
122

 
$
485

 
$
27,714

 
 
 
 
 
 
 
 
 
 
 
 
Non-PCI loans and leases receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
3,340,085

 
$
317,562

 
$
259,591

 
$
17,753

 
$

 
$
3,934,991

Ending balance: individually evaluated for impairment
$
20,795

 
$
3,828

 
$

 
$
321

 
$

 
$
24,944

Ending balance: collectively evaluated for impairment
$
3,319,290

 
$
313,734

 
$
259,591

 
$
17,432

 
$

 
$
3,910,047

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses on PCI loans:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
922

 
$
41

 
$

 
$
8

 
$

 
$
971

Charge-offs

 

 

 

 

 

Loan loss provision (income)
(80
)
 

 

 

 

 
(80
)
Ending balance
$
842

 
$
41

 
$

 
$
8

 
$

 
$
891

 
 
 
 
 
 
 
 
 
 
 
 
PCI loans receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance: acquired with deteriorated credit quality
$
8,790

 
$
120

 
$

 
$
50

 
$

 
$
8,960


14




 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on non-PCI loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
29,800

 
$
7,081

 

 
$
242

 
$
371

 
$
37,494

Charge-offs
(535
)
 
(102
)
 

 

 

 
(637
)
Recoveries on loans and leases previously charged off
93

 
160

 

 

 

 
253

Loan and lease loss provision (income)
(1,080
)
 
(850
)
 

 
13

 
188

 
(1,729
)
Ending balance
$
28,278

 
$
6,289

 
$

 
$
255

 
$
559

 
$
35,381

Ending balance: individually evaluated for impairment
$
3,334

 
$
759

 
$

 
$

 
$

 
$
4,093

Ending balance: collectively evaluated for impairment
$
24,944

 
$
5,530

 
$

 
$
255

 
$
559

 
$
31,288

 
 
 
 
 
 
 
 
 
 
 
 
Non-PCI loans and leases receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
2,966,390

 
$
295,471

 
$

 
$
24,783

 
$

 
$
3,286,644

Ending balance: individually evaluated for impairment
$
25,595

 
$
6,441

 
$

 
$
700

 
$

 
$
32,736

Ending balance: collectively evaluated for impairment
$
2,940,795

 
$
289,030

 
$

 
$
24,083

 
$

 
$
3,253,908

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses on PCI loans:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
5,397

 
$
42

 
$

 
$
2

 
$

 
$
5,441

Loan loss provision (income)
202

 
2

 

 

 

 
204

Ending balance
$
5,599

 
$
44

 
$

 
$
2

 
$

 
$
5,645

 
 
 
 
 
 
 
 
 
 
 
 
PCI loans receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance: acquired with deteriorated credit quality
$
19,625

 
$
161

 
$

 
$
49

 
$

 
$
19,835



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.

15



Substandard: A substandard credit, grade 6, has a well-defined weakness that jeopardizes the liquidation of the debt. A credit graded Substandard is not protected by the sound worth and paying capacity of the borrower, or of the value and type of collateral pledged. With a Substandard loan or lease, there is a distinct possibility that the Bank will sustain some loss if the weaknesses or deficiencies are not corrected.
Doubtful: A doubtful credit, grade 7, is one that has critical weaknesses that would make the collection or liquidation of the full amount due improbable. However, there may be pending events which may work to strengthen the credit, and therefore the amount or timing of a possible loss cannot be determined at the current time.
Loss: A loan or lease classified as loss, grade 8, is considered uncollectible and of such little value that its continuance as an active bank asset is not warranted. This classification does not mean that the loan or lease has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans and leases classified as loss are charged off in a timely manner.

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


16



     As of March 31, 2017 and December 31, 2016, pass/pass-watch, special mention and classified loans and leases (excluding PCI loans), disaggregated by loan class, were as follows:
 
Pass/Pass-Watch
 
Special Mention
 
Classified
 
Total
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
902,614

 
$
1,652

 
$
4,166

 
$
908,432

Hospitality
636,396

 
4,515

 
9,607

 
650,518

Gas station
249,125

 
2,029

 
2,283

 
253,437

Other
1,106,847

 
2,794

 
4,210

 
1,113,851

Construction
56,072

 

 

 
56,072

Residential property
357,543

 

 
232

 
357,775

Commercial and industrial loans:
 
 
 
 
 
 

Commercial term
131,424

 
2,130

 
1,922

 
135,476

Commercial lines of credit
143,979

 
300

 

 
144,279

International loans
37,807

 

 

 
37,807

Leases receivable
257,947

 

 
1,644

 
259,591

Consumer loans
17,292

 

 
461

 
17,753

Total Non-PCI loans and leases
$
3,897,046

 
$
13,420

 
$
24,525

 
$
3,934,991

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
851,147

 
$
2,275

 
$
4,207

 
$
857,629

Hospitality
634,397

 
5,497

 
9,646

 
649,540

Gas station
252,123

 
1,911