hafc-10q_20200930.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 September 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 November 2, 2020, there were 30,720,110 outstanding shares of the Registrant’s Common Stock.

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

Three Months Ended September 30, 2020

Table of Contents


	Part I – Financial Information

Item 1.	Financial Statements	3

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

	Consolidated Statements of Income (Unaudited)	4

	Consolidated Statements of Comprehensive Income (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	43

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	66

Item 4.	Controls and Procedures	67

	Part II – Other Information

Item 1.	Legal Proceedings	68

Item 1A.	Risk Factors	68

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)

	September 30,			December 31,
	2020			2019

Assets
Cash and due from banks	$	359,755		$	121,678
Securities available for sale, at fair value (amortized cost of $721,183, as of September 30, 2020 and $629,725 as of December 31, 2019)		723,601			634,477
Loans held for sale, at the lower of cost or fair value		12,834			6,020
Loans receivable, net of allowance for credit losses of $86,620 as of September 30, 2020 and $61,408 as of December 31, 2019		4,747,517			4,548,739
Accrued interest receivable		21,417			11,742
Premises and equipment, net		27,956			26,070
Customers' liability on acceptances		208			66
Servicing assets		6,348			6,956
Goodwill and other intangible assets, net		11,677			11,873
Federal Home Loan Bank ("FHLB") stock, at cost		16,385			16,385
Income tax assets		43,652			36,787
Bank-owned life insurance		53,623			52,782
Prepaid expenses and other assets		81,809			64,609
Total assets	$	6,106,782		$	5,538,184

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,961,006		$	1,391,624
Interest-bearing		3,233,286			3,307,338
Total deposits		5,194,292			4,698,962
Accrued interest payable		5,427			11,215
Bank's liability on acceptances		208			66
Borrowings		150,000			90,000
Subordinated debentures ($126,800 face amount less unamortized discount and debt issuance costs of $7,979) as of September 30, 2020 and ($126,800 face amount less unamortized discount and debt issuance costs of $8,423) as of December 31, 2019		118,821			118,377
Accrued expenses and other liabilities		74,831			56,297
Total liabilities		5,543,579			4,974,917
Stockholders' equity:
Preferred Stock, $0.001 par value; authorized 10,000,000 shares; no shares issued as of September 30, 2020 and December 31, 2019		—			—
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,560,983 shares (30,719,591 shares outstanding) as of September 30, 2020 and issued 33,475,402 shares (30,799,624 shares outstanding) as of December 31, 2019		33			33
Additional paid-in capital		577,727			575,816
Accumulated other comprehensive income, net of tax expense of $697 as of September 30, 2020 and $1,370 as of December 31, 2019		1,721			3,382
Retained earnings		102,751			100,551
Less treasury stock; 2,841,392 shares as of September 30, 2020 and 2,675,778 shares as of December 31, 2019		(119,029	)		(116,515	)
Total stockholders' equity		563,203			563,267
Total liabilities and stockholders' equity	$	6,106,782		$	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 September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Interest and dividend income:
Interest and fees on loans receivable	$	52,586	$	57,929	$	159,464	$	173,135
Interest on securities		1,972		3,769		8,852		10,996
Dividends on FHLB stock		204		286		696		858
Interest on deposits in other banks		84		193		495		1,085
Total interest and dividend income		54,846		62,177		169,507		186,074
Interest expense:
Interest on deposits		7,032		15,995		28,663		48,406
Interest on borrowings		582		367		1,838		439
Interest on subordinated debentures		1,627		1,757		4,984		5,293
Total interest expense		9,241		18,119		35,485		54,138
Net interest income before credit loss expense		45,605		44,058		134,022		131,936
Credit loss expense		38		1,602		40,371		19,418
Net interest income after credit loss expense		45,567		42,456		93,651		112,518
Noninterest income:
Service charges on deposit accounts		2,002		2,518		6,434		7,362
Trade finance and other service charges and fees		972		1,191		2,920		3,519
Gain on sale of Small Business Administration ("SBA") loans		2,324		1,767		3,478		3,752
Net gain on sales of securities		—		—		15,712		1,295
Other operating income		1,842		1,384		5,751		4,915
Total noninterest income		7,140		6,860		34,295		20,843
Noninterest expense:
Salaries and employee benefits		17,194		17,530		49,645		50,149
Occupancy and equipment		4,650		4,528		13,633		12,517
Data processing		2,761		2,410		8,233		6,633
Professional fees		1,794		2,826		5,255		6,459
Supplies and communications		698		726		2,337		2,220
Advertising and promotion		594		927		1,783		2,632
Other operating expenses		2,233		3,660		7,245		11,207
Total noninterest expense		29,924		32,607		88,131		91,817
Income before tax		22,783		16,709		39,815		41,544
Income tax expense		6,439		4,333		11,945		11,840
Net income	$	16,344	$	12,376	$	27,870	$	29,704
Basic earnings per share	$	0.53	$	0.40	$	0.91	$	0.96
Diluted earnings per share	$	0.53	$	0.40	$	0.91	$	0.96
Weighted-average shares outstanding:
Basic		30,464,263		30,830,445		30,276,462		30,736,456
Diluted		30,464,263		30,859,119		30,276,462		30,769,160

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Net income	$	16,344		$	12,376		$	27,870		$	29,704
Other comprehensive income (loss), net of tax:
Unrealized gain on securities:
Unrealized holding gain arising during period		1,947			1,873			13,378			15,042
Less: reclassification adjustment for net gain included in net income		—			—			(15,712	)		(1,295	)
Income tax benefit (expense) related to items of other comprehensive income		(561	)		(540	)		673			(3,960	)
Other comprehensive income (loss), net of tax		1,386			1,333			(1,661	)		9,787
Comprehensive income	$	17,730		$	13,709		$	26,209		$	39,491

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 September 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 July 1, 2019		33,271,832		(2,296,669	)		30,975,163		$	33	$	571,105	$	2,375	$	100,021		$	(109,077	)	$	564,457
Stock options exercised		180,000		—			180,000			—		2,957		—		—			—			2,957
Restricted stock awards, net of forfeitures		19,870		—			19,870			—		—		—		—			—			—
Share-based compensation expense		—		—			—			—		895		—		—			—			895
Restricted stock surrendered due to employee tax liability		—		(1,152	)		(1,152	)		—		—		—		—			(21	)		(21	)
Cash dividends declared (common stock, $0.24/share)		—		—			—			—		—		—		(7,470	)		—			(7,470	)
Net income		—		—			—			—		—		—		12,376			—			12,376
Change in unrealized gain on securities available for sale, net of income taxes		—		—			—			—		—		1,333		—			—			1,333
Balance at September 30, 2019		33,471,702		(2,297,821	)		31,173,881		$	33	$	574,957	$	3,708	$	104,927		$	(109,098	)	$	574,527

Balance at July 1, 2020		33,495,913		(2,838,284	)		30,657,629		$	33	$	577,211	$	335	$	88,859		$	(119,002	)	$	547,436
Restricted stock awards, net of forfeitures		65,070		—			65,070			—		—		—		—			—			—
Share-based compensation expense		—		—			—			—		516		—		—			—			516
Restricted stock surrendered due to employee tax liability		—		(3,108	)		(3,108	)		—		—		—		—			(27	)		(27	)
Cash dividends declared (common stock, $0.08/share)		—		—			—			—		—		—		(2,452	)		—			(2,452	)
Net income		—		—			—			—		—		—		16,344			—			16,344
Change in unrealized gain on securities available for sale, net of income taxes		—		—			—			—		—		1,386		—			—			1,386
Balance at September 30, 2020		33,560,983		(2,841,392	)		30,719,591		$	33	$	577,727	$	1,721	$	102,751		$	(119,029	)	$	563,203

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Nine Months Ended September 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		181,900		—			181,900			—		2,979		—			—			—			2,979
Restricted stock awards, net of forfeitures		87,433		—			87,433			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		2,266		—			—			—			2,266
Restricted stock surrendered due to employee tax liability		—		(23,889	)		(23,889	)		—		—		—			—			(461	)		(461	)
Cash dividends declared (common stock, $0.72/share)		—		—			—			—		—		—			(22,316	)		—			(22,316	)
Net income		—		—			—			—		—		—			29,704			—			29,704
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		9,787			—			—			9,787
Balance at September 30, 2019		33,471,702		(2,297,821	)		31,173,881		$	33	$	574,957	$	3,708		$	104,927		$	(109,098	)	$	574,527

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		85,581		—			85,581			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		1,911		—			—			—			1,911
Restricted stock surrendered due to employee tax liability		—		(30,214	)		(30,214	)		—		—		—			—			(317	)		(317	)
Repurchase of common stock		—		(135,400	)		(135,400	)		—		—		—			—			(2,196	)		(2,196	)
Cash dividends declared (common stock, $0.44/share)		—		—			—			—		—		—			(13,504	)		—			(13,504	)
Net income		—		—			—			—		—		—			27,870			—			27,870
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		(1,661	)		—			—			(1,661	)
Balance at September 30, 2020		33,560,983		(2,841,392	)		30,719,591		$	33	$	577,727	$	1,721		$	102,751		$	(119,029	)	$	563,203

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2020			2019
Cash flows from operating activities:
Net income	$	27,870		$	29,704
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		8,008			6,848
Share-based compensation expense		1,911			2,266
Credit loss expense		40,371			19,418
Gain on sales of securities		(15,712	)		(1,295	)
Gain on sales of SBA loans		(3,478	)		(3,752	)
Origination of SBA loans held for sale		(54,295	)		(52,379	)
Proceeds from sales of SBA loans		50,950			58,908
Change in bank-owned life insurance		(841	)		(839	)
Change in prepaid expenses and other assets		(32,631	)		(7,949	)
Change in income tax assets		(1,262	)		1,140
Change in accrued expenses and other liabilities		19,384			3,618
Net cash provided by (used in) operating activities		40,275			55,688
Cash flows from investing activities:
Purchases of securities available for sale		(747,858	)		(262,226	)
Proceeds from matured, called and repayment of securities		174,021			115,146
Proceeds from sales of securities available for sale		495,566			113,306
Purchases of loans receivable		(9,437	)		—
Purchases of premises and equipment		(4,860	)		(1,913	)
Proceeds from disposition of premises and equipment		173			3,055
Proceeds from sales of other real estate owned ("OREO")		431			445
Change in loans receivable, excluding purchases		(249,547	)		28,693
Net cash provided by (used in) investing activities		(341,511	)		(3,494	)
Cash flows from financing activities:
Change in deposits		495,330			(57,094	)
Change in overnight borrowings		(15,000	)		20,000
Proceeds from borrowings		75,000			—
Proceeds from exercise of stock options		—			2,979
Cash paid for surrender of vested shares due to employee tax liability		(317	)		(461	)
Repurchase of common stock		(2,196	)		—
Cash dividends paid		(13,504	)		(22,316	)
Net cash provided by (used in) financing activities		539,313			(56,892	)
Net increase (decrease) in cash and due from banks		238,077			(4,698	)
Cash and due from banks at beginning of year		121,678			155,376
Cash and due from banks at end of period	$	359,755		$	150,678

Supplemental disclosures of cash flow information:
Interest expense paid	$	41,273		$	55,441
Income taxes paid	$	13,546		$	9,070
Non-cash activities:
Transfer of loans receivable to other real estate owned	$	1,052		$	168
Income tax benefit (expense) related to items of other comprehensive income	$	673		$	(3,960	)
Change in right-of-use asset obtained in exchange for lease liability	$	21,815		$	43,085

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 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 September 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 loans or leases with similar risk characteristics using the following methodologies:

At January 1, 2020, the Company used the 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. During the quarter ended June 30, 2020, management determined that, due to model limitations, the regression model that supports the DCF calculation for the commercial property, construction, and residential real estate portfolios does not take into account the high degree of uncertainty of the impact of the COVID-19 pandemic and related government assistance programs on these portfolios. As a result, subsequent to March 31, 2020, the Company determined that the Probability of PD/LGD method is more appropriate for these portfolios. This change did not result in a material impact on the Company’s financial statements. 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 quarterly economic projections from the Federal Open Market Committee (“FOMC”) and the Federal Reserve Economic Database (“FRED”) to inform its loss driver forecasts over the four-quarter forecast period. During the quarter ended June 30, 2020, the Company changed from using the FRED unemployment forecast to the Moody’s unemployment forecast, as Moody’s updates the unemployment forecast on a more frequent and timely basis, and thus provides a more appropriate basis for estimating future cash flows. 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 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 the 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 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. Subsequent to March 31, 2020, the Company adjusted the methodologies for the commercial property, construction, and residential real estate portfolios to better reflect the forecast of potential losses arising from the more uncertain 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 COVID-19 has resulted in restrictions on travel and gatherings 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)
September 30, 2020
U.S. Treasury securities	$	19,993	$	202	$	—		$	20,195
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		483,622		2,150		(275	)		485,497
Collateralized mortgage obligations		131,908		317		(112	)		132,113
Debt securities		85,660		137		(1	)		85,796
Total U.S. government agency and sponsored agency obligations		701,190		2,604		(388	)		703,406
Total securities available for sale	$	721,183	$	2,806	$	(388	)	$	723,601

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 September 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	$	21,199	$	21,399
Over one year through five years		123,194		123,602
Over five years through ten years		49,545		49,613
Over ten years		527,245		528,987
Total	$	721,183	$	723,601

The Company evaluates its available-for-sales securities portfolio for impairment on an at least quarterly basis. This assessment takes 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 September 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)
September 30, 2020
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities	$	(275	)	$	121,963		19	$	—		$	—		—	$	(275	)	$	121,963		19
Collateralized mortgage obligations		(112	)		59,737		14		—			—		—		(112	)		59,737		14
Debt securities		(1	)		3,499		1		—			—		—		(1	)		3,499		1
Total U.S. government agency and sponsored agency obligations		(388	)		185,199		34		—			—		—		(388	)		185,199		34
Total	$	(388	)	$	185,199		34	$	—		$	—		—	$	(388	)	$	185,199		34

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 September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands)
Gross realized gains on sales of securities	$	—	$	—	$	15,712	$	1,359
Gross realized losses on sales of securities		—		—		—		(64	)
Net realized gains on sales of securities	$	—	$	—	$	15,712	$	1,295
Proceeds from sales of securities	$	—		—	$	495,566		113,306

During the three months ended September 30, 2020 and 2019, there were no gains or losses in earnings resulting from the sale of securities.

During the nine months ended September 30, 2020, there were $15.7 million in net gains in earnings resulting from the sale of $495.6 million of securities previously recorded with $15.3 million unrealized gains in accumulated other comprehensive income. During the nine months ended September 30, 2019, there were $1.3 million in net gains in earnings resulting from the sale of $113.3 million of securities, which had $586,000 in previously recorded unrealized gains in accumulated other comprehensive income.

Securities available for sale with market values of $35.0 million and $30.2 million as of September 30, 2020 and 2019, respectively, were pledged to secure borrowings from the Federal Reserve Bank (“FRB”) Discount Window.

Note 3 — Loans

Loans Receivable

Loans consisted of the following as of the dates indicated:

	September 30, 2020			December 31, 2019
	(in thousands)
Real estate loans:
Commercial property
Retail	$	805,055		$	869,302
Hospitality		877,354			922,288
Other ⁽¹⁾		1,526,411			1,358,432
Total commercial property loans		3,208,820			3,150,022
Construction		55,627			76,455
Residential property		359,188			402,028
Total real estate loans		3,623,635			3,628,505
Commercial and industrial loans		765,484			484,093
Leases receivable		433,323			483,879
Consumer loans ⁽²⁾		11,695			13,670
Loans receivable		4,834,137			4,610,147
Allowance for credit losses		(86,620	)		(61,408	)
Loans receivable, net	$	4,747,517		$	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 $7.0 million and $8.2 million as of September 30, 2020 and December 31, 2019, respectively.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act) was signed into law 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; 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 September 30, 2020, there were $302.9 million of PPP loans included in commercial and industrial loans in the table above. In addition, at September 30, 2020, there were $578.5 million of loans modified under Section 4013 of the CARES Act.

Accrued interest on loans was $20.2 million and $10.0 million at September 30, 2020 and December 31, 2019, respectively. At September 30, 2020, accrued interest receivable related to the $578.5 million in modified loans under the CARES Act was $8.8 million.

At September 30, 2020 and December 31, 2019, loans of $2.27 billion and $1.35 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 September 30, 2020 and 2019:

	Real Estate			Commercial and Industrial			Total
	(in thousands)
September 30, 2020
Balance at beginning of period	$	12,661		$	5,281		$	17,942
Originations and transfers		12,049			12,107			24,156
Sales		(20,621	)		(8,639	)		(29,260	)
Principal paydowns and amortization		—			(5	)		(5	)
Balance at end of period	$	4,089		$	8,745		$	12,834

September 30, 2019
Balance at beginning of period	$	2,677		$	3,352		$	6,029
Originations		11,502			13,354			24,856
Sales		(11,557	)		(12,729	)		(24,286	)
Principal paydowns and amortization		—			(1	)		(1	)
Balance at end of period	$	2,622		$	3,976		$	6,598

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

	Real Estate			Commercial and Industrial			Total
	(in thousands)
September 30, 2020
Balance at beginning of period	$	2,943		$	3,077		$	6,020
Originations and transfers		31,204			23,091			54,295
Sales		(30,053	)		(17,419	)		(47,472	)
Principal payoffs and amortization		(5	)		(5	)		(10	)
Balance at end of period	$	4,089		$	8,745		$	12,834

September 30, 2019
Balance at beginning of period	$	5,194		$	4,196		$	9,390
Originations		27,215			25,164			52,379
Sales		(29,786	)		(25,370	)		(55,156	)
Principal payoffs and amortization		(1	)		(14	)		(15	)
Balance at end of period	$	2,622		$	3,976		$	6,598

Allowance for Credit Losses

The Company’s estimate of the allowance for credit losses at September 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 September 30, 2020, the Company used the 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 September 30, 2020, the Company leveraged the economic projections from Moody’s Analytics to inform its loss driver forecasts over the four-quarter forecast period whereas it had previously relied on FRED economic data. For each of these loan segments, the Company applied an annualized historical 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 into the 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, as well as changes in the underlying loan composition of specific portfolios.

At September 30, 2020, the Company used the PD/LGD method for the commercial property, construction and residential property portfolios. The Company used historical periods that included an economic downturn to derive historical losses for better alignment in the estimation of expected losses under the PD/LGD method. 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 and for the subsequent six months ended September 30, 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 Company 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 September 30, 2020 and 2019:

	Real Estate			Commercial and Industrial			Leases Receivable			Consumer			Unallocated		Total
	(in thousands)
September 30, 2020
Balance at beginning of period		56,216		$	13,388		$	16,524		$	202		$	—		86,330
Less loans charged off		687			383			1,081			—			—		2,151
Recoveries on loans receivable previously charged off		(1,497	)		(35	)		(213	)		—			—		(1,745	)
Provision for credit losses		(6,752	)		7,809			(368	)		8			—		697
Ending balance	$	50,274		$	20,849		$	15,287		$	210		$	—	$	86,620
Individually evaluated for impairment	$	33		$	1,623		$	2,087		$	2		$	—	$	3,745
Collectively evaluated for impairment	$	50,241		$	19,226		$	13,200		$	208		$	—	$	82,875

Loans receivable	$	3,623,635		$	765,484		$	433,323		$	11,695		$	—	$	4,834,137
Individually evaluated for impairment	$	46,958		$	13,293		$	7,338		$	1,262				$	68,851
Collectively evaluated for impairment	$	3,576,677		$	752,191		$	425,985		$	10,433		$	—	$	4,765,286

September 30, 2019
Balance at beginning of period	$	34,004		$	9,235		$	6,068		$	79		$	—	$	49,386
Less loans charged off		17			244			653			2			—		916
Recoveries on loans receivable previously charged off		(142	)		(381	)		(117	)		—			—		(640	)
Provision for credit losses		2,272			(1,551	)		886			(5	)		—		1,602
Ending balance	$	36,401		$	7,821		$	6,418		$	72		$	—	$	50,712
Individually evaluated for impairment	$	14,781		$	1,270		$	1,049		$	1		$	—	$	17,101
Collectively evaluated for impairment	$	21,620		$	6,551		$	5,369		$	71		$	—	$	33,611

Loans receivable	$	3,646,327		$	441,209		$	467,777		$	14,524		$	—	$	4,569,837
Individually evaluated for impairment	$	47,972		$	13,692		$	4,303		$	1,325		$	—	$	67,292
Collectively evaluated for impairment	$	3,598,355		$	427,517		$	463,474		$	13,199		$	—	$	4,502,545

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

	Real Estate			Commercial and Industrial			Leases Receivable			Consumer			Unallocated			Total
	(in thousands)
September 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			55			—			17,433
Adjusted balance		50,327			13,709			14,669			135			—			78,841
Less loans charged off		14,920			12,972			3,306			—			—			31,197
Recoveries on loans receivable previously charged off		(1,653	)		(179	)		(401	)		—			—			(2,233	)
Provision for credit losses		13,214			19,932			3,523			75			—			36,744
Ending balance	$	50,274		$	20,849		$	15,287		$	210		$	—		$	86,620
Individually evaluated for impairment	$	33		$	1,623		$	2,087		$	2					$	3,745
Collectively evaluated for impairment	$	50,241		$	19,226		$	13,200		$	208		$	—		$	82,875

Loans receivable	$	3,623,635		$	765,484		$	433,323		$	11,695		$	—		$	4,834,137
Individually evaluated for impairment	$	46,958		$	13,293		$	7,338		$	1,262					$	68,851
Collectively evaluated for impairment	$	3,576,677		$	752,191		$	425,985		$	10,433		$	—		$	4,765,286

September 30, 2019
Balance at beginning of period	$	18,384		$	7,162		$	6,303		$	98		$	27		$	31,974
Less loans charged off		131			939			2,479			1			(1	)		3,549
Recoveries on loans receivable previously charged off		(1,704	)		(853	)		(312	)		—			—			(2,869	)
Provision for credit losses		16,444			745			2,282			(25	)		(28	)		19,418
Ending balance	$	36,401		$	7,821		$	6,418		$	72		$	—		$	50,712
Individually evaluated for impairment	$	14,781		$	1,270		$	1,049		$	1		$	—		$	17,101
Collectively evaluated for impairment	$	21,620		$	6,551		$	5,369		$	71		$	—		$	33,611

Loans receivable	$	3,646,327		$	441,209		$	467,777		$	14,524		$	—		$	4,569,837
Individually evaluated for impairment	$	47,972		$	13,692		$	4,303		$	1,325		$	—		$	67,292
Collectively evaluated for impairment	$	3,598,355		$	427,517		$	463,474		$	13,199		$	—		$	4,502,545

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.

	September 30, 2020										December 31, 2019
	Allowance Amount		Percentage of Allowance			Total Loans		Percentage of Total Loans			Allowance Amount		Percentage of Allowance			Total Loans		Percentage of Total Loans
	(in thousands)
Real estate loans:
Commercial property
Retail	$	5,838		6.8	%	$	805,055		16.7	%	$	4,911		8.0	%	$	869,302		18.9	%
Hospitality		20,258		23.4	%		877,354		18.1	%		6,686		10.9	%		922,288		20.0	%
Other		16,876		19.5	%		1,526,411		31.6	%		8,060		13.1	%		1,358,432		29.4	%
Total commercial property loans		42,972		49.7	%		3,208,820		66.4	%		19,657		32.0	%		3,150,022		68.3	%
Construction		4,859		5.6	%		55,627		1.2	%		15,003		24.4	%		76,455		1.7	%
Residential property		2,443		2.8	%		359,188		7.4	%		1,695		2.8	%		402,028		8.7	%
Total real estate loans		50,274		58.1	%		3,623,635		75.0	%		36,355		59.2	%		3,628,505		78.7	%
Commercial and industrial loans		20,849		24.1	%		765,484		15.8	%		16,206		26.4	%		484,093		10.5	%
Leases receivable		15,287		17.6	%		433,323		9.0	%		8,767		14.3	%		483,879		10.5	%
Consumer loans		210		0.2	%		11,695		0.2	%		80		0.1	%		13,670		0.3	%
Total	$	86,620		100.0	%	$	4,834,137		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 September 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
September 30, 2020	(in thousands)
Real estate loans:
Commercial property	$	13,419
Construction		29,444
Residential property		1,763
Total real estate loans		44,626
Commercial and industrial loans		288
Consumer Loans		1,193
Total ⁽¹⁾	$	46,106

⁽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 September 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)
September 30, 2020
Real estate loans:
Commercial property
Retail	$	792,922	$	3,381	$	8,752	$	805,055
Hospitality		831,705		24,979		20,670		877,354
Other		1,493,750		17,772		14,889		1,526,411
Total commercial property		3,118,377		46,132		44,311		3,208,820
Construction		26,183		—		29,444		55,627
Residential property		355,813		784		2,591		359,188
Total real estate loans		3,500,373		46,916		76,346		3,623,635
Commercial and industrial loans		737,561		9,508		18,415		765,484
Leases receivable		422,545		—		10,778		433,323
Consumer loans		10,342		681		672		11,695
Total loans receivable	$	4,670,821	$	57,105	$	106,211	$	4,834,137

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

At September 30, 2020, of the $578.5 million of loans modified in accordance with the provision of the CARES Act, $524.9 million were in pass/watch, $30.1 million were special mention, and $23.5 million were classified.

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)
September 30, 2020
Commercial property
Risk Rating
Pass / Pass Watch	$	570,682	$	533,660	$	549,071	$	403,452	$	444,628	$	581,498	$	35,386	$	3,118,377
Special Mention		13,680		5,892		445		1,682		19,185		5,248		—		46,132
Classified		1,419		749		5,488		3,745		16,155		16,755		—		44,311
Total commercial property		585,781		540,301		555,004		408,879		479,968		603,501		35,386		3,208,820

Construction
Risk Rating
Pass / Pass Watch		25,990		193		—		—		—		—		—		26,183
Special Mention		—		—		—		—		—		—		—		—
Classified		12,808		3,590		13,046		—		—		—		—		29,444
Total construction		38,798		3,783		13,046		—		—		—		—		55,627

Residential property
Risk Rating
Pass / Pass Watch		26,328		954		38,870		141,045		92,614		56,002		—		355,813
Special Mention		—		—		—		—		—		784		—		784
Classified		—		—		—		1,836		755		—		—		2,591
Total residential property		26,328		954		38,870		142,881		93,369		56,786		—		359,188

Total real estate loans
Risk Rating
Pass / Pass Watch		623,000		534,807		587,941		544,497		537,242		637,500		35,386		3,500,373
Special Mention		13,680		5,892		445		1,682		19,185		6,032		—		46,916
Classified		14,227		4,339		18,534		5,581		16,910		16,755		—		76,346
Total real estate loans		650,907		545,038		606,920		551,760		573,337		660,287		35,386		3,623,635

Commercial and industrial loans:
Risk Rating
Pass / Pass Watch		422,525		82,679		60,131		21,854		4,912		12,776		132,684		737,561
Special Mention		3,044		—		—		471		1,732		2,562		1,699		9,508
Classified		9,378		3,894		696		54		134		308		3,951		18,415
Total commercial and industrial loans		434,947		86,573		60,827		22,379		6,778		15,646		138,334		765,484

Leases receivable:
Risk Rating
Pass / Pass Watch		81,035		184,006		104,876		36,545		13,998		2,085		—		422,545
Special Mention		—		—		—		—		—		—		—		—
Classified		148		5,349		2,591		1,071		1,264		355		—		10,778
Total leases receivable		81,183		189,355		107,467		37,616		15,262		2,440		—		433,323

Consumer loans:
Risk Rating
Pass / Pass Watch		119		12		10		77		6		2,464		7,654		10,342
Special Mention		—		—		—		—		—		681		—		681
Classified		—		—		647		25		—		—		—		672
Total commercial term loans		119		12		657		102		6		3,145		7,654		11,695

Total loans receivable:
Risk Rating
Pass / Pass Watch		1,126,679		801,504		752,958		602,973		556,158		654,825		175,724		4,670,821
Special Mention		16,724		5,892		445		2,153		20,917		9,275		1,699		57,105
Classified		23,753		13,582		22,468		6,731		18,308		17,418		3,951		106,211
Total loans receivable	$	1,167,156	$	820,978	$	775,871	$	611,857	$	595,383	$	681,518	$	181,374	$	4,834,137

⁽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)
September 30, 2020
Real estate loans:
Commercial property
Payment performance
Performing	$	585,781	$	540,301	$	554,849	$	407,353	$	477,221	$	599,468	$	35,386	$	3,200,359
Nonperforming		—		—		155		1,526		2,747		4,033		—		8,461
Total commercial property		585,781		540,301		555,004		408,879		479,968		603,501		35,386		3,208,820

Construction
Payment performance
Performing		25,990		193		—		—		—		—		—	$	26,183
Nonperforming		12,808		3,590		13,046		—		—		—		—		29,444
Total construction		38,798		3,783		13,046		—		—		—		—		55,627

Residential property
Payment performance
Performing		26,328		954		38,870		141,873		92,614		56,786		—		357,425
Nonperforming		—		—		—		1,008		755		—		—		1,763
Total residential property		26,328		954		38,870		142,881		93,369		56,786		—		359,188

Total real estate loans
Payment performance
Performing		638,099		541,448		593,719		549,226		569,835		656,254		35,386		3,583,967
Nonperforming		12,808		3,590		13,201		2,534		3,502		4,033		—		39,668
Total real estate loans		650,907		545,038		606,920		551,760		573,337		660,287		35,386		3,623,635

Commercial and industrial loans:
Payment performance
Performing		426,275		82,679		60,378		22,325		6,778		15,500		138,334		752,269
Nonperforming		8,672		3,894		449		54		—		146		—		13,215
Total commercial and industrial loans		434,947		86,573		60,827		22,379		6,778		15,646		138,334		765,484

Leases receivable:
Payment performance
Performing		81,035		184,006		104,876		36,545		13,998		2,085		—		422,545
Nonperforming		148		5,349		2,591		1,071		1,264		355		—		10,778
Total leases receivable		81,183		189,355		107,467		37,616		15,262		2,440		—		433,323