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

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From                      To                     
Commission File Number: 000-30421

 HANMI FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
 
95-4788120
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
3660 Wilshire Boulevard, Penthouse Suite A
Los Angeles, California
 
90010
(Address of Principal Executive Offices)
 
(Zip Code)
(213) 382-2200
(Registrant’s Telephone Number, Including Area Code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the Registrant has submitted electronically 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  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
x
Accelerated Filer
¨
Non-Accelerated Filer
 
¨ 
Smaller Reporting Company
¨
 
 
 
Emerging Growth Company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
As of May 7, 2019, there were 30,928,043 outstanding shares of the Registrant’s Common Stock.




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




Hanmi Financial Corporation and Subsidiaries
Quarterly Report on Form 10-Q
Three Months Ended March 31, 2019
Table of Contents
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 


2


Part I — Financial Information
Item 1. Financial Statements
Hanmi Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
 
 
(Unaudited) March 31, 2019
 
December 31, 2018
Assets
 
 
 
 
Cash and due from banks
 
$
169,830

 
$
155,376

Securities available for sale, at fair value (amortized cost of $624,112 as of March 31, 2019 and $583,444 as of December 31, 2018)
 
621,470

 
574,908

Loans held for sale, at the lower of cost or fair value
 
7,140

 
9,390

Loans and leases receivable, net of allowance for loan and lease losses of $32,896 as of March 31, 2019 and $31,974 as of December 31, 2018
 
4,542,724

 
4,568,566

Accrued interest receivable
 
13,397

 
13,331

Premises and equipment, net
 
28,426

 
27,752

Customers’ liability on acceptances
 
750

 
173

Servicing assets
 
7,978

 
8,520

Goodwill and other intangible assets, net
 
12,105

 
12,182

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

 
16,385

Bank-owned life insurance
 
51,941

 
51,661

Prepaid expenses and other assets
 
98,922

 
63,975

Total assets
 
$
5,571,068

 
$
5,502,219

Liabilities and stockholders’ equity
 
 
 
 
Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing
 
$
1,316,114

 
$
1,284,530

Interest-bearing
 
3,504,061

 
3,462,705

Total deposits
 
4,820,175

 
4,747,235

Accrued interest payable
 
14,437

 
11,379

Bank’s liability on acceptances
 
750

 
173

Borrowings
 
—

 
55,000

Subordinated debentures
 
117,947

 
117,808

Accrued expenses and other liabilities
 
53,467

 
18,056

Total liabilities
 
5,006,776

 
4,949,651

Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,153,888 shares (30,860,533 shares outstanding) as of March 31, 2019 and issued 33,202,369 shares (30,928,437 shares outstanding) as of December 31, 2018
 
33

 
33

Additional paid-in capital
 
570,432

 
569,712

Accumulated other comprehensive loss, net of tax benefit of $760 as of March 31, 2019 and $2,457 as of December 31, 2018
 
(1,882
)
 
(6,079
)
Retained earnings
 
104,771

 
97,539

Less: treasury stock, at cost; 2,293,355 shares as of March 31, 2019 and 2,273,932 shares as of December 31, 2018
 
(109,062
)
 
(108,637
)
Total stockholders’ equity
 
564,292

 
552,568

Total liabilities and stockholders’ equity
 
$
5,571,068

 
$
5,502,219


See Accompanying Notes to Consolidated Financial Statements (Unaudited)

3


Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
(in thousands, except share and per share data)
 
Three Months Ended March 31,
 
2019
 
2018
Interest and dividend income:
 
 
 
Interest and fees on loans and leases
$
58,334

 
$
51,574

Interest on securities
3,456

 
3,105

Dividends on FHLB stock
289

 
289

Interest on deposits in other banks
335

 
114

Total interest and dividend income
62,414

 
55,082

Interest expense:
 
 
 
Interest on deposits
15,683

 
7,785

Interest on borrowings
71

 
679

Interest on subordinated debentures
1,772

 
1,694

Total interest expense
17,526

 
10,158

Net interest income before provision for loan and lease losses
44,888

 
44,924

Loan and lease loss provision
1,117

 
649

Net interest income after provision for loan and lease losses
43,771

 
44,275

Noninterest income:
 
 
 
Service charges on deposit accounts
2,358

 
2,511

Trade finance and other service charges and fees
1,124

 
1,173

Gain on sales of Small Business Administration (“SBA”) loans
926

 
1,448

Net gain (loss) on sales of securities
725

 
(428
)
Other operating income
1,121

 
1,357

Total noninterest income
6,254

 
6,061

Noninterest expense:
 
 
 
Salaries and employee benefits
15,738

 
18,702

Occupancy and equipment
4,521

 
4,072

Data processing
2,083

 
1,678

Professional fees
1,649

 
1,369

Supplies and communications
844

 
708

Advertising and promotion
760

 
876

Other operating expenses
3,470

 
2,352

Total noninterest expense
29,065

 
29,757

Income before income tax expense
20,960

 
20,579

Income tax expense
6,288

 
5,724

Net income
$
14,672

 
$
14,855

 
 
 
 
Basic earnings per share
$
0.48

 
$
0.46

Diluted earnings per share
$
0.48

 
$
0.46

Weighted-average shares outstanding:
 
 
 
Basic
30,667,378

 
32,145,214

Diluted
30,720,772

 
32,301,095


See Accompanying Notes to Consolidated Financial Statements (Unaudited)

4



Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Net income
$
14,672

 
$
14,855

Other comprehensive income (loss), net of tax:
 
 
 
Unrealized gain (loss) on securities:
 
 
 
Unrealized holding gain (loss) arising during period
6,619

 
(8,864
)
Less: reclassification adjustment for net gain included in net income
(725
)
 
—

Income tax (expense) benefit related to items of other comprehensive income
(1,697
)
 
2,543

Other comprehensive income (loss), net of tax
4,197

 
(6,321
)
Comprehensive income
$
18,869

 
$
8,534


See Accompanying Notes to Consolidated Financial Statements (Unaudited)


5


Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(in thousands, except share data)
 
Common Stock - Number of Shares
 
Stockholders’ Equity
 
Shares Issued
 
Treasury Shares
 
Shares Outstanding
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock, at Cost
 
Total Stockholders’ Equity
Balance at January 1, 2018
33,083,133

 
(651,506
)
 
32,431,627

 
$
33

 
$
565,627

 
$
(1,869
)
 
$
70,575

 
$
(71,889
)
 
$
562,477

Adjustments related to adoption of new accounting standards:
 
 
 
 


 

 

 
 
 
 
 
 
 


ASU 2016-01
(See Notes 1 and 2)
—

 
—

 
—

 
—

 
—

 
382

 
(382
)
 
—

 
—

ASU 2018-02
(See Notes 1 and 5)
—

 
—

 
—

 
—

 
—

 
(399
)
 
399

 
—

 
—

Adjusted balance at January 1, 2018
33,083,133

 
(651,506
)
 
32,431,627

 
$
33

 
$
565,627

 
$
(1,886
)
 
$
70,592

 
$
(71,889
)
 
$
562,477

Stock options exercised
25,750

 
—

 
25,750

 
—

 
570

 
—

 
—

 
—

 
570

Restricted stock awards, net of forfeitures
58,885

 
—

 
58,885

 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation expense
—

 
—

 
—

 
—

 
884

 
—

 
—

 
—

 
884

Restricted stock surrendered due to employee tax liability
—

 
(13,604
)
 
(13,604
)
 
—

 
—

 
—

 
—

 
(431
)
 
(431
)
Cash dividends declared
—

 
—

 
—

 
—

 
—

 
—

 
(7,756
)
 
—

 
(7,756
)
Net income
—

 
—

 
—

 
—

 
—

 
—

 
14,855

 
—

 
14,855

Change in unrealized loss on securities available for sale, net of income taxes
—

 
—

 
—

 
—

 
—

 
(6,321
)
 
—

 
—

 
(6,321
)
Balance at March 31, 2018
33,167,768

 
(665,110
)
 
32,502,658

 
$
33

 
$
567,081

 
$
(8,207
)
 
$
77,691

 
$
(72,320
)
 
$
564,278

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
650

 
—

 
650

 
—

 
8

 
—

 
—

 
—

 
8

Restricted stock awards, net of forfeitures
(49,131
)
 
—

 
(49,131
)
 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation expense
—

 
—

 
—

 
—

 
712

 
—

 
—

 
—

 
712

Restricted stock surrendered due to employee tax liability
—

 
(19,423
)
 
(19,423
)
 
—

 
—

 
—

 
—

 
(425
)
 
(425
)
Cash dividends declared
—

 
—

 
—

 
—

 
—

 
—

 
(7,440
)
 
—

 
(7,440
)
Net income
—

 
—

 
—

 
—

 
—

 
—

 
14,672

 
—

 
14,672

Change in unrealized gain on securities available for sale, net of income taxes
—

 
—

 
—

 
—

 
—

 
4,197

 
—

 
—

 
4,197

Balance at March 31, 2019
33,153,888

 
(2,293,355
)
 
30,860,533

 
$
33

 
$
570,432

 
$
(1,882
)
 
$
104,771

 
$
(109,062
)
 
$
564,292

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

6


Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
14,672

 
$
14,855

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,622

 
1,757

Share-based compensation expense
712

 
884

Loan and lease loss provision
1,117

 
649

(Gain) loss on sales of securities
(725
)
 
428

Gain on sales of SBA loans
(926
)
 
(1,448
)
Origination of SBA loans held for sale
(13,223
)
 
(18,805
)
Proceeds from sales of SBA loans
16,608

 
20,981

Change in accrued interest receivable
(66
)
 
19

Change in bank-owned life insurance
(280
)
 
(277
)
Change in prepaid expenses and other assets
1,737

 
5,192

Change in accrued interest payable
3,058

 
622

Change in accrued expenses and other liabilities
(2,873
)
 
(6,357
)
Net cash provided by operating activities
22,433

 
18,500

Cash flows from investing activities:
 
 
 
Proceeds from matured, called and repayment of securities
20,544

 
22,495

Proceeds from sales of securities available for sale
69,187

 
21,958

Change in loans and leases receivable, excluding purchases
24,201

 
(70,971
)
Purchases of securities available for sale
(130,550
)
 
(46,641
)
Purchases of premises and equipment
(1,444
)
 
(481
)
Purchases of loans and leases receivable
—

 
(38,905
)
Net cash used in investing activities
(18,062
)
 
(112,545
)
Cash flows from financing activities:
 
 
 
Change in deposits
72,940

 
29,447

Change in borrowings
(55,000
)
 
70,000

Proceeds from exercise of stock options
8

 
570

Cash paid for surrender of vested shares due to employee tax liability
(425
)
 
(431
)
Cash dividends paid
(7,440
)
 
(7,756
)
Net cash provided by financing activities
10,083

 
91,830

Net increase (decrease) in cash and cash equivalents
14,454

 
(2,215
)
Cash and cash equivalents at beginning of year
155,376

 
153,826

Cash and cash equivalents at end of period
$
169,830

 
$
151,611

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
14,468

 
$
9,536

Income taxes
$
88

 
$
39

Non-cash activities:
 
 
 
Income tax (expense) benefit related to items in other comprehensive income
$
(1,697
)
 
$
2,543

Change in unrealized loss in accumulated other comprehensive income
$
(5,894
)
 
$
8,864

Cash dividends declared
$
(7,440
)
 
$
(7,756
)
Right-of-use asset obtained in exchange for lease liability
$
(40,909
)
 
$
—

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

7


Hanmi Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Three Months Ended March 31, 2019 and 2018
Note 1 — Organization and Basis of Presentation

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

On January 24, 2019, the Company's Board of Directors adopted a new stock repurchase program under which the Company may repurchase up to 5% of its outstanding shares, or approximately 1.5 million shares, of its common stock. The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. Repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The repurchase program does not obligate the Company to purchase any particular number of shares. The Company did not repurchase common stock during the three months ended March 31, 2019.

In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial and its subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended March 31, 2019, but are not necessarily indicative of the results that will be reported for the entire year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The aforementioned unaudited consolidated financial statements are 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 fiscal year ended December 31, 2018 (the “2018 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. Material estimates subject to change include, among other items, the determination of allowance for loan and lease losses and allowance for off-balance sheet items, other-than-temporary impairment, securities valuations, the fair value of other assets and liabilities acquired in a business combination and income taxes. Actual results could differ from those estimates.

Descriptions of our significant accounting policies are included in Note 1 - Summary of Significant Accounting Policies in the Notes to consolidated financial statements in our 2018 Annual Report on Form 10-K.

Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825) and ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). Summaries of ASU 2016-01 and 2018-02 and the impact of their adoption are included in Notes 2 and 5 to the unaudited consolidated financial statements, respectively. In addition to other provisions, ASU 2016-01 requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Beginning with the quarter ended March 31, 2018, the Company measured the fair value of certain financial instruments, included in Note 10 to the unaudited consolidated financial statements, using an exit price notion.

The Company also adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as of January 1, 2018, as required. ASU 2014-09 replaces existing revenue recognition guidance for contracts to provide goods or services to customers and amends existing guidance related to recognition of gains and losses on the sale of certain nonfinancial assets such as real estate.  See Note 13 to the accompanying unaudited consolidated financial statements for the impact of the adoption of this new standard on the Company's consolidated financial statements.


8


Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). ), which requires lessees to recognize a right of use asset and a lease liability on their balance sheet for all leases, including operating leases, with a term of greater than 12 months. In July 2018, the FASB issued ASU 2018-11, which adds a transition option permitting entities to apply the provisions of the new standard at its adoption date instead of the earliest comparative period presented in the consolidated financial statements. Under this transition option, comparative reporting would not be required, and the provisions of the standard would be applied prospectively to leases in effect at the date of adoption. The Company elected to use the optional transition method provided by ASU 2018-11. The Company also elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward its ASC 840 assessment regarding definition of a lease, lease classification, and initial direct costs. The following practical expedients were applied implementing this standard.

•
We did not reassess whether any expired or existing contracts are, or contain, leases. Additionally, we did not reassess for lease classifications of expired or existing leases, or initial direct costs for any existing leases.

•
We applied incremental borrowing rates as of adoption date of January 1, 2019.

•
We elected to not separate non-lease components from lease components and, instead, to account for each separate lease component and the non-lease components associated with it as a single lease component recognized on the balance sheet. This election has been made for all classes of leases.

•
We elected the short-term lease exception, which allows us to account for leases with a lease term of twelve months or less to be accounted for similar to existing operating leases. The cost of these leases is disclosed, but is not recognized in the right-of-use asset and lease liability balances. Consistent with ASC 842 requirements, leases that are one month or less are not included in the disclosures.

•
We have elected to account for the leases under the portfolio approach applying them prospectively for this accounting change. The portfolio approach allows us to present multiple similar leased assets in a pool and prospectively allows us to commence the calculation of the portfolio of leases using the remaining commitments from adoption date forward.

See Note 14 to the unaudited consolidated financial statements for the impact of the adoption of this new standard on the Company's consolidated financial statements.

9


Note 2 — Securities

The following is a summary of securities available for sale as of the dates indicated: 
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
 
(in thousands)
March 31, 2019
 
 
 
 
 
 
 
U.S. Treasury securities
$
54,584

 
$
148

 
$
4

 
$
54,728

U.S. government agency and sponsored agency obligations:
 
 
 
 
 
 
 
Mortgage-backed securities
356,973

 
566

 
2,938

 
354,601

Collateralized mortgage obligations
153,286

 
298

 
1,557

 
152,027

Debt securities
17,472

 
74

 
53

 
17,493

Total U.S. government agency and sponsored agency obligations
527,731

 
938

 
4,548

 
524,121

Municipal bonds-tax exempt
41,797

 
839

 
15

 
42,621

Total securities available for sale
$
624,112

 
$
1,925

 
$
4,567

 
$
621,470

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
U.S. Treasury securities
$
39,768

 
$
69

 
$
7

 
$
39,830

U.S. government agency and sponsored agency obligations:
 
 
 
 
 
 
 
Mortgage-backed securities
300,957

 
61

 
5,984

 
295,034

Collateralized mortgage obligations
124,550

 
74

 
2,332

 
122,292

Debt securities
7,499

 
—

 
97

 
7,402

Total U.S. government agency and sponsored agency obligations
433,006

 
135

 
8,413

 
424,728

Municipal bonds-tax exempt
110,670

 
197

 
517

 
110,350

Total securities available for sale
$
583,444

 
$
401

 
$
8,937

 
$
574,908


The amortized cost and estimated fair value of securities as of March 31, 2019, 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 Cost
 
Estimated Fair Value
 
(in thousands)
Within one year
$
32,693

 
$
32,694

Over one year through five years
146,323

 
145,744

Over five years through ten years
232,279

 
231,518

Over ten years
212,817

 
211,514

Total
$
624,112

 
$
621,470


10


Gross unrealized losses on securities available for sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of March 31, 2019 and December 31, 2018:
 
Holding Period
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Number of Securities
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Number of Securities
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Number of Securities
 
(in thousands, except number of securities)
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
4

 
$
19,773

 
3

 
$
—

 
$
—

 
—

 
$
4

 
$
19,773

 
3

U.S. government agency and sponsored agency obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
19

 
13,442

 
2

 
2,919

 
214,791

 
101

 
2,938

 
228,233

 
103

Collateralized mortgage obligations
17

 
17,874

 
5

 
1,540

 
92,822

 
50

 
1,557


110,696


55

Debt securities
—

 
—

 
—

 
53

 
7,447

 
3

 
53


7,447


3

Total U.S. government agency and sponsored agency obligations
36

 
31,316

 
7

 
4,512

 
315,060

 
154

 
4,548

 
346,376

 
161

Municipal bonds-tax exempt
—

 
—

 
—

 
15

 
3,993

 
3

 
15


3,993


3

Total
$
40

 
$
51,089

 
10

 
$
4,527

 
$
319,053

 
157

 
$
4,567

 
$
370,142

 
167

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
7

 
$
14,797

 
2

 
$
—

 
$
—

 
—

 
$
7

 
$
14,797

 
2

U.S. government agency and sponsored agency obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
226

 
41,527

 
10

 
5,758

 
244,550

 
106

 
5,984

 
286,077

 
116

Collateralized mortgage obligations
59

 
13,732

 
3

 
2,273

 
92,532

 
49

 
2,332

 
106,264

 
52

Debt securities
—

 
—

 
—

 
97

 
7,402

 
3

 
97

 
7,402

 
3

Total U.S. government agency and sponsored agency obligations
285

 
55,259

 
13

 
8,128

 
344,484

 
158

 
8,413

 
399,743

 
171

Municipal bonds-tax exempt
29

 
8,196

 
5

 
488

 
65,644

 
30

 
517

 
73,840

 
35

Total
$
321

 
$
78,252

 
20

 
$
8,616

 
$
410,128

 
188

 
$
8,937

 
$
488,380

 
208


All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of March 31, 2019 and December 31, 2018 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status as of March 31, 2019 and December 31, 2018. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

The Company does not intend to sell these securities and it is more likely than not that we will not be required to sell the investments before the recovery of their amortized cost basis. In addition, the unrealized losses on municipal securities are not considered other-than-temporarily impaired, as the bonds are rated investment grade and there are no credit quality concerns with the issuers. Interest payments have been made as scheduled, and management believes this will continue in the future and the bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of March 31, 2019 and December 31, 2018 were not other-than-temporarily impaired, and therefore, no impairment charges as of March 31, 2019 and December 31, 2018 were warranted.

Realized gains and losses on sales of securities and proceeds from sales of securities were as follows for the periods indicated:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Gross realized gains on sales of securities
$
725

 
$
—

Gross realized losses on sales of securities
—

 
(957
)
Net realized gains (losses) on sales of securities
$
725

 
$
(957
)
 
 
 
 
Proceeds from sales of securities
$
69,187

 
$
21,958



11


During the three months ended March 31, 2019, there was a $725,000 net gain in earnings resulting from the sale of securities. Net unrealized loss of $206,000 related to these securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period in 2019.

In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825). This new guidance, among other provisions, amends accounting related to the classification and measurement of investments in equity securities. We adopted this guidance, as required, in the first quarter of 2018. ASU 2016-01 requires the amounts reported in accumulated other comprehensive income for equity securities that exist as of the date of adoption previously classified as available-for-sale be reclassified to retained earnings. The Company reduced the balance of securities by $529,000 as of January 1, 2018, representing the loss related to all of our mutual fund equity securities, which resulted in a net reduction of retained earnings of $382,000 and an increase of $147,000 in net deferred tax assets based on the transition requirements of this standard.

During the three months ended March 31, 2018, we sold all of our mutual fund equity securities with gross realized losses of $957,000. The Company recorded a $428,000 net loss in earnings resulting from the sale of these securities. The remaining loss of $529,000 related to these sold securities was recorded as a transition adjustment upon adoption of ASU 2016-01 as of the beginning of the period as described in the preceding paragraph.

Securities available for sale with market values of $30.0 million and $29.9 million as of March 31, 2019 and December 31, 2018, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

Note 3 — Loans and Leases

Loans and Leases Receivable

Loans and leases receivable consisted of the following as of the dates indicated:
 
March 31, 2019
 
December 31, 2018
 
(in thousands)
Real estate loans:
 
 
 
Commercial property
 
 
 
Retail
$
898,632

 
$
906,260

Hospitality
812,592

 
830,679

Other (1)
1,436,593

 
1,449,270

Total commercial property loans
3,147,817

 
3,186,209

Construction
82,709

 
71,583

Residential property
483,830

 
500,563

Total real estate loans
3,714,356

 
3,758,355

Commercial and industrial loans:
 
 
 
Commercial term
186,471

 
206,691

Commercial lines of credit
196,213

 
194,032

International loans
39,818

 
29,180

Total commercial and industrial loans
422,502

 
429,903

Leases receivable
425,530

 
398,858

Consumer loans (2)
13,232

 
13,424

Loans and leases receivable
4,575,620

 
4,600,540

Allowance for loan and lease losses
(32,896
)
 
(31,974
)
Loans and leases receivable, net
$
4,542,724

 
$
4,568,566


(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 and leases receivable.
(2) 
Consumer loans include home equity lines of credit of $9.9 million and $10.3 million as of March 31, 2019 and December 31, 2018, respectively.

12



Accrued interest on loans and leases receivable was $11.5 million and $10.9 million at March 31, 2019 and December 31, 2018, respectively. At March 31, 2019 and December 31, 2018, loans and leases receivable of $1.1 billion 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 March 31, 2019 and 2018:
 
SBA Loans Held for Sale
 
Real Estate
 
Commercial and Industrial
 
Total
 
(in thousands)
March 31, 2019
 
 
 
 
 
Balance at beginning of period
$
5,194

 
$
4,196

 
$
9,390

Originations
9,064

 
4,159

 
13,223

Sales
(7,756
)
 
(7,703
)
 
(15,459
)
Principal payoffs and amortization
(2
)
 
(12
)
 
(14
)
Balance at end of period
$
6,500

 
$
640

 
$
7,140

 
 
 
 
 
 
March 31, 2018
 
 
 
 
 
Balance at beginning of period
$
3,746

 
$
2,648

 
$
6,394

Originations
10,433

 
8,372

 
18,805

Sales
(12,028
)
 
(7,159
)
 
(19,187
)
Principal payoffs and amortization
—

 
(4
)
 
(4
)
Balance at end of period
$
2,151

 
$
3,857

 
$
6,008


Allowance for Loan and Lease Losses

Activity in the allowance for loan and lease losses was as follows for the periods indicated:
 
As of and for the Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Balance at beginning of period
$
31,974

 
$
31,043

Loans and leases charged off
(1,107
)
 
(1,632
)
Recoveries on loans and leases previously charged off
912

 
1,717

Net (charge-offs) recoveries
(195
)
 
85

Loan and lease loss provision
1,117

 
649

Balance at end of period
$
32,896

 
$
31,777


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


13


The following table details the information on the allowance for loan and lease losses by portfolio segment as of and for the three months ended March 31, 2019 and 2018:
 
Real Estate
 
Commercial
and Industrial
 
Leases
Receivable
 
Consumer
 
Unallocated
 
Total
 
(in thousands)
As of and for the Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
18,384

 
$
7,162

 
6,303

 
$
98

 
$
27

 
$
31,974

Less loans and leases charged off
(122
)
 
(133
)
 
(852
)
 
—

 
—

 
(1,107
)
Recoveries on loans and leases previously charged off
440

 
382

 
90

 
—

 
—

 
912

Loan and lease loss provision (income)
(396
)
 
1,300

 
39

 
(9
)
 
183

 
1,117

Ending balance
$
18,306

 
$
8,711

 
$
5,580

 
$
89

 
$
210

 
$
32,896

Individually evaluated for impairment
$
—

 
$
3,269

 
$
1,099

 
$
—

 
$
—

 
$
4,368

Collectively evaluated for impairment
$
18,306

 
$
5,442

 
$
4,481

 
$
89

 
$
210

 
$
28,528

 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases receivable:
$
3,714,356

 
$
422,502

 
$
425,530

 
$
13,232

 
$
—

 
$
4,575,620

Individually evaluated for impairment
$
14,015

 
$
23,114

 
$
4,783

 
$
1,370

 
$
—

 
$
43,282

Collectively evaluated for impairment
$
3,700,341

 
$
399,388

 
$
420,747

 
$
11,862

 
$
—

 
$
4,532,338

As of and for the Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses on loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
17,012

 
$
7,400

 
6,279

 
$
122

 
$
230

 
$
31,043

Less loans and leases charged off
(989
)
 
(279
)
 
(364
)
 
—

 
—

 
(1,632
)
Recoveries on loans and leases previously charged off
885

 
736

 
95

 
1

 
—

 
1,717

Loan and lease loss provision (income)
732

 
(967
)
 
1,100

 
2

 
(218
)
 
649

Ending balance
$
17,640

 
$
6,890

 
$
7,110

 
$
125

 
$
12

 
$
31,777

Individually evaluated for impairment
$
1,549

 
$
357

 
$
1,110

 
$
—

 
$
—

 
$
3,016

Collectively evaluated for impairment
$
16,091

 
$
6,533

 
$
6,000

 
$
125

 
$
12

 
$
28,761

 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases receivable:
$
3,667,797

 
$
409,380

 
$
321,481

 
$
14,899

 
$
—

 
$
4,413,557

Individually evaluated for impairment
$
18,513

 
$
2,843

 
$
4,200

 
$
894

 
$
—

 
$
26,450

Collectively evaluated for impairment
$
3,649,284

 
$
406,537

 
$
317,281

 
$
14,005

 
$
—

 
$
4,387,107


Loan Quality Indicators

As part of the on-going monitoring of the quality of our loan and lease portfolio, we utilize an internal loan and lease
grading system to identify credit risk and assign an appropriate grade (from 0 to 8) for each loan or lease in our loan
and lease portfolio. A third-party loan review is required on an annual basis. Additional adjustments are made when determined

14


to be necessary. The loan and lease grade definitions are as follows:

Pass and Pass-Watch: Pass and Pass-Watch loans and leases, grades (0-4), are in compliance with the Bank’s credit
policy and regulatory requirements, and do not exhibit any potential or defined weaknesses as defined under “Special
Mention,” “Substandard” or “Doubtful.” This category is the strongest level of the Bank’s loan and lease grading system. It
consists of all performing loans and leases with no identified credit weaknesses. It includes cash and stock/security secured
loans or other investment grade loans.

Special Mention: A Special Mention loan or lease, 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 and leases that have significant actual, not potential, weaknesses are considered more
severely classified.

Substandard: A Substandard loan or lease, grade (6), has a well-defined weakness that jeopardizes the liquidation of the debt. A loan or lease graded Substandard is not protected by the sound worth and paying capacity of the borrower, or of the
value and type of collateral pledged. With a Substandard loan or lease, there is a distinct possibility that the Bank will sustain
some loss if the weaknesses or deficiencies are not corrected.

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

Loss: A loan or lease classified as Loss, grade (8), is considered uncollectable and of such little value that their
continuance as active bank assets is not warranted. This classification does not mean that the loan or lease has absolutely no
recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery
may be possible in the future. Loans and leases classified as Loss will be charged off in a timely manner.
    
Under regulatory guidance, loans and leases graded special mention or worse are considered criticized loans and leases, and loans and leases graded substandard or worse are considered classified loans and leases.


15


     As of March 31, 2019 and December 31, 2018, pass/pass-watch, special mention and classified loans and leases, disaggregated by loan class, were as follows:
 
Pass/Pass-Watch
 
Special Mention
 
Classified
 
Total
 
(in thousands)
March 31, 2019
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
891,084

 
$
3,320

 
$
4,228

 
$
898,632

Hospitality
803,895

 
163

 
8,534

 
812,592

Other
1,422,697

 
3,037

 
10,859

 
1,436,593

Total commercial property loans
3,117,676

 
6,520

 
23,621

 
3,147,817

Construction
82,709

 
—

 
—

 
82,709

Residential property
482,614

 
808

 
408

 
483,830

Total real estate loans
3,682,999

 
7,328

 
24,029

 
3,714,356

Commercial and industrial loans:
 
 
 
 
 
 

Commercial term
179,424

 
449

 
6,598

 
186,471

Commercial lines of credit
178,558

 
743

 
16,912

 
196,213

International loans
39,818

 
—

 
—

 
39,818

Total commercial and industrial loans
397,800

 
1,192

 
23,510

 
422,502

Leases receivable
420,747

 
—

 
4,783

 
425,530

Consumer loans
11,731

 
737

 
764

 
13,232

Total
$
4,513,277

 
$
9,257

 
$
53,086

 
$
4,575,620

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
901,354

 
$
16

 
$
4,890

 
$
906,260

Hospitality
821,542

 
168

 
8,969

 
830,679

Other
1,441,219

 
2,723

 
5,328

 
1,449,270

Total commercial property loans
3,164,115

 
2,907

 
19,187

 
3,186,209

Construction
71,583

 
—

 
—

 
71,583

Residential property
500,424

 
—

 
139

 
500,563

Total real estate loans
3,736,122

 
2,907

 
19,326

 
3,758,355

Commercial and industrial loans:
 
 
 
 
 
 
 
Commercial term
197,992

 
4,977

 
3,722

 
206,691

Commercial lines of credit
172,338

 
21,107

 
587

 
194,032

International loans
29,180

 
—

 
—

 
29,180

Total commercial and industrial loans
399,510

 
26,084

 
4,309

 
429,903

Leases receivable
393,729

 
—

 
5,129

 
398,858

Consumer loans
12,454

 
191

 
779

 
13,424

Total
$
4,541,815

 
$
29,182

 
$
29,543

 
$
4,600,540

 

16


The following is an aging analysis of loans and leases, disaggregated by loan class, as of the dates indicated:
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due
 
Total Past Due
 
Current
 
Total
 
(in thousands)
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
239

 
$
161

 
$
84

 
$
484

 
$
898,148

 
$
898,632

Hospitality
1,099

 
—

 
2,793

 
3,892

 
808,700

 
812,592

Other
58

 
354

 
1,016

 
1,428

 
1,435,165

 
1,436,593

Total commercial property loans
1,396

 
515

 
3,893

 
5,804

 
3,142,013

 
3,147,817

Construction
—

 
—

 
—

 
—

 
82,709

 
82,709

Residential property
2,392

 
—

 
273

 
2,665

 
481,165

 
483,830

Total real estate loans
3,788

 
515

 
4,166

 
8,469

 
3,705,887

 
3,714,356

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial term
710

 
—

 
108

 
818

 
185,653

 
186,471

Commercial lines of credit
1,310

 
—

 
—

 
1,310

 
194,903

 
196,213

International loans
10

 
—

 
—

 
10

 
39,808

 
39,818

Total commercial and industrial loans
2,030

 
—

 
108

 
2,138

 
420,364

 
422,502

Leases receivable
3,130

 
766

 
2,842

 
6,738

 
418,792

 
425,530

Consumer loans
—

 
102

 
—

 
102

 
13,130

 
13,232

Total
$
8,948

 
$
1,383

 
$
7,116

 
$
17,447

 
$
4,558,173

 
$
4,575,620

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
221

 
$
—

 
$
986

 
$
1,207

 
$
905,053

 
$
906,260

Hospitality
65

 
1,203

 
1,893

 
3,161

 
827,518

 
830,679

Other
816

 
206

 
1,205

 
2,227

 
1,447,043

 
1,449,270

Total commercial property loans
1,102

 
1,409

 
4,084

 
6,595

 
3,179,614

 
3,186,209

Construction
—

 
—

 
—

 
—

 
71,583

 
71,583

Residential property
3,947

 
273

 
44

 
4,264

 
496,299

 
500,563

Total real estate loans
5,049

 
1,682

 
4,128

 
10,859

 
3,747,496

 
3,758,355

Commercial and industrial loans:
 
 
 
 
 
 


 
 
 


Commercial term
334

 
49

 
1,117

 
1,500

 
205,191

 
206,691

Commercial lines of credit
—

 
—

 
587

 
587

 
193,445

 
194,032

International loans
—

 
—

 
—

 
—

 
29,180

 
29,180

Total commercial and industrial loans
334

 
49

 
1,704

 
2,087

 
427,816

 
429,903

Leases receivable
4,681

 
845

 
3,737

 
9,263

 
389,595

 
398,858

Consumer loans
146

 
—

 
—

 
146

 
13,278

 
13,424

Total
$
10,210

 
$
2,576

 
$
9,569

 
$
22,355

 
$
4,578,185

 
$
4,600,540


There were no loans and leases that were 90 days or more past due and accruing interest as of March 31, 2019. As of December 31, 2018, $4,000 of loans and leases were 90 days or more past due and accruing interest.

Impaired Loans and Leases

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

17


We evaluate loan and lease impairment in accordance with GAAP. Impaired loans and leases are measured based on the present value of expected future cash flows discounted at the receivable's effective interest rate or, as a practical expedient, at the receivable's observable market price or the fair value of the collateral if the loan or lease is collateral dependent, less estimated costs to sell. If the estimated value of the impaired loan or lease is less than the recorded investment in the loan or lease, the deficiency is either charged off against the allowance for loan and lease losses or we establish a specific allocation in the allowance for loan and lease losses. Additionally, loans and leases that are consider