hafc-10q_20200630.htm

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging Growth Company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2020

☐	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		(I.R.S. Employer
Incorporation or Organization)		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)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

HAFC

Nasdaq Global Select Market

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 ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ 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.

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 ☒

As of August 3, 2020, there were 30,656,746 outstanding shares of the Registrant’s Common Stock.

Hanmi Financial Corporation and Subsidiaries Quarterly Report on Form 10-Q

Three Months Ended June 30, 2020

Table of Contents


	Part I – Financial Information

Item 1.	Financial Statements	3

	Consolidated Balance Sheets at June 30, 2020 (unaudited) and December 31, 2019	3

	Consolidated Statements of Income (Unaudited)	4

	Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)	6

	Consolidated Statements of Cash Flows (Unaudited)	8

	Notes to Consolidated Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	66

Item 4.	Controls and Procedures	66

	Part II – Other Information

Item 1.	Legal Proceedings	67

Item 1A.	Risk Factors	67

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68

Item 3.	Defaults Upon Senior Securities	68

Item 4.	Mine Safety Disclosures	68

Item 5.	Other Information	68

Item 6.	Exhibits	69

Signatures		70

Part I — Financial Information

Item 1. Financial Statements

Hanmi Financial Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(in thousands, except share data)

	June 30,			December 31,
	2020			2019

Assets
Cash and due from banks	$	546,048		$	121,678
Securities available for sale, at fair value (amortized cost of $655,500, as of June 30, 2020 and $629,725 as of December 31, 2019)		655,971			634,477
Loans held for sale, at the lower of cost or fair value		17,942			6,020
Loans receivable, net of allowance for credit losses of $86,330 as of June 30, 2020 and $61,408 as of December 31, 2019		4,739,312			4,548,739
Accrued interest receivable		21,372			11,742
Premises and equipment, net		26,412			26,070
Customers' liability on acceptances		—			66
Servicing assets		6,187			6,956
Goodwill and other intangible assets, net		11,742			11,873
Federal Home Loan Bank ("FHLB") stock, at cost		16,385			16,385
Income tax assets		43,286			36,787
Bank-owned life insurance		53,334			52,782
Prepaid expenses and other assets		80,172			64,610
Total assets	$	6,218,163		$	5,538,184

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,865,213		$	1,391,624
Interest-bearing		3,344,568			3,307,338
Total deposits		5,209,781			4,698,962
Accrued interest payable		8,655			11,215
Bank's liability on acceptances		—			66
Borrowings		251,808			90,000
Subordinated debentures ($126,800 face amount less unamortized discount and debt issuance costs of $8,130) as of June 30, 2020 and ($126,800 face amount less unamortized discount and debt issuance costs of $8,423) as of December 31, 2019		118,670			118,377
Accrued expenses and other liabilities		81,813			56,297
Total liabilities		5,670,727			4,974,917
Stockholders' equity:
Preferred Stock, $0.001 par value; authorized 10,000,000 shares; no shares issued as of June 30, 2020 and December 31, 2019		—			—
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,495,913 shares (30,657,629 shares outstanding) as of June 30, 2020 and issued 33,475,402 shares (30,799,624 shares outstanding) as of December 31, 2019		33			33
Additional paid-in capital		577,211			575,816
Accumulated other comprehensive income, net of tax expense of $136 as of June 30, 2020 and $1,370 as of December 31, 2019		335			3,382
Retained earnings		88,859			100,551
Less treasury stock; 2,838,284 shares as of June 30, 2020 and 2,675,778 shares as of December 31, 2019		(119,002	)		(116,515	)
Total stockholders' equity		547,436			563,267
Total liabilities and stockholders' equity	$	6,218,163		$	5,538,184

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

(in thousands, except share and per share data)

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Interest and dividend income:
Interest and fees on loans receivable	$	52,230	$	56,872	$	106,878	$	115,206
Interest on securities		3,225		3,770		6,880		7,226
Dividends on FHLB stock		203		283		492		572
Interest on deposits in other banks		78		557		411		892
Total interest and dividend income		55,736		61,482		114,661		123,896
Interest expense:
Interest on deposits		8,889		16,728		21,631		32,410
Interest on borrowings		760		—		1,256		72
Interest on subordinated debentures		1,645		1,764		3,357		3,536
Total interest expense		11,294		18,492		26,244		36,018
Net interest income before credit loss expense		44,442		42,990		88,417		87,878
Credit loss expense		24,594		16,699		40,333		17,816
Net interest income after credit loss expense		19,848		26,291		48,084		70,062
Noninterest income:
Service charges on deposit accounts		2,032		2,486		4,432		4,844
Trade finance and other service charges and fees		961		1,204		1,948		2,328
Gain on sale of Small Business Administration ("SBA") loans		—		1,060		1,154		1,986
Net gain on sales of securities		15,712		570		15,712		1,295
Other operating income		2,226		2,409		3,908		3,530
Total noninterest income		20,931		7,729		27,154		13,983
Noninterest expense:
Salaries and employee benefits		14,701		16,881		32,450		32,619
Occupancy and equipment		4,508		3,468		8,983		7,989
Data processing		2,804		2,140		5,473		4,223
Professional fees		1,545		1,983		3,460		3,632
Supplies and communications		858		649		1,639		1,493
Advertising and promotion		456		945		1,190		1,705
Other operating expenses		2,266		4,078		5,011		7,549
Total noninterest expense		27,138		30,144		58,206		59,210
Income before tax		13,641		3,876		17,032		24,835
Income tax expense		4,466		1,220		5,506		7,507
Net income	$	9,175	$	2,656	$	11,526	$	17,328
Basic earnings per share	$	0.30	$	0.09	$	0.38	$	0.56
Diluted earnings per share	$	0.30	$	0.09	$	0.38	$	0.56
Weighted-average shares outstanding:
Basic		30,426,967		30,685,301		30,447,984		30,688,698
Diluted		30,426,967		30,727,681		30,450,231		30,729,020

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net income	$	9,175		$	2,656		$	11,526		$	17,328
Other comprehensive income (loss), net of tax:
Unrealized gain on securities:
Unrealized holding gain (loss) arising during period		(493	)		6,548			11,431			13,167
Less: reclassification adjustment for net gain included in net income		(15,712	)		(570	)		(15,712	)		(1,295	)
Income tax expense (benefit) related to items of other comprehensive income		4,673			(1,721	)		1,234			(3,418	)
Other comprehensive income (loss), net of tax		(11,532	)		4,257			(3,047	)		8,454
Comprehensive income (loss)	$	(2,357	)	$	6,913		$	8,479		$	25,782

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Three Months Ended June 30, 2020

(in thousands, except share data)

	Common Stock - Number of Shares								Stockholders' Equity
													Accumulated
											Additional		Other						Treasury			Total
	Shares		Treasury			Shares			Common		Paid-in		Comprehensive			Retained			Stock,			Stockholders'
	Issued		Shares			Outstanding			Stock		Capital		Income (Loss)			Earnings			at Cost			Equity
Balance at April 1, 2019		33,153,888		(2,293,355	)		30,860,533		$	33	$	570,432	$	(1,882	)	$	104,771		$	(109,062	)	$	564,292
Stock options exercised		1,250		—			1,250			—		13		—			—			—			13
Restricted stock awards, net of forfeitures		116,694		—			116,694			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		660		—			—			—			660
Restricted stock surrendered due to employee tax liability		—		(3,314	)		(3,314	)		—		—		—			—			(14	)		(14	)
Cash dividends declared (common stock, $0.24/share)		—		—			—			—		—		—			(7,406	)		—			(7,406	)
Net income		—		—			—			—		—		—			2,656			—			2,656
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		4,257			—			—			4,257
Balance at June 30, 2019		33,271,832		(2,296,669	)		30,975,163		$	33	$	571,105	$	2,375		$	100,021		$	(109,076	)	$	564,458

Balance at April 1, 2020		33,448,214		(2,825,473	)		30,622,741		$	33	$	576,585	$	11,867		$	83,355		$	(118,882	)	$	552,958
Restricted stock awards, net of forfeitures		47,699		—			47,699			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		626		—			—			—			626
Restricted stock surrendered due to employee tax liability		—		(12,811	)		(12,811	)		—		—		—			—			(120	)		(120	)
Cash dividends declared (common stock, $0.12/share)		—		—			—			—		—		—			(3,671	)		—			(3,671	)
Net income		—		—			—			—		—		—			9,175			—			9,175
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		(11,532	)		—			—			(11,532	)
Balance at June 30, 2020		33,495,913		(2,838,284	)		30,657,629		$	33	$	577,211	$	335		$	88,859		$	(119,002	)	$	547,436

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Six Months Ended June 30, 2020

(in thousands, except share data)

	Common Stock - Number of Shares								Stockholders' Equity
													Accumulated
											Additional		Other						Treasury			Total
	Shares		Treasury			Shares			Common		Paid-in		Comprehensive			Retained			Stock,			Stockholders'
	Issued		Shares			Outstanding			Stock		Capital		Income (Loss)			Earnings			at Cost			Equity
Balance at January 1, 2019		33,202,369		(2,273,932	)		30,928,437		$	33	$	569,712	$	(6,079	)	$	97,539		$	(108,637	)	$	552,568
Stock options exercised		1,900		—			1,900			—		22		—			—			—			22
Restricted stock awards, net of forfeitures		67,563		—			67,563			—		—		—			—			—			-
Share-based compensation expense		—		—			—			—		1,371		—			—			—			1,371
Restricted stock surrendered due to employee tax liability		—		(22,737	)		(22,737	)		—		—		—			—			(439	)		(439	)
Repurchase of common stock		—		—			—			—		—		—			—			—			-
Cash dividends declared (common stock, $0.48/share)		—		—			—			—		—		—			(14,846	)		—			(14,846	)
Net income		—		—			—			—		—		—			17,328			—			17,328
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		8,454			—			—			8,454
Balance at June 30, 2019		33,271,832		(2,296,669	)		30,975,163		$	33	$	571,105	$	2,375		$	100,021		$	(109,076	)	$	564,458

Balance at January 1, 2020		33,475,402		(2,675,778	)		30,799,624		$	33	$	575,816	$	3,382		$	100,551		$	(116,515	)	$	563,267
Adjustment related to adopting of new accounting standards
ASU 2016-13 (See Notes 1 and 3)		—		—			—			—		—		—			(12,167	)		—			(12,167	)
Adjusted balance at January 1, 2020		33,475,402		(2,675,778	)		30,799,624			33		575,816		3,382			88,385			(116,515	)		551,101
Restricted stock awards, net of forfeitures		20,511		—			20,511			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		1,395		—			—			—			1,395
Restricted stock surrendered due to employee tax liability		—		(27,106	)		(27,106	)		—		—		—			—			(291	)		(291	)
Repurchase of common stock		—		(135,400	)		(135,400	)		—		—		—			—			(2,196	)		(2,196	)
Cash dividends declared (common stock, $0.36/share)		—		—			—			—		—		—			(11,052	)		—			(11,052	)
Net income		—		—			—			—		—		—			11,526			—			11,526
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		(3,047	)		—			—			(3,047	)
Balance at June 30, 2020		33,495,913		(2,838,284	)		30,657,629		$	33	$	577,211	$	335		$	88,859		$	(119,002	)	$	547,436

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities:
Net income	$	11,526		$	17,328
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,018			4,694
Share-based compensation expense		1,395			1,371
Credit loss expense		40,333			17,816
Gain on sales of securities		(15,712	)		(1,295	)
Gain on sales of SBA loans		(1,154	)		(1,986	)
Origination of SBA loans held for sale		(30,139	)		(27,523	)
Proceeds from sales of SBA loans		19,366			32,856
Change in bank-owned life insurance		(552	)		(561	)
Change in prepaid expenses and other assets		(34,409	)		(3,267	)
Change in income tax assets		4,930			—
Change in accrued expenses and other liabilities		23,324			(1,501	)
Net cash provided by operating activities		23,926			37,932
Cash flows from investing activities:
Purchases of securities available for sale		(615,454	)		(230,112	)
Proceeds from matured, called and repayment of securities		108,444			63,528
Proceeds from sales of securities available for sale		495,566			113,306
Purchases of premises and equipment		(2,279	)		(515	)
Proceeds from disposition of premises and equipment		51			3,055
Proceeds from sales of other real estate owned ("OREO")		—			22
Change in loans receivable, excluding purchases		(244,973	)		43,689
Net cash provided by (used in) investing activities		(258,645	)		(7,027	)
Cash flows from financing activities:
Change in deposits		510,819			14,833
Change in overnight borrowings		(15,000	)		(55,000	)
Proceeds from borrowings		176,808			—
Proceeds from exercise of stock options		—			22
Cash paid for surrender of vested shares due to employee tax liability		(291	)		(439	)
Repurchase of common stock		(2,196	)		—
Cash dividends paid		(11,052	)		(14,846	)
Net cash provided by (used in) financing activities		659,088			(55,430	)
Net increase (decrease) in cash and due from banks		424,370			(24,525	)
Cash and due from banks at beginning of year		121,678			155,376
Cash and due from banks at end of period	$	546,048		$	130,851

Supplemental disclosures of cash flow information:
Interest expense paid	$	28,804		$	35,959
Income taxes paid	$	99		$	(3,587	)
Non-cash activities:
Transfer of loans receivable to other real estate owned	$	85		$	—
Income tax (expense) benefit related to items of other comprehensive income	$	1,234		$	(3,418	)
Change in unrealized (gain) loss in accumulated other comprehensive income	$	4,281		$	(11,872	)
Change in right-of-use asset obtained in exchange for lease liability	$	17,333		$	43,110

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Six Months Ended June 30, 2020 and 2019

Note 1 — Organization and Basis of Presentation

Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we,” “us” or “our”) is a bank holding company whose primary 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 periods ended June 30, 2020, 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 unaudited consolidated financial statements are prepared in conformity with GAAP and in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report on Form 10-K”).

The preparation of interim unaudited 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. These estimates and assumptions affect the amounts reported in the unaudited financial statements and disclosures provided, and actual results could differ.

Descriptions of our significant accounting policies are included in Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in the 2019 Annual Report on Form 10-K.

FASB ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASU 2016-13 made changes to the accounting for available-for sale debt securities.

The Company adopted ASU 2016-13 using the prospective transition approach for debt securities for which the Company would have recognized other-than-temporary impairment prior to January 1, 2020. However, the Company had no such securities and as a result, there was no effect on the balance sheet related to securities from the adoption of ASU 2016-13. As a result, the amortized cost basis remained the same before and after the effective date of ASU 2016-13.

The adoption of ASU 2016-13 resulted in a $17.4 million increase to the beginning balance of the allowance for credit losses, a $0.3 million decrease to the beginning balance of the allowance for off-balance sheet items, and an after-tax charge of $12.2 million to the beginning balance of retained earnings.

According to ASU 2016-13, the Bank was required to measure its expected credit losses of financial assets on a collective (pool) basis when similar risk characteristic(s) exist. The Bank segmented the loans primarily by loan types, considering that the same type of loans share considerable similar risk characteristics, including the collateral type, loan purpose, contract term, amortization and payment structure.

The Company measured expected credit losses of financial assets on a collective (pool) basis, when the financial assets share similar risk characteristics. Depending on the nature of the pool of financial assets with similar risk characteristics, the Company used a discounted cash flow (“DCF”) method, Probability of Default / Loss Given Default method (“PD/LGD”), or a Weighted Average Remaining Maturity (“WARM”) method to estimate expected credit losses.

The Company’s methodologies for estimating the allowance for credit losses considered available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies applied historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that were reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. The Company’s methodologies revert to historical loss information on a straight-line basis over twelve quarters when it can no longer develop reasonable and supportable forecasts.

The Company has disaggregated the portfolios of financial assets into the following material segments of like-kind loans or leases with similar risk characteristics using the following methodologies:

The Company used the discounted cash flow (DCF) method to estimate allowances for credit losses for the commercial property, construction, and residential real estate loan portfolios, the commercial and industrial loan portfolio, and the consumer loan portfolio. For all loan pools utilizing the DCF method, the Company utilized and forecasted the national unemployment rate as the primary loss driver. The Company also utilized and forecasted either the annualized average return rate from the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index for commercial real estate loans or the one-year percentage change in the S&P/Case-Shiller U.S National Home Price Index (NHPI) for residential real estate loans as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses.

For all DCF models at January 1, 2020, the Company determined that four-quarters represented a reasonable and supportable forecast period and reverted to a historical loss rate over twelve quarters on a straight-line basis. The Company leveraged economic projections from the quarterly Federal Open Market Committee (FOMC) and the Federal Reserve Economic Database (FRED) to inform its loss driver forecasts over the four-quarter forecast period. For each of these loan segments, the Company applied an expected loss ratio based on the discounted cash flows adjusted as appropriate for qualitative factors. Qualitative loss factors are based on the Company's judgment of company, market, industry or business specific data, changes in the underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, nonperforming and adversely rated loans, and reasonable and supportable forecasts of economic conditions.

The Company used the Probability of Default/Loss Given Default (PD/LGD) method for the SBA portfolio to accommodate the unique nature of these loans. Although the PD/LGD methodology is an element of the DCF model, the stand-alone PD/LGD methodology minimizes complications related to the characteristics of SBA loans. A uniqueness of the SBA portfolio is that the U.S. Small Business Administration policy requires servicers to undertake all reasonable collection efforts before charging-off the loan. As a result, the recovery rate for SBA loans tend to be more volatile and not intuitively correlated to economic factors.

The Company used a Weighted Average Remaining Maturity (WARM) method to estimate expected credit losses for equipment financing agreements or the equipment lease receivables portfolio. The Company applied an expected loss ratio based on internal historical losses adjusted as appropriate for qualitative factors. The Company's evaluation of market, industry or business specific data, changes in the underlying portfolio composition, trends relating to credit quality, delinquency, nonperforming and adversely rated leases, and reasonable and supportable forecasts of economic conditions informed the estimate of qualitative factors.

As allowed by ASU 2016-13, the Company elected to maintain pools of loans accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether modifications to individual acquired financial assets accounted for in pools were troubled debt restructurings as of the date of adoption.

The Company estimated the allowance for credit losses on loans based on the underlying assets’ amortized cost basis, which was the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of allowance for credit losses.

Expected credit losses are reflected in the allowance for credit losses through a charge to credit loss expense. When the Company deems all or a portion of a financial asset to be uncollectible, the appropriate amount is written off and the allowance for credit losses is reduced by the same amount. The Company applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the allowance for credit losses when received.

The following table illustrates the allowance for credit losses and the related impact under ASU 2016-13 to the Company as of January 1, 2020.

	As Reported Under ASU 2016-13		Pre-ASU 2016-13 Adoption		Impact of ASU 2016-13 Adoption
Real estate loans:
Commercial property
Retail	$	6,785	$	4,911	$	1,873
Hospitality		12,387		6,686		5,702
Other		13,415		8,060		5,355
Total commercial property loans		32,587		19,657		12,930
Construction loans		15,590		15,003		587
Residential property loans		2,150		1,695		455
Total real estate loans		50,327		36,355		13,972
Commercial and industrial loans:
Commercial term loans		12,175		14,077		(1,903	)
Commercial lines of credit		1,358		1,887		(529	)
International loans		176		242		(65	)
Total commercial loans		13,709		16,206		(2,497	)
Leases receivable		14,669		8,767		5,902
Consumer loans		135		80		55
Allowance for credit losses on loans receivable	$	78,841	$	61,408	$	17,433

Allowance for credit losses on off-balance sheet items	$	2,062	$	2,398	$	(336	)

The Company used the methodologies described above in the implementation of CECL at January 1, 2020 and through March 31, 2020. The Company, however, adjusted the methodologies for the commercial property, construction, and residential real estate portfolios during the three months ended June 30, 2020 to reflect better the forecast of potential losses arising from the more unstable economic environment due to the COVID-19 pandemic. See Note 3 - Loans for a more detailed description of the changes in the allowance for credit losses methodologies.

FASB ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, Effective January 1, 2020, the Company adopted this standard, which 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 was to apply the amendments in this ASU on a prospective basis and was required to disclose the nature of and reason for the change in accounting principle upon transition. The Company’s goodwill arose from the purchase of an equipment leasing portfolio in 2016. The equipment leasing portfolio has grown since acquisition, and the Company has concluded no impairment has occurred.

The outbreak of the novel coronavirus, also known as COVID-19 has resulted in orders for individuals to shelter-in place and restricted business activities. As a result, the operations and business results of the Company could be materially adversely affected. The extent to which the COVID-19 crisis may impact business activity or investment results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions required to contain the coronavirus or treat its impact, among others. This uncertainty may impact the accuracy of our significant estimates, which includes the allowance for credit losses, the allowance for credit losses related to off-balance sheet items, and the valuation of intangible assets including deferred tax assets, goodwill, and servicing assets.

Note 2 — Securities

The following is a summary of securities available for sale as of the dates indicated:

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gain		Loss			Value
	(in thousands)
June 30, 2020
U.S. Treasury securities	$	44,982	$	280	$	—		$	45,262
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		413,278		422		(437	)		413,263
Collateralized mortgage obligations		120,080		390		(176	)		120,294
Debt securities		77,160		9		(17	)		77,152
Total U.S. government agency and sponsored agency obligations		610,518		821		(630	)		610,709
Total securities available for sale	$	655,500	$	1,101	$	(630	)	$	655,971

December 31, 2019
U.S. Treasury securities	$	34,947	$	259	$	—			35,206
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		406,813		4,334		(347	)	$	410,800
Collateralized mortgage obligations		164,232		792		(432	)		164,592
Debt securities		23,733		168		(22	)		23,879
Total U.S. government agency and sponsored agency obligations		594,778		5,294		(801	)		599,271
Total securities available for sale	$	629,725	$	5,553	$	(801	)	$	634,477

The amortized cost and estimated fair value of securities as of June 30, 2020, by contractual or expected maturity, are shown below. Collateralized mortgage obligations are included in the table shown below based on their expected maturities. All other securities are included based on their contractual maturities.

	Available for Sale
	Amortized		Estimated
	Cost		Fair Value
	(in thousands)
Within one year	$	45,358	$	45,379
Over one year through five years		121,596		122,202
Over five years through ten years		48,702		48,812
Over ten years		439,844		439,578
Total	$	655,500	$	655,971

CECL (ASU 2016-13) requires the Company to assess its available-for-sales securities portfolio for impairment on an at least quarterly basis. The Company performed an impairment assessment of the Bank’s investment in debt securities in accordance with this standard. This assessment took into account the credit quality of these debt securities and determined that since all were U.S. Treasury obligations, U.S. government agency securities, and U.S. government sponsored agency securities, they all have the backing of the U.S. government, and thus no credit impairment is expected.

Gross unrealized losses on securities available for sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of June 30, 2020 and December 31, 2019:

	Holding Period
	Less than 12 Months							12 Months or More							Total
	Gross			Estimated		Number		Gross			Estimated		Number		Gross			Estimated		Number
	Unrealized			Fair		of		Unrealized			Fair		of		Unrealized			Fair		of
	Loss			Value		Securities		Loss			Value		Securities		Loss			Value		Securities
	(in thousands, except number of securities)
June 30, 2020
U.S. Treasury securities	$	—		$	29,988		4	$	—		$	—		—	$	—		$	29,988		4
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		(437	)		192,403		23		—			—		—		(437	)		192,403		23
Collateralized mortgage obligations		(176	)		46,693		12		—			—		—		(176	)		46,693		12
Debt securities		(17	)		32,483		5		—			—		—		(17	)		32,483		5
Total U.S. government agency and sponsored agency obligations		(630	)		271,579		40		—			—		—		(630	)		271,579		40
Total	$	(630	)	$	301,567		44	$	—		$	—		—	$	(630	)	$	301,567		44

December 31, 2019
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities	$	(186	)	$	51,261		17	$	(161	)	$	18,757		14	$	(347	)	$	70,018		31
Collateralized mortgage obligations		(112	)		41,419		14		(320	)		39,936		36		(432	)		81,355		50
Debt securities		(20	)		8,235		2		(3	)		2,997		1		(22	)		11,233		3
Total U.S. government agency and sponsored agency obligations		(318	)		100,916		33		(483	)		61,690		51		(801	)		162,606		84
Total	$	(318	)	$	100,916		33	$	(483	)	$	61,690		51	$	(801	)	$	162,606		84

The unrealized losses in the U.S. government agency and sponsored agency obligations, were caused by fluctuations in interest rates. These securities are not deemed to have credit risk due to their long history with no credit losses, and the explicit guarantee of the U.S. government of timely payment of principal and interest to investors. The Company does not intend to sell the securities and it is not more likely than not that it will be required to sell them before recovery of their amortized cost.

Realized gains and losses on sales of securities and proceeds from sales of securities were as follows for the periods indicated:

	Three Months Ended June 30,					Six Months Ended June 30,
	2020		2019			2020		2019
	(in thousands)
Gross realized gains on sales of securities	$	15,712	$	634		$	15,712	$	1,359
Gross realized losses on sales of securities		—		(64	)		—		(64	)
Net realized gains on sales of securities	$	15,712	$	570		$	15,712	$	1,295
Proceeds from sales of securities	$	495,566		44,119		$	495,566		113,306

During the three months ended June 30, 2020 and 2019, there was a $15.7 million and $570,000 net gain in earnings resulting from the sale of securities, respectively. A net unrealized gain of $15.3 million and $792,000 related to these securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period in 2020 and 2019, respectively.

During the six months ended June 30, 2020, there were $15.7 million securities sales transactions in net gains in earnings resulting from $15.3 million previously recorded for unrealized gains in accumulated other comprehensive income. During the six months ended June 30, 2019, there were $1.3 million in net gains in earnings resulting from the sale of securities which had $586,000 in previously recorded unrealized gains in accumulated other comprehensive income.

Securities available for sale with market values of $50.0 million and $30.2 million as of June 30, 2020 and 2019, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

Note 3 — Loans

Loans Receivable

Loans consisted of the following as of the dates indicated:

	June 30, 2020			December 31, 2019
	(in thousands)
Real estate loans:
Commercial property
Retail	$	808,157		$	869,302
Hospitality		882,812			922,288
Other ⁽¹⁾		1,504,916			1,358,432
Total commercial property loans		3,195,885			3,150,022
Construction		70,357			76,455
Residential property		354,064			402,028
Total real estate loans		3,620,306			3,628,505
Commercial and industrial loans		730,399			484,093
Leases receivable		462,811			483,879
Consumer loans ⁽²⁾		12,126			13,670
Loans receivable		4,825,642			4,610,147
Allowance for credit losses		(86,330	)		(61,408	)
Loans receivable, net	$	4,739,312		$	4,548,739

⁽¹⁾	Includes, among other types, mixed-use, apartment, office, industrial, gas stations, faith-based facilities and warehouse; all other property types represent less than one percent of total loans receivable.

⁽²⁾	Consumer loans include home equity lines of credit of $7.6 million and $8.2 million as of June 30, 2020 and December 31, 2019, respectively.

The CARES Act (the Coronavirus Aid, Relief, and Economic Security Act) was passed by Congress and signed into law by President Trump on March 27, 2020. Among other benefits, the CARES Act allows financial institutions to assist customers in dealing with financial hardship by (a) providing federal funding so that financial institutions can originate SBA loans to borrowers at a low interest rate under the Paycheck Protection Program (PPP loans) with eventual debt forgiveness should the borrower continue to meet certain criteria after the COVID-19 crisis has abated; and (b) allowing financial institutions to temporarily modify loan terms by deferring loan payments, loan fees, etc. on a short-term basis without considering them Troubled Debt Restructures.

At June 30, 2020, there were $301.8 million of PPP loans included in commercial and industrial loans in the table above. In addition, at June 30, 2020, there were $1.4 billion of loans modified under Section 4013 of the CARES Act.

Accrued interest on loans was $20.3 million and $10.0 million at June 30, 2020 and December 31, 2019, respectively. At June 30, 2020 and December 31, 2019, loans of $2.4 billion and $1.4 billion, respectively, were pledged to secure advances from the FHLB.

Loans Held for Sale

The following is the activity for SBA loans held for sale for the three months ended June 30, 2020 and 2019:

	Real Estate			Commercial and Industrial			Total
	(in thousands)
June 30, 2020
Balance at beginning of period	$	—		$	—		$	—
Originations and transfers		12,661			5,281			17,942
Balance at end of period	$	12,661		$	5,281		$	17,942

June 30, 2019
Balance at beginning of period	$	6,500		$	640		$	7,140
Originations		6,650			7,650			14,300
Sales		(10,474	)		(4,937	)		(15,411	)
Balance at end of period	$	2,676		$	3,353		$	6,029

The following is the activity for SBA loans held for sale for the six months ended June 30, 2020 and 2019:

	Real Estate			Commercial and Industrial			Total
	(in thousands)
June 30, 2020
Balance at beginning of period	$	2,943		$	3,077		$	6,020
Originations and transfers		19,155			10,984			30,139
Sales		(9,432	)		(8,780	)		(18,212	)
Principal payoffs and amortization		(5	)		—			(5	)
Balance at end of period	$	12,661		$	5,281		$	17,942

June 30, 2019
Balance at beginning of period	$	5,194		$	4,196		$	9,390
Originations		15,713			11,810			27,523
Sales		(18,229	)		(12,641	)		(30,870	)
Principal payoffs and amortization		(2	)		(12	)		(14	)
Balance at end of period	$	2,676		$	3,353		$	6,029

Allowance for Credit Losses

The Company’s estimate of the allowance for credit losses at June 30, 2020 reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.

At June 30, 2020, the Company used the discounted cash flow (DCF) method to estimate allowances for credit losses for the commercial and industrial loan portfolio and the consumer loan portfolio. For all loan pools utilizing the DCF method, the Company utilizes and forecasts the national unemployment rate as the primary loss driver. In addition, the Company determined that four-quarters represented a reasonable and supportable forecast period and reverted to a historical loss rate over twelve quarters on a straight-line basis. As of and for the quarter ended June 30, 2020, the Company leveraged the economic projections from Moody’s Analytics Economic Scenarios and Forecasts to inform its loss driver forecasts over the four-quarter forecast period. For each of these loan segments, the Company applied an annualized historical Probability of Default/Loss Given Default (PD/LGD) using all available historical periods. The reason for the change from relying on the FRED economic data to Moody’s data was because Moody’s data is updated more frequently and timely than FOMC or FRED, and thus provides a better forecast for PD/LGD models. Since reasonable and supportable forecasts of economic conditions are imbedded directly to DCF model, qualitative adjustments are reduced but considered. Qualitative adjustments were based on the Company's judgment of company, market, industry or business specific data, changes in the underlying loan composition of specific portfolios.

Management determined that, due to model limitations, the regression model that supports the DCF calculation for the SBA and commercial property, construction, and residential real estate portfolios does not take into account the volatile nature of

COVID-19 on these portfolios, as well as the government assistance programs based on the maturities. As a result, at June 30, 2020, the Company utilized the Probability of Default/Loss Given Default (PD/LGD) method for the SBA and commercial property, construction, and residential real estate portfolios. The Company previously applied the DCF method to the real estate secured portfolios in the implementation of CECL at January 1, 2020 and through March 31, 2020 and determined that the change from DCF to PD/LGD was not material. See Note 1 – Organization and Basis of Presentation for a further description of the methodologies applied at the inception of CECL and during the three months ended March 31, 2020. The Company used historical periods that included an economic downturn to derive historical losses for better alignment in the estimation of expected losses. The Company leveraged Frye-Jacobs modeled LGD rates for loan segments with no historical losses. In addition, for those loans granted a loan modification due to COVID-19, the Company used historical periods under PD/LGD as of March 31, 2020 to reflect the moratorium on TDRs under Section 4013 of the CARES Act. The PD/LGD method incorporates a forecast into loss estimates using a qualitative adjustment. Qualitative loss factors were based on the Company's judgment of company, market, industry or business specific data, changes in the underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, nonperforming and adversely rated loans, and reasonable and supportable forecasts of economic conditions.

Management believes the allowance for credit losses is appropriate to provide for estimated losses inherent in the loans receivable portfolio. However, the allowance is an estimate that is inherently uncertain and depends on the outcome of future events. Management’s methodologies for determining such estimates consists of measuring expected credit losses of financial assets on a collective (pool) basis when similar risk characteristic(s) exist. The Bank segments the loans primarily by loan types, considering that the same type of loans share considerable similar risk characteristics, including the collateral type, loan purpose, contract term, amortization and payment structure. Our lending is concentrated generally in real estate loans, commercial loans and leases and SBA loans to small and middle market businesses primarily in California, Texas, Illinois and New York. Further, our regulators, in reviewing our loans receivable portfolio may require us to increase our allowance for credit losses.

The following table details the information on the allowance for credit losses by portfolio segment as of and for the three months ended June 30, 2020 and 2019:

	Real Estate			Commercial and Industrial			Leases Receivable			Consumer			Unallocated			Total
	(in thousands)
June 30, 2020
Balance at beginning of period	$	38,983		$	11,588		$	15,780		$	149		$	—			66,500
Less loans charged off		91			438			1,044			—			—			1,573
Recoveries on loans receivable previously charged off		(98	)		(60	)		(114	)		—			—			(272	)
Provision for credit losses		17,226			2,178			1,674			53			—			21,131
Ending balance	$	56,216		$	13,388		$	16,524		$	202		$	—		$	86,330
Individually evaluated for impairment	$	2,807		$	123		$	2,262		$	2		$	—		$	5,194
Collectively evaluated for impairment	$	53,409		$	13,265		$	14,262		$	200		$	—		$	81,136

Loans receivable	$	3,620,306		$	730,399		$	462,811		$	12,126		$	—		$	4,825,642
Individually evaluated for impairment	$	48,302		$	13,771		$	8,456		$	1,280		$	—		$	71,809
Collectively evaluated for impairment	$	3,572,004		$	716,628		$	454,355		$	10,846		$	—		$	4,753,833

June 30, 2019
Balance at beginning of period	$	18,306		$	8,711		$	5,580		$	89		$	210		$	32,896
Less loans charged off		—			562			974			—			—			1,536
Recoveries on loans receivable previously charged off		(1,133	)		(89	)		(105	)		—			—			(1,327	)
Provision for credit losses		14,565			997			1,357			(10	)		(210	)		16,699
Ending balance	$	34,004		$	9,235		$	6,068		$	79		$	—		$	49,386
Individually evaluated for impairment	$	14,724		$	3,072		$	662		$	1		$	—		$	18,459
Collectively evaluated for impairment	$	19,280		$	6,163		$	5,406		$	78		$	—		$	30,927

Loans receivable	$	3,671,463		$	409,502		$	460,519		$	14,318		$	—		$	4,555,802
Individually evaluated for impairment	$	39,885		$	21,706		$	3,233		$	1,351		$	—		$	66,175
Collectively evaluated for impairment	$	3,631,578		$	387,796		$	457,286		$	12,967		$	—		$	4,489,627

The following table details the information on the allowance for credit losses by portfolio segment as of and for the six months ended June 30, 2020 and 2019:

	Real Estate			Commercial and Industrial			Leases Receivable			Consumer			Unallocated			Total
	(in thousands)
June 30, 2020
Balance at beginning of period	$	36,355		$	16,206		$	8,767		$	80		$	—		$	61,408
Adjustment related to adoption of ASU 2016-13		13,972			(2,497	)		5,902			56			—			17,433
Adjusted balance as of January 1, 2020		50,327			13,709			14,669			136			—			78,841
Less loans charged off		14,233			12,589			2,224			—			—			29,046
Recoveries on loans receivable previously charged off		(156	)		(144	)		(188	)		—			—			(488	)
Provision for credit losses		19,966			12,124			3,891			66			—			36,047
Ending balance	$	56,216		$	13,388		$	16,524		$	202		$	—		$	86,330
Individually evaluated for impairment	$	2,807		$	123		$	2,262		$	2		$	—		$	5,194
Collectively evaluated for impairment	$	53,409		$	13,265		$	14,262		$	200		$	—		$	81,136

Loans receivable	$	3,620,306		$	730,399		$	462,811		$	12,126		$	—		$	4,825,642
Individually evaluated for impairment	$	48,302		$	13,771		$	8,456		$	1,280		$	—		$	71,809
Collectively evaluated for impairment	$	3,572,004		$	716,628		$	454,355		$	10,846		$	—		$	4,753,833

June 30, 2019
Balance at beginning of period	$	18,384		$	7,162		$	6,303		$	98		$	27		$	31,974
Less loans charged off		113			695			1,826			—			—			2,634
Recoveries on loans receivable previously charged off		(1,563	)		(471	)		(196	)		—			—			(2,230	)
Provision for credit losses		14,170			2,297			1,395			(19	)		(27	)		17,816
Ending balance	$	34,004		$	9,235		$	6,068		$	79		$	—		$	49,386
Individually evaluated for impairment	$	14,724		$	3,072		$	662		$	1		$	—		$	18,459
Collectively evaluated for impairment	$	19,280		$	6,163		$	5,406		$	78		$	—		$	30,927

Loans receivable	$	3,671,463		$	409,502		$	460,519		$	14,318		$	—		$	4,555,802
Individually evaluated for impairment	$	39,885		$	21,706		$	3,233		$	1,351		$	—		$	66,175
Collectively evaluated for impairment	$	3,631,578		$	387,796		$	457,286		$	12,967		$	—		$	4,489,627

The table below illustrates the allowance for credit losses by portfolio segment as a percentage of the recorded total allowance for credit losses and as a percentage of the aggregate recorded investment of loans receivable.

	June 30, 2020										December 31, 2019
	Allowance					Total					Allowance					Total
	Amount		Percentage			Loans		Percentage			Amount		Percentage			Loans		Percentage
	(in thousands)
Real estate loans:
Commercial property
Retail	$	7,341		8.5	%	$	808,157		16.7	%	$	4,911		8.0	%	$	869,302		18.9	%
Hospitality		11,984		13.9	%		882,812		18.3	%		6,686		10.9	%		922,288		20.0	%
Other		24,920		28.9	%		1,504,916		31.2	%		8,060		13.1	%		1,358,432		29.4	%
Total commercial property loans		44,245		51.3	%		3,195,885		66.2	%		19,657		32.0	%		3,150,022		68.3	%
Construction		9,331		10.8	%		70,357		1.5	%		15,003		24.4	%		76,455		1.7	%
Residential property		2,640		3.1	%		354,064		7.3	%		1,695		2.8	%		402,028		8.7	%
Total real estate loans		56,216		65.2	%		3,620,306		75.0	%		36,355		59.2	%		3,628,505		78.7	%
Commercial and industrial loans		13,387		15.5	%		730,399		15.1	%		16,206		26.4	%		484,093		10.5	%
Leases receivable		16,525		19.1	%		462,811		9.6	%		8,767		14.3	%		483,879		10.5	%
Consumer loans		202		0.2	%		12,126		0.3	%		80		0.1	%		13,670		0.3	%
Total	$	86,330		100.0	%	$	4,825,642		100.0	%	$	61,408		100.0	%	$	4,610,147		100.0	%

The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of June 30, 2020, for which repayment is expected to be obtained through the sale of the underlying collateral and any collateral dependent loans that are still accruing but are considered impaired.

	Amortized Cost
June 30, 2020	(in thousands)
Real estate loans:
Commercial property	$	16,796
Construction		25,854
Residential property		2,761
Total real estate loans		45,411
Commercial and industrial loans		288
Consumer Loans		1,208
Total ⁽¹⁾	$	46,907

⁽¹⁾	All loans are secured by real estate, except for one commercial term loan secured by $264,000 in cash.

Loan Quality Indicators

As part of the on-going monitoring of the quality of our loans portfolio, we utilize an internal loan grading system to identify credit risk and assign an appropriate grade (from 0 to 8) for each loan in our portfolio. A third-party loan review is performed at least on an annual basis. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:

Pass and Pass-Watch: Pass and Pass-Watch loans, grades (0-4), are in compliance 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 grading system. It consists of all performing loans with no identified credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans.

Special Mention: A Special Mention loan, grade (5), has potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses may result in deterioration of the repayment of the debt and result in a Substandard classification. Loans that have significant actual, not potential, weaknesses are considered more severely classified.

Substandard: A Substandard loan, grade (6), has a well-defined weakness that jeopardizes the liquidation of the debt. A loan 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, there is a distinct possibility that the Bank will sustain some loss if the weaknesses or deficiencies are not corrected.

Doubtful: A Doubtful loan, 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 loan, and therefore the amount or timing of a possible loss cannot be determined at the current time.

Loss: A loan classified as Loss, grade (8), is considered uncollectible and of such little value that their continuance as active bank assets is not warranted. This classification does not mean that the loan 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 classified as Loss will be charged off in a timely manner.

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

The tables below provide a comparison as of June 30, 2020 and December 31, 2019 of the pass/pass-watch, special mention and classified loans, disaggregated by loan segment:

	Pass/Pass- Watch		Special Mention		Classified		Total
	(in thousands)
June 30, 2020
Real estate loans:
Commercial property
Retail	$	800,437	$	1,182	$	6,538	$	808,157
Hospitality		879,131		—		3,681		882,812
Other		1,469,272		6,059		29,585		1,504,916
Total commercial property		3,148,840		7,241		39,804		3,195,885
Construction		44,503		—		25,854		70,357
Residential property		350,520		784		2,760		354,064
Total real estate loans		3,543,863		8,025		68,418		3,620,306
Commercial and industrial loans		702,443		12,423		15,533		730,399
Leases receivable		453,528		—		9,283		462,811
Consumer loans		10,752		686		688		12,126
Total loans receivable	$	4,710,586	$	21,134	$	93,922	$	4,825,642

December 31, 2019
Real estate loans:
Commercial property
Retail	$	859,739	$	2,835	$	6,728	$	869,302
Hospitality		915,834		939		5,515		922,288
Other		1,329,817		7,807		20,809		1,358,432
Total commercial property		3,105,390		11,580		33,052		3,150,022
Construction		36,956		1,613		37,886		76,455
Residential property		398,737		2,512		779		402,028
Total real estate loans		3,541,082		15,705		71,718		3,628,505
Commercial and industrial loans		458,184		10,222		15,687		484,093
Leases receivable		477,977		—		5,902		483,879
Consumer loans		12,247		705		718		13,670
Total loans receivable	$	4,489,491	$	26,632	$	94,025	$	4,610,147

Loans by Vintage Year and Risk Rating

	Term Loans
	Amortized Cost Basis by Origination Year ⁽¹⁾
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
	(in thousands)
June 30, 2020
Commercial property
Risk Rating
Pass / Pass Watch	$	438,577	$	539,598	$	555,748	$	429,415	$	483,511	$	671,096	$	30,895	$	3,148,840
Special Mention		—		2,757		455		2,351		1,271		407		—		7,241
Classified		15,592		1,113		2,965		709		3,992		15,433		—		39,804
Total commercial property		454,169		543,468		559,168		432,475		488,774		686,936		30,895		3,195,885

Construction
Risk Rating
Pass / Pass Watch		18,025		5,633		—		—		20,845		—		—		44,503
Special Mention		—		—		—		—		—		—		—		—
Classified		—		12,808		13,046		—		—		—		—		25,854
Total construction		18,025		18,441		13,046		—		20,845		—		—		70,357

Residential property
Risk Rating
Pass / Pass Watch		274		954		40,468		149,532		100,367		58,925		—		350,520
Special Mention		—		—		—		—		—		784		—		784
Classified		—		—		—		1,890		754		116		—		2,760
Total residential property		274		954		40,468		151,422		101,121		59,825		—		354,064

Total real estate loans
Risk Rating
Pass / Pass Watch		456,876		546,185		596,216		578,947		604,723		730,021		30,895		3,543,863
Special Mention		—		2,757		455		2,351		1,271		1,191		—		8,025
Classified		15,592		13,921		16,011		2,599		4,746		15,549		—		68,418
Total real estate loans		472,468		562,863		612,682		583,897		610,740		746,761		30,895		3,620,306

Commercial and industrial loans:
Risk Rating
Pass / Pass Watch		369,101		124,141		60,742		21,613		5,586		14,952		106,308		702,443
Special Mention		4,281		800		503		78		1,733		1,585		3,443		12,423
Classified		8,969		3,894		568		148		140		1,614		200		15,533
Total commercial and industrial loans		382,351		128,835		61,813		21,839		7,459		18,151		109,951		730,399

Leases receivable:
Risk Rating
Pass / Pass Watch		67,994		203,034		119,213		44,150		18,292		845		—		453,528
Special Mention		—		—		—		—		—		—		—		—
Classified		11		3,554		2,807		1,191		1,299		421		—		9,283
Total leases receivable		68,005		206,588		122,020		45,341		19,591		1,266		—		462,811

Consumer loans:
Risk Rating
Pass / Pass Watch		121		25		15		86		7		2,610		7,888		10,752
Special Mention		—		—		—		—		—		686		—		686
Classified		—		—		661		27		—		—		—		688
Total commercial term loans		121		25		676		113		7		3,296		7,888		12,126

Total loans receivable:
Risk Rating
Pass / Pass Watch		894,092		873,385		776,186		644,796		628,608		748,428		145,091		4,710,586
Special Mention		4,281		3,557		958		2,429		3,004		3,462		3,443		21,134
Classified		24,572		21,369		20,047		3,965		6,185		17,584		200		93,922
Total loans receivable	$	922,945	$	898,311	$	797,191	$	651,190	$	637,797	$	769,474	$	148,734	$	4,825,642

⁽¹⁾	Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision.

Loans by Vintage Year and Payment Performance

	Term Loans
	Amortized Cost Basis by Origination Year ⁽¹⁾
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
	(in thousands)
June 30, 2020
Real estate loans:
Commercial property
Payment performance
Performing	$	453,569	$	543,468	$	559,015	$	432,475	$	488,673	$	681,933	$	30,895	$	3,190,028
Nonperforming		600		—		153		—		101		5,003		—		5,857
Total commercial property		454,169		543,468		559,168		432,475		488,774		686,936		30,895		3,195,885

Construction
Payment performance
Performing		18,025		5,633		—		—		20,845		—		—	$	44,503
Nonperforming		—		12,808		13,046		—		—		—		—		25,854
Total construction		18,025		18,441		13,046		—		20,845		—		—		70,357

Residential property
Payment performance
Performing		274		954		40,468		149,532		100,366		59,677		—		351,271
Nonperforming		—		—		—		1,890		755		148		—		2,793
Total residential property		274		954		40,468		151,422		101,121		59,825		—		354,064

Total real estate loans
Payment performance
Performing		471,868		550,055		599,483		582,007		609,884		741,610		30,895		3,585,802
Nonperforming		600		12,808		13,199		1,890		856		5,151		—		34,504
Total real estate loans		472,468		562,863		612,682		583,897		610,740		746,761		30,895		3,620,306

Commercial and industrial loans:
Payment performance
Performing		373,382		124,940		61,377		21,691		7,459		18,015		109,751		716,615
Nonperforming		8,969		3,895		436		148		—		136		200		13,784
Total commercial and industrial loans		382,351		128,835		61,813		21,839		7,459		18,151		109,951		730,399

Leases receivable:
Payment performance
Performing		67,994		203,034		119,213		44,150		18,292		846		—		453,529
Nonperforming		11		3,554		2,807		1,191		1,299		420		—		9,282
Total leases receivable		68,005		206,588		122,020		45,341		19,591		1,266		—		462,811

Consumer loans: