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EX-32.2 - EXHIBIT 32.2 - HANMI FINANCIAL CORPexhibit3222017q3.htm
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EX-31.2 - EXHIBIT 31.2 - HANMI FINANCIAL CORPexhibit3122017q3.htm
EX-31.1 - EXHIBIT 31.1 - HANMI FINANCIAL CORPexhibit3112017q3.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 September 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 November 4, 2017, there were 32,409,174 outstanding shares of the Registrant’s Common Stock.




Hanmi Financial Corporation and Subsidiaries
Quarterly Report on Form 10-Q
Three and Nine Months Ended September 30, 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) September 30, 2017
 
December 31, 2016
Assets
 
 
 
Cash and due from banks
$
138,139

 
$
147,235

Securities available for sale, at fair value (amortized cost of $597,944 as of September 30, 2017 and $521,053 as of December 31, 2016)
598,440

 
516,964

Loans held for sale, at the lower of cost or fair value
6,469

 
9,316

Loans and leases receivable, net of allowance for loan and lease losses of $32,492 as of September 30, 2017 and $32,429 as of December 31, 2016
4,162,863

 
3,812,340

Accrued interest receivable
12,098

 
10,987

Premises and equipment, net
26,648

 
28,698

Other real estate owned ("OREO"), net
1,946

 
7,484

Customers’ liability on acceptances
647

 
978

Servicing assets
10,428

 
10,564

Goodwill and other intangible assets, net
12,628

 
12,889

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

 
16,385

Income tax asset, net
46,210

 
48,047

Bank-owned life insurance
50,268

 
49,440

Prepaid expenses and other assets
28,227

 
30,019

Total assets
$
5,111,396

 
$
4,701,346

Liabilities and stockholders’ equity
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
1,293,538

 
$
1,203,240

Interest-bearing
3,005,472

 
2,606,497

Total deposits
4,299,010

 
3,809,737

Accrued interest payable
4,071

 
2,567

Bank’s liability on acceptances
657

 
978

FHLB advances
110,000

 
315,000

Subordinated debentures
117,140

 
18,978

Accrued expenses and other liabilities
21,271

 
23,061

Total liabilities
4,552,149

 
4,170,321

Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,059,166 shares (32,413,082 shares outstanding) as of September 30, 2017 and issued 32,946,197 shares (32,330,747 shares outstanding) as of December 31, 2016
33

 
33

Additional paid-in capital
564,787

 
562,446

Accumulated other comprehensive income (loss), net of tax expense of $207 as of September 30, 2017 and tax benefit of $1,696 as of December 31, 2016
290

 
(2,394
)
Retained earnings
65,858

 
41,726

Less: treasury stock, at cost; 646,084 shares as of September 30, 2017 and 615,450 shares as of December 31, 2016
(71,721
)
 
(70,786
)
Total stockholders’ equity
559,247

 
531,025

Total liabilities and stockholders’ equity
$
5,111,396

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Interest and dividend income:
 
 
 
 
 
 
 
Interest and fees on loans and leases
$
50,265

 
$
41,150

 
$
143,614

 
$
120,862

Interest on securities
3,188

 
2,701

 
8,657

 
8,604

Dividends on Federal Reserve Bank ("FRB") and FHLB stock
286

 
419

 
943

 
1,540

Interest on deposits in other banks
123

 
55

 
323

 
152

Total interest and dividend income
53,862

 
44,325

 
153,537

 
131,158

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
7,071

 
4,358

 
18,687

 
11,769

Interest on FHLB advances
198

 
179

 
714

 
673

Interest on subordinated debentures
1,667

 
206

 
3,677

 
584

Total interest expense
8,936

 
4,743

 
23,078

 
13,026

Net interest income before provision for loan and lease losses
44,926

 
39,582

 
130,459

 
118,132

Loan and lease loss provision (income)
269

 
(1,450
)
 
611

 
(4,490
)
Net interest income after provision for loan and lease losses
44,657

 
41,032

 
129,848

 
122,622

Noninterest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
2,678

 
2,883

 
7,667

 
8,782

Trade finance and other service charges and fees
1,133

 
992

 
3,449

 
3,099

Gain on sales of Small Business Administration ("SBA") loans
2,546

 
1,616

 
6,678

 
4,247

Disposition gains on Purchased Credit Impaired ("PCI") loans
979

 
789

 
1,702

 
3,411

Net gain on sales of securities
267

 
46

 
1,473

 
46

Other operating income
1,213

 
2,348

 
4,764

 
5,423

Total noninterest income
8,816

 
8,674

 
25,733

 
25,008

Noninterest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
16,947

 
15,950

 
50,674

 
47,710

Occupancy and equipment
3,883

 
3,917

 
11,743

 
11,351

Data processing
1,779

 
1,330

 
5,148

 
4,219

Professional fees
1,210

 
1,090

 
3,912

 
4,063

Supplies and communications
755

 
821

 
2,135

 
2,266

Advertising and promotion
1,147

 
1,153

 
2,964

 
2,769

OREO expense (income)
(16
)
 
73

 
402

 
721

Merger and integration costs (income)

 

 
(40
)
 

Other operating expenses
2,955

 
4,003

 
7,905

 
9,170

Total noninterest expense
28,660

 
28,337

 
84,843

 
82,269

Income before income tax expense
24,813

 
21,369

 
70,738

 
65,361

Income tax expense
9,890

 
8,248

 
27,576

 
23,288

Net income
$
14,923

 
$
13,121

 
$
43,162

 
$
42,073

Basic earnings per share
$
0.46

 
$
0.41

 
$
1.34

 
$
1.31

Diluted earnings per share
$
0.46

 
$
0.41

 
$
1.33

 
$
1.31

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
32,095,286

 
31,912,470

 
32,058,705

 
31,880,466

Diluted
32,255,814

 
32,088,233

 
32,230,319

 
32,031,295


See Accompanying Notes to Consolidated Financial Statements (Unaudited)

4



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
14,923

 
$
13,121

 
$
43,162

 
$
42,073

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

 
(2,629
)
 
6,059

 
13,518

Less: reclassification adjustment for net gain included in net income
(267
)
 
(46
)
 
(1,473
)
 
(46
)
Unrealized loss on interest-only strip of servicing assets

 

 

 
(9
)
Income tax expense related to items of other comprehensive income
(109
)
 
1,109

 
(1,902
)
 
(5,593
)
Other comprehensive income, net of tax
153

 
(1,566
)
 
2,684

 
7,870

Comprehensive income
$
15,076

 
$
11,555

 
$
45,846

 
$
49,943


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
42,584

 

 
42,584

 

 
592

 

 

 

 
592

Restricted stock awards, net of forfeitures
256,287

 

 
256,287

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 
2,329

 

 

 

 
2,329

Restricted stock surrendered due to employee tax liability

 
(20,456
)
 
(20,456
)
 

 

 

 

 
(502
)
 
(502
)
Cash dividends declared

 

 

 

 

 

 
(15,082
)
 

 
(15,082
)
Net income

 

 

 

 

 

 
42,073

 

 
42,073

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

 

 

 

 

 
7,870

 

 

 
7,870

Balance at September 30, 2016
32,865,393

 
(612,619
)
 
32,252,774

 
$
33

 
$
560,906

 
$
7,555

 
$
33,413

 
$
(70,709
)
 
$
531,198

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
32,946,197

 
(615,450
)
 
32,330,747

 
$
33

 
$
562,446

 
$
(2,394
)
 
$
41,726

 
$
(70,786
)
 
$
531,025

Stock options exercised
22,125

 

 
22,125

 

 
270

 

 

 

 
270

Restricted stock awards, net of forfeitures
90,844

 

 
90,844

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 
2,071

 

 

 

 
2,071

Restricted stock surrendered due to employee tax liability

 
(30,634
)
 
(30,634
)
 

 

 

 

 
(935
)
 
(935
)
Cash dividends declared

 

 

 

 

 

 
(19,030
)
 

 
(19,030
)
Net income

 

 

 

 

 

 
43,162

 

 
43,162

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

 

 

 

 

 
2,684

 

 

 
2,684

Balance at September 30, 2017
33,059,166

 
(646,084
)
 
32,413,082

 
$
33

 
$
564,787

 
$
290

 
$
65,858

 
$
(71,721
)
 
$
559,247

See Accompanying Notes to Consolidated Financial Statements (Unaudited)


6



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
43,162

 
$
42,073

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
9,353

 
10,848

Share-based compensation expense
2,071

 
2,329

Loan and lease loss provision (income)
611

 
(4,490
)
Gain on sales of securities
(1,473
)
 
(46
)
Gain on sales of SBA loans
(6,678
)
 
(4,247
)
Loss (gain) on sale of premises and equipment

 
(1,053
)
Disposition gains on PCI loans
(1,702
)
 
(3,411
)
Gain on sales of OREO
(482
)
 

Valuation adjustment on OREO
884

 
721

Origination of SBA loans held for sale
(81,716
)
 
(60,248
)
Proceeds from sales of SBA loans
92,715

 
61,494

Change in accrued interest receivable
(1,111
)
 
(659
)
Change in bank-owned life insurance
(828
)
 
(809
)
Change in prepaid expenses and other assets
1,894

 
3,791

Change in income tax asset
(65
)
 
1,436

Change in accrued interest payable
1,504

 
(733
)
Change in accrued expenses and other liabilities
(2,316
)
 
(10,121
)
Net cash provided by operating activities
55,823

 
36,875

Cash flows from investing activities:
 
 
 
Proceeds from redemption of FRB stock

 
14,423

Proceeds from matured, called and repayment of securities
51,117

 
98,771

Proceeds from sales of securities available for sale
70,333

 
78,282

Proceeds from sales of OREO
5,710

 
2,306

Change in loans and leases receivable, excluding purchases
(191,594
)
 
(229,063
)
Purchases of securities
(201,398
)
 
(19,992
)
Purchases of premises and equipment
(147
)
 
982

Purchases of loans receivable
(161,253
)
 
(143,189
)
Purchases of FRB stock

 
(325
)
Net cash used in investing activities
(427,232
)
 
(197,805
)
Cash flows from financing activities:
 
 
 
Change in deposits
489,273

 
261,231

Change in overnight FHLB borrowings
(205,000
)
 
(115,000
)
Issuance of subordinated debentures
97,735

 

Proceeds from exercise of stock options
270

 
592

Cash paid for treasury shares acquired in respect of share-based compensation
(935
)
 
(502
)
Cash dividends paid
(19,030
)
 
(19,558
)
Net cash provided by financing activities
362,313

 
126,763

Net decrease in cash and cash equivalents
(9,096
)
 
(34,167
)
Cash and cash equivalents at beginning of year
147,235

 
164,364

Cash and cash equivalents at end of period
$
138,139

 
$
130,197

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid (received) during the period for:
 
 
 
Interest
$
23,078

 
$
13,759

Income taxes
$
25,146

 
$
21,654

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

 
$
4,318

Income tax expense related to items in other comprehensive income
$
(1,902
)
 
$
(5,593
)
Change in unrealized gain in accumulated other comprehensive income
$
(6,059
)
 
$
(13,518
)
Cash dividends declared
$
(19,030
)
 
$
(15,082
)
See Accompanying Notes to Consolidated Financial Statements (Unaudited)


7



Hanmi Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Nine Months Ended September 30, 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 September 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 September 30, 2017 and December 31, 2016: 
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
 
(in thousands)
September 30, 2017
 
 
 
 
 
 
 
Mortgage-backed securities (1) (2)
$
310,111

 
$
793

 
$
1,154

 
$
309,750

Collateralized mortgage obligations (1)
107,052

 
16

 
944

 
106,124

U.S. government agency securities
7,499

 

 
42

 
7,457

SBA loan pool securities
4,036

 

 
140

 
3,896

Municipal bonds-tax exempt
146,177

 
2,424

 
77

 
148,524

U.S. treasury securities
153

 

 

 
153

Mutual funds
22,916

 

 
380

 
22,536

Total securities available for sale
$
597,944

 
$
3,233

 
$
2,737

 
$
598,440

 
 
 
 
 
 
 
 
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 an estimated fair value of $8.1 million and $52.9 million as of September 30, 2017 and December 31, 2016, respectively.






9



The amortized cost and estimated fair value of securities as of September 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
$
24,537

 
$
24,452

Over one year through five years
64,646

 
64,519

Over five years through ten years
256,367

 
257,279

Over ten years
252,394

 
252,190

Total
$
597,944

 
$
598,440

Gross unrealized losses on securities available for sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of September 30, 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)
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
787

 
$
171,919

 
53

 
$
367

 
$
21,430

 
9

 
$
1,154

 
$
193,349

 
62

Collateralized mortgage obligations
320

 
62,309

 
23

 
624

 
38,940

 
24

 
944


101,249


47

U.S. government agency securities
42

 
7,457

 
3

 

 

 

 
42


7,457


3

SBA loan pool securities

 

 

 
140

 
3,896

 
2

 
140


3,896


2

Municipal bonds-tax exempt
60

 
3,459

 
3

 
17

 
1,704

 
4

 
77


5,163


7

U.S. treasury securities

 

 

 

 

 

 





Mutual funds
254

 
20,632

 
2

 
126

 
1,899

 
4

 
380


22,531


6

Total
$
1,463

 
$
265,776

 
84

 
$
1,274

 
$
67,869

 
43

 
$
2,737

 
$
333,645

 
127

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 September 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 September 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 September 30, 2017 and December 31, 2016 were not other-than-temporarily impaired, and therefore, no impairment charges as of September 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Gross realized gains on sales of securities
$
267

 
$
396

 
$
1,473

 
$
396

Gross realized losses on sales of securities

 
(350
)
 

 
(350
)
Net realized gains on sales of securities
$
267

 
$
46

 
$
1,473

 
$
46

Proceeds from sales of securities
$
17,644

 
$
78,282

 
$
70,333

 
$
78,282


For the three months ended September 30, 2017, there was a $267,000 net gain in earnings resulting from sales of securities. Net unrealized gains of $227,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period. There was a $46,000 net gain in earnings resulting from sales of securities during the three months ended September 30, 2016, that had previously been recorded as net unrealized gains of $321,000 in comprehensive income.

For the nine months ended September 30, 2017, there was a $1.5 million net gain in earnings resulting from the sale of securities. Net unrealized gains of $971,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period. There was a $46,000 net gain in earnings resulting from sales of securities during the nine months ended September 30, 2016, that had previously been recorded as net unrealized gains of $314,000 in comprehensive income.

Securities available for sale with market values of $130.7 million and $133.0 million as of September 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:
 
September 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
$
916,236

 
$
1,587

 
$
917,823

 
$
857,629

 
$
2,324

 
$
859,953

Hospitality
731,562

 
1,664

 
733,226

 
649,540

 
1,618

 
651,158

Gas station
245,042

 
2,388

 
247,430

 
260,187

 
2,692

 
262,879

Other (1)
1,144,176

 
2,013

 
1,146,189

 
1,107,589

 
2,067

 
1,109,656

Construction
64,263

 

 
64,263

 
55,962

 

 
55,962

Residential property
429,669

 
958

 
430,627

 
337,791

 
976

 
338,767

Total real estate loans
3,530,948

 
8,610

 
3,539,558

 
3,268,698

 
9,677

 
3,278,375

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial term
170,891

 
51

 
170,942

 
138,032

 
136

 
138,168

Commercial lines of credit
149,937

 

 
149,937

 
136,231

 

 
136,231

International loans
43,577

 

 
43,577

 
25,821

 

 
25,821

Total commercial and industrial loans
364,405

 
51

 
364,456

 
300,084

 
136

 
300,220

Leases receivable
272,271

 

 
272,271

 
243,294

 

 
243,294

Consumer loans (2)
19,027

 
43

 
19,070

 
22,830

 
50

 
22,880

Loans and leases receivable
4,186,651

 
8,704

 
4,195,355

 
3,834,906

 
9,863

 
3,844,769

Allowance for loan and lease losses
(31,698
)
 
(794
)
 
(32,492
)
 
(31,458
)
 
(971
)
 
(32,429
)
Loans and leases receivable, net
$
4,154,953

 
$
7,910

 
$
4,162,863

 
$
3,803,448

 
$
8,892

 
$
3,812,340

 

(1) 
Includes other property types which individually represent less than one percent of loans and leases receivable; other property types include mixed-use, apartment, office, industrial, faith-based facilities and warehouse.
(2) 
Consumer loans include home equity lines of credit of $14.7 million and $17.7 million as of September 30, 2017 and December 31, 2016, respectively.

Accrued interest on loans and leases receivable was $9.5 million and $8.2 million at September 30, 2017 and December 31, 2016, respectively. At September 30, 2017 and December 31, 2016, loans receivable of $1.1 billion and $1.0 billion, respectively, were pledged to secure borrowing facilities from the FHLB.


12



Loans Held for Sale

The following is the activity for SBA loans held for sale for the three months ended September 30, 2017 and 2016:
 
SBA Loans Held for Sale
 
Real Estate
 
Commercial and Industrial
 
Total
 
(in thousands)
September 30, 2017
 
 
 
 
 
Balance at beginning of period
$
8,817

 
$
2,132

 
$
10,949

Originations
16,326

 
11,723

 
28,049

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

 
$
1,923

 
$
6,469

 
 
 
 
 
 
September 30, 2016
 
 
 
 
 
Balance at beginning of period
$
9,293

 
$
3,540

 
$
12,833

Originations
11,272

 
6,417

 
17,689

Sales
(15,968
)
 
(8,122
)
 
(24,090
)
Principal payoffs and amortization
(2
)
 
(5
)
 
(7
)
Balance at end of period
$
4,595

 
$
1,830

 
$
6,425


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

 
$
1,906

 
$
9,316

Originations
51,090

 
30,626

 
81,716

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

 
$
1,923

 
$
6,469

 
 
 
 
 
 
September 30, 2016
 
 
 
 
 
Balance at beginning of period
$
840

 
$
2,034

 
$
2,874

Originations
40,120

 
20,128

 
60,248

Sales
(36,361
)
 
(20,304
)
 
(56,665
)
Principal payoffs and amortization
(4
)
 
(28
)
 
(32
)
Balance at end of period
$
4,595

 
$
1,830

 
$
6,425














13



Allowance for Loan and Lease Losses

Activity in the allowance for loan and lease losses was as follows for the periods indicated:
 
As of and for the Three Months Ended
 
September 30, 2017
 
September 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
$
33,038

 
$
720

 
$
33,758

 
$
34,259

 
$
5,448

 
$
39,707

Charge-offs
(2,405
)
 

 
(2,405
)
 
(111
)
 
(5
)
 
(116
)
Recoveries on loans and leases previously charged off
871

 

 
871

 
831

 

 
831

Net loan and lease (charge-offs) recoveries
(1,534
)
 

 
(1,534
)
 
720

 
(5
)
 
715

Loan and lease loss provision (income)
194

 
74

 
268

 
(1,540
)
 
90

 
(1,450
)
Balance at end of period
$
31,698

 
$
794

 
$
32,492

 
$
33,439

 
$
5,533

 
$
38,972


 
As of and for the Nine Months Ended
 
September 30, 2017
 
September 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
(3,256
)
 

 
(3,256
)
 
(1,410
)
 
(142
)
 
(1,552
)
Recoveries on loans and leases previously charged off
2,709

 

 
2,709

 
2,079

 

 
2,079

Net loan and lease (charge-offs) recoveries
(547
)
 

 
(547
)
 
669

 
(142
)
 
527

Loan and lease loss provision (income)
787

 
(177
)
 
610

 
(4,724
)
 
234

 
(4,490
)
Balance at end of period
$
31,698

 
$
794

 
$
32,492

 
$
33,439

 
$
5,533

 
$
38,972


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 nine months ended September 30, 2017 and 2016:
 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on non-PCI loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
22,762

 
$
6,979

 
2,033

 
$
87

 
$
1,177

 
$
33,038

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

 

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

 
308

 
220

 

 

 
871

Loan and lease loss provision (income)
(3,374
)
 
1,183

 
2,867

 
(23
)
 
(459
)
 
194

Ending balance
$
19,585

 
$
6,494

 
$
4,837

 
$
64

 
$
718

 
$
31,698

Ending balance: individually evaluated for impairment
$
3,882

 
$
531

 
$
2,008

 
$

 
$

 
$
6,421

Ending balance: collectively evaluated for impairment
$
15,703

 
$
5,963

 
$
2,829

 
$
64

 
$
718

 
$
25,277

 
 
 
 
 
 
 
 
 
 
 
 
Non-PCI loans and leases receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
3,530,948

 
$
364,405

 
$
272,271

 
$
19,027

 
$

 
$
4,186,651

Ending balance: individually evaluated for impairment
$
19,466

 
$
3,610

 
$
3,378

 
$
1,045

 
$

 
$
27,499

Ending balance: collectively evaluated for impairment
$
3,511,482

 
$
360,795

 
$
268,893

 
$
17,982

 
$

 
$
4,159,152

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses on PCI loans:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
671

 
$
41

 
$

 
$
8

 
$

 
$
720

Charge-offs

 

 

 

 

 

Loan loss provision (income)
81

 

 

 
(7
)
 

 
74

Ending balance
$
752

 
$
41

 
$

 
$
1

 
$

 
$
794

 
 
 
 
 
 
 
 
 
 
 
 
PCI loans receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance: acquired with deteriorated credit quality
$
8,610

 
$
51

 
$

 
$
43

 
$

 
$
8,704


15




 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on non-PCI loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
28,116

 
$
5,502

 

 
$
242

 
$
399

 
$
34,259

Charge-offs
(18
)
 
(93
)
 

 

 

 
(111
)
Recoveries on loans and leases previously charged off
337

 
494

 

 

 

 
831

Loan and lease loss provision (income)
(479
)
 
(622
)
 

 
(40
)
 
(399
)
 
(1,540
)
Ending balance
$
27,956

 
$
5,281

 
$

 
$
202

 
$

 
$
33,439

Ending balance: individually evaluated for impairment
$
2,723

 
$
495

 
$

 
$

 
$

 
$
3,218

Ending balance: collectively evaluated for impairment
$
25,233

 
$
4,786

 
$

$

$
202

 
$

 
$
30,221

 
 
 
 
 
 
 
 
 
 
 
 
Non-PCI loans and leases receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
3,195,332

 
$
319,521

 
$

 
$
22,266

 
$

 
$
3,537,119

Ending balance: individually evaluated for impairment
$
18,522

 
$
4,705

 
$

 
$
680

 
$

 
$
23,907

Ending balance: collectively evaluated for impairment
$
3,176,810

 
$
314,816

 
$

 
$
21,586

 
$

 
$
3,513,212

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses on PCI loans:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
5,400

 
$
41

 
$

 
$
7

 
$

 
$
5,448

Charge-offs
(5
)
 

 

 

 

 
(5
)
Loan loss provision (income)
89

 
1

 

 

 

 
90

Ending balance
$
5,484

 
$
42

 
$

 
$
7

 
$

 
$
5,533

 
 
 
 
 
 
 
 
 
 
 
 
PCI loans receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance: acquired with deteriorated credit quality
$
15,355

 
$
135

 
$

 
$
50

 
$

 
$
15,540



16




 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on non-PCI loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
25,212

 
$
5,582

 
307

 
$
191

 
$
166

 
$
31,458

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

 

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

 
1,021

 
239

 
15

 

 
2,709

Loan and lease loss provision (income)
(6,772
)
 
1,908

 
5,241

 
(142
)
 
552

 
787

Ending balance
$
19,585

 
$
6,494

 
$
4,837

 
$
64

 
$
718

 
$
31,698

Ending balance: individually evaluated for impairment
$
3,882

 
$
531

 
$
2,008

 
$

 
$

 
$
6,421

Ending balance: collectively evaluated for impairment
$
15,703

 
$
5,963

 
$
2,829

 
$
64

 
$
718

 
$
25,277

 
 
 
 
 
 
 
 
 
 
 
 
Non-PCI loans and leases receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
3,530,948

 
$
364,405

 
$
272,271

 
$
19,027

 
$

 
$
4,186,651

Ending balance: individually evaluated for impairment
$
19,466

 
$
3,610

 
$
3,378

 
$
1,045

 
$

 
$
27,499

Ending balance: collectively evaluated for impairment
$
3,511,482

 
$
360,795

 
$
268,893

 
$
17,982

 
$

 
$
4,159,152

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

 
$
41

 
$

 
$
8

 
$

 
$
971

Charge-offs

 

 

 

 

 

Loan loss provision (income)
(170
)
 

 

 
(7
)
 

 
(177
)
Ending balance
$
752

 
$
41

 
$

 
$
1

 
$

 
$
794

 
 
 
 
 
 
 
 
 
 
 
 
PCI loans receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance: acquired with deteriorated credit quality
$
8,610

 
$
51

 
$

 
$
43

 
$

 
$
8,704


17




 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
As of and for the Nine Months Ended 
 September 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
(709
)
 
(701
)
 

 

 

 
(1,410
)
Recoveries on loans and leases previously charged off
527

 
1,499

 

 
53

 

 
2,079

Loan and lease loss provision (income)
(1,662
)
 
(2,598
)
 

 
(93
)
 
(371
)
 
(4,724
)
Ending balance
$
27,956

 
$
5,281

 
$

 
$
202

 
$

 
$
33,439

Ending balance: individually evaluated for impairment
$
2,723

 
$
495

 
$

 
$

 
$

 
$
3,218

Ending balance: collectively evaluated for impairment
$
25,233

 
$
4,786

 
$

 
$
202

 
$

 
$
30,221

 
 
 
 
 
 
 
 
 
 
 
 
Non-PCI loans and leases receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
3,195,332

 
$
319,521

 
$

 
$
22,266

 
$

 
$
3,537,119

Ending balance: individually evaluated for impairment
$
18,522

 
$
4,705

 
$

 
$
680

 
$

 
$
23,907

Ending balance: collectively evaluated for impairment
$
3,176,810

 
$
314,816

 
$

 
$
21,586

 
$

 
$
3,513,212

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

 
$
42

 
$

 
$
2

 
$

 
$
5,441

Charge-offs
(142
)
 

 

 

 

 
(142
)
Loan loss provision (income)
229

 

 

 
5

 

 
234

Ending balance
$
5,484

 
$
42

 
$

 
$
7

 
$

 
$
5,533

 
 
 
 
 
 
 
 
 
 
 
 
PCI loans receivable:
 
 
 
 
 
 
 
 
 
 
 
Ending balance: acquired with deteriorated credit quality
$
15,355

 
$
135

 
$

 
$
50

 
$

 
$
15,540


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 September 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)
September 30, 2017
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
910,890

 
$
1,577

 
$
3,769

 
$
916,236

Hospitality
718,244

 
4,979

 
8,339

 
731,562

Gas station
240,952

 
2,274

 
1,816

 
245,042

Other
1,131,423

 
8,840

 
3,913

 
1,144,176

Construction
64,263

 

 

 
64,263

Residential property
429,048

 
326

 
295

 
429,669

Total real estate loans
3,494,820

 
17,996

 
18,132

 
3,530,948

Commercial and industrial loans:
 
 
 
 
 
 

Commercial term
167,492

 
1,623

 
1,776

 
170,891

Commercial lines of credit
149,646

 
110

 
181

 
149,937

International loans
43,577

 

 

 
43,577

Total commercial and industrial loans
360,715

 
1,733

 
1,957

 
364,405

Leases receivable
268,893

 

 
3,378

 
272,271

Consumer loans
17,930

 

 
1,097

 
19,027

Total Non-PCI loans and leases
$
4,142,358

 
$
19,729

 
$
24,564

 
$
4,186,651

 
 
 
 
 
 
 
 
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)
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
7

 
$
1

 
$
223

 
$
231

 
$
916,005

 
$
916,236

Hospitality
1,869

 

 
975

 
2,844

 
728,718

 
731,562

Gas station
43

 
63

 
128

 
234

 
244,808

 
245,042

Other
1,043

 
280

 
739

 
2,062

 
1,142,114

 
1,144,176

Construction

 

 

 

 
64,263

 
64,263

Residential property
500

 

 
326

 
826

 
428,843

 
429,669

Total real estate loans
3,462

 
344

 
2,391

 
6,197

 
3,524,751

 
3,530,948

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial term
236

 
53

 
510

 
799

 
170,092

 
170,891

Commercial lines of credit

 

 
181

 
181

 
149,756

 
149,937

International loans

 

 

 

 
43,577

 
43,577

Total commercial and industrial loans
236

 
53

 
691

 
980

 
363,425

 
364,405

Leases receivable
3,042

 
476

 
2,033

 
5,551

 
266,720

 
272,271

Consumer loans

 

 

 

 
19,027

 
19,027

Total Non-PCI loans and leases
$
6,740

 
$
873

 
$
5,115

 
$
12,728

 
$
4,173,923

 
$
4,186,651

 
 
 
 
 
 
 
 
 
 
 
 
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 September 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.


22



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)
September 30, 2017
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
Retail
$
1,475

 
$
1,495

 
$
124

 
$
1,351

 
$
61

Hospitality
6,288

 
7,233

 
2,165

 
4,123

 
3,057

Gas station
4,260

 
4,732

 
4,155

 
105

 

Other
4,777

 
5,170

 
1,881

 
2,897

 
764

Residential property
2,666

 
2,812

 
2,666

 

 

Total real estate loans
19,466

 
21,442

 
10,991

 
8,476

 
3,882

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
Commercial term
3,429

 
3,482

 
361

 
3,068

 
531

Commercial lines of credit
181

 
181

 
181

 

 

Total commercial and industrial loans
3,610

 
3,663

 
542

 
3,068

 
531

Leases receivable
3,378

 
3,482

 
658

 
2,720

 
2,008

Consumer loans
1,045

 
1,221

 
1,045

 

 

Total Non-PCI loans and leases
$
27,499

 
$
29,808

 
$
13,236

 
$
14,264

 
$
6,421

 
 
 
 
 
 
 
 
 
 
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



23



 
Three Months Ended
 
Nine Months Ended
 
Average Recorded Investment
 
Interest
Income
Recognized
 
Average Recorded Investment
 
Interest
Income
Recognized
 
(in thousands)
September 30, 2017
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
1,487

 
$
24

 
$
1,551

 
$
85

Hospitality
6,476

 
143

 
6,268

 
309

Gas station
4,603

 
85

 
4,764

 
297

Other
4,886

 
117

 
4,917

 
304

Residential property
2,794

 
26

 
2,797

 
87

Total real estate loans
20,246

 
395

 
20,297

 
1,082

Commercial and industrial loans:
 
 
 
 
 
 
 
Commercial term
3,495

 
54

 
3,739

 
165

Commercial lines of credit
1,060

 

 
853

 
16

Total commercial and industrial loans
4,555

 
54

 
4,592

 
181

Leases receivable
3,560

 
12

 
4,044

 
36

Consumer loans
1,201

 
15

 
917

 
21

Total Non-PCI loans and leases
$
29,562

 
$
476

 
$
29,850

 
$
1,320

 
 
 
 
 
 
 
 
September 30, 2016
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
1,985

 
$
31

 
$
2,430

 
$
117

Hospitality
3,222

 
66

 
4,429

 
367

Gas station
4,557

 
134

 
4,772

 
395

Other
6,541

 
138

 
7,438

 
533

Residential property
2,512

 
28

 
2,606

 
85

Total real estate loans
18,817

 
397

 
21,675

 
1,497

Commercial and industrial loans:
 
 
 
 
 
 
 
Commercial term
4,792

 
71

 
5,032

 
235

Commercial lines of credit
15

 
3

 
29

 
12

International loans

 

 
420

 

Total commercial and industrial loans
4,807

 
74

 
5,481

 
247

Consumer loans
682

 
7

 
688

 
22

Total Non-PCI loans and leases
$
24,306

 
$
478

 
$
27,844

 
$
1,766



The following is a summary of interest foregone on impaired loans and leases (excluding PCI loans) for the periods indicated:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 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
$
696

 
$
695

 
$
1,934

 
$
2,306

Less: Interest income recognized on impaired loans and leases
(476
)
 
(478
)
 
(1,320
)
 
(1,766
)
Interest foregone on impaired loans and leases
$
220

 
$
217

 
$
614

 
$
540


24



    
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:
 
September 30, 2017
 
December 31, 2016
 
(in thousands)
Real estate loans:
 
 
 
Commercial property
 
 
 
Retail
$
253

 
$
404

Hospitality
5,368

 
5,266

Gas station
742

 
1,025

Other
2,097

 
2,033

Residential property
621

 
564

Total real estate loans
9,081

 
9,292

Commercial and industrial loans:
 
 
 
Commercial term
984

 
824

Commercial lines of credit
181

 

Total commercial and industrial loans
1,165

 
824

Leases receivable
3,378

 
901

Consumer loans
934

 
389

Total nonaccrual Non-PCI loans and leases
$
14,558

 
$
11,406


The following table details nonperforming assets (excluding PCI loans) as of the dates indicated:
 
September 30, 2017
 
December 31, 2016
 
(in thousands)
Nonaccrual Non-PCI loans and leases
$
14,558

 
$
11,406

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

 

Total nonperforming Non-PCI loans and leases
14,558

 
11,406

OREO
1,946

 
7,484

Total nonperforming assets
$
16,504

 
$
18,890


As of September 30, 2017, OREO consisted of six properties with a combined carrying value of $1.9 million, five of which with a combined carrying value of $1.8 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.


25



Troubled Debt Restructurings
    
The following table details TDRs (excluding PCI loans) as of September 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)
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans
$
1,959

 
$
3,836

 
$
67

 
$

 
$
5,862

 
$
3,389

 
$

 
$
1,399

 
$
1,245

 
$
6,033

Commercial and industrial loans
132

 
186

 
48

 
109

 
475

 
10

 
184

 
1,667

 
485

 
2,346

Consumer loans
820

 

 

 

 
820

 

 

 
111

 

 
111

Total Non-PCI TDR loans
$
2,911

 
$
4,022

 
$
115

 
$
109

 
$
7,157

 
$
3,399

 
$
184

 
$
3,177

 
$
1,730

 
$
8,490

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 September 30, 2017 and December 31, 2016, total TDRs were $15.6 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 September 30, 2017 and December 31, 2016, $2.2 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 and nine month periods ended September 30, 2016, there was one commercial term loan with recorded investment of $53,000 that defaulted subsequent to the modifications occurring within the previous 12 months.There were no such defaults during the three and nine months periods ended September 30, 2017.

26



Purchased Credit Impaired Loans

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

 
$
(5,677
)
Accretion
501

 
501

Payments received
(1,770
)
 

Disposal/transfer to OREO
110

 

Change in expected cash flows, net

 
(306
)
Loan loss (provision) income
177

 

Balance at September 30, 2017
$
7,910

 
$
(5,482
)
 
 
 
 
Balance at January 1, 2016
$
14,573

 
$
(5,944
)
Accretion
933

 
933

Payments received
(6,408
)
 

Disposal/transfer to OREO
1,143

 

Change in expected cash flows, net

 
(900
)
Loan loss (provision) income
(234
)
 

Balance at September 30, 2016
$
10,007

 
$
(5,911
)
    
As of September 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)
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Real estate loans
$
1,257

 
$
357

 
$
6,996

 
$
8,610

 
$
752

 
$
7,858

Commercial and industrial loans

 

 
51

 
51

 
41

 
10

Consumer loans

 

 
43

 
43

 
1

 
42

Total PCI loans
$
1,257

 
$
357

 
$
7,090

 
$
8,704

 
$
794

 
$
7,910

 
 
 
 
 
 
 
 
 
 
 
 
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 September 30, 2017 and December 31, 2016, we had no PCI loans on nonaccrual status.


27



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)
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans
$
689

 
$

 
$
579

 
$
1,268

 
$
7,342

 
$
8,610

 
$
752

 
$
7,858

Commercial and industrial loans

 

 
5

 
5

 
46

 
51

 
41

 
10

Consumer loans

 

 

 

 
43

 
43

 
1

 
42

Total PCI loans
$
689

 
$

 
$
584

 
$
1,273

 
$
7,431

 
$
8,704

 
$
794

 
$
7,910

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 September 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)
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial property
41

 
6

 
$
6,788

 
88.7
%
 
1

 
$
864

 
11.3
%
 
$
7,652

Residential property

 

 

 
%
 
1

 
958

 
100.0
%
 
$
958

Total real estate loans
41

 
6

 
6,788

 
78.8
%
 
2

 
1,822

 
21.2
%
 
8,610

Commercial and industrial loans
3

 
3

 
51

 
100.0
%
 

 

 
%
 
51

Consumer loans
1

 
1

 
4

 
9.3
%
 
1

 
39

 
90.4
%
 
43

Total acquired loans
45

 
10

 
6,843

 
78.6
%
 
3

 
1,861

 
21.4
%
 
8,704

Allowance for loan losses
 
 
 
 
(378
)
 
 
 
 
 
(416
)
 
 
 
(794
)
Total carrying amount
 
 
 
 
$
6,465

 
 
 
 
 
$
1,445

 
 
 
$
7,910


 
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



28



Note 4 — Servicing Assets and Liabilities

The changes in servicing assets and liabilities for the nine months ended September 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
1,949

 
1,452

Amortization
(2,415
)
 
(2,363
)
Reversal of allowance
330

 

Balance at end of period
$
10,428

 
$
10,833

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

 
$
4,784

Amortization
(706
)
 
(1,358
)
Reversal of allowance
(67
)
 

Balance at end of period
$
2,370

 
$
3,426


At September 30, 2017 and 2016, we serviced loans sold to unaffiliated parties in the amounts of $482.0 million and $485.1 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 September 30, 2017 and 2016, and $3.5 million and $3.6 million for the nine months ended September 30, 2017 and 2016, respectively. Servicing fee income, net of the amortization of servicing assets and liabilities, is included in other operating income in the consolidated statements of income. Net amortization expense was $624,000 and $598,000 for the three months ended September 30, 2017 and 2016, respectively, and $1.7 million and $1.0 million for the nine months ended September 30, 2017 and 2016, respectively.

Note 5 — Income Taxes

The Company’s income tax expense was $9.9 million and $8.2 million for the three months ended September 30, 2017 and 2016, respectively. The effective income tax rate was 39.9 percent and 38.6 percent for the three months ended September 30, 2017 and 2016, respectively. The Company’s income tax expense was $27.6 million and $23.3 million for the nine months ended September 30, 2017 and 2016, respectively. The effective income tax rate was 39.0 percent and 35.6 percent for the nine months ended September 30, 2017 and 2016, respectively. Income tax expense for the nine months ended September 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 September 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 September 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.







29



Note 6 — Debt

FHLB Borrowings

The Bank had $110.0 million and $315.0 million in advances (borrowings) from the FHLB as of September 30, 2017 and December 31, 2016, respectively. The FHLB advances were all overnight borrowings at September 30, 2017 and December 31, 2016. For the three months ended September 30, 2017 and 2016, interest expense on FHLB advances was $198,000 and $179,000, respectively, and the weighted-average interest rate was 1.16 percent and 0.47 percent, respectively. For the nine months ended September 30, 2017 and 2016, interest expense on FHLB advances was $714,000 and $673,000, respectively, and the weighted-average interest rate was 0.80 percent and 0.44 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 $1.1 billion of loans pledged as collateral with the FHLB, which provides $808.9 million in borrowing capacity, of which $698.9 million remained available at September 30, 2017.

The Bank also has securities with market values of $9.3 million pledged with the FRB, which provides $9.2 million in available borrowing capacity through the Fed Discount Window. There were no outstanding borrowings with the FRB as of September 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 September 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 $90,000 for the three and nine months ended September 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 September 30, 2017 and December 31, 2016, the balance of Subordinated Debentures included in the Company's consolidated balance sheets, net of discount of $7.6 million and $7.8 million, was $19.2 million and $19.0 million, respectively. The amortization of discount was $85,000 and $67,000 for the three months ended September 30, 2017, and 2016, respectively, and $243,000 and $185,000 for the nine months ended September 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.

30




The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except for share and per share data)
Basic EPS:
 
 
 
 
 
 
 
Net income
$
14,923

 
$
13,121

 
$
43,162

 
$
42,073

Less: income allocated to unvested restricted shares
93

 
81

 
270

 
258

Income allocated to common shares
$
14,830

 
$
13,040

 
$
42,892

 
$
41,815

Weighted-average shares for basic EPS
32,095,286

 
31,912,470

 
32,058,705

 
31,880,466

Basic EPS
$
0.46

 
$
0.41

 
$
1.34

 
$
1.31

 
 
 
 
 
 
 
 
Effect of dilutive securities - options and unvested restricted stock
160,528

 
175,763

 
171,614

 
150,829

 
 
 
 
 
 
 
 
Diluted EPS:

 

 

 

Income allocated to common shares
$
14,830

 
$
13,040

 
$
42,892

 
$
41,815

Weighted-average shares for diluted EPS
32,255,814

 
32,088,233

 
32,230,319

 
32,031,295

Diluted EPS
$
0.46

 
$
0.41

 
$
1.33

 
$
1.31


There were no stock options with an anti-dilutive effect for the three and nine months ended September 30, 2017. For the three and nine months ended September 30, 2016, 12,034 and 74,389 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 September 30, 2017 and 2016 was as follows:
 
Unrealized Gains
and Losses on
Available for Sale
Securities
 
Tax Benefit (Expense)
 
Total
 
(in thousands)
September 30, 2017
 
 
 
 
 
Balance at beginning of period
$
235

 
$
(98
)
 
$
137

Other comprehensive income before reclassification
529

 
(109
)
 
420

Reclassification from accumulated other comprehensive income
(267
)
 

 
(267
)
Period change
262

 
(109
)
 
153

Balance at end of period
$
497

 
$
(207
)
 
$
290

 
 
 
 
 
 
September 30, 2016
 
 
 
 
 
Balance at beginning of period
$
13,816

 
$
(4,695
)
 
$
9,121

Other comprehensive income before reclassification
(2,629
)
 
1,109

 
(1,520
)
Reclassification from accumulated other comprehensive income
(46
)
 

 
(46
)
Period change
(2,675
)
 
1,109

 
(1,566
)
Balance at end of period
$
11,141

 
$
(3,586
)
 
$
7,555


For the three months ended September 30, 2017, there was a $267,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $267,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities under noninterest income. Net unrealized gains of $227,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period.

31




For the three months ended September 30, 2016, there was a $46,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $46,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities under noninterest income. Net unrealized gains of $321,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period.

Activity in accumulated other comprehensive income for the nine months ended September 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)
September 30, 2017
 
 
 
 
 
 
 
Balance at beginning of period
$
(4,089
)
 
$

 
$
1,695

 
$
(2,394
)
Other comprehensive income before reclassification
6,059

 

 
(1,902
)
 
4,157

Reclassification from accumulated other comprehensive income
(1,473
)
 

 

 
(1,473
)
Period change
4,586

 

 
(1,902
)
 
2,684

Balance at end of period
$
497

 
$

 
$
(207
)
 
$
290

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

 
$
2,007

 
$
(315
)
Other comprehensive income before reclassification
13,518

 
(9
)
 
(5,593
)
 
7,916

Reclassification from accumulated other comprehensive income
(46
)
 

 

 
(46
)
Period change
13,472

 
(9
)
 
(5,593
)
 
7,870

Balance at end of period
$
11,141

 
$

 
$
(3,586
)
 
$
7,555


For the nine months ended September 30, 2017, there was a $1.5 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $1.5 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 $971,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period.

For the nine months ended September 30, 2016, there was a $46,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $46,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities under noninterest income. Net unrealized gains of $314,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period.

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

32



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 6.56% and 7.32%, respectively, as of September 30, 2017, and 5.86% and 5.64%, respectively, as of December 31, 2016.

The capital ratios of Hanmi Financial and the Bank as of September 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)
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
677,024

 
15.58
%
 
$
347,757

 
8.00
%
 
 N/A

 
N/A

Hanmi Bank
$
666,298

 
15.32
%
 
$
347,949

 
8.00
%
 
$
434,936

 
10.00
%
Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
545,698

 
12.56
%
 
$
260,818

 
6.00
%
 
 N/A

 
N/A

Hanmi Bank
$
632,891

 
14.55
%
 
$
260,962

 
6.00
%
 
$
347,949

 
8.00
%
Common equity Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
530,347

 
12.20
%
 
$
195,613

 
4.50
%
 
 N/A

 
N/A

Hanmi Bank
$
632,891

 
14.55
%
 
$
195,721

 
4.50
%
 
$
282,709

 
6.50
%
Tier 1 capital (to average assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
545,698

 
10.92
%
 
$
199,818

 
4.00
%
 
 N/A

 
N/A

Hanmi Bank
$
632,891

 
12.66
%
 
$
199,897

 
4.00
%
 
$
249,871

 
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:


33



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.
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 September 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.



34



Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of September 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)
September 30, 2017
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Mortgage-backed securities
$

 
$
309,750

 
$

 
$
309,750

Collateralized mortgage obligations

 
106,124

 

 
106,124

U.S. government agency securities

 
7,457

 

 
7,457

SBA loan pools securities

 
3,896

 

 
3,896

Municipal bonds-tax exempt

 
148,524

 

 
148,524

U.S. treasury securities
153

 

 

 
153

Mutual funds
22,536

 

 

 
22,536

Total securities available for sale
$
22,689

 
$
575,751

 
$

 
$
598,440

 
 
 
 
 
 
 
 
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


35



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

As of September 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 Nine Months Ended September 30, 2017
 
(in thousands)
September 30, 2017
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans (excluding PCI loans) (1)
$

 
$
4,920

 
$
2,269

 
$
149

OREO (2)

 
1,946

 

 

 
 
 
 
 
 
 
 
 
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 $4.9 million and commercial and industrial loans of $2.3 million.
(2) 
Consist of properties obtained from the foreclosure of commercial property loans of $237,000 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.
    

36



The estimated fair values of financial instruments were as follows:
 
September 30, 2017
 
Carrying
 
Fair Value
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
Cash and due from banks
138,139

 
138,139

 

 

Securities available for sale
598,440

 
22,689

 
575,751

 

Loans and leases receivable, net of allowance for loan and lease losses
4,162,863

 

 

 
4,124,666

Loans held for sale
6,469

 

 
6,469

 

Accrued interest receivable
12,098

 
12,098

 

 

FHLB stock
16,385

 

 
16,385

 

Financial liabilities:

 
 
 
 
 
 
Noninterest-bearing deposits
1,293,538

 

 
1,293,538

 

Interest-bearing deposits
3,005,472

 

 

 
2,956,667

Borrowings
227,140

 

 

 
227,140

Accrued interest payable
4,071

 
4,071

 

 

Off-balance sheet items:

 
 
 
 
 
 
Commitments to extend credit
301,049

 

 

 
301,049

Standby letters of credit
19,521

 

 

 
19,521

Commercial letters of credit
6,833

 

 

 
6,833

 
 
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


37





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 adjustments are typically significant and result 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).


38



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 September 30, 2017 and 2016, share-based compensation expenses were $709,000 and $787,000, respectively, and net tax benefits recognized from stock option and restricted stock awards were $291,000 and $313,000, respectively. For the nine months ended September 30, 2017 and 2016, share-based compensation expenses were $2.1 million and $2.3 million, respectively, and net tax benefits recognized from stock option exercises and vested restricted stock awards were $666,000 and $182,000, 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 nine months ended September 30, 2017 and 2016.

Unrecognized Share-Based Compensation Expense

As of September 30, 2017, unrecognized share-based compensation expense was as follows:
 
Unrecognized
Expense
 
Average Expected
Recognition
Period
 
(in thousands)
 
 
Stock option awards
$
19

 
0.9 years
Restricted stock awards
4,751

 
2.3 years
Total unrecognized share-based compensation expense
$
4,770

 
2.3 years

Stock Option Awards

The table below provides stock option information for the three months ended September 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
376,401

 
$
17.68

 
6.3 years
 
$
4,168

(1) 
Options exercised
(10,625
)
 
$
12.21

 
4.5 years
 

 
Options outstanding at end of period
365,776

 
$
17.84

 
6.1 years
 
$
4,797

(2) 
 
 
 
 
 
 
 
 
 
Options exercisable at end of period
348,105

 
$
17.62

 
6.1 years
 
$
4,641

(2) 
                              
(1) 
Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $28.45 as of June 30, 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 $30.95 as of September 30, 2017, over the exercise price, multiplied by the number of options.


39



The table below provides stock option information for the nine months ended September 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
(22,125
)
 
$
12.19

 
4.5 years
 

 
Options outstanding at end of period
365,776

 
$
17.84

 
6.1 years
 
$
4,797

(2) 
 
 
 
 
 
 
 
 
 
Options exercisable at end of period
348,105

 
$
17.62

 
6.1 years
 
$
4,641

(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 $30.95 as of September 30, 2017, over the exercise price, multiplied by the number of options.

There were 10,625 and 2,375 stock options exercised during the three months ended September 30, 2017 and 2016, respectively. There were 22,125 and 42,584 stock options exercised during the nine months ended September 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 nine months ended September 30, 2017:
 
Three Months Ended 
 September 30, 2017
 
Nine Months Ended 
 September 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
305,951

 
$
20.21

 
343,958

 
$
16.60

Restricted stock granted
13,173

 
28.79

 
104,179

 
31.04

Restricted stock vested
(2,666
)
 
20.52

 
(122,010
)
 
18.12

Restricted stock forfeited
(3,667
)
 
28.60

 
(13,336
)
 
24.73

Restricted stock at end of period
312,791

 
20.47

 
312,791

 
20.47


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

40



evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by 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:
 
September 30, 2017
 
December 31, 2016
 
(in thousands)
Commitments to extend credit
$
301,049

 
$
310,987

Standby letters of credit
19,521

 
15,669

Commercial letters of credit
6,833

 
4,215

Total undisbursed loan commitments
$
327,403

 
$
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Balance at beginning of period
$
1,135

 
$
1,475

 
$
1,184

 
$
986

Provision (income)
(220
)
 
16

 
(269
)
 
505

Balance at end of period
$
915

 
$
1,491

 
$
915

 
$
1,491



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 September 30, 2017, or would be required to be recognized in the Consolidated Financial Statements (Unaudited) as of September 30, 2017.


41



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 nine months ended September 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 September 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.

42




Selected Financial Data
 
The following table sets forth certain selected financial data for the periods indicated:
 
As of or for the
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(dollars in thousands, except per share data)
Summary balance sheets:
 
 
 
 
 
 
 
Cash and due from banks
$
138,139

 
$
130,197

 
$
138,139

 
$
130,197

Securities
598,440

 
548,961

 
598,440

 
548,961

Loans and leases receivable, net (1)
4,162,863

 
3,513,687

 
4,162,863

 
3,513,687

Assets
5,111,396

 
4,402,180

 
5,111,396

 
4,402,180

Deposits
4,299,010

 
3,771,207

 
4,299,010

 
3,771,207

Liabilities
4,552,149

 
3,870,982

 
4,552,149

 
3,870,982

Stockholders’ equity
559,247

 
531,198

 
559,247

 
531,198

Tangible equity
546,619

 
529,742

 
546,619

 
529,742

Average loans and leases receivable (1)
4,092,131

 
3,447,428

 
3,976,021

 
3,333,419

Average securities
611,538

 
589,832

 
574,801

 
643,125

Average interest-earning assets
4,759,035

 
4,130,145

 
4,608,870

 
4,045,480

Average assets
5,027,704

 
4,397,703

 
4,881,527

 
4,315,062

Average deposits
4,260,349

 
3,669,419

 
4,101,640

 
3,544,389

Average borrowings
185,000

 
171,779

 
207,340

 
222,889

Average interest-bearing liabilities
3,187,395

 
2,651,505

 
3,084,094

 
2,600,851

Average stockholders’ equity
551,763

 
528,581

 
543,503

 
515,403

Average tangible equity
539,087

 
527,072

 
530,740

 
513,813

Per share data:
 
 
 
 
 
 
 
Earnings per share – basic (2)
$
0.46

 
$
0.41

 
$
1.34

 
$
1.31

Earnings per share – diluted (2)
$
0.46

 
$
0.41

 
$
1.33

 
$
1.31

Book value per share (3)
$
17.25

 
$
16.47

 
$
17.25

 
$
16.47

Tangible book value per share (4)
$
16.86

 
$
16.42

 
$
16.86

 
$
16.42

Cash dividends per share
$
0.21

 
$
0.19

 
$
0.59

 
$
0.47

Common shares outstanding
32,413,082

 
32,252,774

 
32,413,082

 
32,252,774

Performance ratios:
 
 
 
 
 
 
 
Return on average assets (5) (6)
1.18
%
 
1.19
 %
 
1.18
%
 
1.30
 %
Return on average stockholders’ equity (5) (7)
10.73
%
 
9.88
 %
 
10.62
%
 
10.90
 %
Return on average tangible equity (5) (8)
10.98
%
 
9.90
 %
 
10.87
%
 
10.94
 %
Net interest margin (9)
3.79
%
 
3.86
 %
 
3.83
%
 
3.95
 %
Net interest margin excluding acquisition accounting (9)
3.76
%
 
3.75
 %
 
3.79
%
 
3.76
 %
Efficiency ratio (10)
53.33
%
 
58.72
 %
 
54.32
%
 
57.47
 %
Dividend payout ratio (11)
45.45
%
 
46.50
 %
 
53.66
%
 
35.83
 %
Average stockholders’ equity to average assets
10.97
%
 
12.02
 %
 
11.13
%
 
11.94
 %
 


 


 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

43



Capital ratios (15):
 
 
 
 
 
 
 
Total risk-based capital:
 
 
 
 
 
 
 
Hanmi Financial
15.58
%
 
14.99
 %
 
15.58
%
 
14.99
 %
Hanmi Bank
15.32
%
 
14.61
 %
 
15.32
%
 
14.61
 %
Tier 1 risk-based capital:
 
 
 
 
 
 
 
Hanmi Financial
12.56
%
 
13.89
 %
 
12.56
%
 
13.89
 %
Hanmi Bank
14.55
%
 
13.50
 %
 
14.55
%
 
13.50
 %
Common equity Tier 1 capital:
 
 
 
 
 
 
 
Hanmi Financial
12.20
%
 
13.73
 %
 
12.20
%
 
13.73
 %
Hanmi Bank
14.55
%
 
13.50
 %
 
14.55
%
 
13.50
 %
Tier 1 leverage:
 
 
 
 
 
 
 
Hanmi Financial
10.92
%
 
11.68
 %
 
10.92
%
 
11.68
 %
Hanmi Bank
12.66
%
 
11.36
 %
 
12.66
%
 
11.36
 %
Asset quality ratios:
 
 
 
 
 
 
 
Nonperforming Non-PCI loans and leases to loans and leases (12)
0.35
%
 
0.31
 %
 
0.35
%
 
0.31
 %
Nonperforming assets to assets (13)
0.32
%
 
0.50
 %
 
0.32
%
 
0.50
 %
Net loan and lease charge-offs (recoveries) to average loans and leases
0.15
%
 
(0.08
)%
 
%
 
(0.02
)%
Allowance for loan lease losses to loans and leases
0.77
%
 
1.10
 %
 
0.77
%
 
1.10
 %
Allowance for loan and lease losses to non-performing loans and leases (12) (14)
217.74
%
 
305.43
 %
 
217.74
%
 
305.43
 %
Acquired loans:
 
 
 
 
 
 
 
PCI loans, net of discounts
$
8,704

 
$
15,540

 
$
8,704

 
$
15,540

Allowance for loan losses on PCI loans
794

 
5,533

 
794

 
5,533

Non-PCI loans, net of discounts
91,013

 
108,434

 
91,013

 
108,434

Unamortized acquisition discounts on Non-PCI loans
4,999

 
7,087

 
4,999

 
7,087

 
(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.


44



Tangible equity is calculated by subtracting goodwill created from acquisition of the Commercial Equipment Leasing Division 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:
 
September 30,
 
2017
 
2016
 
(in thousands, except per share data)
Total assets
$
5,111,396

 
$
4,402,180

Less goodwill
(11,031
)
 

Less other intangible assets, net
(1,597
)
 
(1,456
)
Tangible assets
$
5,098,768

 
$
4,400,724

 
 
 
 
Total stockholders’ equity
$
559,247

 
$
531,198

Less goodwill
(11,031
)
 

Less other intangible assets, net
(1,597
)
 
(1,456
)
Tangible stockholders' equity
$
546,619

 
$
529,742

 
 
 
 
Book value per share
$
17.25

 
$
16.47

Effect of goodwill
(0.34
)
 

Effect of other intangible assets
(0.05
)
 
(0.05
)
Tangible book value per share
$
16.86

 
$
16.42



45



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:
 
Three Months Ended
 
September 30, 2017
 
September 30, 2016
 
Amount
 
Rate
 
Amount
 
Rate
 
(dollars in thousands)
Core loan and lease interest income and yield
$
49,924

 
4.84
 %
 
$
40,476

 
4.63
 %
Accretion of discount on purchased loans
341

 
0.03
 %
 
674

 
0.08
 %
As reported
$
50,265

 
4.87
 %
 
$
41,150

 
4.71
 %
 
 
 
 
 
 
 
 
Net interest income and net interest margin excluding acquisition accounting (1)
$
45,048

 
3.76
 %
 
$
38,874

 
3.75
 %
Accretion of discount on Non-PCI loans and leases
303

 
0.03
 %
 
648

 
0.06
 %
Accretion of discount on PCI loans and leases
38

 
 %
 
26

 
 %
Accretion of time deposits premium
116

 
0.01
 %
 
610

 
0.06
 %
Amortization of subordinated debentures discount
(85
)
 
(0.01
)%
 
(67
)
 
(0.01
)%
Net impact
372

 
0.03
 %
 
1,217

 
0.11
 %
As reported on a fully taxable equivalent basis
$
45,420

 
3.79
 %
 
$
40,091

 
3.86
 %
 
(1) 
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.

 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
Amount
 
Rate
 
Amount
 
Rate
 
(dollars in thousands)
Core loan and lease interest income and yield
$
142,183

 
4.78
 %
 
$
117,066

 
4.69
 %
Accretion of discount on purchased loans
1,431

 
0.05
 %
 
3,796

 
0.15
 %
As reported
$
143,614

 
4.83
 %
 
$
120,862

 
4.84
 %
 
 
 
 
 
 
 
 
Net interest income and net interest margin excluding acquisition accounting (1)
$
130,409

 
3.79
 %
 
$
113,710

 
3.76
 %
Accretion of discount on Non-PCI loans and leases
1,287

 
0.04
 %
 
3,396

 
0.11
 %
Accretion of discount on PCI loans and leases
144

 
 %
 
400

 
0.01
 %
Accretion of time deposits premium
358

 
0.01
 %
 
2,343

 
0.08
 %
Amortization of subordinated debentures discount
(243
)
 
(0.01
)%
 
(185
)
 
(0.01
)%
Net impact
1,546

 
0.04
 %
 
5,954

 
0.19
 %
As reported on a fully taxable equivalent basis
$
131,955

 
3.83
 %
 
$
119,664

 
3.95
 %
 
(1) 
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.



46



Executive Overview

For the three months ended September 30, 2017, net income was $14.9 million, or $0.46 per diluted share, compared with $13.1 million, or $0.41 per diluted share, for the three months ended September 30, 2016. Net income for the third quarter of 2017 increased 13.7%, or $1.8 million. Income before the provision for income taxes for the third quarter of 2017 increased 16.1%, or $3.4 million principally because of the 13.5%, or $5.3 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 an increase in the loan and lease loss provision of $1.7 million and a $0.3 million increase in non-interest expenses.

For the nine months ended September 30, 2017, net income was $43.2 million, or $1.33 per diluted share, compared with $42.1 million, or $1.31 per diluted share, for the nine months ended September 30, 2016. Net income for the first nine months of 2017 increased 2.6%, or $1.1 million. Income before the provision for income taxes for the first nine months of 2017 increased 8.2%, or $5.4 million, principally because of the 10.4%, or $12.3 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 an increase in the loan and lease loss provision of $5.1 million and a $2.6 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 $4.20 billion at the end of the third quarter of 2017, up $350.6 million, or 9.1 percent, from $3.84 billion at the end of 2016.

Deposits at September 30, 2017 were $4.30 billion, an increase of $89.3 million, or 12.8 percent, from $3.81 billion at the end of 2016.

Non-performing assets were $16.5 million, or 0.32 percent of assets, at the end of the third quarter of 2017 compared with $18.9 million, or 0.40 percent of total assets at the end of 2016.

 

47



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
 
September 30, 2017
 
September 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)
$
4,092,131

 
$
50,265

 
4.87
%
 
$
3,477,428

 
$
41,150

 
4.71
%
Securities (2)
611,538

 
3,683

 
2.41
%
 
589,832

 
3,210

 
2.18
%
FRB and FHLB stock
16,385

 
286

 
6.93
%
 
19,207

 
419

 
8.73
%
Interest-bearing deposits in other banks
38,981

 
123

 
1.25
%
 
43,678

 
55

 
0.50
%
Total interest-earning assets
4,759,035

 
54,357

 
4.53
%
 
4,130,145

 
44,834

 
4.32
%
Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
114,108

 
 
 
 
 
116,779

 
 
 
 
Allowance for loan and lease losses
(34,252
)
 
 
 
 
 
(40,214
)
 
 
 
 
Other assets
188,813

 
 
 
 
 
190,993

 
 
 
 
Total assets
$
5,027,704

 
 
 
 
 
$
4,397,703

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 

Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand: interest-bearing
$
90,720

 
$
18

 
0.08
%
 
$
93,852

 
$
19

 
0.08
%
Money market and savings
1,526,951

 
3,311

 
0.86
%
 
1,141,747

 
1,834

 
0.64
%
Time deposits
1,384,724

 
3,742

 
1.07
%
 
1,244,127

 
2,505

 
0.80
%
Total interest-bearing deposits
3,002,395

 
7,071

 
0.93
%
 
2,479,726

 
4,358

 
0.70
%
FHLB advances
67,935

 
198

 
1.16
%
 
152,935

 
179

 
0.47
%
Subordinated debentures
117,065

 
1,667

 
5.68
%
 
18,844

 
206

 
4.35
%
Total interest-bearing liabilities
3,187,395

 
8,936

 
1.11
%
 
2,651,505

 
4,743

 
0.71
%
Noninterest-bearing liabilities and equity:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits: noninterest-bearing
1,257,954

 
 
 
 
 
1,189,693

 
 
 
 
Other liabilities
30,592

 
 
 
 
 
27,924

 
 
 
 
Stockholders’ equity
551,763

 
 
 
 
 
528,581

 
 
 
 
Total liabilities and stockholders’ equity
$
5,027,704

 
 
 
 
 
$
4,397,703

 
 
 

Net interest income (taxable equivalent)
 
 
$
45,421

 
 
 
 
 
$
40,091

 
 
Cost of deposits (3)
 
 
 
 
0.66
%
 
 
 
 
 
0.47
%
Net interest spread (4)
 
 
 
 
3.42
%
 
 
 
 
 
3.61
%
Net interest margin (5)
 
 
 
 
3.79
%
 
 
 
 
 
3.86
%
 
(1) 
Loans and leases receivable include LHFS and exclude the allowance for loan and lease losses. Nonaccrual loans and leases are

48



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
 
September 30, 2017 vs. September 30, 2016
 
Increases (Decreases) Due to Change In
 
Volume
 
Rate
 
Total
 
(in thousands)
Interest and dividend income:
 
 
 
 
 
Loans and leases receivable
$
7,646

 
$
1,469

 
$
9,115

Securities
122

 
351

 
473

FRB and FHLB stock
(55
)
 
(78
)
 
(133
)
Interest-bearing deposits in other banks
(7
)
 
75

 
68

Total interest and dividend income
$
7,706

 
$
1,817

 
$
9,523

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

 
$
(1
)
Money market and savings
732

 
745

 
1,477

Time deposits
310

 
927

 
1,237

FHLB advances
(140
)
 
159

 
19

Subordinated debentures
1,380

 
81

 
1,461

Total interest expense
$
2,281

 
$
1,912

 
$
4,193

Change in net interest income (taxable equivalent)
$
5,425

 
$
(95
)
 
$
5,330


Interest income, on a taxable equivalent basis, increased $9.5 million, or 21.2 percent, to $54.4 million for the three months ended September 30, 2017 from $44.8 million for the same period in 2016. Interest expense increased $4.2 million, or 88.4 percent, to $8.9 million for the three months ended September 30, 2017 from $4.7 million for the same period in 2016. For the three months ended September 30, 2017 and 2016, net interest income, on a taxable equivalent basis, was $45.4 million and $40.1 million, respectively. The increase in net interest income was primarily attributable to the 17.7 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 third quarter of 2017, up from 84.2 percent for the third 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 September 30, 2017 were 3.42 percent and 3.79 percent, respectively, compared with 3.61 percent and 3.86 percent, respectively, for the same period in 2016. Excluding the effects of acquisition accounting adjustments, net interest margin was 3.76 percent and 3.75 percent for the three months ended September 30, 2017 and 2016, respectively.

Average loans and leases increased $614.7 million, or 17.7 percent, to $4.10 billion for the three months ended September 30, 2017 from $3.48 billion for the same period in 2016. Average securities increased $21.7 million, or 3.7 percent, to $611.5 million for the three months ended September 30, 2017 from $589.8 million for the same period in 2016. Average interest-earning assets increased $628.9 million, or 15.2 percent, to $4.76 billion for the three months ended September 30, 2017 from $4.13 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 $535.9 million, or 20.2 percent, to $3.19 billion for the three months ended September 30, 2017, compared with $2.65 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, time deposits and the $100 million of subordinated debt issued in the first quarter of 2017. In addition, average noninterest-bearing demand deposits increased $68.3 million, or 5.7 percent, to $1.26 billion for the third quarter of 2017 from $1.19 billion in the same period in 2016.

49




The average yield on loans and leases increased to 4.87 percent for the three months ended September 30, 2017 from 4.71 percent for the same period in 2016, primarily due to new loan production and the commencement of the Commercial Equipment Leasing Division in the fourth quarter of 2016. The average yield on securities, on a taxable equivalent basis, increased to 2.41 percent for the three months ended September 30, 2017 from 2.18 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 21 basis points to 4.53 percent for the three months ended September 30, 2017 from 4.32 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 40 basis points to 1.11 percent for the three months ended September 30, 2017 from 0.71 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.
 
Nine Months Ended
 
September 30, 2017
 
September 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)
$
3,976,021

 
$
143,614

 
4.83
%
 
$
3,333,419

 
$
120,862

 
4.84
%
Securities (2)
574,801

 
10,153

 
2.36
%
 
643,125

 
10,136

 
2.10
%
FRB and FHLB stock
16,385

 
943

 
7.69
%
 
26,809

 
1,540

 
7.66
%
Interest-bearing deposits in other banks
41,663

 
323

 
1.04
%
 
42,127

 
152

 
0.48
%
Total interest-earning assets
4,608,870

 
155,033

 
4.50
%
 
4,045,480

 
132,690

 
4.38
%
Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
116,206

 
 
 
 
 
115,235

 
 
 
 
Allowance for loan and lease losses
(33,550
)
 
 
 
 
 
(41,401
)
 
 
 
 
Other assets
190,001

 
 
 
 
 
195,748

 
 
 
 
Total assets
$
4,881,527

 
 
 
 
 
$
4,315,062

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand: interest-bearing
$
94,040

 
$
56

 
0.08
%
 
$
95,264

 
$
56

 
0.08
%
Money market and savings
1,489,302

 
9,200

 
0.83
%
 
996,578

 
4,130

 
0.55
%
Time deposits
1,293,412

 
9,431

 
0.97
%
 
1,286,120

 
7,583

 
0.79
%
Total interest-bearing deposits
2,876,754

 
18,687

 
0.87
%
 
2,377,962

 
11,769

 
0.66
%
FHLB advances
118,736

 
714

 
0.80
%
 
204,106

 
673

 
0.44
%
Subordinated debentures
88,604

 
3,677

 
5.52
%
 
18,783

 
584

 
4.15
%
Total interest-bearing liabilities
3,084,094

 
23,078

 
1.00
%
 
2,600,851

 
13,026

 
0.67
%
Noninterest-bearing liabilities and equity:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits: noninterest-bearing
1,224,886

 
 
 
 
 
1,166,427

 
 
 
 
Other liabilities
29,044

 
 
 
 
 
32,381

 
 
 
 
Stockholders’ equity
543,503

 
 
 
 
 
515,403

 
 
 
 
Total liabilities and stockholders’ equity
$
4,881,527

 
 
 
 
 
$
4,315,062

 
 
 

Net interest income (taxable equivalent)
 
 
$
131,955

 
 
 
 
 
$
119,664

 
 
Cost of deposits (3)
 
 
 
 
0.61
%
 
 
 
 
 
0.44
%
Net interest spread (4)
 
 
 
 
3.50
%
 
 
 
 
 
3.71
%
Net interest margin (5)
 
 
 
 
3.83
%
 
 
 
 
 
3.95
%
 
(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.

50



(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.
 
Nine Months Ended
 
September 30, 2017 vs. September 30, 2016
 
Increases (Decreases) Due to Change In
 
Volume
 
Rate
 
Total
 
(in thousands)
Interest and dividend income:
 
 
 
 
 
Loans and leases receivable
$
23,006

 
$
(254
)
 
$
22,752

Securities
(1,152
)
 
1,169

 
17

FRB and FHLB stock
(603
)
 
6

 
(597
)
Interest-bearing deposits in other banks
(2
)
 
173

 
171

Total interest and dividend income
$
21,249

 
$
1,094

 
$
22,343

Interest expense:
 
 
 
 
 
Money market and savings
$
2,499

 
$
2,571

 
$
5,070

Time deposits
44

 
1,804

 
1,848

FHLB advances
(110
)
 
151

 
41

Subordinated debentures
2,840

 
253

 
3,093

Total interest expense
$
5,273

 
$
4,779

 
$
10,052

Change in net interest income (taxable equivalent)
$
15,976

 
$
(3,685
)
 
$
12,291


Interest income, on a taxable equivalent basis, increased $22.3 million, or 16.8 percent, to $155.0 million for the nine months ended September 30, 2017 from $132.7 million for the same period in 2016. Interest expense increased $10.1 million, or 77.2 percent, to $23.1 million for the nine months ended September 30, 2017 from $13.0 million for the same period in 2016. For the nine months ended September 30, 2017 and 2016, net interest income, on a taxable equivalent basis, was $132.0 million and $119.7 million, respectively. The increase in net interest income was primarily attributable to the 19.3 percent growth in average loans and leases and the change in the mix of interest earning assets with average loans and leases at 86.3 percent of average interest-earning assets for the first nine months of 2017, up from 82.4 percent for the same period in 2016. The net interest spread and net interest margin, on a taxable equivalent basis, for the nine months ended September 30, 2017 were 3.50 percent and 3.83 percent, respectively, compared with 3.71 percent and 3.95 percent, respectively, for the same period in 2016. Excluding the effects of acquisition accounting adjustments, net interest margin was 3.79 percent and 3.76 percent for the nine months ended September 30, 2017 and 2016, respectively.

Average loans and leases increased $642.6 million, or 19.3 percent, to $3.98 billion for the nine months ended September 30, 2017 from $3.33 billion for the same period in 2016. Average securities decreased $68.3 million, or 10.6 percent, to $574.8 million for the nine months ended September 30, 2017 from $643.1 million for the same period in 2016. Average interest-earning assets increased $563.4 million, or 13.9 percent, to $4.61 billion for the nine months ended September 30, 2017 from $4.05 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 $483.2 million, or 18.6 percent, to $3.08 billion for the nine months ended September 30, 2017, compared with $2.60 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 $58.5 million, or 5.0 percent, to $1.22 billion for the first nine months of 2017 from $1.17 billion in the same period in 2016.

The average yield on loans and leases decreased to 4.83 percent for the nine months ended September 30, 2017 from 4.84 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 2.36 percent for the nine months ended September 30, 2017 from

51



2.10 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 12 basis points to 4.50 percent for the nine months ended September 30, 2017 from 4.38 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 33 basis points to 1.00 percent for the nine months ended September 30, 2017 from 0.67 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 $0.3 million for the third quarter of 2017. For the same period in 2016, the provision for loan and lease losses was a negative $1.5 million. The charge to other noninterest expense for losses on off-balance sheet items was a negative $0.2 million for the three months ended September 30, 2017 compared to none for the same period in 2016.

The provision for loan and lease losses was $0.6 million for the first nine 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 $4.5 million, which included a loan loss provision of $0.2 million related to Purchased Credit Impaired loans. The charge to other noninterest expense for losses on off-balance sheet items was a negative $0.3 million for the nine months ended September 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 September 30,
 
Increase (Decrease)
 
2017
 
2016
 
Amount
 
Percentage
 
(dollars in thousands)
Service charges on deposit accounts
$
2,678

 
$
2,883

 
$
(205
)
 
(7.1
)%
Trade finance and other service charges and fees
1,133

 
992

 
141

 
14.2
 %
Other operating income
1,213

 
2,348

 
(1,135
)
 
(48.3
)%
Subtotal service charges, fees and other income
5,024

 
6,223

 
(1,199
)
 
(19.3
)%
Gain on sale of SBA loans
2,546

 
1,616

 
930

 
57.5
 %
Disposition gains on PCI loans
979

 
789

 
190

 
24.1
 %
Net gain on sales of securities
267

 
46

 
221

 
480.4
 %
Total noninterest income
$
8,816

 
$
8,674

 
$
142

 
1.6
 %

For the three months ended September 30, 2017, noninterest income was $8.8 million, an increase of $0.1 million, or 1.6 percent, compared with $8.7 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 other operating income. Gains on SBA loan sales were $2.5 million for the third quarter of 2017, an increase of $0.9 million from the third quarter of 2016 as the volume of loan sales increased to $32.5 million from $24.1 million in the same quarter last year. Sales of securities resulted in a net gain of $267,000 for the third quarter of 2017 compared with $46,000 for the same period in 2016. Other operating income was $1.2 million for the third quarter of 2017, a decrease of $1.1 million, or 48.3%, compared with $2.3 million for the third quarter of 2016. The decrease in other operating income was due to the gain from the sale of a branch facility in the third quarter of 2016.


52



The following table sets forth the various components of noninterest income for the periods indicated:
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
2017
 
2016
 
Amount
 
Percentage
 
(dollars in thousands)
Service charges on deposit accounts
$
7,667

 
$
8,782

 
$
(1,115
)
 
(12.7
)%
Trade finance and other service charges and fees
3,449

 
3,099

 
350

 
11.3
 %
Other operating income
4,764

 
5,423

 
(659
)
 
(12.2
)%
Subtotal service charges, fees and other income
15,880

 
17,304

 
(1,424
)
 
(8.2
)%
Gain on sale of SBA loans
6,678

 
4,247

 
2,431

 
57.2
 %
Disposition gains on PCI loans
1,473

 
3,411

 
(1,938
)
 
(56.8
)%
Net gain on sales of securities
1,702

 
46

 
1,656

 
3,600.0
 %
Total noninterest income
$
25,733

 
$
25,008

 
$
725

 
2.9
 %

For the nine months ended September 30, 2017, noninterest income was $25.7 million, an increase of $0.7 million, or 2.9 percent, compared with $25.0 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. Gains on SBA loan sales were $6.7 million for the first nine months of 2017, an increase of $2.4 million from the first nine months of 2016 as the volume of loan sales increased to $84.5 million from $55.9 million in the same quarter last year. Sales of securities resulted in a net gain of $1.7 million for the first nine months of 2017 compared with $46,000 for the same period in 2016. Disposition gains on PCI loans were $1.5 million for the nine months ended September 30, 2107 compared with $3.4 million the same period in 2016.

Noninterest Expense

The following table sets forth the components of noninterest expense for the periods indicated:
 
Three Months Ended September 30,
 
Increase (Decrease)
 
2017
 
2016
 
Amount
 
Percentage
 
(dollars in thousands)
Salaries and employee benefits
$
16,947

 
$
15,950

 
$
997

 
6.3
 %
Occupancy and equipment
3,883

 
3,917

 
(34
)
 
-0.9
 %
Data processing
1,779

 
1,330

 
449

 
33.8
 %
Professional fees
1,210

 
1,090

 
120

 
11.0
 %
Supplies and communications
755

 
821

 
(66
)
 
-8.0
 %
Advertising and promotion
1,147

 
1,153

 
(6
)
 
-0.5
 %
OREO expense
(16
)
 
73

 
(89
)
 
-121.9
 %
Other operating expenses
2,955

 
4,003

 
(1,048
)
 
-26.2
 %
Total noninterest expense
$
28,660

 
$
28,337

 
$
323

 
1.1
 %

For the three months ended September 30, 2017, noninterest expense was $28.7 million, an increase of $0.3 million or 1.1 percent, compared with $28.3 million for the same period in 2016. The increase was due primarily to increases in salaries and employee benefits, OREO and data processing, offset by a decrease in other operating expenses. The increase in salaries and employee benefits is largely due to personnel added with the commencement of the Commercial Equipment Leasing Division and annual merit increases compared to the same period in 2016. The decrease in other operating expenses is mainly due to a $1.4 million charge for the three months ended September 30, 2016 related to the finalization of prior year FDIC loss share claims.




53



The following table sets forth the components of noninterest expense for the periods indicated:
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
2017
 
2016
 
Amount
 
Percentage
 
(dollars in thousands)
Salaries and employee benefits
$
50,674

 
$
47,710

 
$
2,964

 
6.2
 %
Occupancy and equipment
11,743

 
11,351

 
392

 
3.5
 %
Data processing
5,148

 
4,219

 
929

 
22.0
 %
Professional fees
3,912

 
4,063

 
(151
)
 
-3.7
 %
Supplies and communications
2,135

 
2,266

 
(131
)
 
-5.8
 %
Advertising and promotion
2,964

 
2,769

 
195

 
7.0
 %
OREO expense
402

 
721

 
(319
)
 
-44.2
 %
Merger and integration costs (income)
(40
)
 

 
(40
)
 
-100.0
 %
Other operating expenses
7,905

 
9,170

 
(1,265
)
 
-13.8
 %
Total noninterest expense
$
84,843

 
$
82,269

 
$
2,574

 
3.1
 %

For the nine months ended September 30, 2017, noninterest expense was $84.8 million, an increase of $2.6 million or 3.1 percent, compared with $82.3 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 a decrease in other operating expense. The increase in salaries and employee benefits is largely due to personnel added with the commencement of the Commercial Equipment Leasing Division and annual merit increases compared to the same period in 2016. The decrease in other operating expenses is mainly due to a $1.4 million charge for the three months ended September 30, 2016 related to the finalization of prior year FDIC loss share claims.

Income Tax Expense

Income tax expense was $9.9 million for the three months ended September 30, 2017, compared with $8.2 million for the same period in 2016. The effective income tax rate was 39.9 percent for the three months ended September 30, 2017 and 38.6 percent for the same period in 2016.

Income tax expense was $27.6 million for the nine months ended September 30, 2017, compared with $23.3 million for the same period in 2016. The effective income tax rate was 39.0 percent for the nine months ended September 30, 2017, compared with 35.6 percent for the same period in 2016. Income tax expense for the first nine months of 2016 included a $1.8 million benefit arising from the finalization of the 2014 amended income tax returns.


54



Financial Condition

Securities

As of September 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 Sepember 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:
 
September 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)
$
310,111

 
$
309,750

 
$
(361
)
 
$
230,489

 
$
229,630

 
$
(859
)
Collateralized mortgage obligations (1)
107,052

 
106,124

 
(928
)
 
77,447

 
76,451

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

 
7,457

 
(42
)
 
7,499

 
7,441

 
(58
)
SBA loan pool securities
4,036

 
3,896

 
(140
)
 
4,356

 
4,146

 
(210
)
Municipal bonds-tax exempt
146,177

 
148,524

 
2,347

 
159,789

 
158,030

 
(1,759
)
Municipal bonds-taxable

 

 

 
13,391

 
13,701

 
310

Corporate bonds

 

 

 
5,010

 
5,015

 
5

U.S. treasury securities
153

 
153

 

 
156

 
156

 

Mutual funds
22,916

 
22,536

 
(380
)
 
22,916

 
22,394

 
(522
)
Total securities available for sale
$
597,944

 
$
598,440

 
$
496

 
$
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 an estimated fair value of $8.1 million and $52.9 million as of September 30, 2017 and December 31, 2016, respectively.

As of September 30, 2017, securities available for sale increased 15.8 percent to $598.4 million, compared with $517.0 million as of December 31, 2016, due mainly to security purchases. As of September 30, 2017, securities available for sale had a net unrealized gain of $496,000, comprised of $3.2 million of unrealized gains and $2.7 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.


55



The following table summarizes the contractual maturity schedule for securities, at amortized cost, and their weighted-average yields as of September 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
$
23,222

 
1.76
%
 
$
37,312

 
2.01
%
 
$
92,049

 
2.21
%
 
$
157,528

 
2.28
%
 
$
310,111

 
2.19
%
Collateralized mortgage obligations
21

 
%
 
1,935

 
1.55
%
 
17,941

 
1.71
%
 
87,155

 
1.86
%
 
107,052

 
1.83
%
U.S. government agency securities

 
%
 
6,000

 
1.35
%
 
1,499

 
2.20
%
 

 
%
 
7,499

 
1.52
%
SBA loan pool securities

 
%
 

 
%
 

 
%
 
4,036

 
1.72
%
 
4,036

 
1.72
%
Municipal bonds-tax exempt (1)

 
%
 
5,296

 
2.64
%
 
85,104

 
3.20
%
 
55,777

 
4.18
%
 
146,177

 
3.55
%
Municipal bonds-taxable

 
%
 

 
%
 

 
%
 

 
%
 

 
%
Corporate bonds

 
%
 

 
%
 

 
%
 

 
%
 

 
%
U.S. treasury securities
153

 
1.20
%
 

 
%
 

 
%
 

 
%
 
153

 
1.20
%
Mutual funds (2)

 
%
 

 
%
 

 
%
 
22,916

 
2.46
%
 
22,916

 
2.46
%
Total securities available for sale
$
23,396

 
1.75
%
 
$
50,543

 
1.98
%
 
$
196,593

 
2.59
%
 
$
327,412

 
2.50
%
 
$
597,944

 
2.46
%
 
(1) 
The yield on municipal bonds has been computed on a federal tax-equivalent basis of 35 percent.
(2) 
Mutual funds do not have contractual maturities. However, they are included in the table shown above as over ten years, since the Company intends to hold these securities for at least this duration.

Loans and Leases Receivable, Net
The following table shows the loan and lease portfolio composition by type as of the dates indicated:
 
September 30, 2017
 
December 31, 2016
 
(in thousands)
Real estate loans:
 
 
 
Commercial property
 
 
 
Retail
$
917,823

 
$
859,953

Hospitality
733,226

 
651,158

Gas station
247,430

 
262,879

Other (1)
1,146,189

 
1,109,656

Total commercial real estate loans
3,044,668

 
2,883,646

Construction
64,263

 
55,962

Residential property
430,627

 
338,767

Total real estate loans
3,539,558

 
3,278,375

Commercial and industrial loans:
 
 
 
Commercial term
170,942

 
138,168

Commercial lines of credit
149,937

 
136,231

International loans
43,577

 
25,821

Total commercial and industrial loans
364,456

 
300,220

Leases receivable
272,271

 
243,294

Consumer loans (2)
19,070

 
22,880

Loans and leases receivable
4,195,355

 
3,844,769

Allowance for loan and lease losses
(32,492
)
 
(32,429
)
Loans and leases receivable, net
$
4,162,863

 
$
3,812,340

 
(1) 
Includes other property types which individually represent less than one percent of loans and leases receivable; other property types include mixed-use, apartment, office, industrial, faith-based facilities and warehouse.
(2) 
Consumer loans include home equity lines of credit of $14.7 million and $17.7 million as of September 30, 2017 and December 31, 2016, respectively.

As of September 30, 2017 and December 31, 2016, net loans and leases receivable were $4.16 billion and $3.81 billion, respectively, representing an increase of $350.5 million, or 9.2 percent. The increase in loans and leases as of September

56



30, 2017 compared with December 31, 2016 was primarily attributable to new loan and lease production of $702.1 million and loan purchases of $161.3 million.

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 September 30, 2017
 
Percentage of Loans and Leases
Outstanding
 
 
Industry
(in thousands)
 
 
Lessor of nonresidential buildings
$
1,262,200

 
30.1
%
Hospitality
$
739,401

 
17.6
%

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 September 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.


57



The following table provides information with respect to the components of nonperforming assets (excluding PCI loans) as of the dates indicated:
 
September 30, 2017
 
December 31, 2016
 
Increase (Decrease)
 
 
 
Amount
 
Percentage
 
 
 
(dollars in thousands)
 
 
Nonperforming Non-PCI loans and leases:
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
253

 
$
404

 
$
(151
)
 
-37.4
 %
Hospitality
5,368

 
5,266

 
102

 
1.9
 %
Gas station
742

 
1,025

 
(283
)
 
-27.6
 %
Other
2,097

 
2,033

 
64

 
3.1
 %
Total commercial real estate loans
8,460

 
8,728

 
(268
)
 
-3.1
 %
Residential property
621

 
564

 
57

 
10.1
 %
Commercial and industrial loans
1,165

 
824

 
341

 
41.4
 %
Leases receivable
3,378

 
901

 
2,477

 
274.9
 %
Consumer loans
934

 
389

 
545

 
140.1
 %
Total nonperforming Non-PCI loans
14,558

 
11,406

 
3,152

 
27.6
 %
Loans 90 days or more past due and still accruing

 

 

 

Total nonperforming Non-PCI loans and leases(1)
14,558

 
11,406

 
3,152

 
27.6
 %
OREO
1,946

 
7,484

 
(5,538
)
 
-74.0
 %
Total nonperforming assets
$
16,504

 
$
18,890

 
$
(2,386
)
 
-12.6
 %
 
 
 
 
 
 
 
 
Nonperforming Non-PCI loans and leases as a percentage of Non-PCI loans and leases
0.35
%
 
0.30
%
 
 
 
 
Nonperforming assets as a percentage of assets
0.32
%
 
0.40
%
 
 
 
 
Troubled debt restructured performing Non-PCI loans and leases
$
8,490

 
$
11,146

 
 
 
 
                              
(1) 
Includes nonperforming TDRs of $7.2 million and $6.9 million as of September 30, 2017 and December 31, 2016, respectively.

Nonaccrual Non-PCI loans and leases were $14.6 million as of September 30, 2017, compared with $11.4 million as of December 31, 2016, representing an increase of $3.2 million, or 27.6 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 September 30, 2017 and December 31, 2016. During the nine months ended September 30, 2017, $8.8 million of loans and leases were placed on nonaccrual status. These additions to nonaccrual loans and leases were partially offset by $1.1 million of nonaccrual loans and leases restored to accrual status and $2.1 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 $7.6 million as of September 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 0.35 percent at September 30, 2017 from 0.30 percent at December 31, 2016. Of the $14.6 million nonperforming Non-PCI loans and leases, approximately $14.3 million were impaired based on the definition contained in ASC 310, Receivables, which resulted in an aggregate impairment reserve of $6.4 million as of September 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 September 30, 2017, OREO consisted of 6 properties with a combined carrying value of $1.9 million, as compared with 12 properties with a combined carrying value of $7.5 million as of December 31, 2016.
 

58



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:
 
September 30, 2017
 
December 31, 2016
 
Recorded
Investment
 
Percentage
 
Recorded
Investment
 
Percentage
 
(dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
1,475

 
5.4
%
 
$
1,678

 
6.4
%
Hospitality
6,288

 
22.9
%
 
6,227

 
23.6
%
Gas station
4,260

 
15.5
%
 
4,984

 
18.9
%
Other
4,777

 
17.3
%
 
6,070

 
23.0
%
Total commercial real estate loans
16,800

 
61.1
%
 
18,959

 
71.9
%
Residential property
2,666

 
9.7
%
 
2,798

 
10.6
%
Commercial and industrial loans
3,610

 
13.1
%
 
4,174

 
15.9
%
Leases Receivable
3,378

 
12.3
%
 

 
%
Consumer loans
1,045

 
3.8
%
 
419

 
1.6
%
Total Non-PCI loans and leases
$
27,499

 
100.0
%
 
$
26,350

 
100.0
%

Total impaired loans and leases increased $1.1 million, or 4.4 percent, to $27.5 million as of September 30, 2017, from $26.4 million at December 31, 2016. Specific allowances associated with impaired loans and leases were $6.4 million and $4.3 million as of September 30, 2017 and December 31, 2016, respectively.

During the three months ended September 30, 2017 and 2016, interest income that would have been recognized had impaired loans and leases performed in accordance with their original terms totaled $0.2 million and $0.2 million, respectively. Of these amounts, actual interest recognized on impaired loans and leases was $0.5 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively.

During the nine months ended September 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 $0.5 million, respectively. Of these amounts, actual interest recognized on impaired loans and leases was $1.3 million and $1.8 million for the nine months ended September 30, 2017 and 2016, respectively.





59



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

 
 
 
 
 
 
 
 
 
 
Commercial property
$
5,862

 
$
5,114

 
$
10,976

 
$
6,195

 
$
6,870

 
$
13,065

Residential property

 
919

 
919

 

 
1,072

 
1,072

Commercial and industrial loans
475

 
2,346

 
2,821

 
708

 
3,085

 
3,793

Consumer loans
820

 
111

 
931

 

 
119

 
119

Total Non-PCI loans and leases
$
7,157

 
$
8,490

 
$
15,647

 
$
6,903

 
$
11,146

 
$
18,049


For the three months ended September 30, 2017, four loans were restructured and subsequently classified as TDRs. Temporary payment structure modifications included, but were not limited to, 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 September 30, 2017, TDRs on accrual status were $8.5 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 September 30, 2017, TDRs on nonaccrual status were $7.2 million, and a $2.0 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 nine months of 2017, the Bank utilized a 24-quarter look-back period with equal weighting to all quarters. For the first nine months of 2016, the Bank utilized a 20-quarter look-back period.

To determine general reserve requirements, existing loans and leases are divided into general pools of risk-rated loans, as well as homogeneous pools. During the first nine months of 2016, existing loans were divided into fourteen general loan pools of risk-rated loans as well as three homogeneous loan pools. For the fourth quarter of 2016 through the first nine months of 2017, loans were divided into eleven general pools of risk-rated loans, as well as the three homogeneous 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

60



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.

The following tables reflect our allocation of allowance for loan and lease losses by category as well as the receivable for each loan type:
 
September 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
$
3,442

 
10.9
%
 
$
916,236

 
$
4,172

 
13.3
%
 
$
857,629

Hospitality
7,760

 
24.5
%
 
731,562

 
9,171

 
29.2
%
 
649,540

Gas station
1,136

 
3.6
%
 
245,042

 
1,438

 
4.6
%
 
260,187

Other
5,606

 
17.6
%
 
1,144,176

 
7,448

 
23.7
%
 
1,107,589

Total commercial real estate loans
17,944

 
56.6
%
 
3,037,016

 
22,229

 
70.8
%
 
2,874,945

Construction
659

 
2.1
%
 
64,263

 
1,916

 
6.1
%
 
55,962

Residential property
982

 
3.1
%
 
429,669

 
1,067

 
3.4
%
 
337,791

Total real estate loans
19,585

 
61.8
%
 
3,530,948

 
25,212

 
80.3
%
 
3,268,698

Commercial and industrial loans:
 
 

 
 
 
 
 
 
 
 
Commercial term
5,338

 
16.8
%
 
170,891

 
3,961

 
12.6
%
 
138,032

Commercial lines of credit
894

 
2.8
%
 
149,937

 
1,297

 
4.1
%
 
136,231

International loans
262

 
0.8
%
 
43,577

 
324

 
1.0
%
 
25,821

Total commercial and industrial loans
6,494

 
20.4
%
 
364,405

 
5,582

 
17.7
%
 
300,084

Leases receivable
64

 
0.2
%
 
272,271

 
307

 
1.0
%
 
243,294

Consumer loans
4,837

 
15.3
%
 
19,027

 
191

 
0.6
%
 
22,830

Unallocated
718

 
2.3
%
 

 
166

 
0.4
%
 

Total
$
31,698

 
100.0
%
 
$
4,186,651

 
$
31,458

 
100.0
%
 
$
3,834,906

 
September 30, 2017
 
December 31, 2016
 
Allowance
Amount
 
Percentage
 
PCI Loans
 
Allowance
Amount
 
Percentage
 
PCI Loans
 
(dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
97

 
12.2
%
 
$
1,587

 
$
122

 
12.6
%
 
$
2,324

Hospitality
132

 
16.6
%
 
1,664

 
138

 
14.2
%
 
1,618

Gas station
369

 
46.5
%
 
2,388

 
589

 
60.7
%
 
2,692

Other
8

 
1.0
%
 
2,013

 
1

 
0.1
%
 
2,067

Total commercial real estate loans
606

 
76.3
%
 
7,652

 
850

 
87.6
%
 
8,701

Residential property
146

 
18.4
%
 
958

 
72

 
7.4
%
 
976

Total real estate loans
752

 
94.7
%
 
8,610

 
922

 
95.0
%
 
9,677

Commercial and industrial loans:
 
 

 
 
 
 
 
 
 
 
Commercial term
41

 
5.2
%
 
51

 
41

 
4.2
%
 
136

Consumer loans
1

 
0.1
%
 
43

 
8

 
0.8
%
 
50

Total
$
794

 
100.0
%
 
$
8,704

 
$
971

 
100.0
%
 
$
9,863



61



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
 
September 30, 2017
 
December 31, 2016
 
September 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
$
33,038

 
$
720

 
$
33,758

 
$
33,439

 
$
5,533

 
$
38,972

 
$
34,259

 
$
5,448

 
$
39,707

Charge-offs
(2,405
)
 

 
(2,405
)
 
(2,326
)
 
(4,991
)
 
(7,317
)
 
(111
)
 
(5
)
 
(116
)
Recoveries on loans previously charged off
871

 

 
871

 
623

 

 
623

 
831

 

 
831

Net loan (charge-offs)
recoveries
(1,534
)
 

 
(1,534
)
 
(1,703
)
 
(4,991
)
 
(6,694
)
 
720

 
(5
)
 
715

Loan and lease loss provision (income)
194

 
74

 
268

 
(278
)
 
429

 
151

 
(1,540
)
 
90

 
(1,450
)
Balance at end of period
$
31,698

 
$
794

 
$
32,492

 
$
31,458

 
$
971

 
$
32,429

 
$
33,439

 
$
5,533

 
$
38,972

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for off-balance sheet items:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
1,135

 
$

 
$
1,135

 
$
1,491

 
$

 
$
1,491

 
$
1,475

 
$

 
$
1,475

Provision (income)
(220
)
 

 
(220
)
 
(307
)
 

 
(307
)
 
16

 

 
16

Balance at end of period
$
915

 
$

 
$
915

 
$
1,184

 
$

 
$
1,184

 
$
1,491

 
$

 
$
1,491

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loan and lease charge-offs (recoveries) to average loans and leases (1)
0.15
%
 
%
 
0.15
%
 
0.18
%
 
157.18
%
 
0.73
%
 
(0.08
)%
 
0.13
%
 
(0.08
)%
Net loan and lease charge-offs (recoveries) to loans and leases (1)
0.15
%
 
%
 
0.15
%
 
0.18
%
 
202.41
%
 
0.70
%
 
(0.08
)%
 
0.13
%
 
(0.08
)%
Allowance for loan and lease losses to average loans and leases
0.78
%
 
9.08
%
 
0.79
%
 
0.85
%
 
7.64
%
 
0.88
%
 
0.96
 %
 
36.21
%
 
1.12
 %
Allowance for loan and lease losses to loans and leases
0.76
%
 
9.12
%
 
0.77
%
 
0.82
%
 
9.84
%
 
0.84
%
 
0.95
 %
 
35.60
%
 
1.10
 %
Net loan and lease charge-offs (recoveries) to allowance for loan and lease losses (1)
19.36
%
 
%
 
18.88
%
 
21.65
%
 
2056.02
%
 
82.57
%
 
(8.61
)%
 
0.36
%
 
(7.34
)%
Allowance for loan and lease losses to nonperforming loans and leases
217.74
%
 
%
 
223.19
%
 
275.80
%
 
%
 
284.32
%
 
305.43
 %
 
%
 
355.97
 %
Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average loans and leases during period
$
4,125,465

 
$
8,744

 
$
4,092,131

 
$
3,686,013

 
$
12,702

 
$
3,690,955

 
$
3,485,705

 
$
15,280

 
$
3,477,428

Loans and leases at end of period
$
4,186,651

 
$
8,704

 
$
4,195,355

 
$
3,834,906

 
$
9,863

 
$
3,844,769

 
$
3,537,119

 
$
15,540

 
$
3,552,659

Nonperforming loans and leases at end of period
$
14,558

 
$

 
$
14,558

 
$
11,406

 
$

 
$
11,406

 
$
10,948

 
$

 
$
10,948

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


62



 
As of and for the Nine Months Ended
 
September 30, 2017
 
September 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

Charge-offs
(3,256
)
 

 
(3,256
)
 
(1,410
)
 
(142
)
 
(1,552
)
Recoveries on loans previously charged off
2,709

 

 
2,709

 
2,079

 

 
2,079

Net loan (charge-offs) recoveries
(547
)
 

 
(547
)
 
669

 
(142
)
 
527

Loan and lease loss provision (income)
787

 
(177
)
 
610

 
(4,724
)
 
234

 
(4,490
)
Balance at end of period
$
31,698

 
$
794

 
$
32,492

 
$
33,439

 
$
5,533

 
$
38,972

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

 
$

 
$
1,184

 
$
986

 
$

 
$
986

Provision (income)
(269
)
 

 
(269
)
 
505

 

 
505

Balance at end of period
$
915

 
$

 
$
915

 
$
1,491

 
$

 
$
1,491

 
 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 
 
 
 
Net loan charge-offs (recoveries) to average loans (1)
0.02
%
 
%
 
0.02
%
 
(0.03
)%
 
1.07
%
 
(0.02
)%
Net loan charge-offs (recoveries) to loans (1)
0.02
%
 
%
 
0.02
%
 
(0.03
)%
 
1.22
%
 
(0.02
)%
Allowance for loan losses to average loans
0.79
%
 
8.55
%
 
0.82
%
 
1.00
 %
 
31.12
%
 
1.17
 %
Allowance for loan losses to loans
0.76
%
 
9.12
%
 
0.77
%
 
0.95
 %
 
35.60
%
 
1.10
 %
Net loan charge-offs (recoveries) to allowance for loan losses (1)
2.30
%
 
%
 
2.24
%
 
(2.67
)%
 
3.42
%
 
(1.80
)%
Allowance for loan losses to nonperforming loans
217.75
%
 
%
 
223.2
%
 
305.43
 %
 
%
 
355.97
 %
Balance:
 
 
 
 
 
 
 
 
 
 
 
Average loans during period
$
4,010,779

 
$
9,283

 
$
3,976,021

 
$
3,350,211

 
$
17,777

 
$
3,333,419

Loans at end of period
$
4,186,651

 
$
8,704

 
$
4,195,355

 
$
3,537,119

 
$
15,540

 
$
3,552,659

Nonperforming loans at end of period
$
14,558

 
$

 
$
14,558

 
$
10,948

 
$

 
$
10,948

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

Allowance for loan and lease losses was $32.5 million, $32.4 million and $39.0 million, as of September 30, 2017, December 31, 2016, and September 30, 2016, respectively. The increase of $63,000, or 0.2 percent, in the allowance for loan and lease losses as of September 30, 2017, compared with December 31, 2016 was due primarily to the in loan and lease receivables. Accordingly, the non-PCI loan and lease loss allowance increased $240,000 to $31.7 million as of September 30, 2017, compared with $31.5 million at December 31, 2016. The PCI loan loss allowance decreased $0.2 million to $0.8 million as of September 30, 2017, compared with $1.0 million at December 31, 2016.

The allowance for off-balance sheet exposure, primarily unfunded loan commitments, was $0.9 million, $1.2 million and $1.5 million as of September 30, 2017, December 31, 2016 and September 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 September 30, 2017.


63



The following table presents a summary of net charge-offs (recoveries):
 
As of and for the Three Months Ended
 
As of and for the Nine Months Ended
 
Charge-offs
 
Recoveries
 
Net
Charge-offs (Recoveries)
 
Charge-offs
 
Recoveries
 
Net
Charge-offs (Recoveries)
 
(in thousands)
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Real estate loans
$
146

 
$
343

 
$
(197
)
 
$
289

 
$
1,434

 
$
(1,145
)
Commercial and industrial loans
1,976

 
308

 
1,668

 
2,015

 
1,021

 
994

Leases receivable
283

 
220

 
63

 
952

 
239

 
713

Consumer loans

 

 

 
 
 
15

 
(15
)
Total Non-PCI loans
$
2,405

 
$
871

 
$
1,534

 
$
3,256

 
$
2,709

 
$
547

 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Real estate loans
$
18

 
$
337

 
(319
)
 
$
709

 
$
527

 
182

Commercial and industrial loans
93

 
494

 
(401
)
 
701

 
1,499

 
(798
)
Consumer loans

 

 

 

 
53

 
(53
)
Total Non-PCI loans
$
111

 
$
831

 
$
(720
)
 
$
1,410

 
$
2,079

 
$
(669
)

For the three months ended September 30, 2017 and 2016, total charge-offs were $2.4 million and $0.1 million, respectively. For the three months ended September 30, 2017, total recoveries were $871,000, an increase of $40,000, or 4.8 percent, from $831,000 for the same period in 2016. For the nine months ended September 30, 2017, total charge-offs were $3.3 million, an increase of $1.8 million or 131.0 percent from $1.4 million for the same period in 2016, and total recoveries were $2.7 million, an increase of $0.6 million or 30.3 percent from $2.1 million for the same period in 2016.

Deposits

The following table shows the composition of deposits by type as of the dates indicated:
 
September 30, 2017
 
December 31, 2016
 
Balance
 
Percent
 
Balance
 
Percent
 
(dollars in thousands)
Demand – noninterest-bearing
$
1,293,538

 
30.1
%
 
$
1,203,240

 
31.6
%
Interest-bearing:

 


 


 


Demand
90,734

 
2.1
%
 
96,856

 
2.5
%
Money market and savings
1,534,457

 
35.7
%
 
1,329,324

 
34.9
%
Time deposits of $100,000 or more (1)
1,074,870

 
25.0
%
 
844,386

 
22.2
%
Other time deposits
305,411

 
7.1
%
 
335,931

 
8.8
%
Total deposits
$
4,299,010

 
100.0
%
 
$
3,809,737

 
100.0
%
                              
(1) 
Includes $430.5 million and $445.4 million of time deposits of $250,000 or more as of September 30, 2017 and December 31, 2016, respectively.

Deposits increased $489.3 million, or 12.8 percent, to $4.30 billion as of September 30, 2017 from $3.81 billion as of December 31, 2016. The increase in deposits was mainly attributable to the $205.1 million and $200.0 million increase in money market and savings deposits and time deposits, respectively.
 
Borrowings

At September 30, 2017 and December 31, 2016, there were $110.0 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 nine months of 2017. In addition, subordinated debentures were $117.1 million and $19.0 million at September 30, 2017 and December 31, 2016, respectively. The change represents the proceeds from the subordinated note offering that closed on March 21, 2017.


64



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%
$
(2,297
)
 
(1.25)%
 
$
5,326

 
2.89%
200%
$
(1,547
)
 
(0.84)%
 
$
3,582

 
1.94%
100%
$
(395
)
 
(0.21)%
 
$
2,728

 
1.48%
(100)%
$
(12,406
)
 
(6.74)%
 
$
(21,438
)
 
(11.63)%

 
 
 
 
 
Economic Value of Equity (EVE)
Change in
Interest
Rate
 
 
 
 

Dollar
Change
 

Percentage
Change
 
 
 
 
 
(dollars in thousands)
300%
 
 
 
 
$
(20,246
)
 
(3.53)%
200%
 
 
 
 
$
(12,411
)
 
(2.16)%
100%
 
 
 
 
$
788

 
0.14%
(100)%
 
 
 
 
$
(45,610
)
 
(7.94)%

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.
 
At September 30, 2017, the Bank’s total risk-based capital ratio of 15.32 percent, Tier 1 risk-based capital ratio of 14.55 percent, common equity Tier 1 capital ratio of 14.55 percent and Tier 1 leverage capital ratio of 12.66 percent, placed the

65



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 September 30, 2017, the Company's total risk-based capital ratio was 15.58 percent, Tier 1 risk-based capital ratio was 12.56 percent, common equity Tier 1 capital ratio was 12.20 percent and Tier 1 leverage capital ratio was 10.92 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 September 30, 2017, the Bank had $145.2 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 September 30, 2017, the total borrowing capacity available based on pledged collateral and remaining available borrowing capacity were $808.9 million and $698.9 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 $8.9 million from the Federal Reserve Discount Window, to which the Bank pledged securities with a carrying value of $9.5 million, and had no borrowings as of September 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 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

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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 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 and, 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

68



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.
FASB ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, was issued in August 2017 with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition to that main objective, the amendments in this Update make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The ASU requires certain hedging instrument to be presented in the same line item as the hedged item and also requires expanded disclosures. This ASU’s mandatory effective date for calendar year-end public companies is January 1, 2019, but the amendments may be early adopted in any interim or annual period after issuance. The Company does not currently have hedging transactions that would be impacted by this ASU and 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 September 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 September 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
3.1
31.1
31.2
32.1
32.2
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:
November 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)



73