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EX-32.2 - EXHIBIT 32.2 - HANMI FINANCIAL CORPexhibit3222017q2.htm
EX-32.1 - EXHIBIT 32.1 - HANMI FINANCIAL CORPexhibit3212017q2.htm
EX-31.2 - EXHIBIT 31.2 - HANMI FINANCIAL CORPexhibit3122017q2.htm
EX-31.1 - EXHIBIT 31.1 - HANMI FINANCIAL CORPexhibit3112017q2.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 June 30, 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
x
Accelerated Filer
¨
Non-Accelerated Filer
 
¨  (Do Not Check if a Smaller Reporting Company)
Smaller Reporting Company
¨
 
 
 
Emerging Growth Company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
As of August 4, 2017, there were 32,407,152 outstanding shares of the Registrant’s Common Stock.




Hanmi Financial Corporation and Subsidiaries
Quarterly Report on Form 10-Q
Three and Six Months Ended June 30, 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) June 30, 2017
 
December 31, 2016
Assets
 
 
 
Cash and due from banks
$
138,507

 
$
147,235

Securities available for sale, at fair value (amortized cost of $571,611 as of June 30, 2017 and $521,053 as of December 31, 2016)
571,846

 
516,964

Loans held for sale, at the lower of cost or fair value
10,949

 
9,316

Loans and leases receivable, net of allowance for loan and lease losses of $33,758 as of June 30, 2017 and $32,429 as of December 31, 2016
4,039,304

 
3,812,340

Accrued interest receivable
11,167

 
10,987

Premises and equipment, net
26,869

 
28,698

Other real estate owned ("OREO"), net
4,321

 
7,484

Customers’ liability on acceptances
1,481

 
978

Servicing assets
10,480

 
10,564

Goodwill and other intangible assets, net
12,712

 
12,889

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

 
16,385

Income tax asset, net
50,286

 
48,047

Bank-owned life insurance
49,982

 
49,440

Prepaid expenses and other assets
29,057

 
30,019

Total assets
$
4,973,346

 
$
4,701,346

Liabilities and stockholders’ equity
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
1,260,929

 
$
1,203,240

Interest-bearing
2,998,244

 
2,606,497

Total deposits
4,259,173

 
3,809,737

Accrued interest payable
3,432

 
2,567

Bank’s liability on acceptances
1,481

 
978

FHLB advances
20,000

 
315,000

Subordinated debentures
117,011

 
18,978

Accrued expenses and other liabilities
22,109

 
23,061

Total liabilities
4,423,206

 
4,170,321

Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,039,034 shares (32,393,856 shares outstanding) as of June 30, 2017 and issued 32,946,197
shares (32,330,747 shares outstanding) as of December 31, 2016
33

 
33

Additional paid-in capital
563,948

 
562,446

Accumulated other comprehensive income (loss), net of tax expense of $98 as of June 30, 2017 and tax benefit of $1,696 as of December 31, 2016
137

 
(2,394
)
Retained earnings
57,717

 
41,726

Less: treasury stock, at cost; 645,178 shares as of June 30, 2017 and 615,450 shares as of December 31, 2016
(71,695
)
 
(70,786
)
Total stockholders’ equity
550,140

 
531,025

Total liabilities and stockholders’ equity
$
4,973,346

 
$
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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Interest and dividend income:
 
 
 
 
 
 
 
Interest and fees on loans and leases
$
47,971

 
$
40,645

 
$
93,349

 
$
79,712

Interest on securities
2,949

 
2,886

 
5,468

 
5,903

Dividends on Federal Reserve Bank ("FRB") and FHLB stock
283

 
579

 
657

 
1,121

Interest on deposits in other banks
123

 
49

 
200

 
97

Total interest and dividend income
51,326

 
44,159

 
99,674

 
86,833

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
6,463

 
3,684

 
11,617

 
7,410

Interest on FHLB advances
49

 
299

 
517

 
494

Interest on subordinated debentures
1,636

 
196

 
2,009

 
379

Total interest expense
8,148

 
4,179

 
14,143

 
8,283

Net interest income before provision for loan and lease losses
43,178

 
39,980

 
85,531

 
78,550

Loan and lease loss provision (income)
422

 
(1,515
)
 
342

 
(3,040
)
Net interest income after provision for loan and lease losses
42,756

 
41,495

 
85,189

 
81,590

Noninterest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
2,461

 
2,898

 
4,989

 
5,899

Trade finance and other service charges and fees
1,269

 
1,064

 
2,316

 
2,109

Gain on sales of Small Business Administration ("SBA") loans
2,668

 
1,774

 
4,132

 
2,632

Disposition gains on Purchased Credit Impaired ("PCI") loans
540

 
1,963

 
723

 
2,622

Net gain on sales of securities
938

 

 
1,206

 

Other operating income
1,826

 
1,674

 
3,551

 
3,072

Total noninterest income
9,702

 
9,373

 
16,917

 
16,334

Noninterest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
16,623

 
16,061

 
33,727

 
31,759

Occupancy and equipment
3,878

 
3,938

 
7,861

 
7,434

Data processing
1,738

 
1,454

 
3,369

 
2,889

Professional fees
1,554

 
1,509

 
2,702

 
2,974

Supplies and communications
745

 
709

 
1,379

 
1,445

Advertising and promotion
1,015

 
1,094

 
1,817

 
1,616

OREO expense (income)
519

 
183

 
418

 
648

Merger and integration costs (income)
(9
)
 

 
(40
)
 

Other operating expenses
2,881

 
2,915

 
4,948

 
5,167

Total noninterest expense
28,944

 
27,863

 
56,181

 
53,932

Income before income tax expense
23,514

 
23,005

 
45,925

 
43,992

Income tax expense
9,057

 
8,857

 
17,685

 
15,040

Net income
$
14,457

 
$
14,148

 
$
28,240

 
$
28,952

Basic earnings per share
$
0.45

 
$
0.44

 
$
0.88

 
$
0.90

Diluted earnings per share
$
0.45

 
$
0.44

 
$
0.87

 
$
0.90

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
32,078,038

 
31,882,489

 
32,040,113

 
31,864,427

Diluted
32,243,034

 
32,029,910

 
32,216,671

 
32,001,163


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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
14,457

 
$
14,148

 
$
28,240

 
$
28,952

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gain on securities:
 
 
 
 
 
 
 
Unrealized holding gain arising during period
3,910

 
6,424

 
5,530

 
16,147

Less: reclassification adjustment for net gain included in net income
(938
)
 

 
(1,206
)
 

Unrealized loss on interest-only strip of servicing assets

 
(9
)
 

 
(9
)
Income tax expense related to items of other comprehensive income
(1,232
)
 
(2,658
)
 
(1,793
)
 
(6,702
)
Other comprehensive income, net of tax
1,740

 
3,757

 
2,531

 
9,436

Comprehensive income
$
16,197

 
$
17,905

 
$
30,771

 
$
38,388


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
40,209

 

 
40,209

 

 
562

 

 

 

 
562

Restricted stock awards, net of forfeitures
256,276

 

 
256,276

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 
1,542

 

 

 

 
1,542

Restricted stock surrendered due to employee tax liability

 
(10,524
)
 
(10,524
)
 

 

 

 

 
(247
)
 
(247
)
Cash dividends declared

 

 

 

 

 

 
(8,978
)
 

 
(8,978
)
Net income

 

 

 

 

 

 
28,952

 

 
28,952

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

 

 

 

 

 
9,436

 

 

 
9,436

Balance at June 30, 2016
32,863,007

 
(602,687
)
 
32,260,320

 
$
33

 
$
560,089

 
$
9,121

 
$
26,396

 
$
(70,454
)
 
$
525,185

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
11,500

 

 
11,500

 

 
139

 

 

 

 
139

Restricted stock awards, net of forfeitures
81,337

 

 
81,337

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 
1,363

 

 

 

 
1,363

Restricted stock surrendered due to employee tax liability

 
(29,728
)
 
(29,728
)
 

 

 

 

 
(909
)
 
(909
)
Cash dividends declared

 

 

 

 

 

 
(12,249
)
 

 
(12,249
)
Net income

 

 

 

 

 

 
28,240

 

 
28,240

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

 

 

 

 

 
2,531

 

 

 
2,531

Balance at June 30, 2017
33,039,034

 
(645,178
)
 
32,393,856

 
$
33

 
$
563,948

 
$
137

 
$
57,717

 
$
(71,695
)
 
$
550,140

See Accompanying Notes to Consolidated Financial Statements (Unaudited)


6



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands) 
 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
28,240

 
$
28,952

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
7,081

 
7,595

Share-based compensation expense
1,363

 
1,542

Loan and lease loss provision (income)
342

 
(3,040
)
Gain on sales of securities
(1,206
)
 

Gain on sales of SBA loans
(4,132
)
 
(2,632
)
Loss (gain) on sale of premises and equipment
76

 
(35
)
Disposition gains on PCI loans
(723
)
 
(2,622
)
Gain on sales of OREO
(532
)
 

Valuation adjustment on OREO
949

 
648

Origination of SBA loans held for sale
(53,667
)
 
(42,559
)
Proceeds from sales of SBA loans
56,938

 
35,119

Change in accrued interest receivable
(180
)
 
(1,051
)
Change in bank-owned life insurance
(542
)
 
(511
)
Change in prepaid expenses and other assets
(508
)
 
882

Change in income tax assets
(4,032
)
 
(1,689
)
Change in accrued interest payable
865

 
(70
)
Change in FDIC loss sharing liability

 
(1,271
)
Change in accrued expenses and other liabilities
633

 
(8,366
)
Net cash provided by operating activities
30,965

 
10,892

Cash flows from investing activities:
 
 
 
Proceeds from matured, called and repayment of securities
33,665

 
74,063

Proceeds from sales of securities available for sale
52,688

 

Proceeds from sales of OREO
3,386

 
1,297

Change in loans and leases receivable, excluding purchases
(157,068
)
 
(171,240
)
Purchases of securities
(138,777
)
 

Purchases of premises and equipment
269

 
(1,393
)
Purchases of loans receivable
(73,008
)
 
(97,200
)
Purchases of FRB stock

 
(325
)
Net cash used in investing activities
(278,845
)
 
(194,798
)
Cash flows from financing activities:
 
 
 
Change in deposits
449,436

 
79,313

Change in overnight FHLB borrowings
(295,000
)
 
110,000

Issuance of subordinated debentures
97,735

 

Proceeds from exercise of stock options
139

 
562

Cash paid for treasury shares acquired in respect of share-based compensation
(909
)
 
(247
)
Cash dividends paid
(12,249
)
 
(13,454
)
Net cash provided by financing activities
239,152

 
176,174

Net decrease in cash and cash equivalents
(8,728
)
 
(7,732
)
Cash and cash equivalents at beginning of year
147,235

 
164,364

Cash and cash equivalents at end of period
$
138,507

 
$
156,632

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid (received) during the period for:
 
 
 
Interest
$
14,143

 
$
8,353

Income taxes
$
19,826

 
$
16,486

Non-cash activities:
 
 
 
Transfer of loans receivable to OREO
$
143

 
$
4,318

Income tax expense related to items in other comprehensive income
$
(1,793
)
 
$
(6,702
)
Change in unrealized gain in accumulated other comprehensive income
$
(5,530
)
 
$
(16,147
)
Cash dividends declared
$
(12,249
)
 
$
(8,978
)
See Accompanying Notes to Consolidated Financial Statements (Unaudited)


7



Hanmi Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 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 June 30, 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.

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 June 30, 2017 and December 31, 2016: 
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
 
(in thousands)
June 30, 2017
 
 
 
 
 
 
 
Mortgage-backed securities (1) (2)
$
280,494

 
$
767

 
$
1,496

 
$
279,765

Collateralized mortgage obligations (1)
92,360

 
14

 
936

 
91,438

U.S. government agency securities
7,499

 

 
42

 
7,457

SBA loan pool securities
4,037

 

 
142

 
3,895

Municipal bonds-tax exempt
158,614

 
2,567

 
118

 
161,063

Municipal bonds-taxable
531

 
6

 

 
537

Corporate bonds
5,006

 
16

 

 
5,022

U.S. treasury securities
154

 

 

 
154

Mutual funds
22,916

 

 
401

 
22,515

Total securities available for sale
$
571,611

 
$
3,370

 
$
3,135

 
$
571,846

 
 
 
 
 
 
 
 
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 $9.1 million and $52.9 million as of June 30, 2017 and December 31, 2016, respectively.






9



The amortized cost and estimated fair value of securities as of June 30, 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
$
15,692

 
$
15,648

Over one year through five years
59,465

 
59,365

Over five years through ten years
249,990

 
251,060

Over ten years
246,464

 
245,773

Total
$
571,611

 
$
571,846

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 June 30, 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)
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,432

 
$
189,400

 
62

 
$
64

 
$
6,868

 
2

 
$
1,496

 
$
196,268

 
64

Collateralized mortgage obligations
560

 
67,725

 
30

 
376

 
18,424

 
12

 
936


86,149


42

U.S. government agency securities
42

 
7,457

 
3

 

 

 

 
42


7,457


3

SBA loan pool securities

 

 

 
142

 
3,896

 
2

 
142


3,896


2

Municipal bonds-tax exempt
118

 
5,128

 
7

 

 

 

 
118


5,128


7

U.S. treasury securities

 
154

 
1

 

 

 

 


154


1

Mutual funds
290

 
21,596

 
3

 
111

 
914

 
3

 
401


22,510


6

Total
$
2,442

 
$
291,460

 
106

 
$
693

 
$
30,102

 
19

 
$
3,135

 
$
321,562

 
125

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 June 30, 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 June 30, 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 June 30, 2017 and December 31, 2016 were not other-than-temporarily impaired, and therefore, no impairment charges as of June 30, 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 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Gross realized gains on sales of securities
$
938

 
$

 
$
1,206

 
$

Gross realized losses on sales of securities

 

 

 

Net realized gains on sales of securities
$
938

 
$

 
$
1,206

 
$

Proceeds from sales of securities
$
40,115

 
$

 
$
52,688

 
$


For the three months ended June 30, 2017, there was a $938,000 net gain in earnings resulting from the sale of securities. Net unrealized gains of $430,000 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 June 30, 2016.

For the six months ended June 30, 2017, there was a $1.2 million net gain in earnings resulting from the sale of securities. Net unrealized gains of $744,000 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 six months ended June 30, 2016.

Securities available for sale with market values of $132.3 million and $133.0 million as of June 30, 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:
 
June 30, 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
$
914,470

 
$
1,643

 
$
916,113

 
$
857,629

 
$
2,324

 
$
859,953

Hospitality
737,369

 
1,698

 
739,067

 
649,540

 
1,618

 
651,158

Gas station
247,566

 
2,363

 
249,929

 
260,187

 
2,692

 
262,879

Other (1)
1,102,084

 
2,016

 
1,104,100

 
1,107,589

 
2,067

 
1,109,656

Construction
58,159

 

 
58,159

 
55,962

 

 
55,962

Residential property
382,692

 
965

 
383,657

 
337,791

 
976

 
338,767

Total real estate loans
3,442,340

 
8,685

 
3,451,025

 
3,268,698

 
9,677

 
3,278,375

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial term
159,432

 
55

 
159,487

 
138,032

 
136

 
138,168

Commercial lines of credit
148,421

 

 
148,421

 
136,231

 

 
136,231

International loans
39,328

 

 
39,328

 
25,821

 

 
25,821

Total commercial and industrial loans
347,181

 
55

 
347,236

 
300,084

 
136

 
300,220

Leases receivable
257,525

 

 
257,525

 
243,294

 

 
243,294

Consumer loans (2)
17,232

 
44

 
17,276

 
22,830

 
50

 
22,880

Loans and leases receivable
4,064,278

 
8,784

 
4,073,062

 
3,834,906

 
9,863

 
3,844,769

Allowance for loan and lease losses
(33,038
)
 
(720
)
 
(33,758
)
 
(31,458
)
 
(971
)
 
(32,429
)
Loans and leases receivable, net
$
4,031,240

 
$
8,064

 
$
4,039,304

 
$
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 $15.1 million and $17.7 million as of June 30, 2017 and December 31, 2016, respectively.

Accrued interest on loans and leases receivable was $8.3 million and $8.2 million at June 30, 2017 and December 31, 2016, respectively. At June 30, 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 June 30, 2017 and 2016:
 
SBA Loans Held for Sale
 
Real Estate
 
Commercial and Industrial
 
Total
 
(in thousands)
June 30, 2017
 
 
 
 
 
Balance at beginning of period
$
7,789

 
$
1,060

 
$
8,849

Originations
22,130

 
12,344

 
34,474

Sales
(21,083
)
 
(11,271
)
 
(32,354
)
Principal payoffs and amortization
(19
)
 
(1
)
 
(20
)
Balance at end of period
$
8,817

 
$
2,132

 
$
10,949

 
 
 
 
 
 
June 30, 2016
 
 
 
 
 
Balance at beginning of period
$
1,824

 
$
759

 
$
2,583

Originations
22,376

 
8,031

 
30,407

Sales
(14,905
)
 
(5,247
)
 
(20,152
)
Principal payoffs and amortization
(1
)
 
(4
)
 
(5
)
Balance at end of period
$
9,294

 
$
3,539

 
$
12,833


The following is the activity for SBA loans held for sale for the six months ended June 30, 2017 and 2016:
 
SBA Loans Held for Sale
 
Real Estate
 
Commercial and Industrial
 
Total
 
(in thousands)
June 30, 2017
 
 
 
 
 
Balance at beginning of period
$
7,410

 
$
1,906

 
$
9,316

Originations
34,763

 
18,904

 
53,667

Sales
(33,337
)
 
(18,660
)
 
(51,997
)
Principal payoffs and amortization
(19
)
 
(18
)
 
(37
)
Balance at end of period
$
8,817

 
$
2,132

 
$
10,949

 
 
 
 
 
 
June 30, 2016
 
 
 
 
 
Balance at beginning of period
$
840

 
$
2,034

 
$
2,874

Originations
28,849

 
13,710

 
42,559

Sales
(20,393
)
 
(12,182
)
 
(32,575
)
Principal payoffs and amortization
(2
)
 
(23
)
 
(25
)
Balance at end of period
$
9,294

 
$
3,539

 
$
12,833














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
 
June 30, 2017
 
June 30, 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
$
32,261

 
$
891

 
$
33,152

 
$
35,381

 
$
5,645

 
$
41,026

Charge-offs
(665
)
 

 
(665
)
 
(662
)
 
(137
)
 
(799
)
Recoveries on loans and leases previously charged off
849

 

 
849

 
995

 

 
995

Net loan and lease (charge-offs) recoveries
184

 

 
184

 
333

 
(137
)
 
196

Loan and lease loss provision (income)
593

 
(171
)
 
422

 
(1,455
)
 
(60
)
 
(1,515
)
Balance at end of period
$
33,038

 
$
720

 
$
33,758

 
$
34,259

 
$
5,448

 
$
39,707


 
As of and for the Six Months Ended
 
June 30, 2017
 
June 30, 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
(851
)
 

 
(851
)
 
(1,299
)
 
(137
)
 
(1,436
)
Recoveries on loans and leases previously charged off
1,838

 

 
1,838

 
1,248

 

 
1,248

Net loan and lease (charge-offs) recoveries
987

 

 
987

 
(51
)
 
(137
)
 
(188
)
Loan and lease loss provision (income)
593

 
(251
)
 
342

 
(3,184
)
 
144

 
(3,040
)
Balance at end of period
$
33,038

 
$
720

 
$
33,758

 
$
34,259

 
$
5,448

 
$
39,707


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.

14



The following tables detail the information on the allowance for loan and lease losses by portfolio segment as of and for the three and six months ended June 30, 2017 and 2016:
 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on non-PCI loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
24,760

 
$
5,914

 
980

 
$
122

 
$
485

 
$
32,261

Charge-offs
(38
)
 

 
(627
)
 

 

 
(665
)
Recoveries on loans and leases previously charged off
447

 
367

 
20

 
15

 

 
849

Loan and lease loss provision (income)
(2,407
)
 
698

 
1,660

 
(50
)
 
692

 
593

Ending balance
$
22,762

 
$
6,979

 
$
2,033

 
$
87

 
$
1,177

 
$
33,038

Ending balance: individually evaluated for impairment
$
3,638

 
$
1,841

 
$

 
$

 
$

 
$
5,479

Ending balance: collectively evaluated for impairment
$
19,124

 
$
5,138

 
$
2,033

 
$
87

 
$
1,177

 
$
27,559

 
 
 
 
 
 
 
 
 
 
 
 
Non-PCI loans and leases receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
3,442,340

 
$
347,181

 
$
257,525

 
$
17,232

 
$

 
$
4,064,278

Ending balance: individually evaluated for impairment
$
19,695

 
$
5,275

 
$

 
$
1,224

 
$

 
$
26,194

Ending balance: collectively evaluated for impairment
$
3,422,645

 
$
341,906

 
$
257,525

 
$
16,008

 
$

 
$
4,038,084

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses on PCI loans:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
842

 
$
41

 
$

 
$
8

 
$

 
$
891

Charge-offs

 

 

 

 

 

Loan loss provision (income)
(171
)
 

 

 

 

 
(171
)
Ending balance
$
671

 
$
41

 
$

 
$
8

 
$

 
$
720

 
 
 
 
 
 
 
 
 
 
 
 
PCI loans receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance: acquired with deteriorated credit quality
$
8,685

 
$
55

 
$

 
$
44

 
$

 
$
8,784


15




 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Three Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on non-PCI loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
28,278

 
$
6,289

 

 
$
255

 
$
559

 
$
35,381

Charge-offs
(156
)
 
(506
)
 

 

 

 
(662
)
Recoveries on loans and leases previously charged off
97

 
845

 

 
53

 

 
995

Loan and lease loss provision (income)
(103
)
 
(1,126
)
 

 
(66
)
 
(160
)
 
(1,455
)
Ending balance
$
28,116

 
$
5,502

 
$

 
$
242

 
$
399

 
$
34,259

Ending balance: individually evaluated for impairment
$
2,589

 
$
422

 
$

 
$

 
$

 
$
3,011

Ending balance: collectively evaluated for impairment
$
25,527

 
$
5,080

 
$

$

$
242

 
$
399

 
$
31,248

 
 
 
 
 
 
 
 
 
 
 
 
Non-PCI loans and leases receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
3,116,749

 
$
292,927

 
$

 
$
24,614

 
$

 
$
3,434,290

Ending balance: individually evaluated for impairment
$
20,412

 
$
5,089

 
$

 
$
686

 
$

 
$
26,187

Ending balance: collectively evaluated for impairment
$
3,096,337

 
$
287,838

 
$

 
$
23,928

 
$

 
$
3,408,103

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses on PCI loans:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
5,599

 
$
44

 
$

 
$
2

 
$

 
$
5,645

Charge-offs
(137
)
 

 

 

 

 
(137
)
Loan loss provision (income)
(62
)
 
(3
)
 

 
5

 

 
(60
)
Ending balance
$
5,400

 
$
41

 
$

 
$
7

 
$

 
$
5,448

 
 
 
 
 
 
 
 
 
 
 
 
PCI loans receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance: acquired with deteriorated credit quality
$
14,823

 
$
146

 
$

 
$
51

 
$

 
$
15,020



16




 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Six Months Ended June 30, 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
(142
)
 
(40
)
 
(669
)
 

 

 
(851
)
Recoveries on loans and leases previously charged off
1,159

 
644

 
20

 
15

 

 
1,838

Loan and lease loss provision (income)
(3,467
)
 
793

 
2,375

 
(119
)
 
1,011

 
593

Ending balance
$
22,762

 
$
6,979

 
$
2,033

 
$
87

 
$
1,177

 
$
33,038

Ending balance: individually evaluated for impairment
$
3,638

 
$
1,841

 
$

 
$

 
$

 
$
5,479

Ending balance: collectively evaluated for impairment
$
19,124

 
$
5,138

 
$
2,033

 
$
87

 
$
1,177

 
$
27,559

 
 
 
 
 
 
 
 
 
 
 
 
Non-PCI loans and leases receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
3,442,340

 
$
347,181

 
$
257,525

 
$
17,232

 
$

 
$
4,064,278

Ending balance: individually evaluated for impairment
$
19,695

 
$
5,275

 
$

 
$
1,224

 
$

 
$
26,194

Ending balance: collectively evaluated for impairment
$
3,422,645

 
$
341,906

 
$
257,525

 
$
16,008

 
$

 
$
4,038,084

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

 
$
41

 
$

 
$
8

 
$

 
$
971

Charge-offs

 

 

 

 

 

Loan loss provision (income)
(251
)
 

 

 

 

 
(251
)
Ending balance
$
671

 
$
41

 
$

 
$
8

 
$

 
$
720

 
 
 
 
 
 
 
 
 
 
 
 
PCI loans receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance: acquired with deteriorated credit quality
$
8,685

 
$
55

 
$

 
$
44

 
$

 
$
8,784


17




 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Six Months Ended 
 June 30, 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
(691
)
 
(608
)
 

 

 

 
(1,299
)
Recoveries on loans and leases previously charged off
190

 
1,005

 

 
53

 

 
1,248

Loan and lease loss provision (income)
(1,183
)
 
(1,976
)
 

 
(53
)
 
28

 
(3,184
)
Ending balance
$
28,116

 
$
5,502

 
$

 
$
242

 
$
399

 
$
34,259

Ending balance: individually evaluated for impairment
$
2,589

 
$
422

 
$

 
$

 
$

 
$
3,011

Ending balance: collectively evaluated for impairment
$
25,527

 
$
5,080

 
$

 
$
242

 
$
399

 
$
31,248

 
 
 
 
 
 
 
 
 
 
 
 
Non-PCI loans and leases receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
3,116,749

 
$
292,927

 
$

 
$
24,614

 
$

 
$
3,434,290

Ending balance: individually evaluated for impairment
$
20,412

 
$
5,089

 
$

 
$
686

 
$

 
$
26,187

Ending balance: collectively evaluated for impairment
$
3,096,337

 
$
287,838

 
$

 
$
23,928

 
$

 
$
3,408,103

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

 
$
42

 
$

 
$
2

 
$

 
$
5,441

Charge-offs
(137
)
 

 

 

 

 
(137
)
Loan loss provision (income)
140

 
(1
)
 

 
5

 

 
144

Ending balance
$
5,400

 
$
41

 
$

 
$
7

 
$

 
$
5,448

 
 
 
 
 
 
 
 
 
 
 
 
PCI loans receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance: acquired with deteriorated credit quality
$
14,823

 
$
146

 
$

 
$
51

 
$

 
$
15,020


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.

18



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.


19



     As of June 30, 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)
June 30, 2017
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
909,076

 
$
1,601

 
$
3,793

 
$
914,470

Hospitality
724,423

 
5,798

 
7,148

 
737,369

Gas station
243,388

 
2,006

 
2,172

 
247,566

Other
1,089,244

 
9,483

 
3,357

 
1,102,084

Construction
58,159

 

 

 
58,159

Residential property
382,068

 
320

 
304

 
382,692

Total real estate loans
3,406,358

 
19,208

 
16,774

 
3,442,340

Commercial and industrial loans:
 
 
 
 
 
 

Commercial term
155,226

 
2,143

 
2,063

 
159,432

Commercial lines of credit
146,921

 

 
1,500

 
148,421

International loans
39,328

 

 

 
39,328

Total commercial and industrial loans
341,475

 
2,143

 
3,563

 
347,181

Leases receivable
253,881

 

 
3,644

 
257,525

Consumer loans
15,956

 

 
1,276

 
17,232

Total Non-PCI loans and leases
$
4,017,670

 
$
21,351

 
$
25,257

 
$
4,064,278

 
 
 
 
 
 
 
 
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

 
6,153

 
260,187

Other
1,100,070

 
1,645

 
5,874

 
1,107,589

Construction
55,962

 

 

 
55,962

Residential property
337,227

 

 
564

 
337,791

Total real estate loans
3,230,926

 
11,328

 
26,444

 
3,268,698

Commercial and industrial loans:
 
 
 
 
 
 
 
Commercial term
133,811

 
2,060

 
2,161

 
138,032

Commercial lines of credit
135,699

 
464

 
68

 
136,231

International loans
23,406

 
2,415

 

 
25,821

Total commercial and industrial loans
292,916

 
4,939

 
2,229

 
300,084

Leases receivable
242,393

 

 
901

 
243,294

Consumer loans
22,139

 

 
691

 
22,830

Total Non-PCI loans and leases
$
3,788,374

 
$
16,267

 
$
30,265

 
$
3,834,906

 

20



The following is an aging analysis of loans and leases (excluding PCI loans), disaggregated by loan class, as of the dates indicated:
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due
 
Total Past Due
 
Current
 
Total
 
(in thousands)
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
128

 
$
138

 
$
143

 
$
409

 
$
914,061

 
$
914,470

Hospitality
1,336

 
999

 
3,797

 
6,132

 
731,237

 
737,369

Gas station
264

 
1,582

 
130

 
1,976

 
245,590

 
247,566

Other
876

 
433

 
69

 
1,378

 
1,100,706

 
1,102,084

Construction

 

 

 

 
58,159

 
58,159

Residential property
1,165

 
50

 
456

 
1,671

 
381,021

 
382,692

Total real estate loans
3,769

 
3,202

 
4,595

 
11,566

 
3,430,774

 
3,442,340

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial term
186

 
418

 
372

 
976

 
158,456

 
159,432

Commercial lines of credit
95

 

 

 
95

 
148,326

 
148,421

International loans

 

 

 

 
39,328

 
39,328

Total commercial and industrial loans
281

 
418

 
372

 
1,071

 
346,110

 
347,181

Leases receivable
1,983

 
1,787

 
1,971

 
5,741

 
251,784

 
257,525

Consumer loans
121

 

 
990

 
1,111

 
16,121

 
17,232

Total Non-PCI loans and leases
$
6,154

 
$
5,407

 
$
7,928

 
$
19,489

 
$
4,044,789

 
$
4,064,278

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
9

 
$
137

 
$
234

 
$
380

 
$
857,249

 
$
857,629

Hospitality
1,037

 
46

 
600

 
1,683

 
647,857

 
649,540

Gas station
245

 
643

 
137

 
1,025

 
259,162

 
260,187

Other
432

 
79

 
1,100

 
1,611

 
1,105,978

 
1,107,589

Construction

 

 

 

 
55,962

 
55,962

Residential property
730

 
89

 
423

 
1,242

 
336,549

 
337,791

Total real estate loans
2,453

 
994

 
2,494

 
5,941

 
3,262,757

 
3,268,698

Commercial and industrial loans:
 
 
 
 
 
 


 
 
 


Commercial term
484

 
42

 
111

 
637

 
137,395

 
138,032

Commercial lines of credit

 

 

 

 
136,231

 
136,231

International loans
80

 

 

 
80

 
25,741

 
25,821

Total commercial and industrial loans
564

 
42

 
111

 
717

 
299,367

 
300,084

Leases receivable
2,090

 
1,043

 
385

 
3,518

 
239,776

 
243,294

Consumer loans
170

 

 

 
170

 
22,660

 
22,830

Total Non-PCI loans and leases
$
5,277

 
$
2,079

 
$
2,990

 
$
10,346

 
$
3,824,560

 
$
3,834,906


There were no loans that were 90 days or more past due and accruing interest as of June 30, 2017 and 2016.

Impaired Loans and Leases

Loans and leases are considered impaired when the Bank will be unable to collect all interest and principal payments per the contractual terms of the loan and lease agreement, unless the loan is well-collateralized and in the process of collection; or they are classified as Troubled Debt Restructurings (“TDRs”) because, due to the financial difficulties of the borrowers, we have granted concessions to the borrowers we would not otherwise consider; or when current information or events make it unlikely to collect in full according to the contractual terms of the loan or lease agreements; or there is a deterioration in the borrower’s financial condition that raises uncertainty as to timely collection of either principal or interest; or full payment of both interest and principal is in doubt according to the original contractual terms.

21



We evaluate loan and lease impairment in accordance with applicable GAAP. Impaired loans and leases are measured based on the present value of expected future cash flows discounted at the receivable's effective interest rate or, as a practical expedient, at the receivable's observable market price or the fair value of the collateral if the loan or lease is collateral dependent, less estimated costs to sell. If the measure of the impaired loan or lease is less than the recorded investment in the loan or lease, the deficiency is either charged off against the allowance for loan and lease losses or we establish a specific allocation in the allowance for loan and lease losses. Additionally, loans and leases that are considered impaired are specifically excluded from the quarterly migration analysis when determining the amount of the allowance for loan and lease losses required for the period.
The allowance for collateral-dependent loans is determined by calculating the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as nonperforming. We continue to monitor the collateral coverage, using recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.

The following tables provide information on impaired loans and leases (excluding PCI loans), disaggregated by loan class, as of the dates indicated:
 
Recorded
Investment
 
Unpaid 
Principal
Balance
 
With No
Related
Allowance
Recorded
 
With an
Allowance
Recorded
 
Related
Allowance
 
(in thousands)
June 30, 2017
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
Retail
$
1,495

 
$
1,506

 
$
1,186

 
$
309

 
$
66

Hospitality
6,057

 
6,730

 
2,341

 
3,716

 
3,078

Gas station
4,828

 
4,991

 
4,828

 

 

Other
4,502

 
4,810

 
3,652

 
850

 
494

Residential property
2,813

 
2,837

 
2,813

 

 

Total real estate loans
19,695

 
20,874

 
14,820

 
4,875

 
3,638

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
Commercial term
3,775

 
3,859

 
1,252

 
2,523

 
651

Commercial lines of credit
1,500

 
1,500

 

 
1,500

 
1,190

Total commercial and industrial loans
5,275

 
5,359

 
1,252

 
4,023

 
1,841

Consumer loans
1,224

 
1,228

 
1,224

 

 

Total Non-PCI loans and leases
$
26,194

 
$
27,461

 
$
17,296

 
$
8,898

 
$
5,479

 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
Retail
$
1,678

 
$
1,684

 
$
151

 
$
1,527

 
$
120

Hospitality
6,227

 
6,823

 
2,243

 
3,984

 
3,078

Gas station
4,984

 
5,092

 
4,984

 

 

Other
6,070

 
6,808

 
3,127

 
2,943

 
782

Residential property
2,798

 
2,851

 
2,798

 

 

Total real estate loans
21,757

 
23,258

 
13,303

 
8,454

 
3,980

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
Commercial term
4,106

 
4,171

 
1,229

 
2,877

 
347

Commercial lines of credit
68

 
68

 
68

 

 

Total commercial and industrial loans
4,174

 
4,239

 
1,297

 
2,877

 
347

Consumer loans
419

 
489

 
419

 

 

Total Non-PCI loans and leases
$
26,350

 
$
27,986

 
$
15,019

 
$
11,331

 
$
4,327


22




 
Three Months Ended
 
Six Months Ended
 
Average Recorded Investment
 
Interest
Income
Recognized
 
Average Recorded Investment
 
Interest
Income
Recognized
 
(in thousands)
June 30, 2017
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
1,500

 
$
29

 
$
1,584

 
$
61

Hospitality
6,074

 
99

 
6,164

 
167

Gas station
4,860

 
117

 
4,844

 
211

Other
4,532

 
98

 
4,932

 
187

Residential property
2,823

 
28

 
2,798

 
61

Total real estate loans
19,789

 
371

 
20,322

 
687

Commercial and industrial loans:
 
 
 
 
 
 
 
Commercial term
3,829

 
52

 
3,861

 
110

Commercial lines of credit
1,500

 
16

 
750

 
16

Total commercial and industrial loans
5,329

 
68

 
4,611

 
126

Consumer loans
1,226

 
3

 
775

 
6

Total Non-PCI loans and leases
$
26,344

 
$
442

 
$
25,708

 
$
819

 
 
 
 
 
 
 
 
June 30, 2016
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
2,434

 
$
44

 
$
2,653

 
$
85

Hospitality
3,362

 
146

 
5,032

 
300

Gas station
4,653

 
99

 
4,880

 
261

Other
7,525

 
183

 
7,887

 
395

Residential property
2,537

 
27

 
2,653

 
57

Total real estate loans
20,511

 
499

 
23,105

 
1,098

Commercial and industrial loans:
 
 
 
 
 
 
 
Commercial term
5,089

 
87

 
5,151

 
164

Commercial lines of credit
28

 
4

 
37

 
9

International loans

 

 
630

 

Total commercial and industrial loans
5,117

 
91

 
5,818

 
173

Consumer loans
690

 
8

 
692

 
16

Total Non-PCI loans and leases
$
26,318

 
$
598

 
$
29,615

 
$
1,287



23




The following is a summary of interest foregone on impaired loans and leases (excluding PCI loans) for the periods indicated:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Interest income that would have been recognized had impaired loans and leases performed in accordance with their original terms
$
622

 
$
718

 
$
1,213

 
$
1,611

Less: Interest income recognized on impaired loans and leases
(442
)
 
(598
)
 
(819
)
 
(1,287
)
Interest foregone on impaired loans and leases
$
180

 
$
120

 
$
394

 
$
324

    
There were no commitments to lend additional funds to borrowers whose loans are included in the table above.

Nonaccrual Loans and Leases and Nonperforming Assets

Loans and leases are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless management believes the receivable is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan or lease receivable on nonaccrual status earlier, depending upon the individual circumstances surrounding the delinquency. When a receivable is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Nonaccrual loans and leases may be restored to accrual status when principal and interest payments become current and full repayment is expected.
    
The following table details nonaccrual loans and leases (excluding PCI loans), disaggregated by loan class, as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
 
(in thousands)
Real estate loans:
 
 
 
Commercial property
 
 
 
Retail
$
210

 
$
404

Hospitality
5,199

 
5,266

Gas station
945

 
1,025

Other
1,990

 
2,033

Residential property
667

 
564

Total real estate loans
9,011

 
9,292

Commercial and industrial loans:
 
 
 
Commercial term
1,199

 
824

Commercial lines of credit
1,500

 

Total commercial and industrial loans
2,699

 
824

Leases receivable
3,644

 
901

Consumer loans
1,110

 
389

Total nonaccrual Non-PCI loans and leases
$
16,464

 
$
11,406



24



The following table details nonperforming assets (excluding PCI loans) as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
 
(in thousands)
Nonaccrual Non-PCI loans and leases
$
16,464

 
$
11,406

Loans and leases 90 days or more past due and still accruing

 

Total nonperforming Non-PCI loans and leases
16,464

 
11,406

OREO
4,321

 
7,484

Total nonperforming assets
$
20,785

 
$
18,890


As of June 30, 2017, OREO consisted of seven properties with a combined carrying value of $4.3 million, six of which with a combined carrying value of $4.2 million were acquired in the Central Bancorp Inc. ("CBI") acquisition on August 31, 2014, or were obtained as a result of PCI loan collateral foreclosures subsequent to the acquisition date. As of December 31, 2016, OREO consisted of 12 properties with a combined carrying value of $7.5 million, including $5.7 million OREO acquired in the CBI acquisition or obtained as a result of PCI loan collateral foreclosures subsequent to the acquisition date.

Troubled Debt Restructurings
    
The following table details TDRs (excluding PCI loans) as of June 30, 2017 and December 31, 2016:
 
Nonaccrual TDRs
 
Accrual TDRs
 
Deferral
of
Principal
 
Deferral
of
Principal
and
Interest
 
Reduction
of
Principal
and
Interest
 
Extension
of
Maturity
 
Total
 
Deferral
of
Principal
 
Deferral
of
Principal
and
Interest
 
Reduction
of
Principal
and
Interest
 
Extension
of
Maturity
 
Total
 
(in thousands)
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans
$
2,083

 
$
3,989

 
$
69

 
$

 
$
6,141

 
$
3,772

 
$

 
$
1,255

 
$
1,255

 
$
6,282

Commercial and industrial loans
139

 
67

 
352

 
385

 
943

 
14

 
189

 
1,709

 
540

 
2,452

Consumer loans

 

 

 

 

 

 

 
114

 

 
114

Total Non-PCI TDR loans
$
2,222

 
$
4,056

 
$
421

 
$
385

 
$
7,084

 
$
3,786

 
$
189

 
$
3,078

 
$
1,795

 
$
8,848

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans
$
1,679

 
$
4,373

 
$
143

 
$

 
$
6,195

 
$
4,795

 
$

 
$
1,514

 
$
1,633

 
$
7,942

Commercial and industrial loans
149

 
71

 
69

 
419

 
708

 
22

 
198

 
2,135

 
730

 
3,085

Consumer loans

 

 

 

 

 

 

 
119

 

 
119

Total Non-PCI TDR loans
$
1,828

 
$
4,444

 
$
212

 
$
419

 
$
6,903

 
$
4,817

 
$
198

 
$
3,768

 
$
2,363

 
$
11,146


As of June 30, 2017 and December 31, 2016, total TDRs were $15.9 million and $18.0 million, respectively. A debt restructuring is considered a TDR if we grant a concession, that we would not have otherwise considered to the borrower, for economic or legal reasons related to the borrower’s financial difficulties. Loans are considered to be TDRs if they were restructured through payment structure modifications such as reducing the amount of principal and interest due monthly and/or allowing for interest only monthly payments for three months or more. All TDRs are impaired and are individually evaluated for specific impairment using one of these three criteria: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent. At June 30, 2017 and December 31, 2016, $3.5 million and $3.4 million, respectively, of allowance relating to these loans were included in the allowance for loan and lease losses.

For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms are probable.
    
During the three months ended June 30, 2016, there was one commercial term loan with recorded investment of $55,000 that defaulted subsequent to the modifications occurring within the previous 12 months. During the six months ended June 30, 2016, there was one commercial real estate loan with recorded investment of $399,000 and two commercial term loans with combined recorded investment of $85,000 that defaulted subsequent to the modifications occurring within the previous 12 months. There were no such defaults during the three and six months periods ended June 30, 2017.

25



Purchased Credit Impaired Loans

The following table summarizes the changes in carrying value of PCI loans during the three months ended June 30, 2017 and 2016:
 
Carrying Amount
 
Accretable Yield
 
(in thousands)
Balance at January 1, 2017
$
8,892

 
$
(5,677
)
Accretion
317

 
317

Payments received
(1,434
)
 

Disposal/transfer to OREO
37

 

Change in expected cash flows, net

 
121

Loan loss (provision) income
252

 

Balance at June 30, 2017
$
8,064

 
$
(5,239
)
 
 
 
 
Balance at January 1, 2016
$
14,573

 
$
(5,944
)
Accretion
753

 
753

Payments received
(6,713
)
 

Disposal/transfer to OREO
1,103

 

Change in expected cash flows, net

 
683

Loan loss (provision) income
(144
)
 

Balance at June 30, 2016
$
9,572

 
$
(4,508
)
    
As of June 30, 2017 and December 31, 2016, pass/pass-watch, special mention and classified PCI loans, disaggregated by loan class, were as follows:
 
Pass/Pass-Watch
 
Special Mention
 
Classified
 
Total
 
Allowance
 
Total
 
(in thousands)
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Real estate loans
$
1,243

 
$
1,108

 
$
6,334

 
$
8,685

 
$
658

 
$
8,027

Commercial and industrial loans

 

 
55

 
55

 
41

 
14

Consumer loans

 

 
44

 
44

 
21

 
23

Total PCI loans
$
1,243

 
$
1,108

 
$
6,433

 
$
8,784

 
$
720

 
$
8,064

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Real estate loans
$
1,153

 
$
1,180

 
$
7,344

 
$
9,677

 
$
922

 
$
8,755

Commercial and industrial loans

 

 
136

 
136

 
41

 
95

Consumer loans

 

 
50

 
50

 
8

 
42

Total PCI loans
$
1,153

 
$
1,180

 
$
7,530

 
$
9,863

 
$
971

 
$
8,892

    
Loans accounted for as PCI are generally considered accruing and performing loans as the accretable discount is accreted to interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, PCI loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans are classified as nonaccrual loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated. As of June 30, 2017 and December 31, 2016, we had no PCI loans on nonaccrual status and included in the delinquency table below.


26



The following table presents a summary of the borrowers' underlying payment status of PCI loans as of the dates indicated:
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due
 
Total Past Due
 
Current
 
Total
 
Allowance Amount
 
Total
 
(in thousands)
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans
$
349

 
$

 
$
425

 
$
774

 
$
7,911

 
$
8,685

 
$
658

 
$
8,027

Commercial and industrial loans

 

 
5

 
5

 
50

 
55

 
41

 
14

Consumer loans

 

 
39

 
39

 
5

 
44

 
21

 
23

Total PCI loans
$
349

 
$

 
$
469

 
$
818

 
$
7,966

 
$
8,784

 
$
720

 
$
8,064

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans
$
975

 
$

 
$
361

 
$
1,336

 
$
8,341

 
$
9,677

 
$
922

 
$
8,755

Commercial and industrial loans

 

 
6

 
6

 
130

 
136

 
41

 
95

Consumer loans

 

 
50

 
50

 

 
50

 
8

 
42

Total PCI loans
$
975

 
$

 
$
417

 
$
1,392

 
$
8,471

 
$
9,863

 
$
971

 
$
8,892


Below is a summary of PCI loans as of June 30, 2017 and December 31, 2016:
 
Pooled PCI Loans
 
Non-pooled PCI Loans
 
 
 
Number of Loans
 
Number of Pools
 
Carrying Amount
(in thousands)
 
Percentage of Total
 
Number of Loans
 
Carrying Amount
(in thousands)
 
Percentage of Total
 
Total PCI Loans
 (in thousands)
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial property
41

 
6

 
$
6,837

 
88.6
%
 
1

 
$
883

 
11.4
%
 
$
7,720

Residential property

 

 

 
%
 
1

 
965

 
100.0
%
 
$
965

Total real estate loans
41

 
6

 
6,837

 
78.7
%
 
2

 
1,848

 
21.3
%
 
8,685

Commercial and industrial loans
3

 
3

 
55

 
100.0
%
 

 

 
%
 
55

Consumer loans
1

 
1

 
5

 
11.4
%
 
1

 
39

 
88.6
%
 
44

Total acquired loans
45

 
10

 
6,897

 
78.5
%
 
3

 
1,887

 
21.5
%
 
8,784

Allowance for loan losses
 
 
 
 
(355
)
 
 
 
 
 
(365
)
 
 
 
(720
)
Total carrying amount
 
 
 
 
$
6,542

 
 
 
 
 
$
1,522

 
 
 
$
8,064


 
Pooled PCI Loans
 
Non-pooled PCI Loans
 
 
 
Number of Loans
 
Number of Pools
 
Carrying Amount
(in thousands)
 
Percentage of Total
 
Number of Loans
 
Carrying Amount
(in thousands)
 
Percentage of Total
 
Total PCI Loans
 (in thousands)
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial property
45

 
6

 
$
7,780

 
89.4
%
 
1

 
$
921

 
10.6
%
 
$
8,701

Residential property

 

 

 
%
 
2

 
976

 
100.0
%
 
$
976

Total real estate loans
45

 
6

 
7,780

 
80.4
%
 
3

 
1,897

 
19.6
%
 
9,677

Commercial and industrial loans
6

 
3

 
136

 
100.0
%
 

 

 
%
 
136

Consumer loans
1

 
1

 
50

 
100.0
%
 

 

 
%
 
50

Total acquired loans
52

 
10

 
7,966

 
80.8
%
 
3

 
1,897

 
19.2
%
 
9,863

Allowance for loan losses
 
 
 
 
(617
)
 
 
 
 
 
(354
)
 
 
 
(971
)
Total carrying amount
 
 
 
 
$
7,349

 
 
 
 
 
$
1,543

 
 
 
$
8,892



27



Note 4 — Servicing Assets and Liabilities

The changes in servicing assets and liabilities for the six months ended June 30, 2017 and 2016 were as follows:

 
2017
 
2016
 
(in thousands)
Servicing assets:
 
 
 
Balance at beginning of period
$
10,564

 
$
11,744

Addition related to sale of SBA loans
1,194

 
863

Amortization
(1,608
)
 
(1,270
)
Reversal of allowance
330

 

Balance at end of period
$
10,480

 
$
11,337

 
 
 
 
Servicing liabilities:
 
 
 
Balance at beginning of period
$
3,143

 
$
4,784

Amortization
(523
)
 
(863
)
Reversal of allowance
(67
)
 

Balance at end of period
$
2,553

 
$
3,921


At June 30, 2017 and 2016, we serviced loans sold to unaffiliated parties in the amounts of $477.3 million and $481.4 million, respectively. These represented loans that have been sold for which the Bank continues to provide servicing. These loans are maintained off balance sheet and are not included in the loans receivable balance. All of the loans serviced were SBA loans.

The Company recorded servicing fee income of $1.2 million for each of the three-month periods ended June 30, 2017 and 2016, and $2.4 million and $2.3 million for the six months ended June 30, 2017 and 2016, respectively. Servicing fee income, net of amortization of servicing assets and liabilities, is included in other operating income in the consolidated statements of income. Net amortization expense was $658,000 and $52,000 for the three months ended June 30, 2017 and 2016, respectively, and $1.1 million and $407,000 for the six months ended June 30, 2017 and 2016, respectively.

Note 5 — Income Taxes

The Company’s income tax expense was $9.1 million and $8.9 million for the three months ended June 30, 2017 and 2016, respectively. The effective income tax rate was 38.5 percent for both the three months ended June 30, 2017 and 2016, respectively. The Company’s income tax expense was $17.7 million and $15.0 million for the six months ended June 30, 2017 and 2016, respectively. The effective income tax rate was 38.5 percent and 34.2 percent for the six months ended June 30, 2017 and 2016, respectively. Income tax expense for the six months ended June 30, 2016 includes a $1.8 million tax benefit recorded as a result of finalization of the Company's 2014 amended income tax returns.

Management concluded that as of June 30, 2017 and December 31, 2016, a valuation allowance of $1.0 million was appropriate against certain state net operating losses.
The Company is subject to examination by various federal and state tax authorities for the years ended December 31, 2008 through 2016. As of June 30, 2017, the Company was subject to audit or examination by Internal Revenue Service for the 2014 tax year and California Franchise Tax Board for the 2008 and 2009 tax years. Management does not anticipate any material changes in our financial statements as a result of these audits or examinations.

Note 6 — Debt

FHLB Borrowings

The Bank had $20.0 million and $315.0 million in advances (borrowings) from the FHLB as of June 30, 2017 and December 31, 2016, respectively. The FHLB advances were all overnight borrowings at June 30, 2017 and December 31, 2016. For the three months ended June 30, 2017 and 2016, interest expense on FHLB advances was $49,000 and $299,000,

28



respectively, and the weighted-average interest rate was 0.98 percent and 0.43 percent, respectively. For the six months ended June 30, 2017 and 2016, interest expense on FHLB advances was $517,000 and $494,000, respectively, and the weighted-average interest rate was 0.72 percent and 0.43 percent, respectively.

The Bank maintains a secured credit facility with the FHLB, allowing the Bank to borrow on an overnight and term basis. The Bank had $1.0 billion of loans pledged as collateral with the FHLB, which provides $756.5 million in borrowing capacity, of which $736.5 million remained available at June 30, 2017.

The Bank also has securities with market values of $9.7 million pledged with the FRB, which provides $9.5 million in available borrowing capacity through the Fed Discount Window. There were no outstanding borrowings with the FRB as of June 30, 2017 and December 31, 2016.

Subordinated Debentures
The Company issued Fixed-to-Floating Subordinated Notes (“Notes”) of $100 million on March 21, 2017, with a final maturity on March 30, 2027.  The Notes will bear interest at an initial fixed rate of 5.45% per annum, payable semi-monthly on March 30 and September 30 of each year, commencing September 30, 2017.  From and including March 30, 2022 and thereafter, the Notes will bear interest at a floating rate equal to the then current three-month LIBOR, as calculated on each applicable date of determination, plus 3.315% payable quarterly. If the then current three-month LIBOR is less than zero, three-month LIBOR will be deemed to be zero. Debt issuance cost was $2.3 million, which is being amortized through the Note's maturity date. At June 30, 2017, the balance of Notes included in the Company's consolidated balance sheet, net of debt issuance cost, was $97.9 million. The amortization of debt issuance cost was $43,000 and $47,000 for the three and six months ended June 30, 2017, respectively.
The Company assumed Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) as a result of the acquisition of CBI with an unpaid principal balance of $26.8 million and an estimated fair value of $18.5 million. The $8.3 million discount is being amortized to interest expense through the debentures' maturity date of March 15, 2036. CBI formed a trust in 2005 and issued $26.0 million of Trust Preferred Securities (“TPS”) at 6.26 percent fixed rate for the first five years and a variable rate at the 3 month LIBOR plus 140 basis points thereafter and invested the proceeds in the Subordinated Debentures. The Company may redeem the Subordinated Debentures at an earlier date if certain conditions are met. The TPS will be subject to mandatory redemption if the Subordinated Debentures are repaid by the Company. Interest is payable quarterly, and the Company has the option to defer interest payments on the Subordinated Debentures from time to time for a period not to exceed five consecutive years. At June 30, 2017 and December 31, 2016, the balance of Subordinated Debentures included in the Company's consolidated balance sheets, net of discount of $7.7 million and $7.8 million, was $19.1 million and $19.0 million, respectively. The amortization of discount was $81,000 and $62,000 for the three months ended June 30, 2017, and 2016, respectively, and $158,000 and $118,000 for the six months ended June 30, 2017, and 2016, respectively.

Note 7 — Earnings Per Share

Earnings per share (“EPS”) is calculated on both a basic and a diluted basis. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that then shared in earnings, excluding common shares in treasury.

For diluted EPS, weighted-average number of common shares included the impact of restricted stock under the treasury method. Unvested restricted stock containing rights to non-forfeitable dividends are considered participating securities prior to vesting and have been included in the earnings allocation in computing basic and diluted EPS under the two-class method. Basic EPS is computed by dividing net income, net of income allocated to participating securities, by the weighted-average number of common shares. For diluted EPS, weighted-average number of common shares include the diluted effect of stock options.


29



The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except for share and per share data)
Basic EPS:
 
 
 
 
 
 
 
Net income
$
14,457

 
$
14,148

 
$
28,240

 
$
28,952

Less: income allocated to unvested restricted shares
93

 
98

 
177

 
178

Income allocated to common shares
$
14,364

 
$
14,050

 
$
28,063

 
$
28,774

Weighted-average shares for basic EPS
32,078,038

 
31,882,489

 
32,040,113

 
31,864,427

Basic EPS
$
0.45

 
$
0.44

 
$
0.88

 
$
0.90

 
 
 
 
 
 
 
 
Effect of dilutive securities - options and unvested restricted stock
164,996

 
147,421

 
176,558

 
136,736

 
 
 
 
 
 
 
 
Diluted EPS:

 

 

 

Income allocated to common shares
$
14,364

 
$
14,050

 
$
28,063

 
$
28,774

Weighted-average shares for diluted EPS
32,243,034

 
32,029,910

 
32,216,671

 
32,001,163

Diluted EPS
$
0.45

 
$
0.44

 
$
0.87

 
$
0.90


There were no stock options with an anti-dilutive effect for the three and six months ended June 30, 2017. For the three and six months ended June 30, 2016, 52,332 and 90,875 stock options, respectively, were not included in the computation of diluted EPS because their effect was anti-dilutive.

Note 8 – Accumulated Other Comprehensive Income

Activity in accumulated other comprehensive income for the three months ended June 30, 2017 and 2016 was as follows:
 
Unrealized Gains
and Losses on
Available for Sale
Securities
 
Unrealized Gains
and Losses on
Interest-Only
Strip
 
Tax Benefit (Expense)
 
Total
 
(in thousands)
June 30, 2017
 
 
 
 
 
 
 
Balance at beginning of period
$
(2,737
)
 
$

 
$
1,134

 
$
(1,603
)
Other comprehensive income before reclassification
3,910

 

 
(1,232
)
 
2,678

Reclassification from accumulated other comprehensive income
(938
)
 

 

 
(938
)
Period change
2,972

 

 
(1,232
)
 
1,740

Balance at end of period
$
235

 
$

 
$
(98
)
 
$
137

 
 
 
 
 
 
 
 
June 30, 2016
 
 
 
 
 
 
 
Balance at beginning of period
$
7,392

 
$
9

 
$
(2,037
)
 
$
5,364

Other comprehensive income (loss)
6,424

 
(9
)
 
(2,658
)
 
3,757

Balance at end of period
$
13,816

 
$

 
$
(4,695
)
 
$
9,121


For the three months ended June 30, 2017, there was a $938,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $938,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities under noninterest income. Net unrealized gains of $430,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period. There was no sale of securities during the three months ended June 30, 2016.


30



Activity in accumulated other comprehensive income for the six months ended June 30, 2017 and 2016 was as follows:
 
Unrealized Gains
and Losses on
Available for Sale
Securities
 
Unrealized Gains
and Losses on
Interest-Only
Strip
 
Tax Benefit (Expense)
 
Total
 
(in thousands)
June 30, 2017
 
 
 
 
 
 
 
Balance at beginning of period
$
(4,089
)
 
$

 
$
1,695

 
$
(2,394
)
Other comprehensive income before reclassification
5,530

 

 
(1,793
)
 
3,737

Reclassification from accumulated other comprehensive income
(1,206
)
 

 

 
(1,206
)
Period change
4,324

 

 
(1,793
)
 
2,531

Balance at end of period
$
235

 
$

 
$
(98
)
 
$
137

 
 
 
 
 
 
 
 
June 30, 2016
 
 
 
 
 
 
 
Balance at beginning of period
$
(2,331
)
 
$
9

 
$
2,007

 
$
(315
)
Other comprehensive income (loss)
16,147

 
(9
)
 
(6,702
)
 
9,436

Balance at end of period
$
13,816

 
$

 
$
(4,695
)
 
$
9,121


For the six months ended June 30, 2017, there was a $1.2 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $1.2 million reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities under noninterest income. Net unrealized gains of $744,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period. There was no sale of securities during the six months ended June 30, 2016.


Note 9 — Regulatory Matters

Risk-Based Capital

In July 2013, the Board of Governors of the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC approved the Basel III regulatory capital framework and related changes under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The rules also revise the regulatory capital elements, add a new common equity Tier I capital ratio, and increase the minimum Tier I capital ratio requirement. The revisions permit banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. Basel III rules, including certain transitional provisions, became effective January 1, 2015, and its requirements are included in the capital ratios presented in the table shown below.

In addition, a new capital conservation buffer of 2.5% began to be phased in effective January 1, 2016 through January 1, 2019, and must be met to avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. In January 2016, the new capital conservation buffer requirement was 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. The Company and the Bank's capital conservation buffer was 6.58% and 7.44%, respectively, as of June 30, 2017, and 5.86% and 5.64%, respectively, as of December 31, 2016.


31



The capital ratios of Hanmi Financial and the Bank as of June 30, 2017 and December 31, 2016 were as follows:
 
Actual
 
Minimum
Regulatory
Requirement
 
Minimum to Be
Categorized as
“Well Capitalized”
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(dollars in thousands)
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
669,476

 
15.69
%
 
$
341,429

 
8.00
%
 
 N/A

 
N/A

Hanmi Bank
$
659,526

 
15.44
%
 
$
341,689

 
8.00
%
 
$
427,111

 
10.00
%
Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
536,708

 
12.58
%
 
$
256,072

 
6.00
%
 
 N/A

 
N/A

Hanmi Bank
$
624,633

 
14.62
%
 
$
256,267

 
6.00
%
 
$
341,689

 
8.00
%
Common equity Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
521,442

 
12.22
%
 
$
192,054

 
4.50
%
 
 N/A

 
N/A

Hanmi Bank
$
624,633

 
14.62
%
 
$
192,200

 
4.50
%
 
$
277,622

 
6.50
%
Tier 1 capital (to average assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
536,708

 
11.08
%
 
$
193,732

 
4.00
%
 
 N/A

 
N/A

Hanmi Bank
$
624,633

 
12.89
%
 
$
193,822

 
4.00
%
 
$
242,278

 
5.00
%
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
554,089

 
13.86
%
 
$
319,901

 
8.00
%
 
 N/A

 
N/A

Hanmi Bank
$
544,759

 
13.64
%
 
$
319,520

 
8.00
%
 
$
399,399

 
10.00
%
Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
520,477

 
13.02
%
 
$
239,926

 
6.00
%
 
 N/A

 
N/A

Hanmi Bank
$
511,146

 
12.80
%
 
$
239,640

 
6.00
%
 
$
319,520

 
8.00
%
Common equity Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
509,239

 
12.73
%
 
$
179,944

 
4.50
%
 
 N/A

 
N/A

Hanmi Bank
$
511,146

 
12.80
%
 
$
179,730

 
4.50
%
 
$
259,610

 
6.50
%
Tier 1 capital (to average assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
520,477

 
11.53
%
 
$
180,581

 
4.00
%
 
 N/A

 
N/A

Hanmi Bank
$
511,146

 
11.33
%
 
$
180,411

 
4.00
%
 
$
225,514

 
5.00
%

Note 10 — Fair Value Measurements

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:

Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

32



Level 2 - Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.

We record securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, impaired loans, OREO, and core deposit intangible, are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument below:

Securities available for sale - The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve, prepayment speeds, and default rates. Level 1 securities include U.S. treasury securities and mutual funds that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 securities primarily include mortgage-backed securities, collateralized mortgage obligations, U.S. government agency securities, SBA loan pool securities, municipal bonds and corporate bonds in markets that are active. In determining the fair value of the securities categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security held as of each reporting date. The broker-dealers use prices obtained from nationally recognized pricing services to value our fixed income securities. The fair value of the municipal securities is determined based on pricing data provided by nationally recognized pricing services. We review the prices obtained for reasonableness based on our understanding of the marketplace, and also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. Level 3 securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available, which necessitates the use of significant unobservable inputs.

Loans held for sale - Loans held for sale are all SBA loans and carried at the lower of cost or fair value. Management obtains quotes, bids or pricing indication sheets on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At June 30, 2017, the entire balance of SBA loans held for sale was recorded at its cost. We record SBA loans held for sale on a nonrecurring basis with Level 2 inputs.

Impaired loans (excluding PCI loans) - Nonaccrual loans and performing restructured loans are considered impaired for reporting purposes and are measured and recorded at fair value on a non-recurring basis. Nonaccrual Non-PCI loans with an unpaid principal balance over $100,000 and all performing restructured loans are reviewed individually for the amount of impairment, if any. Nonaccrual Non-PCI loans with an unpaid principal balance of $100,000 or less are evaluated for impairment collectively. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement.

OREO - Fair value of OREO is based primarily on third party appraisals, less costs to sell and result in a Level 2 classification of the inputs for determining fair value. Appraisals are required annually and may be updated more frequently as circumstances require and the fair value adjustments are made to OREO based on the updated appraised value of the property.



33



Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of June 30, 2017 and December 31, 2016, assets and liabilities measured at fair value on a recurring basis are as follows:
 
Level 1
 
Level 2
 
Level 3
 
 
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Observable
Inputs with No
Active Market
with Identical
Characteristics
 
Significant
Unobservable
Inputs
 
Balance
 
(in thousands)
June 30, 2017
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Mortgage-backed securities
$

 
$
279,765

 
$

 
$
279,765

Collateralized mortgage obligations

 
91,438

 

 
91,438

U.S. government agency securities

 
7,457

 

 
7,457

SBA loan pools securities

 
3,895

 

 
3,895

Municipal bonds-tax exempt

 
161,063

 

 
161,063

Municipal bonds-taxable

 
537

 

 
537

Corporate bonds

 
5,022

 

 
5,022

U.S. treasury securities
154

 

 

 
154

Mutual funds
22,515

 

 

 
22,515

Total securities available for sale
$
22,669

 
$
549,177

 
$

 
$
571,846

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Mortgage-backed securities
$

 
$
229,630

 
$

 
$
229,630

Collateralized mortgage obligations

 
76,451

 

 
76,451

U.S. government agency securities

 
7,441

 

 
7,441

SBA loan pools securities

 
4,146

 

 
4,146

Municipal bonds-tax exempt

 
158,030

 

 
158,030

Municipal bonds-taxable

 
13,701

 

 
13,701

Corporate bonds

 
5,015

 

 
5,015

U.S. treasury securities
156

 

 

 
156

Mutual funds
22,394

 

 

 
22,394

Total securities available for sale
$
22,550

 
$
494,414

 
$

 
$
516,964


34



Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

As of June 30, 2017 and December 31, 2016, assets and liabilities measured at fair value on a non-recurring basis are as follows:
 
Level 1
 
Level 2
 
Level 3
 
 
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Observable
Inputs With No
Active Market
With Identical
Characteristics
 
Significant
Unobservable
Inputs
 
Loss During the Six Months Ended June 30, 2017
 
(in thousands)
June 30, 2017
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans (excluding PCI loans) (1)
$

 
$
3,811

 
$
2,157

 
$
1,379

OREO (2)

 
4,321

 

 

 
 
 
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Observable
Inputs With No
Active Market
With Identical
Characteristics
 
Significant
Unobservable
Inputs
 
Loss During the Twelve Months Ended December 31, 2016
 
(in thousands)
December 31, 2016
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans (excluding PCI loans) (3)
$

 
$
15,257

 
$
6,767

 
$
868

OREO (4)

 
7,484

 

 

 
(1) 
Consist of real estate loans of $3.8 million and commercial and industrial loans of $2.2 million.
(2) 
Consist of properties obtained from the foreclosure of commercial property loans of $2.6 million and residential property loans of $1.7 million.
(3) 
Consist of real estate loans of $17.8 million, commercial and industrial loans of $3.8 million, and consumer loans of $419,000.
(4) 
Consist of properties obtained from the foreclosure of commercial property loans of $5.4 million and residential property loans of $2.1 million.

ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured on a recurring basis or non-recurring basis are discussed above.

The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
    

35



The estimated fair values of financial instruments were as follows:
 
June 30, 2017
 
Carrying
 
Fair Value
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
Cash and due from banks
138,507

 
138,507

 

 

Securities available for sale
571,846

 
22,669

 
549,177

 

Loans and leases receivable, net of allowance for loan and lease losses
4,039,304

 

 

 
3,989,950

Loans held for sale
10,949

 

 
10,949

 

Accrued interest receivable
11,167

 
11,167

 

 

FHLB stock
16,385

 

 
16,385

 

Financial liabilities:

 
 
 
 
 
 
Noninterest-bearing deposits
1,260,929

 

 
1,260,929

 

Interest-bearing deposits
2,998,244

 

 

 
2,965,188

Borrowings
137,011

 

 

 
137,011

Accrued interest payable
3,432

 
3,432

 

 

Off-balance sheet items:

 
 
 
 
 
 
Commitments to extend credit
313,290

 

 

 
313,290

Standby letters of credit
19,249

 

 

 
19,249

Commercial letters of credit
14,890

 

 

 
14,890

 
 
December 31, 2016
 
Carrying
 
Fair Value
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
Cash and due from banks
$
147,235

 
$
147,235

 
$

 
$

Securities available for sale
516,964

 
22,550

 
494,414

 

Loans and leases receivable, net of allowance for loan and lease losses
3,812,340

 

 

 
3,789,579

Loans held for sale
9,316

 

 
9,316

 

Accrued interest receivable
10,987

 
10,987

 

 

FHLB stock
16,385

 

 
16,385

 

Financial liabilities:
 
 
 
 
 
 
 
Noninterest-bearing deposits
1,203,240

 

 
1,203,240

 

Interest-bearing deposits
2,606,497

 

 

 
2,541,929

Borrowings
333,978

 

 

 
333,978

Accrued interest payable
2,567

 
2,567

 

 

Off-balance sheet items:
 
 
 
 
 
 
 
Commitments to extend credit
310,987

 

 

 
310,987

Standby letters of credit
15,669

 

 

 
15,669

Commercial letters of credit
4,215

 

 

 
4,215


36





The methods and assumptions used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value are explained below:
Cash and cash equivalents - The carrying amounts of cash and cash equivalents approximate fair value due to the short-term nature of these instruments (Level 1).
Securities - The fair value of securities, consisting of securities available for sale, is generally obtained from market bids for similar or identical securities, from independent securities brokers or dealers, or from other model-based valuation techniques described above (Levels 1, 2 and 3).
Loans and leases receivable, net of allowance for loan and leases losses - Loans and leases receivable include Non-PCI loans and leases, PCI loans and Non-PCI impaired loans. The fair value of Non-PCI loans and leases receivable is estimated based on the discounted cash flow approach. The discount rate was derived from the associated yield curve plus spreads and reflects the offering rates offered by the Bank for loans and leases with similar financial characteristics. Yield curves are constructed by product type using the Bank’s loan and lease pricing model for like-quality credits. The discount rates used in the Bank’s model represent the rates the Bank would offer to current borrowers for like-quality credits. These rates could be different from what other financial institutions could offer for these loans and leases. No adjustments have been made for changes in credit within the loan and lease portfolio. It is our opinion that the allowance for loan and lease losses relating to performing and nonperforming loans and leases results in a fair valuation of such loans and leases. Additionally, the fair value of our loans and leases may differ significantly from the values that would have been used had a ready market existed for such loans and leases and may differ materially from the values that we may ultimately realize (Level 3).
The fair value of PCI loans receivable was estimated based on discounted expected cash flows. Increases in expected cash flows and improvements in the timing of cash flows over those previously estimated increase the amount of accretable yield and are recognized as an increase in yield and interest income prospectively. Decreases in the amount and delays in the timing of expected cash flows compared to those previously estimated decrease the amount of accretable yield and usually result in a provision for loan losses and the establishment of an allowance for loan losses (Level 3).
The fair value of impaired loans (excluding PCI loans) is estimated based on the net realizable fair value of the collateral or the observable market price of the most recent sale or quoted price from loans held for sale.  The Company does not record loans at fair value on a recurring basis.  Nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on the current appraised value of the collateral (Level 3).

Loans held for sale - Loans held for sale are carried at the lower of aggregate cost or fair market value, as determined based upon quotes, bids or sales contract prices, or as may be assessed based upon the fair value of the collateral which is obtained from recent real estate appraisals (Level 2). Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustment is typically significant and results in Level 3 classification of the inputs for determining fair value.
Accrued interest receivable - The carrying amount of accrued interest receivable approximates its fair value (Level 1).
FHLB stock - The carrying amount of FHLB stock approximates its fair value as such stock may be resold to the issuer at carrying value (Level 2).
Noninterest-bearing deposits - The fair value of noninterest-bearing deposits is the amount payable on demand at the reporting date (Level 2).
Interest-bearing deposits - The fair value of interest-bearing deposits, such as savings accounts, money market checking, and certificates of deposit, is estimated based on discounted cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).
Borrowings - Borrowings consist of FHLB advances, subordinated debentures and other borrowings. Discounted cash flows based on current market rates for borrowings with similar remaining maturities are used to estimate the fair value of borrowings (Level 3).
Accrued interest payable - The carrying amount of accrued interest payable approximates its fair value (Level 1).


37



Commitments to extend credit, standby letters of credit and commercial letters of credit - The fair values of commitments to extend credit and letters of credit are based upon the difference between the current value of similar loans and the price at which the Bank has committed to make the loans (Level 3).

Note 11 — Share-Based Compensation

Share-Based Compensation Expense

For the three months ended June 30, 2017 and 2016, share-based compensation expenses were $670,000 and $923,000, respectively, and net tax benefits recognized from stock option and restricted stock awards were $274,000 and $366,000, respectively. For the six months ended June 30, 2017 and 2016, share-based compensation expenses were $1.4 million and $1.5 million, respectively, and net tax benefits recognized from stock option exercises and restricted stock awards were $550,000 and $604,000, respectively.

The Company adopted Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation, during the three months ended March 30, 2016. Adoption of this ASU did not have a material impact on the Company's financial statements. As a result of adoption of this ASU, excess tax benefits related to the Company's share-based compensation were recognized as income tax expense in the consolidated statement of income during the six months ended June 30, 2017 and 2016.

Unrecognized Share-Based Compensation Expense

As of June 30, 2017, unrecognized share-based compensation expense was as follows:
 
Unrecognized
Expense
 
Average Expected
Recognition
Period
 
(in thousands)
 
 
Stock option awards
$
32

 
0.8 years
Restricted stock awards
5,170

 
2.3 years
Total unrecognized share-based compensation expense
$
5,202

 
2.3 years

Stock Option Awards

The table below provides stock option information for the three months ended June 30, 2017:
 
Number of
Shares
 
Weighted-
Average
Exercise
Price Per
Share
 
Weighted-
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value of
In-the-
Money
Options
 
 
 
 
 
 
 
 
(in thousands)
 
Options outstanding at beginning of period
386,901

 
$
17.53

 
6.5 years
 
$
5,116

(1) 
Options exercised
(10,500
)
 
$
12.13

 
4.6 years
 

 
Options outstanding at end of period
376,401

 
$
17.68

 
6.3 years
 
$
4,168

(2) 
 
 
 
 
 
 
 
 
 
Options exercisable at end of period
357,730

 
$
17.45

 
6.3 years
 
$
4,042

(2) 
                              
(1) 
Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $30.75 as of March 31, 2017, over the exercise price, multiplied by the number of options.
(2) 
Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $28.75 as of June 30, 2017, over the exercise price, multiplied by the number of options.


38



The table below provides stock option information for the six months ended June 30, 2017:
 
Number of
Shares
 
Weighted-
Average
Exercise
Price Per
Share
 
Weighted-
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value of
In-the-
Money
Options
 
 
 
 
 
 
 
 
(in thousands)
 
Options outstanding at beginning of period
387,901

 
$
17.49

 
6.8 years
 
$
6,752

(1) 
Options exercised
(11,500
)
 
$
12.16

 
4.7 years
 

 
Options outstanding at end of period
376,401

 
$
17.68

 
6.3 years
 
$
4,168

(2) 
 
 
 
 
 
 
 
 
 
Options exercisable at end of period
357,730

 
$
17.45

 
6.3 years
 
$
4,042

(2) 
                              
(1) 
Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $34.90 as of December 31, 2016, over the exercise price, multiplied by the number of options.
(2) 
Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $28.75 as of June 30, 2017, over the exercise price, multiplied by the number of options.

There were 10,500 and 18,000 stock options exercised during the three months ended June 30, 2017 and 2016, respectively. There were 11,500 and 40,209 stock options exercised during the six months ended June 30, 2017 and 2016, respectively.

Restricted Stock Awards

Restricted stock awards under the Company’s 2007 and 2013 Equity Compensation Plans typically vest over three years and are subject to forfeiture if employment terminates prior to the lapse of restrictions. Hanmi Financial becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued. Forfeited shares of restricted stock become available for future grants upon forfeiture.

The table below provides information for restricted stock awards for the three and six months ended June 30, 2017:
 
Three Months Ended 
 June 30, 2017
 
Six Months Ended 
 June 30, 2017
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
Per Share
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
Per Share
Restricted stock at beginning of period
336,455

 
$
20.39

 
343,958

 
$
16.60

Restricted stock granted
3,761

 
28.91

 
91,006

 
31.36

Restricted stock vested
(30,430
)
 
22.62

 
(119,344
)
 
18.07

Restricted stock forfeited
(3,835
)
 
25.25

 
(9,669
)
 
23.26

Restricted stock at end of period
305,951

 
20.21

 
305,951

 
20.21


Note 12 — Off-Balance Sheet Commitments

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to the risk involved with on-balance sheet items recognized in the consolidated balance sheets.

The Bank’s exposure to losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by

39



the Bank upon extension of credit, was based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-producing or borrower-occupied properties.

The following table shows the distribution of undisbursed loan commitments as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
 
(in thousands)
Commitments to extend credit
$
313,290

 
$
310,987

Standby letters of credit
19,249

 
15,669

Commercial letters of credit
14,890

 
4,215

Total undisbursed loan commitments
$
347,429

 
$
330,871


The allowance for off-balance sheet items is maintained at a level believed to be sufficient to absorb probable losses related to these unfunded credit facilities. The determination of the allowance adequacy is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. Net adjustments to the allowance for off-balance sheet items are included in other operating expenses. Activity in the allowance for loan off-balance sheet items was as follows for the periods indicated:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Balance at beginning of period
$
1,184

 
$
1,220

 
$
1,184

 
$
986

Provision (income)
(49
)
 
255

 
(49
)
 
489

Balance at end of period
$
1,135

 
$
1,475

 
$
1,135

 
$
1,475



Note 13 — Subsequent Events

Management has evaluated subsequent events through the date of issuance of the financial data included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Quarterly Report on Form 10-Q for the period ended June 30, 2017, or would be required to be recognized in the Consolidated Financial Statements (Unaudited) as of June 30, 2017.


40



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three and six months ended June 30, 2017. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Annual Report on Form 10-K”) and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the period ended June 30, 2017 (this “Report”).

Forward-Looking Statements

Some of the statements under this item and elsewhere in this Report 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 (the “Exchange Act”). All statements in this Report other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial position and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs and availability, developments regarding our capital plans, plans and objectives of management for future operations, strategic alternatives for a possible business combination, merger or sale transactions, and other similar forecasts and statements of expectation and statements of assumption underlying any of the foregoing. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statement. These factors include the following: failure to maintain adequate levels of capital and liquidity to support our operations; the effect of potential future supervisory action against us or Hanmi Bank; general economic and business conditions internationally, nationally and in those areas in which we operate, including, but not limited to, California, Illinois and Texas; volatility and deterioration in the credit and equity markets; changes in consumer spending, borrowing and savings habits; availability of capital from private and government sources; demographic changes; competition for loans and deposits and failure to attract or retain loans and deposits; fluctuations in interest rates and a decline in the level of our interest rate spread; risks of natural disasters related to our real estate portfolio; risks associated with Small Business Administration ("SBA") loans; failure to attract or retain key employees; changes in governmental regulation; enforcement actions against us and litigation we may become a party to; ability of Hanmi Bank to make distributions to Hanmi Financial, which is restricted by certain factors, including Hanmi Bank's retained earnings, net income, prior distributions made, and certain other financial tests; ability to successfully and efficiently integrate the operations of banks and other institutions we acquire; adequacy of our allowance for loan and lease losses; credit quality and the effect of credit quality on our provision for loan and lease losses and allowance for loan and lease losses; changes in the financial performance and/or condition of our borrowers and the ability of our borrowers to perform under the terms of their loans and leases and other terms of credit agreements; our ability to control expenses; and changes in securities markets. In addition, for a discussion of some of the other factors that might cause such a difference, see the discussion contained in our 2016 Annual Report on Form 10-K, as well as other factors we identify from time to time in our filings with the SEC. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date, on which such statements were made, except as required by law.

Critical Accounting Policies

We have established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Our significant accounting policies are described in the Notes to Consolidated Financial Statements in our 2016 Annual Report on Form 10-K. We had no significant changes in our accounting policies since the filing of our 2016 Annual Report on Form 10-K.

Certain accounting policies require us to make significant estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities, and we consider these critical accounting policies. For a description of these critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in our 2016 Annual Report on Form 10-K. We use estimates and assumptions based on historical experience and other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of Hanmi Financial’s Board of Directors.

41




Selected Financial Data
 

The following table sets forth certain selected financial data for the periods indicated:
 
As of or for the
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(dollars in thousands, except per share data)
Summary balance sheets:
 
 
 
 
 
 
 
Cash and due from banks
$
138,507

 
$
156,632

 
$
138,507

 
$
156,632

Securities
571,846

 
636,275

 
571,846

 
636,275

Loans and leases receivable (1)
4,039,304

 
3,409,603

 
4,039,304

 
3,409,603

Assets
4,973,346

 
4,441,333

 
4,973,346

 
4,441,333

Deposits
4,259,173

 
3,589,289

 
4,259,173

 
3,589,289

Liabilities
4,423,206

 
3,916,148

 
4,423,206

 
3,916,148

Stockholders’ equity
550,140

 
525,185

 
550,140

 
525,185

Tangible equity
537,428

 
523,648

 
537,428

 
523,648

Average loans and leases receivable (1)
3,951,934

 
3,328,416

 
3,917,004

 
3,260,625

Average securities
585,384

 
657,756

 
556,129

 
670,063

Average interest-earning assets
4,601,105

 
4,055,578

 
4,532,544

 
4,002,683

Average assets
4,875,473

 
4,325,500

 
4,807,226

 
4,273,288

Average deposits
4,166,487

 
3,479,365

 
4,020,971

 
3,481,176

Average borrowings
136,850

 
296,858

 
218,695

 
248,724

Average interest-bearing liabilities
3,083,461

 
2,605,737

 
3,031,587

 
2,575,246

Average stockholders’ equity
544,283

 
518,015

 
539,305

 
508,742

Average tangible equity
531,522

 
516,424

 
526,498

 
507,111

Per share data:
 
 
 
 
 
 
 
Earnings per share – basic (2)
$
0.45

 
$
0.44

 
$
0.88

 
$
0.90

Earnings per share – diluted (2)
$
0.45

 
$
0.44

 
$
0.87

 
$
0.90

Book value per share (3)
$
16.98

 
$
16.28

 
$
16.98

 
$
16.28

Tangible book value per share (4)
$
16.59

 
$
16.23

 
$
16.59

 
$
16.23

Cash dividends per share
$
0.19

 
$
0.14

 
$
0.38

 
$
0.28

Common shares outstanding
32,393,856

 
32,260,320

 
32,393,856

 
32,260,320

Performance ratios:
 
 
 
 
 
 
 
Return on average assets (5) (6)
1.19
 %
 
1.32
 %
 
1.18
 %
 
1.36
%
Return on average stockholders’ equity (5) (7)
10.65
 %
 
10.98
 %
 
10.56
 %
 
11.41
%
Return on average tangible equity (5) (8)
10.91
 %
 
11.02
 %
 
10.82
 %
 
11.45
%
Net interest margin (9)
3.81
 %
 
4.02
 %
 
3.85
 %
 
4.00
%
Net interest margin excluding acquisition accounting (9)
3.76
 %
 
3.84
 %
 
3.80
 %
 
3.75
%
Efficiency ratio (10)
54.74
 %
 
56.46
 %
 
54.84
 %
 
56.84
%
Dividend payout ratio (11)
42.43
 %
 
31.82
 %
 
53.66
 %
 
31.11
%
Average stockholders’ equity to average assets
11.16
 %
 
11.98
 %
 
11.22
 %
 
11.91
%
 


 


 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

42



Capital ratios (15):
 
 
 
 
 
 
 
Total risk-based capital:
 
 
 
 
 
 
 
Hanmi Financial
15.69
 %
 
15.16
 %
 
15.69
 %
 
15.16
%
Hanmi Bank
15.44
 %
 
14.58
 %
 
15.44
 %
 
14.58
%
Tier 1 risk-based capital:
 
 
 
 
 
 
 
Hanmi Financial
12.58
 %
 
14.00
 %
 
12.58
 %
 
14.00
%
Hanmi Bank
14.62
 %
 
13.43
 %
 
14.62
 %
 
13.43
%
Common equity Tier 1 capital:
 
 
 
 
 
 
 
Hanmi Financial
12.22
 %
 
13.85
 %
 
12.22
 %
 
13.85
%
Hanmi Bank
14.62
 %
 
13.43
 %
 
14.62
 %
 
13.43
%
Tier 1 leverage:
 
 
 
 
 
 
 
Hanmi Financial
11.08
 %
 
11.69
 %
 
11.08
 %
 
11.69
%
Hanmi Bank
12.89
 %
 
11.21
 %
 
12.89
 %
 
11.21
%
Asset quality ratios:
 
 
 
 
 
 
 
Nonperforming Non-PCI loans and leases to loans and leases (12)
0.41
 %
 
0.36
 %
 
0.41
 %
 
0.36
%
Nonperforming assets to assets (13)
0.42
 %
 
0.54
 %
 
0.42
 %
 
0.54
%
Net loan and lease charge-offs (recoveries) to average loans and leases
(0.02
)%
 
(0.02
)%
 
(0.01
)%
 
0.01
%
Allowance for loan lease losses to loans and leases
0.83
 %
 
1.15
 %
 
0.83
 %
 
1.15
%
Allowance for loan and lease losses to non-performing loans and leases (12) (14)
200.67
 %
 
277.60
 %
 
200.67
 %
 
277.60
%
Acquired loans:
 
 
 
 
 
 
 
PCI loans, net of discounts
$
8,784

 
$
15,020

 
$
8,784

 
$
15,020

Allowance for loan losses on PCI loans
720

 
5,448

 
720

 
5,448

Non-PCI loans, net of discounts
96,600

 
117,750

 
96,600

 
117,750

Unamortized acquisition discounts on Non-PCI loans
5,322

 
7,735

 
5,322

 
7,735

 
(1) 
Loans and leases receivable, net of allowance for loan and lease losses
(2) 
Calculation based on net income allocated to common shares
(3) 
Stockholders’ equity divided by common shares outstanding
(4) 
Tangible equity divided by common shares outstanding
(5) 
Calculation based on annualized net income
(6) 
Net income divided by average assets
(7) 
Net income divided by average stockholders’ equity
(8) 
Net income divided by average tangible equity
(9) 
Net interest income on a taxable equivalent basis before provision for loan and lease losses divided by average interest-earning assets
(10) 
Noninterest expenses divided by the sum of net interest income before provision for loan and lease losses and noninterest income
(11) 
Dividend declared per share divided by basic earnings per share
(12) 
Excludes PCI loans
(13) 
Nonperforming assets consist of nonperforming loans and leases (see footnote (12) above) and OREO
(14) 
Excludes allowance for loan and lease losses allocated to PCI loans
(15) 
Basel III rules, including certain transitional provisions, became effective January 1, 2015
Non-GAAP Financial Measures

The Company calculates certain supplemental financial information determined by methods other than in accordance with U.S. GAAP, including tangible assets, tangible stockholders' equity, tangible book value per share, core interest income and yield, and net interest income and margin excluding acquisition accounting. These non-GAAP measures are used by management in analyzing Hanmi Financial’s capital strength, core loan and lease interest income and yield, and net interest income and margin without the impact of the CBI acquisition.


43



Tangible equity is calculated by subtracting goodwill created from acquisition of the Commercial Equipment Leasing Divison and core deposit intangible from stockholders’ equity. Banking and financial institution regulators also exclude goodwill and core deposit intangible from stockholders’ equity when assessing the capital adequacy of a financial institution. Core loan and lease interest income and yield are calculated by subtracting accretion of discount on purchased loans. Net interest income and net interest margin are calculated by adjusting the reported amounts and rates for the impact of the CBI acquisition, including accretion of discount on purchased loans, accretion of time deposit premium and amortization of subordinated debentures discount.

Management believes the presentation of these financial measures excluding the impact of items described in the preceding paragraph provide useful supplemental information that are essential to a proper understanding of the capital strength of Hanmi Financial and our core interest income and margin. These disclosures should not be viewed as a substitution for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Tangible Assets, Tangible Stockholders’ Equity and Tangible Book Value Per Share

The following table reconciles these non-GAAP performance measures to the most comparable GAAP performance measures as of the dates indicated:
 
June 30,
 
2017
 
2016
 
(in thousands, except per share data)
Total assets
$
4,973,346

 
$
4,441,333

Less goodwill
(11,031
)
 

Less other intangible assets, net
(1,681
)
 
(1,537
)
Tangible assets
$
4,960,634

 
$
4,439,796

 
 
 
 
Total stockholders’ equity
$
550,140

 
$
525,185

Less goodwill
(11,031
)
 

Less other intangible assets, net
(1,681
)
 
(1,537
)
Tangible stockholders' equity
$
537,428

 
$
523,648

 
 
 
 
Book value per share
$
16.98

 
$
16.28

Effect of goodwill
(0.34
)
 

Effect of other intangible assets
(0.01
)
 
(0.05
)
Tangible book value per share
$
16.59

 
$
16.23


Core Loan and Lease Yield and Net Interest Margin
The impact of acquisition accounting adjustments on core loan and lease interest income and yield and net interest margin are summarized in the following table:

44



 
Three Months Ended
 
June 30, 2017
 
June 30, 2016
 
Amount
 
Rate
 
Amount
 
Rate
 
(dollars in thousands)
Core loan and lease interest income and yield
$
47,462

 
4.82
 %
 
$
39,554

 
4.78
 %
Accretion of discount on purchased loans
509

 
0.05
 %
 
1,091

 
0.13
 %
As reported
$
47,971

 
4.87
 %
 
$
40,645

 
4.91
 %
 
 
 
 
 
 
 
 
Net interest income and net interest margin excluding acquisition accounting (1)
$
43,129

 
3.76
 %
 
$
38,671

 
3.84
 %
Accretion of discount on Non-PCI loans and leases
457

 
0.04
 %
 
994

 
0.10
 %
Accretion of discount on PCI loans and leases
52

 
 %
 
97

 
0.01
 %
Accretion of time deposits premium
116

 
0.01
 %
 
791

 
0.08
 %
Amortization of subordinated debentures discount
(81
)
 
(0.01
)%
 
(62
)
 
(0.01
)%
Net impact
544

 
0.05
 %
 
1,820

 
0.18
 %
As reported on a fully taxable equivalent basis
$
43,673

 
3.81
 %
 
$
40,491

 
4.02
 %
 
(1) 
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate (rates may not sum due to rounding).

 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
Amount
 
Rate
 
Amount
 
Rate
 
(dollars in thousands)
Core loan and lease interest income and yield
$
92,259

 
4.75
 %
 
$
76,590

 
4.72
%
Accretion of discount on purchased loans
1,090

 
0.06
 %
 
3,122

 
0.20
%
As reported
$
93,349

 
4.81
 %
 
$
79,712

 
4.92
%
 
 
 
 
 
 
 
 
Net interest income and net interest margin excluding acquisition accounting (1)
$
85,357

 
3.80
 %
 
$
74,836

 
3.75
%
Accretion of discount on Non-PCI loans and leases
984

 
0.04
 %
 
2,748

 
0.14
%
Accretion of discount on PCI loans and leases
106

 
 %
 
374

 
0.02
%
Accretion of time deposits premium
242

 
0.01
 %
 
1,733

 
0.09
%
Amortization of subordinated debentures discount
(158
)
 
(0.01
)%
 
(118
)
 
%
Net impact
1,174

 
0.05
 %
 
4,737

 
0.25
%
As reported on a fully taxable equivalent basis
$
86,531

 
3.85
 %
 
$
79,573

 
4.00
%
 
(1) 
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate (rates may not sum due to rounding).


Executive Overview

For the three months ended June 30, 2017, net income was $14.5 million, or $0.45 per diluted share, compared with $14.1 million, or $0.44 per diluted share, for the three months ended June 30, 2016. Net income for the second quarter of 2017 increased 2.2%, or $0.3 million. Income before the provision for income taxes for the second quarter of 2017 increased 2.2%, or $0.5 million principally because of the 8.0%, or $3.2 million, increase in net interest income driven by an increase in loans and leases receivable. The increase in net interest income however was partially offset by the reduction in the negative loan and lease loss provision of $1.9 million and a $1.1 million increase in non-interest expenses.

For the six months ended June 30, 2017, net income was $28.2 million, or $0.87 per diluted share, compared with $29.0 million, or $0.90 per diluted share, for the six months ended June 30, 2016. Net income for the first six months of 2017 decreased 2.5%, or $0.7 million. Income before the provision for income taxes for the first half of 2017 increased 4.4%, or

45



$1.9 million, principally because of the 8.9%, or $7.0 million, increase in net interest income driven by an increase in loans and leases receivable. The increase in net interest income however was partially offset by the reduction in the negative loan and lease loss provision of $3.4 million and a $2.2 million increase in non-interest expenses.

Other financial highlights include the following:

Loans and leases receivable, before the allowance for loan and lease losses, were $4.07 billion at the end of the second quarter of 2017, up $228.3 million, or 6.0 percent, from $3.84 billion at the end of 2016.

Deposits at June 30, 2017 were $4.26 billion, an increase of $449.4 million, or 11.8 percent, from $3.81 billion at the end of 2016.

Non-performing assets were at the end of the second quarter of 2017 were $20.8 million, or 0.42 percent of assets , compared with $18.9 million, or 0.40 percent of total assets at the end of 2016.





46



Results of Operations

Net Interest Income

Our primary source of revenue is net interest income, which is the difference between interest and fees derived from earning assets, and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes in the level and mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. Net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on loans and leases are affected principally by changes to interest rates, the demand for such loans and leases, the supply of money available for lending purposes, and other competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve.

The following tables show the average balances of assets, liabilities and stockholders’ equity; the amount of interest income, on a tax-equivalent basis, and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. All average balances are daily average balances.
 
Three Months Ended
 
June 30, 2017
 
June 30, 2016
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield /
Rate
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield /
Rate
 
(dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans and leases receivable (1)
$
3,951,934

 
$
47,971

 
4.87
%
 
$
3,328,416

 
$
40,645

 
4.91
%
Securities (2)
585,384

 
3,444

 
2.35
%
 
657,756

 
3,397

 
2.07
%
FRB and FHLB stock
16,385

 
283

 
6.93
%
 
30,808

 
579

 
7.52
%
Interest-bearing deposits in other banks
47,402

 
123

 
1.04
%
 
38,598

 
49

 
0.51
%
Total interest-earning assets
4,601,105

 
51,821

 
4.52
%
 
4,055,578

 
44,670

 
4.43
%
Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
116,750

 
 
 
 
 
114,247

 
 
 
 
Allowance for loan and lease losses
(33,540
)
 
 
 
 
 
(41,483
)
 
 
 
 
Other assets
191,158

 
 
 
 
 
197,158

 
 
 
 
Total assets
$
4,875,473

 
 
 
 
 
$
4,325,500

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand: interest-bearing
$
93,873

 
$
18

 
0.08
%
 
$
96,397

 
$
19

 
0.08
%
Money market and savings
1,532,733

 
3,224

 
0.84
%
 
944,355

 
1,212

 
0.52
%
Time deposits
1,320,005

 
3,221

 
0.98
%
 
1,268,127

 
2,453

 
0.78
%
Total interest-bearing deposits
2,946,611

 
6,463

 
0.88
%
 
2,308,879

 
3,684

 
0.65
%
FHLB advances
20,000

 
49

 
0.98
%
 
278,077

 
299

 
0.43
%
Subordinated debentures
116,850

 
1,636

 
5.59
%
 
18,781

 
196

 
4.20
%
Total interest-bearing liabilities
3,083,461

 
8,148

 
1.06
%
 
2,605,737

 
4,179

 
0.65
%
Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits: noninterest-bearing
1,219,876

 
 
 
 
 
1,170,486

 
 
 
 
Other liabilities
27,853

 
 
 
 
 
31,262

 
 
 
 
Stockholders’ equity
544,283

 
 
 
 
 
518,015

 
 
 
 
Total liabilities and stockholders’ equity
$
4,875,473

 
 
 
 
 
$
4,325,500

 
 
 
 
Net interest income (taxable equivalent)
 
 
$
43,673

 
 
 
 
 
$
40,491

 
 
Cost of deposits (3)
 
 
 
 
0.62
%
 
 
 
 
 
0.43
%
Net interest spread (4)
 
 
 
 
3.46
%
 
 
 
 
 
3.78
%
Net interest margin (5)
 
 
 
 
3.81
%
 
 
 
 
 
4.02
%
 
(1) 
Loans and leases receivable include LHFS and exclude the allowance for loan and lease losses. Nonaccrual loans and leases are

47



included in the average loan and lease balance.
(2) 
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
(3) 
Represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits.
(4) 
Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
(5) 
Represents net interest income as a percentage of average interest-earning assets.

The table below shows changes in interest income (on a tax equivalent basis) and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.
 
 Three Months Ended
 
June 30, 2017 vs. June 30, 2016
 
Increases (Decreases) Due to Change In
 
Volume
 
Rate
 
Total
 
(in thousands)
Interest and dividend income:
 
 
 
 
 
Loans and leases receivable
$
7,657

 
$
(331
)
 
$
7,326

Securities
(391
)
 
438

 
47

FRB and FHLB stock
(253
)
 
(43
)
 
(296
)
Interest-bearing deposits in other banks
13

 
61

 
74

Total interest and dividend income
$
7,026

 
$
125

 
$
7,151

Interest expense:
 
 
 
 
 
Demand: interest-bearing
$
(1
)
 
$

 
$
(1
)
Money market and savings
1,012

 
1,000

 
2,012

Time deposits
106

 
662

 
768

FHLB advances
(426
)
 
176

 
(250
)
Subordinated debentures
1,354

 
86

 
1,440

Total interest expense
$
2,045

 
$
1,924

 
$
3,969

Change in net interest income (taxable equivalent)
$
4,981

 
$
(1,799
)
 
$
3,182


Interest income, on a taxable equivalent basis, increased $7.2 million, or 16.0 percent, to $51.8 million for the three months ended June 30, 2017 from $44.7 million for the same period in 2016. Interest expense increased $4.0 million, or 95.0 percent, to $8.2 million for the three months ended June 30, 2017 from $4.2 million for the same period in 2016. For the three months ended June 30, 2017 and 2016, net interest income, on a taxable equivalent basis, was $43.7 million and $40.5 million, respectively. The increase in net interest income was primarily attributable to the 18.7 percent growth in average loans and leases and the change in the mix of interest earning assets with average loans and leases at 86.0 percent of average interest-earning assets for the second quarter of 2017, up from 82.1 percent for the second quarter of 2016, offset by higher rates paid on interest-bearing deposit and increases in other borrowings balances and rates. The net interest spread and net interest margin, on a taxable equivalent basis, for the three months ended June 30, 2017 were 3.46 percent and 3.81 percent, respectively, compared with 3.78 percent and 4.02 percent, respectively, for the same period in 2016. Excluding the effects of acquisition accounting adjustments, net interest margin was 3.76 percent and 3.84 percent for the three months ended June 30, 2017 and 2016, respectively.

Average loans and leases increased $623.5 million, or 18.7 percent, to $3.95 billion for the three months ended June 30, 2017 from $3.33 billion for the same period in 2016. Average securities decreased $72.4 thousand, or 11.0 percent, to $585.4 million for the three months ended June 30, 2017 from $657.8 million for the same period in 2016. Average interest-earning assets increased $545.5 million, or 13.5 percent, to $4.60 billion for the three months ended June 30, 2017 from $4.06 billion for the same period in 2016. The increase in average loans and leases was due mainly to new loan production and the commencement of the Commercial Equipment Leasing Division in the fourth quarter of 2016. Average interest-bearing liabilities increased $477.7 million, or 18.3 percent, to $3.08 billion for the three months ended June 30, 2017, compared with $2.61 billion for the same period in 2016. The increase in average interest-bearing liabilities resulted primarily from an increase in money market and savings deposits and the $100 million of subordinated debt issued in the first quarter of 2017. In addition, average noninterest-bearing demand deposits increased $49.4 million, or 4.2 percent, to $1.20 billion for the second quarter of 2017 from $1.17 billion in the same period in 2016.


48



The average yield on loans and leases decreased to 4.87 percent for the three months ended June 30, 2017 from 4.91 percent for the same period in 2016, primarily due to a decrease in discount accretion on purchased loans. The average yield on securities, on a taxable equivalent basis, increased to 2.35 percent for the three months ended June 30, 2017 from 2.07 percent for the same period in 2016, attributable primarily to purchasing higher yielding U.S. Government agency mortgage-backed securities. The average yield on interest-earning assets, on a taxable equivalent basis, increased 9 basis points to 4.52 percent for the three months ended June 30, 2017 from 4.43 percent for the same period in 2016, due mainly to the higher percentage of loans in the mix of interest-earning assets. The average cost of interest-bearing liabilities increased by 41 basis points to 1.06 percent for the three months ended June 30, 2017 from 0.65 percent for the same period in 2016.

The following tables show the average balances of assets, liabilities and stockholders’ equity; the amount of interest income, on a tax-equivalent basis, and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. All average balances are daily average balances.
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield /
Rate
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield /
Rate
 
(dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans and leases receivable (1)
$
3,917,004

 
$
93,349

 
4.81
%
 
$
3,260,625

 
$
79,712

 
4.92
%
Securities (2)
556,129

 
6,468

 
2.33
%
 
670,063

 
6,926

 
1.03
%
FRB and FHLB stock
16,385

 
657

 
8.09
%
 
30,652

 
1,121

 
3.66
%
Interest-bearing deposits in other banks
43,026

 
200

 
0.94
%
 
41,343

 
97

 
0.47
%
Total interest-earning assets
4,532,544

 
100,674

 
4.48
%
 
4,002,683

 
87,856

 
4.41
%
Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
117,273

 
 
 
 
 
114,455

 
 
 
 
Allowance for loan and lease losses
(33,193
)
 
 
 
 
 
(42,001
)
 
 
 
 
Other assets
190,602

 
 
 
 
 
198,151

 
 
 
 
Total assets
$
4,807,226

 
 
 
 
 
$
4,273,288

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand: interest-bearing
$
95,727

 
$
38

 
0.08
%
 
$
95,979

 
$
38

 
0.08
%
Money market and savings
1,470,165

 
5,890

 
0.81
%
 
923,196

 
2,295

 
0.50
%
Time deposits
1,247,000

 
5,689

 
0.92
%
 
1,307,347

 
5,077

 
0.78
%
Total interest-bearing deposits
2,812,892

 
11,617

 
0.83
%
 
2,326,522

 
7,410

 
0.64
%
FHLB advances
144,558

 
517

 
0.72
%
 
229,973

 
494

 
0.43
%
Subordinated debentures
74,137

 
2,009

 
5.41
%
 
18,751

 
379

 
4.06
%
Total interest-bearing liabilities
3,031,587

 
14,143

 
0.94
%
 
2,575,246

 
8,283

 
0.65
%
Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits: noninterest-bearing
1,208,079

 
 
 
 
 
1,154,654

 
 
 
 
Other liabilities
28,255

 
 
 
 
 
34,646

 
 
 
 
Stockholders’ equity
539,305

 
 
 
 
 
508,742

 
 
 
 
Total liabilities and stockholders’ equity
$
4,807,226

 
 
 
 
 
$
4,273,288

 
 
 
 
Net interest income (taxable equivalent)
 
 
$
86,531

 
 
 
 
 
$
79,573

 
 
Cost of deposits (3)
 
 
 
 
0.58
%
 
 
 
 
 
0.43
%
Net interest spread (4)
 
 
 
 
3.54
%
 
 
 
 
 
3.76
%
Net interest margin (5)
 
 
 
 
3.85
%
 
 
 
 
 
4.00
%
 
(1) 
Loans and leases receivable include LHFS and exclude the allowance for loan and lease losses. Nonaccrual loans and leases are included in the average loan and lease balance.
(2) 
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
(3) 
Represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits.
(4) 
Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

49



(5) 
Represents net interest income as a percentage of average interest-earning assets.



The table below shows changes in interest income (on a tax equivalent basis) and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.
 
 Six Months Ended
 
June 30, 2017 vs. June 30, 2016
 
Increases (Decreases) Due to Change In
 
Volume
 
Rate
 
Total
 
(in thousands)
Interest and dividend income:
 
 
 
 
 
Loans and leases receivable
$
17,121

 
$
(3,484
)
 
$
13,637

Securities
(1,607
)
 
1,149

 
(458
)
FRB and FHLB stock
(695
)
 
231

 
(464
)
Interest-bearing deposits in other banks
4

 
99

 
103

Total interest and dividend income
$
14,823

 
$
(2,005
)
 
$
12,818

Interest expense:
 
 
 
 
 
Money market and savings
$
1,757

 
$
1,838

 
$
3,595

Time deposits
(61
)
 
673

 
612

FHLB advances
(110
)
 
133

 
23

Subordinated debentures
1,465

 
165

 
1,630

Total interest expense
$
3,051

 
$
2,809

 
$
5,860

Change in net interest income (taxable equivalent)
$
11,772

 
$
(4,814
)
 
$
6,958


Interest income, on a taxable equivalent basis, increased $12.8 million, or 14.6 percent, to $100.7 million for the six months ended June 30, 2017 from $87.9 million for the same period in 2016. Interest expense increased $5.9 million, or 70.8 percent, to $14.1 million for the six months ended June 30, 2017 from $8.3 million for the same period in 2016. For the six months ended June 30, 2017 and 2016, net interest income, on a taxable equivalent basis, was $86.5 million and $79.6 million, respectively. The increase in net interest income was primarily attributable to the 20.1 percent growth in average loans and leases and the change in the mix of interest earning assets with average loans and leases at 86.4 percent of average interest-earning assets for the first half of 2017, up from 81.5 percent for the same period in 2016. The net interest spread and net interest margin, on a taxable equivalent basis, for the six months ended June 30, 2017 were 3.54 percent and 3.85 percent, respectively, compared with 3.76 percent and 4.00 percent, respectively, for the same period in 2016. Excluding the effects of acquisition accounting adjustments, net interest margin was 3.80 percent and 3.75 percent for the six months ended June 30, 2017 and 2016, respectively.

Average loans and leases increased $656.4 million, or 20.1 percent, to $3.92 billion for the six months ended June 30, 2017 from $3.26 billion for the same period in 2016. Average securities decreased $113.9 million, or 17.0 percent, to $556.1 million for the six months ended June 30, 2017 from $670.1 million for the same period in 2016. Average interest-earning assets increased $530.0 million, or 13.2 percent, to $4.53 billion for the six months ended June 30, 2017 from $4.00 billion for the same period in 2016. The increase in average loans and leases was due mainly to new loan production and the commencement of the Commercial Equipment Leasing Division in the fourth quarter of 2016. Average interest-bearing liabilities increased $456.3 million, or 17.7 percent, to $3.03 billion for the six months ended June 30, 2017, compared with $2.58 billion for the same period in 2016. The increase in average interest-bearing liabilities resulted primarily from an increase in money market and savings deposits and the $100 million of subordinated debt issued in the first quarter of 2017. In addition, average noninterest-bearing demand deposits increased $53.4 million, or 4.6 percent, to $1.21 billion for the first six months of 2017 from $1.15 billion in the same period in 2016.

The average yield on loans and leases decreased to 4.81 percent for the six months ended June 30, 2017 from 4.92 percent for the same period in 2016, primarily due to a decrease in discount accretion on purchased loans. The average yield on securities, on a taxable equivalent basis, increased to 2.33 percent for the six months ended June 30, 2017 from 1.03 percent for

50



the same period in 2016, attributable primarily to purchasing higher yielding U.S. government agency mortgage-backed securities. The average yield on interest-earning assets, on a taxable equivalent basis, increased 7 basis points to 4.48 percent for the six months ended June 30,2017 from 4.41 percent for the same period in 2016, due mainly to the higher percentage of loans in the mix of interest-earning assets. The average cost of interest-bearing liabilities increased by 29 basis points to 0.94 percent for the six months ended June 30, 2017 from 0.65 percent for the same period in 2016.

Provision for Loan and Lease Losses

In anticipation of credit risks inherent in our lending business, we set aside an allowance for loan and lease losses through charges to earnings. These charges are made not only for our outstanding loan and lease portfolio, but also for off-balance sheet items, such as commitments to extend credit, or letters of credit. The provisions, whether a charge or a credit, made for our outstanding loan and lease portfolio are recorded to the allowance for loan and lease losses, whereas charges or credits to other noninterest expense for off-balance sheet items are recorded to the allowance for off-balance sheet items, and are presented as a component of other liabilities.

The provision for loan and lease losses was $0.4 million for the second quarter of 2017, which included a negative loan loss provision of $0.2 million related to Purchased Credit Impaired loans from the 2014 acquisition. For the same period in 2016, the provision for loan and lease losses was a negative $1.5 million, which included a negative loan loss provision of $0.06 million related to Purchased Credit Impaired loans. The charge to other noninterest expense for losses on off-balance sheet items was $0.05 million for the three months ended June 30, 2017 compared to $0.30 million for the same period in 2016.

The provision for loan and lease losses was $0.3 million for the first six months of 2017, which included a negative loan loss provision of $0.2 million related to Purchased Credit Impaired loans from the 2014 acquisition. For the same period in 2016, the provision for loan and lease losses was a negative $3.0 million, which included a loan loss provision of $0.1 million related to Purchased Credit Impaired loans. The charge to other noninterest expense for losses on off-balance sheet items was $0.05 million for the six months ended June 30, 2017 compared to $0.5 million for the same period in 2016.

See also “Allowance for Loan and Lease Losses and Allowance for Off-Balance Sheet Items" for further details.

Noninterest Income

The following table sets forth the various components of noninterest income for the periods indicated:
 
Three Months Ended June 30,
 
Increase (Decrease)
 
2017
 
2016
 
Amount
 
Percentage
 
(dollars in thousands)
Service charges on deposit accounts
$
2,461

 
$
2,898

 
$
(437
)
 
(15.1
)%
Trade finance and other service charges and fees
1,269

 
1,064

 
205

 
19.3
 %
Other operating income
1,826

 
1,674

 
152

 
9.1
 %
Subtotal service charges, fees and other income
5,556

 
5,636

 
(80
)
 
(1.4
)%
Gain on sale of SBA loans
2,668

 
1,774

 
894

 
50.4
 %
Disposition gains on PCI loans
540

 
1,963

 
(1,423
)
 
(72.5
)%
Net gain on sales of securities
938

 

 
938

 
100.0
 %
Total noninterest income
$
9,702

 
$
9,373

 
$
329

 
3.5
 %

For the three months ended June 30, 2017, noninterest income was $9.7 million, an increase of $0.3 million, or 3.5 percent, compared with $9.4 million for the same period in 2016. The increase was primarily attributable to increased gains on the sale of SBA loans and securities transactions offset by lower gains from the resolution or disposition of PCI loans and service charges on deposit accounts. Sales of securities resulted in a net gain of $938,000 for the second quarter of 2017 compared to no gains for the same period in 2016. When a PCI loan is removed from a loan pool and the cash proceeds or assets received from the settlement of the loan are in excess of its carrying amount, we recognize such gains as disposition gains. Disposition gains on PCI loans were $0.5 million for the three months ended June 30, 2107 compared with $1.9 million the same period in 2016. Gains on SBA loan sales were $2.7 million for the second quarter of 2017, an increase of $0.9 million from the second quarter of 2016 as the volume of loan sales increased to $32.4 million from $20.2 million in the same quarter last year.



51



The following table sets forth the various components of noninterest income for the periods indicated:
 
Six Months Ended June 30,
 
Increase (Decrease)
 
2017
 
2016
 
Amount
 
Percentage
 
(dollars in thousands)
Service charges on deposit accounts
$
4,989

 
$
5,899

 
$
(910
)
 
(15.4
)%
Trade finance and other service charges and fees
2,316

 
2,109

 
207

 
9.8
 %
Other operating income
3,551

 
3,072

 
479

 
15.6
 %
Subtotal service charges, fees and other income
10,856

 
11,080

 
(224
)
 
(2.0
)%
Gain on sale of SBA loans
4,132

 
2,632

 
1,500

 
57.0
 %
Disposition gains on PCI loans
723

 
2,622

 
(1,899
)
 
(72.4
)%
Net gain on sales of securities
1,206

 

 
1,206

 
100.0
 %
Total noninterest income
$
16,917

 
$
16,334

 
$
583

 
3.6
 %

For the six months ended June 30, 2017, noninterest income was $16.9 million, an increase of $0.6 million, or 3.6 percent, compared with $16.3 million for the same period in 2016. The increase was primarily attributable to increased gains on the sale of SBA loans and securities transactions offset by lower gains from the resolution or disposition of PCI loans and service charges on deposit accounts. Sales of securities resulted in a net gain of $1.2 million for the first six months of 2017 compared to no gains for the same period in 2016. Disposition gains on PCI loans were $0.7 million for the six months ended June 30, 2107 compared with $2.6 million the same period in 2016. Gains on SBA loan sales were $4.1 million for the first six months of 2017, an increase of $1.5 million from the first six months of 2016 as the volume of loan sales increased to $52.0 million from $32.6 million in the same quarter last year.

Noninterest Expense

The following table sets forth the components of noninterest expense for the periods indicated:
 
Three Months Ended June 30,
 
Increase (Decrease)
 
2017
 
2016
 
Amount
 
Percentage
 
(dollars in thousands)
Salaries and employee benefits
$
16,623

 
$
16,061

 
$
562

 
3.5
 %
Occupancy and equipment
3,878

 
3,938

 
(60
)
 
-1.5
 %
Data processing
1,738

 
1,454

 
284

 
19.5
 %
Professional fees
1,554

 
1,509

 
45

 
3.0
 %
Supplies and communications
745

 
709

 
36

 
5.1
 %
Advertising and promotion
1,015

 
1,094

 
(79
)
 
-7.2
 %
OREO expense
519

 
183

 
336

 
183.6
 %
Merger and integration costs (income)
(9
)
 

 
(9
)
 
-100.0
 %
Other operating expenses
2,881

 
2,915

 
(34
)
 
-1.2
 %
Total noninterest expense
$
28,944

 
$
27,863

 
$
1,081

 
3.9
 %

For the three months ended June 30, 2017, noninterest expense was $28.9 million, an increase of $1.1 million or 3.9 percent, compared with $27.9 million for the same period in 2016. The increase was due primarily to increases in salaries and employee benefits, OREO expense and data processing. The increase in salaries and employee benefits is largely due to the increased headcount due to the commencement of the Commercial Equipment Leasing Division and merit increases compared to the same period in 2016.



52



The following table sets forth the components of noninterest expense for the periods indicated:
 
Six Months Ended June 30,
 
Increase (Decrease)
 
2017
 
2016
 
Amount
 
Percentage
 
(dollars in thousands)
Salaries and employee benefits
$
33,727

 
$
31,759

 
$
1,968

 
6.2
 %
Occupancy and equipment
7,861

 
7,434

 
427

 
5.7
 %
Data processing
3,369

 
2,889

 
480

 
16.6
 %
Professional fees
2,702

 
2,974

 
(272
)
 
-9.1
 %
Supplies and communications
1,379

 
1,445

 
(66
)
 
-4.6
 %
Advertising and promotion
1,817

 
1,616

 
201

 
12.4
 %
OREO expense
418

 
648

 
(230
)
 
-35.5
 %
Merger and integration costs (income)
(40
)
 

 
(40
)
 
-100.0
 %
Other operating expenses
4,948

 
5,167

 
(219
)
 
-4.2
 %
Total noninterest expense
$
56,181

 
$
53,932

 
$
2,249

 
4.2
 %

For the six months ended June 30, 2017, noninterest expense was $56.2 million, an increase of $2.2 million or 4.2 percent, compared with $53.9 million for the same period in 2016. The increase was due primarily to increases in salaries and employee benefits, data processing and occupancy and equipment expense, offset by lower OREO expenses. The increase in salaries and employee benefits is largely due to the increased headcount due to the commencement of the Commercial Equipment Leasing Division and merit increases compared to the same period in 2016.

Income Tax Expense

Income tax expense was $9.1 million for the three months ended June 30, 2017, compared with $8.9 million for the same period in 2016. The effective income tax rate was 38.5 percent for the three months ended June 30, 2017 and 2016.

Income tax expense was $17.7 million for the six months ended June 30, 2017, compared with $15.0 million for the same period in 2016. The effective income tax rate was 38.5 percent for the six months ended June 30, 2017, compared with 34.2 percent for the same period in 2016. Income tax expense for the first six months of 2016 included a $1.8 million benefit arising from the finalization of the 2014 amended income tax returns. The effective income tax rate for the first quarter of 2016 would have been 38.2 percent without this benefit.




53



Financial Condition

Securities

As of June 30, 2017, our securities portfolio was composed primarily of U.S. government agency mortgage-backed securities and collateralized mortgage obligations, as well as tax exempt municipal bonds. Most of the securities carried fixed interest rates. Other than holdings of U.S. government agency securities, there were no securities of any one issuer exceeding 10 percent of stockholders’ equity as of June 30, 2017 and December 31, 2016.

The following table summarizes the amortized cost, estimated fair value and unrealized gain (loss) on securities as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
 
Amortized
Cost
 
Estimated
Fair
Value
 
Unrealized
Gain
(Loss)
 
Amortized
Cost
 
Estimated
Fair
Value
 
Unrealized
Gain
(Loss)
 
(in thousands)
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities (1) (2)
$
280,494

 
$
279,765

 
$
(729
)
 
$
230,489

 
$
229,630

 
$
(859
)
Collateralized mortgage obligations (1)
92,360

 
91,438

 
(922
)
 
77,447

 
76,451

 
(996
)
U.S. government agency securities
7,499

 
7,457

 
(42
)
 
7,499

 
7,441

 
(58
)
SBA loan pool securities
4,037

 
3,895

 
(142
)
 
4,356

 
4,146

 
(210
)
Municipal bonds-tax exempt
158,614

 
161,063

 
2,449

 
159,789

 
158,030

 
(1,759
)
Municipal bonds-taxable
531

 
537

 
6

 
13,391

 
13,701

 
310

Corporate bonds
5,006

 
5,022

 
16

 
5,010

 
5,015

 
5

U.S. treasury securities
154

 
154

 

 
156

 
156

 

Mutual funds
22,916

 
22,515

 
(401
)
 
22,916

 
22,394

 
(522
)
Total securities available for sale
$
571,611

 
$
571,846

 
$
235

 
$
521,053

 
$
516,964

 
$
(4,089
)
 
(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 $9.1 million and $52.9 million as of June 30, 2017 and December 31, 2016, respectively.

As of June 30, 2017, securities available for sale increased 10.6 percent to $571.8 million, compared with $517.0 million as of December 31, 2016, due mainly to security purchases. As of June 30, 2017, securities available for sale had a net unrealized gain of $235,000, comprised of $3.4 million of unrealized gains and $3.1 million of unrealized losses. As of December 31, 2016, securities available for sale had a net unrealized loss of $4.1 million, comprised of $1.2 million of unrealized gains and $5.3 million of unrealized losses.


54



The following table summarizes the contractual maturity schedule for securities, at amortized cost, and their weighted-average yields as of June 30, 2017:
 
 
 
 
 
After One Year But
 
After Five Years But
 
 
 
 
 
 
 
 
 
Within One Year
 
Within Five Years
 
Within Ten Years
 
After Ten Years
 
Total
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
9,136

 
1.93
%
 
$
33,906

 
1.75
%
 
$
95,558

 
2.20
%
 
$
141,894

 
2.34
%
 
$
280,494

 
2.21
%
Collateralized mortgage obligations

 
%
 
387

 
1.47
%
 
18,814

 
1.63
%
 
73,159

 
1.81
%
 
92,360

 
1.77
%
U.S. government agency securities

 
%
 
6,000

 
1.35
%
 
1,499

 
2.20
%
 

 
%
 
7,499

 
1.52
%
SBA loan pool securities

 
%
 

 
%
 

 
%
 
4,037

 
1.73
%
 
4,037

 
1.73
%
Municipal bonds-tax exempt (1)

 
%
 
5,323

 
2.64
%
 
87,342

 
3.26
%
 
65,949

 
4.18
%
 
158,614

 
3.62
%
Municipal bonds-taxable
531

 
3.27
%
 

 
%
 

 
%
 

 
%
 
531

 
3.27
%
Corporate bonds
5,006

 
1.63
%
 

 
%
 

 
%
 

 
%
 
5,006

 
1.63
%
U.S. treasury securities
154

 
1.19
%
 

 
%
 

 
%
 

 
%
 
154

 
1.19
%
Mutual funds

 
%
 

 
%
 

 
%
 
22,916

 
2.11
%
 
22,916

 
2.11
%
Total securities available for sale
$
14,827

 
1.87
%
 
$
45,616

 
1.80
%
 
$
203,213

 
2.60
%
 
$
307,955

 
2.58
%
 
$
571,611

 
2.51
%
 
(1) 
The yield on municipal bonds has been computed on a federal tax-equivalent basis of 35 percent.

Loans and Leases Receivable, Net
The following table shows the loan and lease portfolio composition by type as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
 
(in thousands)
Real estate loans:
 
 
 
Commercial property
 
 
 
Retail
$
916,113

 
$
859,953

Hospitality
739,067

 
651,158

Gas station
249,929

 
262,879

Other (1)
1,104,100

 
1,109,656

Total commercial real estate loans
3,009,209

 
2,883,646

Construction
58,159

 
55,962

Residential property
383,657

 
338,767

Total real estate loans
3,451,025

 
3,278,375

Commercial and industrial loans:
 
 
 
Commercial term
159,487

 
138,168

Commercial lines of credit
148,421

 
136,231

International loans
39,328

 
25,821

Total commercial and industrial loans
347,236

 
300,220

Leases receivable
257,525

 
243,294

Consumer loans (2)
17,276

 
22,880

Loans and leases receivable
4,073,062

 
3,844,769

Allowance for loan and lease losses
(33,758
)
 
(32,429
)
Loans and leases receivable, net
$
4,039,304

 
$
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 $15.1 million and $17.7 million as of June 30, 2017 and December 31, 2016, respectively.

As of June 30, 2017 and December 31, 2016, net loans and leases receivable were $4.04 billion and $3.81 billion, respectively, representing an increase of $227.0 million, or 6.0 percent. The increase in loans and leases as of June 30, 2017 compared with December 31, 2016 was primarily attributable to new loan and lease production of $481.7 million and residential mortgage loan purchases of $73.0 million.

55





Our loan and lease portfolio included the following concentrations of loans to one type of industry that were greater than 10 percent of loans and leases outstanding:
 
Balance at June 30, 2017
 
Percentage of Loans and Leases
Outstanding
 
 
Industry
(in thousands)
 
 
Lessor of nonresidential buildings
$
1,257,366

 
30.9
%
Hospitality
$
746,927

 
18.3
%

There was no other concentration of loans and leases to any one type of industry exceeding 10.0 percent of loans and leases outstanding.

Nonperforming Loans and Leases and Nonperforming Assets

Nonperforming loans and leases (excluding PCI loans) consist of loans and leases on nonaccrual status and loans and leases 90 days or more past due and still accruing interest. Nonperforming assets consist of nonperforming loans and leases and OREO. Non-purchased credit impaired (“Non-PCI”) loans and leases are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless we believe the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular receivable on nonaccrual status earlier, depending upon the individual circumstances surrounding the receivable's delinquency. When an asset is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Nonaccrual assets may be restored to accrual status when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans and leases not meeting the criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means that management intends to offer for sale.

Except for nonperforming loans and leases set forth below and PCI loans, we are not aware of any loans or leases as of June 30, 2017 and December 31, 2016 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present repayment terms, or any known events that would result in the receivable being designated as nonperforming at some future date. We cannot, however, predict the extent to which a deterioration in general economic conditions, real estate values, increases in general rates of interest, or changes in the financial condition or business of borrower may adversely affect a borrower’s ability to pay.


56



The following table provides information with respect to the components of nonperforming assets (excluding PCI loans) as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
 
Increase (Decrease)
 
 
 
Amount
 
Percentage
 
 
 
(dollars in thousands)
 
 
Nonperforming Non-PCI loans and leases:
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
210

 
$
404

 
$
(194
)
 
-48.0
 %
Hospitality
5,199

 
5,266

 
(67
)
 
-1.3
 %
Gas station
945

 
1,025

 
(80
)
 
-7.8
 %
Other
1,990

 
2,033

 
(43
)
 
-2.1
 %
Total commercial real estate loans
8,344

 
8,728

 
(384
)
 
-4.4
 %
Residential property
667

 
564

 
103

 
18.3
 %
Commercial and industrial loans
2,699

 
824

 
1,875

 
227.5
 %
Leases receivable
3,644

 
901

 
2,743

 
304.4
 %
Consumer loans
1,110

 
389

 
721

 
185.3
 %
Total nonperforming Non-PCI loans
16,464

 
11,406

 
5,058

 
44.3
 %
Loans 90 days or more past due and still accruing

 

 

 

Total nonperforming Non-PCI loans and leases(1)
16,464

 
11,406

 
5,058

 
44.3
 %
OREO
4,321

 
7,484

 
(3,163
)
 
-42.3
 %
Total nonperforming assets
$
20,785

 
$
18,890

 
$
1,895

 
10.0
 %
 
 
 
 
 
 
 
 
Nonperforming Non-PCI loans and leases as a percentage of Non-PCI loans and leases
0.41
%
 
0.30
%
 
 
 
 
Nonperforming assets as a percentage of assets
0.42
%
 
0.40
%
 
 
 
 
Troubled debt restructured performing Non-PCI loans and leases
$
8,848

 
$
11,146

 
 
 
 
                              
(1) 
Includes nonperforming TDRs of $7.1 million and $6.9 million as of June 30, 2017 and December 31, 2016, respectively.

Nonaccrual Non-PCI loans and leases were $16.5 million as of June 30, 2017, compared with $11.4 million as of December 31, 2016, representing an increase of $5.1 million, or 44.3 percent, primarily due to lease receivables. There were no Non-PCI loans or leases past due 90 days or more and still accruing as of June 30, 2017 and December 31, 2016. During the six months ended June 30, 2017, $7.0 million of loans and leases were placed on nonaccrual status. These additions to nonaccrual loans and leases were partially offset by $0.3 million of nonaccrual loans and leases restored to accrual status and $1.4 million in principal payoffs and pay downs and $0.2 million in OREO transfers.

Delinquent Non-PCI loans and leases (defined as 30 to 89 days past due and still accruing) were $11.6 million as of June 30, 2017, compared with $7.4 million as of December 31, 2016.

The ratio of nonperforming Non-PCI loans and leases to Non-PCI loans and leases increased to 0.41 percent at June 30, 2017 from 0.30 percent at December 31, 2016. Of the $16.5 million nonperforming Non-PCI loans and leases, approximately $12.2 million were impaired based on the definition contained in ASC 310, Receivables, which resulted in an aggregate impairment reserve of $5.5 million as of June 30, 2017. The allowance for collateral-dependent loans is calculated as the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals less estimated costs to sell. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as nonperforming. We continue to monitor the collateral coverage, based on recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.

As of June 30, 2017, OREO consisted of 7 properties with a combined carrying value of $4.3 million, as compared with 12 properties with a combined carrying value of $7.5 million as of December 31, 2016.


57



 
Impaired Loans and Leases

We evaluate loan and lease impairment in accordance with GAAP. With the exception of PCI loans, loans and leases are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan and lease agreement, including scheduled interest payments. Impaired loans and leases are measured based on the present value of expected future cash flows discounted at the receivable's effective interest rate or, as an expedient, at the receivable's observable market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired receivable is less than the recorded investment in the receivable, the deficiency will be charged off against the allowance for loan and lease losses or, alternatively, a specific allocation will be established. Additionally, impaired loans and leases are specifically excluded from the quarterly migration analysis when determining the amount of the allowance for loan and lease losses required for the period.

The following table provides information on impaired loans and lease (excluding PCI loans) as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
 
Recorded
Investment
 
Percentage
 
Recorded
Investment
 
Percentage
 
(dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
1,495

 
5.7
%
 
$
1,678

 
6.4
%
Hospitality
6,057

 
23.2
%
 
6,227

 
23.6
%
Gas station
4,828

 
18.4
%
 
4,984

 
18.9
%
Other
4,502

 
17.2
%
 
6,070

 
23.0
%
Total commercial real estate loans
16,882

 
64.5
%
 
18,959

 
71.9
%
Residential property
2,813

 
10.7
%
 
2,798

 
10.6
%
Commercial and industrial loans:
5,275

 
20.1
%
 
4,174

 
15.9
%
Consumer loans
1,224

 
4.7
%
 
419

 
1.6
%
Total Non-PCI loans and leases
$
26,194

 
100.0
%
 
$
26,350

 
100.0
%

Total impaired loans and leases decreased $0.2 million, or 0.6 percent, to $26.2 million as of June 30, 2017, as compared with $26.4 million at December 31, 2016. Specific allowances associated with impaired loans and leases were $5.5 million and $4.3 million as of June 30, 2017 and December 31, 2016, respectively.

During the three months ended June 30, 2017 and 2016, interest income that would have been recognized had impaired loans and leases performed in accordance with their original terms totaled $0.6 million and $0.7 million, respectively. Of these amounts, actual interest recognized on impaired loans and leases was $0.4 million and $0.6 million for the three months ended June 30, 2017 and 2016, respectively.

During the six months ended June 30, 2017 and 2016, interest income that would have been recognized had impaired loans and leases performed in accordance with their original terms totaled $1.2 million and $1.6 million, respectively. Of these amounts, actual interest recognized on impaired loans and leases was $0.8 million and $1.3 million for the six months ended June 30, 2017 and 2016, respectively.




58



The following table provides information on TDRs (excluding PCI loans) as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
 
Nonaccrual TDRs
 
Accrual TDRs
 
Total
 
Nonaccrual TDRs
 
Accrual TDRs
 
Total
 
(in thousands)
Real estate loans

 
 
 
 
 
 
 
 
 
 
Commercial property
$
6,141

 
$
5,228

 
$
11,369

 
$
6,195

 
$
6,870

 
$
13,065

Residential property

 
1,054

 
1,054

 

 
1,072

 
1,072

Commercial and industrial loans
943

 
2,452

 
3,395

 
708

 
3,085

 
3,793

Consumer loans

 
114

 
114

 

 
119

 
119

Total Non-PCI loans and leases
$
7,084

 
$
8,848

 
$
15,932

 
$
6,903

 
$
11,146

 
$
18,049


For the three months ended June 30, 2017, no loans were restructured and subsequently classified as TDRs. Temporary payment structure modifications included, but were not limited to, extending the maturity date, reducing the amount of principal and/or interest due monthly, and/or allowing for interest only monthly payments for nine months or less.

As of June 30, 2017, TDRs on accrual status were $8.8 million, all of which were temporary interest rate and payment reductions or extensions of maturity, and a $0.2 million allowance relating to these loans was included in the allowance for loan and lease losses. For the TDRs on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms is probable. As of June 30, 2017, TDRs on nonaccrual status were $7.1 million, and a $3.5 million allowance relating to these loans was included in the allowance for loan and lease losses.

As of December 31, 2016, TDRs on accrual status were $11.1 million, all of which were temporary interest rate and payment reductions or extensions of maturity, and a $0.7 million allowance relating to these loans was included in the allowance for loan and lease losses. As of December 31, 2016, TDRs on nonaccrual status were $6.9 million, and a $2.6 million allowance relating to these loans was included in the allowance for loan and lease losses.

Allowance for Loan and Lease Losses and Allowance for Off-Balance Sheet Items

The Bank charges or credits operating expenses for provisions to the allowance for loan and lease losses and the allowance for off-balance sheet items at least quarterly based upon the allowance need. The allowance is determined through an analysis involving quantitative calculations based on historic loss rates and qualitative adjustments for general reserves and individual impairment calculations for specific allocations. The Bank charges the allowance for actual losses and credits the allowance for recoveries on loans and leases previously charged-off.

The Bank evaluates the allowance methodology at least annually. Beginning in the fourth quarter of 2016 through the first half of 2017, the Bank utilized a 24-quarter look-back period with equal weighting to all quarters. For the first six months of 2016, the Bank utilized a 20-quarter look-back period.

To determine general reserve requirements, existing loans and leases are divided into eleven general pools of risk-rated loans, as well as three homogeneous pools. During the first half of 2016, existing loans were divided into fourteen general loan pools of risk-rated loans as well as three homogenous loan pools. For risk-rated loans, migration analysis allocates historical losses by pool and risk grade to determine risk factors for potential loss inherent in the current outstanding portfolio. As three homogeneous pools are bulk graded, the risk grade is not factored into the historical loss analysis. In addition, specific reserves are allocated for loans deemed “impaired.”

When determining the appropriate level for allowance for loan and lease losses, management considers qualitative adjustments for any factors that are likely to cause estimated loan and lease losses associated with the Bank’s current portfolio to differ from historical loss experience, including, but not limited to, national and local economic and business conditions, volume and geographic concentrations, and problem loan trends.

To systematically quantify the credit risk impact of trends and changes within the loan and lease portfolio, a credit risk matrix is utilized. The qualitative factors are considered on a loan pool by loan pool basis subsequent to, and in conjunction with, a loss migration analysis. The credit risk matrix provides various scenarios with positive or negative impact on the portfolio along with corresponding basis points for qualitative adjustments.

59




The following tables reflect our allocation of allowance for loan and lease losses by category as well as the receivable for each loan type:
 
June 30, 2017
 
December 31, 2016
 
Allowance
Amount
 
Percentage
 
Non- PCI Loans and Leases
 
Allowance
Amount
 
Percentage
 
Non- PCI Loans and Leases
 
(dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
4,185

 
12.7
%
 
$
914,470

 
$
4,172

 
13.3
%
 
$
857,629

Hospitality
9,003

 
27.3
%
 
737,369

 
9,171

 
29.2
%
 
649,540

Gas station
1,312

 
4.0
%
 
247,566

 
1,438

 
4.6
%
 
260,187

Other
6,189

 
18.6
%
 
1,102,084

 
7,448

 
23.7
%
 
1,107,589

Total commercial real estate loans
20,689

 
62.6
%
 
3,001,489

 
22,229

 
70.8
%
 
2,874,945

Construction
1,019

 
3.1
%
 
58,159

 
1,916

 
6.1
%
 
55,962

Residential property
1,053

 
3.2
%
 
382,692

 
1,067

 
3.4
%
 
337,791

Total real estate loans
22,761

 
68.9
%
 
3,442,340

 
25,212

 
80.3
%
 
3,268,698

Commercial and industrial loans:
 
 

 
 
 
 
 
 
 
 
Commercial term
4,344

 
13.1
%
 
159,432

 
3,961

 
12.6
%
 
138,032

Commercial lines of credit
2,325

 
7.0
%
 
148,421

 
1,297

 
4.1
%
 
136,231

International loans
310

 
0.9
%
 
39,328

 
324

 
1.0
%
 
25,821

Total commercial and industrial loans
6,979

 
21.0
%
 
347,181

 
5,582

 
17.7
%
 
300,084

Leases receivable
87

 
0.3
%
 
257,525

 
307

 
1.0
%
 
243,294

Consumer loans
2,032

 
6.2
%
 
17,232

 
191

 
0.6
%
 
22,830

Unallocated
1,179

 
3.6
%
 

 
166

 
0.4
%
 

Total
$
33,038

 
100.0
%
 
$
4,064,278

 
$
31,458

 
100.0
%
 
$
3,834,906

 
June 30, 2017
 
December 31, 2016
 
Allowance
Amount
 
Percentage
 
PCI Loans
 
Allowance
Amount
 
Percentage
 
PCI Loans
 
(dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
75

 
10.4
%
 
$
1,643

 
$
122

 
12.6
%
 
$
2,324

Hospitality
132

 
18.3
%
 
1,698

 
138

 
14.2
%
 
1,618

Gas station
378

 
52.6
%
 
2,363

 
589

 
60.7
%
 
2,692

Other

 
%
 
2,016

 
1

 
0.1
%
 
2,067

Total commercial real estate loans
585

 
81.3
%
 
7,720

 
850

 
87.6
%
 
8,701

Residential property
73

 
10.1
%
 
965

 
72

 
7.4
%
 
976

Total real estate loans
658

 
91.4
%
 
8,685

 
922

 
95.0
%
 
9,677

Commercial and industrial loans:
 
 

 
 
 
 
 
 
 
 
Commercial term
41

 
5.7
%
 
55

 
41

 
4.2
%
 
136

Consumer loans
21

 
2.9
%
 
44

 
8

 
0.8
%
 
50

Total
$
720

 
100.0
%
 
$
8,784

 
$
971

 
100.0
%
 
$
9,863



60



The following tables set forth certain information regarding allowance for loan and lease losses and allowance for off-balance sheet items for the periods presented. Allowance for off-balance sheet items is determined by applying reserve factors according to pool and grade as well as actual current commitment usage figures by type to existing contingent liabilities.
 
As of and for the Three Months Ended
 
June 30, 2017
 
December 31, 2016
 
June 30, 2016
 
Non-PCI Loans and Leases
 
PCI Loans
 
Total
 
Non-PCI Loans and Leases
 
PCI Loans
 
Total
 
Non-PCI Loans and Leases
 
PCI Loans
 
Total
 
(dollars in thousands)
Allowance for loan and Lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
32,261

 
$
891

 
$
33,152

 
$
33,439

 
$
5,533

 
$
38,972

 
$
35,381

 
$
5,645

 
$
41,026

Actual charge-offs
(665
)
 

 
(665
)
 
(2,326
)
 
(4,991
)
 
(7,317
)
 
(662
)
 
(137
)
 
(799
)
Recoveries on loans previously charged off
849

 

 
849

 
623

 

 
623

 
995

 

 
995

Net loan recoveries (charge-offs)
184

 

 
184

 
(1,703
)
 
(4,991
)
 
(6,694
)
 
333

 
(137
)
 
196

Loan and lease loss provision (income)
593

 
(171
)
 
422

 
(278
)
 
429

 
151

 
(1,455
)
 
(60
)
 
(1,515
)
Balance at end of period
$
33,038

 
$
720

 
$
33,758

 
$
31,458

 
$
971

 
$
32,429

 
$
34,259

 
$
5,448

 
$
39,707

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for off-balance sheet items:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
1,184

 
$

 
$
1,184

 
$
1,491

 
$

 
$
1,491

 
$
1,220

 
$

 
$
1,220

Provision (income)
(49
)
 

 
(49
)
 
(307
)
 

 
(307
)
 
255

 

 
255

Balance at end of period
$
1,135

 
$

 
$
1,135

 
$
1,184

 
$

 
$
1,184

 
$
1,475

 
$

 
$
1,475

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loan and lease charge-offs (recoveries) to average loans and leases (1)
(0.02
)%
 
%
 
(0.02
)%
 
0.18
%
 
157.18
%
 
0.73
%
 
(0.04
)%
 
3.14
%
 
(0.02
)%
Net loan and lease charge-offs (recoveries) to loans and leases (1)
(0.02
)%
 
%
 
(0.02
)%
 
0.18
%
 
202.41
%
 
0.70
%
 
(0.04
)%
 
3.65
%
 
(0.02
)%
Allowance for loan and lease losses to average loans and leases
0.83
 %
 
8.12
%
 
0.86
 %
 
0.85
%
 
7.64
%
 
0.88
%
 
1.02
 %
 
31.26
%
 
1.19
 %
Allowance for loan and lease losses to loans and leases
0.81
 %
 
8.20
%
 
0.83
 %
 
0.82
%
 
9.84
%
 
0.84
%
 
1.00
 %
 
36.27
%
 
1.15
 %
Net loan and lease charge-offs (recoveries) to allowance for loan and lease losses (1)
(2.23
)%
 
%
 
(2.17
)%
 
21.65
%
 
2056.02
%
 
82.57
%
 
(3.89
)%
 
10.06
%
 
(1.97
)%
Allowance for loan and lease losses to nonperforming loans and leases
200.67
 %
 
%
 
205.04
 %
 
275.80
%
 
%
 
284.32
%
 
277.60
 %
 
%
 
321.75
 %
Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average loans and leases during period
$
3,999,635

 
$
8,872

 
$
3,951,934

 
$
3,686,013

 
$
12,702

 
$
3,690,955

 
$
3,360,467

 
$
17,428

 
$
3,328,416

Loans and leases at end of period
$
4,064,278

 
$
8,784

 
$
4,073,062

 
$
3,834,906

 
$
9,863

 
$
3,844,769

 
$
3,434,290

 
$
15,020

 
$
3,449,310

Nonperforming loans and leases at end of period
$
16,464

 
$

 
$
16,464

 
$
11,406

 
$

 
$
11,406

 
$
12,341

 
$

 
$
12,341

                              
(1) 
Net loan charge-offs (recoveries) are annualized to calculate the ratios.


61



 
As of and for the Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
Non-PCI Loans
 
PCI Loans
 
Total
 
Non-PCI Loans
 
PCI Loans
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
31,458

 
$
971

 
$
32,429

 
$
37,494

 
$
5,441

 
$
42,935

Actual charge-offs
(851
)
 

 
(851
)
 
(1,299
)
 
(137
)
 
(1,436
)
Recoveries on loans previously charged off
1,838

 

 
1,838

 
1,248

 

 
1,248

Net loan recoveries (charge-offs)
987

 

 
987

 
(51
)
 
(137
)
 
(188
)
Loan and lease loss provision (income
593

 
(251
)
 
342

 
(3,184
)
 
144

 
(3,040
)
Balance at end of period
$
33,038

 
$
720

 
$
33,758

 
$
34,259

 
$
5,448

 
$
39,707

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for off-balance sheet items:
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
1,184

 
$

 
$
1,184

 
$
986

 
$

 
$
986

Provision (income)
(49
)
 

 
(49
)
 
489

 

 
489

Balance at end of period
$
1,135

 
$

 
$
1,135

 
$
1,475

 
$

 
$
1,475

 
 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 
 
 
 
Net loan charge-offs (recoveries) to average loans (1)
(0.05
)%
 
%
 
(0.05
)%
 
%
 
1.56
%
 
0.01
%
Net loan charge-offs (recoveries) to loans (1)
(0.05
)%
 
%
 
(0.05
)%
 
%
 
1.82
%
 
0.01
%
Allowance for loan losses to average loans
0.84
 %
 
7.72
%
 
0.86
 %
 
1.04
%
 
31.10
%
 
1.22
%
Allowance for loan losses to loans
0.81
 %
 
8.2
%
 
0.83
 %
 
1.00
%
 
36.27
%
 
1.15
%
Net loan charge-offs (recoveries) to allowance for loan losses (1)
(5.97
)%
 
%
 
(5.85
)%
 
0.03
%
 
5.03
%
 
0.95
%
Allowance for loan losses to nonperforming loans
200.67
 %
 
%
 
205.04
 %
 
277.60
%
 
%
 
321.75
%
Balance:
 
 
 
 
 
 
 
 
 
 
 
Average loans during period
$
3,949,592

 
$
9,324

 
$
3,917,004

 
$
3,298,796

 
$
17,517

 
$
3,260,625

Loans at end of period
$
4,046,278

 
$
8,784

 
$
4,073,062

 
$
3,434,290

 
$
15,020

 
$
3,449,310

Nonperforming loans at end of period
$
16,464

 
$

 
$
16,464

 
$
12,341

 
$

 
$
12,341

                              
(1) 
Net loan charge-offs (recoveries) are annualized to calculate the ratios.

Allowance for loan and lease losses was $33.8 million, $32.4 million and $39.7 million, as of June 30, 2017, December 31, 2016, and June 30, 2016, respectively. The increase of $1.4 million, or 4.1 percent, in the allowance for loan and lease losses as of June 30, 2017, compared with December 31, 2016 was due primarily to the increase in estimated loss factors and an increase in loans and lease. Accordingly, the non-PCI loan and lease loss allowance increased $1.5 million to $33.0 million as of June 30, 2017, compared with $31.5 million at December 31, 2016. The PCI loan loss allowance decreased $0.3 million to $0.7 million as of June 30, 2017, compared with $1.0 million at December 31, 2016.

The allowance for off-balance sheet exposure, primarily unfunded loan commitments, was $1.1 million, $1.2 million and $1.5 million as of June 30, 2017, December 31, 2016 and June 30, 2016, respectively. The Bank closely monitors the borrower’s repayment capabilities, while funding existing commitments to ensure losses are minimized.

Based on management’s evaluation and analysis of portfolio credit quality and prevailing economic conditions, we believe these allowances are adequate for losses inherent in the loan and lease portfolio and for off-balance sheet exposures as of June 30, 2017.


62



The following table presents a summary of net charge-offs (recoveries):
 
As of and for the Three Months Ended
 
As of and for the Six Months Ended
 
Charge-offs
 
Recoveries
 
Net
Charge-offs (Recoveries)
 
Charge-offs
 
Recoveries
 
Net
Charge-offs (Recoveries)
 
(in thousands)
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Real estate loans
$
38

 
$
447

 
$
(409
)
 
$
142

 
$
1,159

 
$
(1,017
)
Commercial and industrial loans

 
367

 
(367
)
 
40

 
644

 
(604
)
Leases receivable
627

 
20

 
607

 
669

 
20

 
649

Consumer loans

 
15

 
(15
)
 
 
 
15

 
(15
)
Total Non-PCI loans
$
665

 
$
849

 
$
(184
)
 
$
851

 
$
1,838

 
$
(987
)
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Real estate loans
$
156

 
$
97

 
59

 
$
691

 
$
190

 
501

Commercial and industrial loans
506

 
845

 
(339
)
 
608

 
1,005

 
(397
)
Consumer loans

 
53

 
(53
)
 

 
53

 
(53
)
Total Non-PCI loans
$
662

 
$
995

 
$
(333
)
 
$
1,299

 
$
1,248

 
$
51


For the three months ended June 30, 2017 and 2016, total charge-offs were $0.7 million. For the three months ended June 30, 2017, total recoveries were $0.8 million, a decrease of $0.1 million, or 14.7 percent, from $1.0 million for the same period in 2016. For the six months ended June 30, 2017, total charge-offs were $0.9 million, a decrease of $0.5 million or 34.5 percent from $1.3 million for the same period in 2016, and total recoveries were $1.8 million, an increase of $0.6 million or 47.3 percent from $1.2 million for the same period in 2016.

Deposits

The following table shows the composition of deposits by type as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
 
Balance
 
Percent
 
Balance
 
Percent
 
(dollars in thousands)
Demand – noninterest-bearing
$
1,260,929

 
29.6
%
 
$
1,203,240

 
31.6
%
Interest-bearing:
 
 


 


 


Demand
93,390

 
2.2
%
 
96,856

 
2.5
%
Money market and savings
1,528,127

 
35.9
%
 
1,329,324

 
34.9
%
Time deposits of $100,000 or more
1,057,243

 
24.8
%
 
844,386

 
22.2
%
Other time deposits
319,484

 
7.5
%
 
335,931

 
8.8
%
Total deposits
$
4,259,173

 
100.0
%
 
$
3,809,737

 
100.0
%
                              
(1) 
Includes $460.5 million and $445.4 million of time deposits of $250,000 or more as of June 30, 2017 and December 31, 2016, respectively.

Deposits increased $449.4 million, or 11.8 percent, to $4.26 billion as of June 30, 2017 from $3.81 billion as of December 31, 2016. The increase in deposits was mainly attributable to the $198.8 million and $196.4 million increase in money market and savings deposits and time deposits, respectively.

 
Borrowings

At June 30, 2017 and December 31, 2016, there were $20.0 million and $315.0 million in overnight advances from the FHLB, respectively. The reduction in FHLB advances was supported by the increase in deposits for the first six months of 2017. In addition, subordinated debentures were $117.0 million and $19.0 million at June 30, 2017 and December 31, 2016, respectively. The change represents the proceeds from the Subordinated Note that closed on March 21, 2017.


63




Interest Rate Risk Management

The spread between interest income on interest-earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and interest rate changes substantially affect our financial performance. We emphasize capital protection through stable earnings rather than maximizing yield. In order to achieve stable earnings, we prudently manage our assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits established within our guidelines.

The Company performs simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated below). This sensitivity analysis is compared to policy limits, which specify the maximum tolerance level for net interest income exposure over a 1- to 12-month and a 13- to 24-month horizon, given the basis point adjustment in interest rates reflected below.
 
Net Interest Income Simulation
 
1- to 12-Month Horizon
 
13- to 24-Month Horizon
Change in
Interest
Rate

Dollar
Change
 

Percentage
Change
 

Dollar
Change
 

Percentage
Change
 
(dollars in thousands)
300%
$
532

 
0.30%
 
$
6,060

 
3.37%
200%
$
255

 
0.14%
 
$
4,039

 
2.25%
100%
$
431

 
0.24%
 
$
2,893

 
1.61%
(100)%
$
(12,586
)
 
(7.00)%
 
$
(21,317
)
 
(11.87)%

 
 
 
 
 
Economic Value of Equity (EVE)
Change in
Interest
Rate
 
 
 
 

Dollar
Change
 

Percentage
Change
 
 
 
 
 
(dollars in thousands)
300%
 
 
 
 
$
(18,304
)
 
(3.27)%
200%
 
 
 
 
$
(11,674
)
 
(2.09)%
100%
 
 
 
 
$
866

 
0.15%
(100)%
 
 
 
 
$
(45,434
)
 
(8.11)%

The estimated sensitivity does not necessarily represent our forecast, and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including the nature and timing of interest rate levels including yield curve shape, prepayments on loans and leases and securities, pricing strategies on loans and leases and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions, including how customer preferences or competitor influences might change.

Capital Resources and Liquidity

Capital Resources

Historically, our primary source of capital has been the retention of operating earnings. In order to ensure adequate levels of capital, the Board regularly assesses projected sources and uses of capital in conjunction with projected increases in assets and levels of risk. Management considers, among other things, earnings generated from operations, and access to capital from financial markets through the issuance of additional securities, including common stock or notes, to meet our capital needs.
 

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At June 30, 2017, the Bank’s total risk-based capital ratio of 15.44 percent, Tier 1 risk-based capital ratio of 14.62 percent, common equity Tier 1 capital ratio of 14.62 percent and Tier 1 leverage capital ratio of 12.89 percent, placed the Bank in the “well capitalized” category pursuant to capital rules, which is defined as institutions with total risk-based capital ratio equal to or greater than 10.00 percent, Tier 1 risk-based capital ratio equal to or greater than 8.00 percent, common equity Tier 1 capital ratios equal to or greater than 6.50 percent and Tier 1 leverage capital ratio equal to or greater than 5.00 percent.

At June 30, 2017, the Company's total risk-based capital ratio was 15.69 percent, Tier 1 risk-based capital ratio was 12.58 percent, common equity Tier 1 capital ratio was 12.22 percent and Tier 1 leverage capital ratio was 11.08 percent.

For a discussion of implemented changes to the capital adequacy framework prompted by Basel III and the Dodd-Frank Wall Street Reform and Consumer Protection Act, see our 2016 Annual Report on Form 10-K.

Liquidity

Hanmi Financial

Management believes that Hanmi Financial, on a stand-alone basis, has adequate liquid assets to meet its current obligations.

Hanmi Bank

The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash flow requirements of our customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances and brokered deposits. As of June 30, 2017, the Bank had $145.1 million of brokered deposits.

We monitor the sources and used of funds on a regular basis to maintain an acceptable liquidity position. The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 30% of its assets. As of June 30, 2017, the total borrowing capacity available based on pledged collateral and remaining available borrowing capacity were $756.5 million and $736.5 million, respectively, compared to $736.6 million and $421.6 million, respectively as of December 31, 2016.

As a means of augmenting its liquidity, the Bank had an available borrowing source of $9.5 million from the Federal Reserve Discount Window, to which the Bank pledged securities with a carrying value of $9.7 million, and had no borrowings as of June 30, 2017.

Off-Balance Sheet Arrangements

For a discussion of off-balance sheet arrangements, see Note 12 - Off-Balance Sheet Commitments included in the Notes to Consolidated Financial Statements (Unaudited) in this Report and “Item 1. Business - Off-Balance Sheet Commitments” in our 2016 Annual Report on Form 10-K.

Contractual Obligations

There have been no material changes to the contractual obligations described in our 2016 Annual Report on Form 10-K.

Recently Issued Accounting Standards
    
FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606), 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.  ASU 2014-09 established a principles-based approach to recognizing revenue that applies to all contracts other than those covered by other authoritative U.S. GAAP guidance. Quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows are also required.  ASU 2014-09 was to be effective for interim and annual periods beginning after December 15, 2016 and was to be

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applied on either a modified retrospective or full retrospective basis. In August 2015, the FASB issued ASU 2015-14 which defers the original effective date for all entities by one year. Public business entities should apply the guidance in ASU 2015-14 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
While the guidance will replace most existing revenue recognition guidance in GAAP, the ASU is not applicable to financial instruments and, therefore, will not impact a majority of the Company’s revenue, including net interest income. While in scope of the new guidance, the Company does not expect a material change in the timing or measurement of revenues related to deposit account fees. The Company will continue to evaluate the effect that this guidance will have on other revenue streams within its scope, as well as changes in disclosures required by the new guidance. However, we do not expect adoption of this ASU to have a material impact on the Company’s consolidated financial statements.
FASB ASU 2016-01, Financial Instruments-Overall Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, amends the guidance in U.S. GAAP on the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The FASB additionally clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. While we are currently evaluating the impact of this ASU, we do not expect its adoption to have a material impact on our consolidated financial statements.
FASB ASU 2016-02, Leases (Topic 842), introduces the most significant change for lessees including the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. By definition, a short-term lease is one in which: (a) the lease term is 12 months or less; and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which right-of-use assets and lease liabilities are not recognized and lease payments are generally recognized as expense over the lease term on a straight-line basis. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under the legacy lease accounting guidance. Examples of changes in the new guidance affecting both lessees and lessors include: (a) defining initial direct costs to only include those incremental costs that would not have been incurred if the lease had not been entered into, (b) requiring related party leases to be accounted for based on their legally enforceable terms and conditions, (c) eliminating the additional requirements that must be applied today to leases involving real estate and (d) revising the circumstances under which the transfer contract in a sale-leaseback transaction should be accounted for as the sale of an asset by the seller-lessee and the purchase of an asset by the buyer-lessor. In addition, both lessees and lessors are subject to new disclosure requirements. ASU 2016-02 is effective for public entities for interim and annual periods beginning after December 15, 2018.
As a lessee in several operating lease arrangements that are not considered short-tem, effective January 1, 2019, the Company expects to recognize a lease liability for the present value of future such lease commitments and a right of use asset for the same leases. While the Company is currently evaluating the impact of this new guidance, the adoption will result in an increase in the Company’s assets and liabilities on our consolidated balance sheets and it will likely not have a significant impact on our consolidated net income, stockholders’ equity or cash flows.
FASB ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. Current expected credit losses (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost; and (2) certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees, and net investments in leases, as well as reinsurance and trade receivables. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses (ECL) should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating ECL. ASU 2016-13 is effective for public entities for interim and annual periods beginning after December 15, 2019. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently of evaluating the impact of this ASU on our consolidated financial statements.

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FASB ASU 2016-15, Statement of Cash flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force), addresses eight classification issues related to the statement of cash flows: (1) Debt prepayment of debt extinguishment costs; (2) Settlement of zero-coupon bonds: (3) Contingent consideration payments made after a business combination; (4) Proceeds from the settlement of insurance claims; (5) Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) Distributions received from equity method investees; (7) Beneficial interests in securitization transactions; and (8) Separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
FASB ASU 2016-18, Statement of Cash flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. ASU 2016-18 is effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
FASB ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of Business, provides guidance on evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new standard clarifies that when substantially all of the fair value of gross assets acquired is concentrated in a single asset, or a group of similar assets, the asset acquired would not represent a business. The new ASU introduces this initial required screen, if met, eliminates the need for further assessment. For public business entities with a calendar year end, the standard is effective in 2018. Early adoption is permitted, including adoption in an interim period. The amendments can be applied to transactions occurring before the guidance was issued, as long as the applicable financial statements have not been issued. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.
FASB ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, simplifies the subsequent measurement of goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill (i.e., the current Step 2 of the goodwill impairment test) to measure a goodwill impairment charge. Under this ASU, the impairment test is simply the comparison of the fair value of a reporting unit with its carrying amount (the current Step 1), with the impairment charge being the deficit in fair value but not exceeding the total amount of goodwill allocated to that reporting unit. The simplified one-step impairment test applies to all reporting units (including those with zero or negative carrying amounts). An entity should apply the amendments in this ASU on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this standard. Public business entities should adopt the amendments in this ASU for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
FASB ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Topic 310): Premium Amortization on Purchased Callable Debt Securities, shortens the period of amortization of the premium on certain callable debt securities to the earliest call date. ASU 2017-08 applies to securities that have explicit, non-contingent call features that are callable at fixed prices and on preset dates. Securities purchased at a discount and mortgage-backed securities in which early repayment is based on prepayment of the underlying assets of the security are outside the scope of ASU 2017-08. For public business entities, the standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period, and applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
FASB ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, provides clarity and reduces both diversity in practice, and costs and complexity when applying the guidance in Topic 718 to a change in the terms or conditions of a share-based payment award. Under ASU 2017-09, an entity should account for the effects of a modification unless all the following are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified, (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the

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original award immediately before the original award is modified. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures regarding market risks in Hanmi Bank’s portfolio, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk Management” and “- Capital Resources” in this Report.


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Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of June 30, 2017, Hanmi Financial carried out an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, under the supervision and with the participation of our senior management, including our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial and accounting officer). The purpose of the disclosure controls and procedures is to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that Hanmi Financial’s disclosure controls and procedures were effective as of June 30, 2017.

Changes in Internal Control Over Financial Reporting

During the most recent fiscal quarter, there has been no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that has materially affected or is reasonably likely to materially affect Hanmi Financial's internal control over financial reporting.

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Part II — Other Information

Item 1. Legal Proceedings

From time to time, Hanmi Financial and its subsidiaries are parties to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of Hanmi Financial and its subsidiaries. In the opinion of management, the resolution of any such issues would not have a material adverse impact on the financial condition, results of operations, or liquidity of Hanmi Financial or its subsidiaries.

Item 1A. Risk Factors

There have been no material changes in the risk factors previously disclosed under Part I, Item 1A, "Risk Factors" of our 2016 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.


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Item 6. Exhibits
Exhibit
Number
Document
10.1
Employment Agreement, dated as of April 27, 2017, by and among Hanmi Financial Corporation, Hanmi Bank and C. G. Kum (incorporated by reference herein from Exhibit 10.1 to Hanmi Financial's Current Report on Form 8-K, filed with the SEC on May 3, 2017).
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document *
101.SCH
XBRL Taxonomy Extension Schema Document *
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document *
101.LAB
XBRL Taxonomy Extension Label Linkbase Document *
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document *
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document *

* Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language).


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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
 
Hanmi Financial Corporation
 
 
 
 
Date:
August 9, 2017
 
By:
/s/ C. G. Kum
 
 
 
 
C. G. Kum
 
 
 
 
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
 
By:
/s/ Romolo C. Santarosa
 
 
 
 
Romolo C. Santarosa
 
 
 
 
Senior Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)



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