HOPE BANCORP INC - Quarter Report: 2017 September (Form 10-Q)

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, 2017

Commission File Number: 000-50245

______________________________________________

HOPE BANCORP, INC.

(Exact name of registrant as specified in its charter)

______________________________________________



Delaware		95-4849715
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3200 Wilshire Boulevard, Suite 1400, Los Angeles, California		90010
(Address of principal executive offices)		(Zip Code)

(213) 387-3200

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if change 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition 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	o

Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	o

			Emerging growth company	o

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(d) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 2, 2017, there were 135,498,278 outstanding shares of Hope Bancorp, Inc. common stock, $0.001 par value.

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		Page
PART I - FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS

	Consolidated Statements of Financial Condition - September 30, 2017 (Unaudited) and December 31, 2016	4

	Consolidated Statements of Income (Unaudited) - Three and Nine Months Ended September 30, 2017 and 2016	6

	Consolidated Statements of Comprehensive Income (Unaudited) - Three and Nine Months Ended September 30, 2017 and 2016	7

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) - Nine Months Ended September 30, 2017 and 2016	8

	Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2017 and 2016	9

	Notes to Consolidated Financial Statements (Unaudited)	10

Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	55

Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	77

Item 4.	CONTROLS AND PROCEDURES	78


PART II - OTHER INFORMATION

Item 1.	LEGAL PROCEEDINGS	79

Item 1A.	RISK FACTORS	79

Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	79

Item 3.	DEFAULTS UPON SENIOR SECURITIES	79

Item 4.	MINE SAFETY DISCLOSURES	79

Item 5.	OTHER INFORMATION	79

Item 6.	EXHIBITS	79


INDEX TO EXHIBITS		80

SIGNATURES		81

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Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to, among other things, expectations regarding the business environment in which we operate, projections of future performance, perceived opportunities in the market, and statements regarding our business strategies, objectives and vision. Forward-looking statements include, but are not limited to, statements preceded by, followed by or that include the words “will,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions. With respect to any such forward-looking statements, the Company claims the protection provided for in the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties. Our actual results, performance or achievements may differ significantly from the results, performance or achievements expressed or implied in any forward-looking statements. The risks and uncertainties include: the Company’s inability to remediate its presently identified material weaknesses or to do so in a timely manner, the possibility that additional material weaknesses may arise in the future, and that a material weakness may have an impact on our reported financial results; possible deterioration in economic conditions in our areas of operation; interest rate risk associated with volatile interest rates and related asset-liability matching risk; liquidity risks; risk of significant non-earning assets, and net credit losses that could occur, particularly in times of weak economic conditions or times of rising interest rates; and regulatory risks associated with current and future regulations. For additional information concerning these and other risk factors, see Part I, Item 1A. Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

The Company does not undertake, and specifically disclaims any obligation, to update any forward looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

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PART I

FINANCIAL INFORMATION


Item 1.	Financial Statements

HOPE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


	(Unaudited)
	September 30, 2017		December 31, 2016
ASSETS	(Dollars in thousands, except share data)
Cash and cash equivalents:
Cash and due from banks	$	159,609	$	168,827
Interest bearing cash in other banks	245,687		268,507
Total cash and cash equivalents	405,296		437,334
Interest bearing deposits in other financial institutions and other investments	53,715		44,202
Securities available for sale, at fair value	1,868,309		1,556,740
Loans held for sale, at the lower of cost or fair value	11,425		22,785
Loans receivable (net of allowance for loan losses of $83,633 and $79,343 at September 30, 2017 and December 31, 2016, respectively)	10,879,341		10,463,989
Other real estate owned (“OREO”), net	17,208		21,990
Federal Home Loan Bank (“FHLB”) stock, at cost	28,426		21,964
Premises and equipment, net	55,838		55,316
Accrued interest receivable	29,145		26,880
Deferred tax assets, net	83,230		88,110
Customers’ liabilities on acceptances	1,433		2,899
Bank owned life insurance (“BOLI”)	74,514		73,696
Investments in affordable housing partnerships	88,540		70,059
Goodwill	464,450		462,997
Core deposit intangible assets, net	17,198		19,226
Servicing assets	25,079		26,457
Other assets	46,874		46,778
Total assets	$	14,150,021	$	13,441,422

(Continued)

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HOPE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


	(Unaudited)
	September 30, 2017			December 31, 2016
LIABILITIES AND STOCKHOLDERS’ EQUITY	(Dollars in thousands, except share data)
LIABILITIES:
Deposits:
Noninterest bearing	$	3,049,998		$	2,900,241
Interest bearing:
Money market and NOW accounts	3,685,973			3,401,446
Savings deposits	243,042			301,906
Time deposits	4,014,307			4,038,442
Total deposits	10,993,320			10,642,035
FHLB advances	1,018,046			754,290
Subordinated debentures	100,590			99,808
Accrued interest payable	13,740			10,863
Acceptances outstanding	1,433			2,899
Commitments to fund investments in affordable housing partnerships	42,433			24,409
Other liabilities	46,028			51,645
Total liabilities	12,215,590			11,585,949
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value; authorized 150,000,000 shares at September 30, 2017 and December 31, 2016: issued and outstanding, 135,467,176 and 135,240,079 shares at September 30, 2017 and December 31, 2016, respectively	135			135
Additional paid-in capital	1,403,586			1,400,490
Retained earnings	540,921			469,505
Accumulated other comprehensive loss, net	(10,211		)	(14,657		)
Total stockholders’ equity	1,934,431			1,855,473
Total liabilities and stockholders’ equity	$	14,150,021		$	13,441,422

See accompanying Notes to Consolidated Financial Statements (Unaudited).

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HOPE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees	$	136,822		$	112,132		$	388,631		$	266,336
Securities	9,540			6,645			26,394			18,051
Interest bearing deposits in other banks and other investments	1,281			775			3,894			2,160
Total interest income	147,643			119,552			418,919			286,547
INTEREST EXPENSE:
Deposits	20,376			13,017			53,001			33,276
FHLB advances	2,698			2,161			7,176			5,370
Other borrowings	1,306			900			3,754			1,755
Total interest expense	24,380			16,078			63,931			40,401
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES	123,263			103,474			354,988			246,146
PROVISION FOR LOAN LOSSES	5,400			6,500			13,760			8,200
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	117,863			96,974			341,228			237,946
NONINTEREST INCOME:
Service fees on deposit accounts	5,151			4,778			15,668			10,363
International service fees	1,107			1,010			3,334			2,601
Loan servicing fees, net	1,373			955			4,102			2,234
Wire transfer fees	1,287			1,158			3,816			2,966
Net gains on sales of SBA loans	3,631			230			10,148			5,090
Net gains on sales of other loans	847			1,476			1,619			1,519
Net gains on sales of securities available for sale	—			948			—			948
Other income and fees	2,850			3,591			11,277			7,906
Total noninterest income	16,246			14,146			49,964			33,627
NONINTEREST EXPENSE:
Salaries and employee benefits	35,987			30,456			105,099			73,782
Occupancy	7,131			6,889			21,479			16,626
Furniture and equipment	3,642			3,297			10,611			7,921
Advertising and marketing	2,217			2,306			8,035			4,845
Data processing and communications	3,221			3,199			9,503			7,499
Professional fees	3,239			1,898			10,401			4,255
Investments in affordable housing partnership expenses	2,803			1,457			8,019			2,133
FDIC assessments	1,262			1,564			3,276			3,697
Credit related expenses	(2,487		)	810			(491		)	2,142
OREO expense, net	678			(423		)	2,863			1,138
Merger and integration expenses	260			11,222			1,769			13,962
Other	3,884			5,171			13,009			10,244
Total noninterest expense	61,837			67,846			193,573			148,244
INCOME BEFORE INCOME TAXES	72,272			43,274			197,619			123,329
INCOME TAX PROVISION	27,708			17,169			76,158			50,212
NET INCOME	$	44,564		$	26,105		$	121,461		$	73,117
EARNINGS PER COMMON SHARE
Basic	$	0.33		$	0.22		$	0.90		$	0.80
Diluted	$	0.33		$	0.22		$	0.90		$	0.79

See accompanying Notes to Consolidated Financial Statements (Unaudited)

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HOPE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands)
Net income	$	44,564		$	26,105		$	121,461		$	73,117
Other comprehensive (loss) income:
Change in unrealized net holding (losses) gains on securities available for sale	(208		)	(3,383		)	7,741			18,857
Change in unrealized net holding (losses) gains on interest only strips	(3		)	535			(44		)	490
Reclassification adjustment for gains realized in income	—			(948		)	—			(948		)
Less tax effect	(89		)	(1,239		)	3,251			8,150
Other comprehensive (loss) income, net of tax	(122		)	(2,557		)	4,446			10,249
Total comprehensive income	$	44,442		$	23,548		$	125,907		$	83,366

See accompanying Notes to Consolidated Financial Statements (Unaudited)

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HOPE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)



		Common stock			Additional paid-in capital		Retained earnings			Accumulated other comprehensive (loss) income, net			Total stockholders’ equity
		Shares	Amount		Additional paid-in capital		Retained earnings			Accumulated other comprehensive (loss) income, net			Total stockholders’ equity
	(Dollars in thousands, except share data)
BALANCE, JANUARY 1, 2016		79,566,356	$	80	$	541,596	$	398,251		$	(1,832	)	$	938,095
Issuance of shares pursuant to various stock plans		49,559			1,098								1,098
Stock-based compensation					1,967								1,967
Issuance of Hope stock options in exchange for Wilshire stock options					3,370								3,370
Issuance of shares in exchange for Wilshire common stock		55,493,726	55		852,884								852,939
Cash dividends declared on common stock							(26,264		)				(26,264		)
Comprehensive income:
Net income							73,117						73,117
Other comprehensive income										10,249			10,249
BALANCE, SEPTEMBER 30, 2016		135,109,641	$	135	$	1,400,915	$	445,104		$	8,417		$	1,854,571

BALANCE, JANUARY 1, 2017		135,240,079	$	135	$	1,400,490	$	469,505		$	(14,657	)	$	1,855,473
Issuance of shares pursuant to various stock plans		227,097			1,278								1,278
Stock-based compensation					1,818								1,818
Cash dividends declared on common stock							(50,045		)				(50,045		)
Comprehensive income:
Net income							121,461						121,461
Other comprehensive income										4,446			4,446
BALANCE, SEPTEMBER 30, 2017		135,467,176	$	135	$	1,403,586	$	540,921		$	(10,211	)	$	1,934,431

See accompanying Notes to Consolidated Financial Statements (Unaudited)

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HOPE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Nine Months Ended September 30,
	2017			2016
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	121,461		$	73,117
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amortization, net of discount accretion	(9,270		)	(1,574		)
Stock-based compensation expense	2,298			1,967
Provision for loan losses	13,760			8,200
Credit for unfunded loan commitments	(2,358		)	(191		)
Valuation adjustment of premises held for sale	1,084			—
Valuation adjustment of OREO	2,001			1,025
Net gains on sales of SBA and other loans	(11,767		)	(6,609		)
Earnings on BOLI	(818		)	(1,032		)
Net change in fair value of derivatives	46			285
Net (gains) losses on sale and disposal of premises and equipment	(277		)	2,449
Net (gains) losses on sales of OREO	(34		)	97
Net gains on sales of securities available for sale	—			(948		)
Losses on investments in affordable housing partnership	7,766			3,057
Net change in deferred income taxes	891			5,183
Proceeds from sales of loans held for sale	221,821			127,467
Originations of loans held for sale	(200,951		)	(156,908		)
Originations of servicing assets	(4,096		)	(2,472		)
Net change in accrued interest receivable	(2,265		)	256
Net change in other assets	(592		)	(3,654		)
Net change in accrued interest payable	2,877			1,092
Net change in other liabilities	(3,259		)	(18,276		)
Net cash provided by operating activities	138,318			32,531
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash received from acquisition - Wilshire Bancorp, Inc.	—			100,124
Purchases of interest bearing deposits in other financial institutions and other investments	(28,615		)	(1,960		)
Redemption of interest bearing deposits in other financial institutions and other investments	19,102			—
Purchase of securities available for sale	(504,831		)	(428,867		)
Proceeds from matured or paid-down securities available for sale	193,320			167,101
Proceeds from sale of securities available for sale	—			217,077
Proceeds from sales of other loans held for sale	417			—
Net change in loans receivable	(407,767		)	(500,329		)
Proceeds from sales of OREO	7,542			12,196
Purchase of FHLB stock	(7,223		)	(30		)
Redemption of FHLB stock	761			12,084
Purchase of premises and equipment	(10,271		)	(10,788		)
Proceeds from sales and disposals of premises and equipment held for sale	3,267			—
Investments in affordable housing partnerships	(8,476		)	—
Net cash used in investing activities	(742,774		)	(433,392		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	356,185			551,541
Proceeds from FHLB advances	815,000			725,000
Repayment of FHLB advances	(550,000		)	(705,000		)
Cash dividends paid on common stock	(50,045		)	(26,264		)
Issuance of additional stock pursuant to various stock plans	1,278			1,098
Net cash provided by financing activities	572,418			546,375
NET CHANGE IN CASH AND CASH EQUIVALENTS	(32,038		)	145,514
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	437,334			298,389
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	405,296		$	443,903

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	$	66,416		$	36,700
Income taxes paid	$	85,384		$	48,378
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES
Transfer from loans receivable to OREO	$	7,173		$	4,823
Transfer from loans receivable to loans held for sale	$	429		$	1,392
Transfer from loans held for sale to loans receivable	$	1,829		$	—
Transfer from premises and equipment to premises held for sale	$	3,300		$	—
New commitments to fund affordable housing partnership investments	$	26,500		$	—
Assets acquired from Wilshire	$	—		$	4,627,636
Liabilities assumed from Wilshire	$	—		$	4,130,342
Equity issued in consideration for Wilshire	$	—		$	856,309

See accompanying Notes to Consolidated Financial Statements (Unaudited)

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HOPE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


1.	Hope Bancorp, Inc.

Hope Bancorp, Inc. (“Hope Bancorp” on a parent-only basis and the “Company” on a consolidated basis), headquartered in Los Angeles, California, is the holding company for Bank of Hope (the “Bank”). As of September 30, 2017, the Bank operated branches in California, Washington, Texas, Illinois, Alabama, Georgia, Virginia, New Jersey, and New York, as well as loan production offices in Virginia, Texas, Oregon, Washington, Georgia, Southern California, and Northern California. The Company is a corporation organized under the laws of the state of Delaware and a bank holding company registered under the Bank Holding Company Act of 1956, as amended.

Effective at the close of business on July 29, 2016, the Company (previously known as BBCN Bancorp, Inc.) completed its merger with Wilshire Bancorp, Inc. (“Wilshire”) pursuant to the Agreement and Plan of Merger, dated as of December 7, 2015, by and between the Company and Wilshire (the “Merger Agreement”). On the date of the acquisition, Wilshire merged with and into the Company, with the Company being the surviving corporation. On the date of the merger with Wilshire, the Company changed its name to “Hope Bancorp, Inc.” and changed its ticker symbol to “HOPE”.


2.	Basis of Presentation

The consolidated financial statements included herein have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), except for the Consolidated Statement of Financial Condition as of December 31, 2016 which was from the audited financial statements included in the Company’s 2016 Annual Report on Form 10-K. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations.

The consolidated financial statements include the accounts of Hope Bancorp and its wholly owned subsidiaries, principally Bank of Hope. All intercompany transactions and balances have been eliminated in consolidation. The Company has made all adjustments, that in the opinion of management, are necessary to fairly present the Company’s financial position at September 30, 2017 and December 31, 2016 and the results of operations for the three and nine months ended September 30, 2017 and 2016. Certain reclassifications have been made to prior period amounts to conform to the current year presentation. The results of operations for the interim periods are not necessarily indicative of results to be anticipated for the full year.

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

These unaudited consolidated financial statements should be read along with the audited consolidated financial statements and accompanying notes included in the Company’s 2016 Annual Report on Form 10-K.

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Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, is effective for interim and annual periods beginning after December 15, 2017 and is applied on either a modified retrospective or full retrospective basis. Early adoption is permitted for interim and annual periods beginning after December 15, 2016. The Company’s revenue primarily consists of net interest income and noninterest income. The scope of the guidance explicitly excludes net interest income, as well as other revenues from financial instruments such as loans, leases, securities and derivatives. Certain noninterest income revenue items such as service charges on deposits accounts, gain/loss on other real estate owned sales, and other income items may be in the scope of ASU 2014-09 and how these revenue streams are recognized may change. The Company is currently in the process of evaluating the impact of ASU 2014-09 on its consolidated financial statements, but does not expect the adoption of ASU 2014-09 to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently in the process of evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. ASU 2016-13 becomes effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”. ASU 2017-08 was issued to amend the amortization period for certain callable debt securities held at a premium. ASU 2017-08 shortens the amortization period of premiums on certain purchased callable debt securities to the earliest call date. ASU 2017-08 affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). ASU 2017-08 does not impact securities purchased at a discount, which continue to be amortized to maturity. ASU 2017-08 is effective for annual period beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted in an interim period. If an entity chooses to adopt early, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. The adoption of ASU 2017-08 is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718), “Scope of Modification”. ASU 2017-09 was issued to provide clarity and reduce both 1) diversity in practice and 2) cost and complexity when applying the guidance in Topic 718, Compensation - Stock Compensation, to a change to the terms or conditions of a share-based payment award. Diversity in practice has arisen in part because some entities apply modification accounting under Topic 718 for modifications to terms and conditions that they consider substantive, but do not when they conclude that particular modifications are not substantive. Others apply modification accounting for any change to an award, except for changes that they consider purely administrative in nature. Still others apply modification accounting when a change to an award changes the fair value, the vesting, or the classification of the award. In practice, it appears that the evaluation of a change in fair value, vesting, or classification may be used to evaluate whether a change is substantive. ASU 2017-09 include guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. ASU 2017-09 is effective for the annual period, and interim periods within the annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for: (a) public business entities for reporting periods for which financial statements have not yet been issued, and (b) all other entities for reporting periods for which financial statements have not yet been made available for issuance. ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. The Company is currently in the process of evaluating the impact of ASU 2017-09 on its consolidated financial statements, but does not expect the adoption of ASU 2017-09 to have material impact on its consolidated financial statements.

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In September 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815), “Targeted Improvements to Accounting for Hedging Activities”. ASU 2017-12 refines and expands hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes, for investors and analysts. The amendments also simplify the application of hedge accounting in certain situations. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. In addition, the guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. ASU 2017-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently in the process of evaluating the impact of ASU 2017-12 on its consolidated financial statements, but does not expect the adoption of ASU 2017-12 to have material impact on its consolidated financial statements.

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3.	Mergers and Acquisitions

The Company applies the acquisition method of accounting for business combinations, including the merger with Wilshire under ASC 805 “Business Combinations”. Under the acquisition method of accounting, the acquiring entity in a business combination recognizes 100 percent of the assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed as incurred as merger and integration expense.

Termination of Acquisition of U & I Financial Corp

On January 23, 2017, the Company announced the signing of a definitive agreement and plan of merger (the “U & I Merger Agreement”) with U & I Financial Corporation (“U & I”) pursuant to which U & I would have merged with and into Hope Bancorp with Hope Bancorp as the surviving corporation. As part of the merger, UniBank, a wholly-owned subsidiary of U & I, would have merged with and into the Bank.

Subsequently on September 15, 2017, the Company announced the mutual termination of the proposed merger with U & I as the Company was unable to obtain the required regulatory approval prior to the transaction termination deadline of September 23, 2017. The Mutual Termination Agreement provides, among other things, that each party will bear its own costs and expenses in connection with the terminated transaction, without penalties or termination fees. In connection with the termination, the parties have provided mutual releases from any claims of liability to one another relating to the merger transaction.

Merger with Wilshire Bancorp, Inc.

On July 29, 2016, the Company completed the merger with Wilshire Bancorp, Inc. (“Wilshire”), the holding company of Wilshire Bank. Wilshire’s primary subsidiary, Wilshire Bank, previously operated thirty-five branches located in California, New York, New Jersey, Texas, Georgia, and Alabama. Approximately $4.63 billion in assets were acquired through the transaction including $3.80 billion in loans receivable and $3.81 billion in deposits. Subsequent to the merger, the Bank now operates 64 branches in nine different states throughout the United States, has loan production offices throughout the country, and a representative office in Seoul, Korea.

Under the terms of the Merger Agreement, Wilshire shareholders received 0.7034 shares of Hope Bancorp common stock for each share of Wilshire common stock owned. As a result, 55.5 million shares of Hope Bancorp common stock were issued to Wilshire shareholders in addition to $3 thousand that was paid for fractional shares. In addition, the Company issued Hope stock options and restricted stock in exchange for Wilshire stock options and restricted stock outstanding at July 29, 2016 under substantially the same terms that were applicable immediately prior to the merger, subject to adjustment for the exchange ratio. Total consideration for the merger was $856.3 million.

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The consideration paid, the assets acquired, and the liabilities assumed are summarized in the following table:



	(Dollars in thousands)
Consideration Paid:
Hope common stock issued in exchange for Wilshire common stock	$	852,939
Cash paid for fractional shares	3
Hope stock options issued in exchange Wilshire stock options	3,370
Total consideration paid	$	856,312

Assets Acquired:
Cash and cash equivalents	$	100,127
Investment securities available for sale	478,938
Loans receivable	3,800,807
FRB and FHLB stock	16,539
OREO	13,173
Premises and equipment	16,812
Bank owned life insurance	25,240
Servicing assets	16,203
Low income housing tax credit investments	47,111
Core deposit intangibles	18,138
Deferred tax assets, net	17,698
Other assets	76,818
Liabilities Assumed:
Deposits	(3,812,367		)
Borrowings	(206,282		)
Subordinated debentures	(56,942		)
Other liabilities	(54,751		)
Total identifiable net assets	$	497,262
Excess of consideration paid over fair value of net assets acquired (goodwill)	$	359,050

Fair values are primarily determined through the use of inputs that are not observable from market-based information. Under ASC 805-10-25-13, management may adjust the fair values of acquired assets or assumed liabilities for a period of up to one year from the date of the acquisition to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have an effect on the measurement of the amounts recognized as of that date. During the fourth quarter of 2016, the Company made a net adjustment of $1.4 million to deferred tax assets and taxes receivable acquired from Wilshire which reduced the previous goodwill recorded from the transaction by $1.4 million. Subsequently in the first quarter of 2017, the Company made an adjustment which increased goodwill by $978 thousand consisting of a $1.7 million adjustment to OREO partially offset by a $716 thousand adjustment to deferred tax assets. During the second quarter of 2017, the Company made an adjustment of $475 thousand to deferred tax assets which increased goodwill by the same amount.

Acquired Loans

The fair value of loans were estimated on an individual basis based on the characteristics for each loan. A discounted cash flow analysis was used to project cash flows for each loan using assumptions for rate, remaining maturity, prepayment speeds, projected default probabilities, loss given defaults, and estimates of prevailing discount rates. At the time of the merger with Wilshire on July 29, 2016, the fair value of loans acquired from Wilshire with deteriorated credit quality totaled $243.1 million. The carrying balance of the acquired loans included in the Statement of Financial Condition at September 30, 2017 and was $3.10 billion for loans acquired from Wilshire compared to $3.59 billion at December 31, 2016.

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Merger-Related Expenses

The following table presents merger-related expenses associated with the merger with Wilshire, the terminated merger with U & I, and other previous transactions which were reflected in the Consolidated Statements of Income in merger and integration expenses. These expenses are comprised primarily of salaries and employee benefits, professional fees, and other noninterest expenses related to mergers.



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017		2016
	(Dollars in thousands)
Wilshire	$	288		$	11,198	$	1,226	$	13,890
U & I	(52		)	—		471		—
Other	24			24		72		72
Total merger and integration expenses	$	260		$	11,222	$	1,769	$	13,962

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4. Stock-Based Compensation

The Company has a stock-based incentive plan (the “2016 Plan”) to award equity as a form of compensation. The 2016 Plan, was approved by the Company’s stockholders on September 1, 2016. The 2016 Plan provides for grants of stock options, stock appreciation rights (“SARs”), restricted stock, performance shares, and performance units (sometimes referred to individually or collectively as “awards”) to non-employee directors, employees, and consultants of the Company. Stock options may be either incentive stock options (“ISOs”), as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or nonqualified stock options (“NQSOs”).

The 2016 Plan gives the Company flexibility to (i) attract and retain qualified non-employee directors, executives, other key employees, and consultants with appropriate equity-based awards to; (ii) motivate high levels of performance; (iii) recognize employee contributions to the Company’s success; and (iv) align the interests of the 2016 Plan participants with those of the Company’s stockholders. The plan initially had 2,400,000 shares available for grant to participants. The exercise price for shares under an ISO may not be less than 100% of fair market value on the date the award is granted under Code Section 422. Similarly, under the terms of the 2016 Plan, the exercise price for SARs and NQSOs may not be less than 100% of fair market value on the date of grant. Performance units are awarded to a participant at the market price of the Company’s common stock on the date of award (after the lapse of the restriction period and the attainment of the performance criteria). No minimum exercise price is prescribed for performance shares and restricted stock awarded under the 2016 Plan. All options not exercised generally expire 10 years after the date of grant.

ISOs, SARs and NQSOs have vesting periods of three to five years and have 10-year contractual terms. Restricted stock, performance shares, and performance units are granted with a restriction period of not less than one year from the grant date for performance-based awards and not more than three years from the grant date for time-based vesting of grants. Compensation expense for awards is recognized over the vesting period.

The Company had another stock-based incentive plan, the 2007 Equity Incentive Plan (“2007 Plan”), which was approved by stockholders in May 2007. Under the terms of this plan, awards cannot be granted under the plan more than ten years after the plan adoption date. Therefore, subsequent to May 2017, equity awards can no longer be issued from this plan.

Under the 2016 Plan, 1,331,888 shares were available for future grants as of September 30, 2017.

The total shares reserved for issuance will serve as the underlying value for all equity awards under the 2016 Plan. With the exception of the shares underlying stock options and restricted stock awards, the board of directors may choose to settle the awards by paying the equivalent cash value or by delivering the appropriate number of shares.

The following is a summary of stock option activity under the 2007 Plan and 2016 Plan for the nine months ended September 30, 2017:



	Number of Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value (Dollars in thousands)
Outstanding - January 1, 2017	1,603,876		$	15.28
Granted	—		—
Exercised	(172,959	)	7.19
Expired	(268,070	)	21.35
Forfeited	(38,421	)	17.17
Outstanding - September 30, 2017	1,124,426		$	15.01	7.43	$	3,035
Options exercisable - September 30, 2017	669,089		$	13.71	6.62	$	2,679

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The following is a summary of restricted stock and performance unit activity under the 2007 Plan and 2016 Plan for the nine months ended September 30, 2017:



	Number of Shares		Weighted- Average Grant Date Fair Value
Outstanding - January 1, 2017	398,658		$	16.16
Granted	165,612		16.77
Vested	(145,392	)	16.16
Forfeited	(21,332	)	16.13
Outstanding - September 30, 2017	397,546		$	16.41

The total fair value of restricted stock and performance units vested for the nine months ended September 30, 2017 and 2016 was $2.6 million and $1.7 million, respectively.

On August, 21, 2017 the Company adopted the Hope Employee Stock Purchase Plan (“ESPP”). The ESPP allows eligible employees to purchase the Company’s common shares through payroll deductions which build up between the offering date and the purchase date. At the purchase date, the Company uses the accumulated funds to purchase shares in the Company on behalf of the participating employees at 10% discount of the closing price of the Company’s common shares. The closing price is the lower of either the closing price on the first day of the offering period or on the closing price on the purchase date. The dollar amount of common shares purchased under the ESPP must not exceed 20% of the participating employee’s base salary, subject to a cap of $25 thousand in stock value based on the grant date. The ESPP is considered compensatory under GAAP and compensation expense for the ESPP is recognized as part of the Company’s stock based compensation expenses. The compensation expense for ESPP during the three and nine months ended September 30, 2017 was $18 thousand. The Company did not have any compensation expenses for the ESPP during the three or nine months ended September 30, 2016.

The amount charged against income related to stock-based payment arrangements and the ESPP was $792 thousand and $1.9 million for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, $2.3 million and $2.0 million, respectively, of stock-based payment arrangements were charged against income.

The income tax benefit recognized was approximately $304 thousand and $761 thousand for the three months ended September 30, 2017 and 2016, respectively. The income tax benefit recognized for the nine months ended September 30, 2017 and 2016, was approximately $886 thousand and $821 thousand, respectively.

At September 30, 2017, the unrecognized compensation expense related to non-vested stock option grants was $1.3 million which is expected to be recognized over a weighted average vesting period of 2.94 years. Unrecognized compensation expense related to non-vested restricted stock and performance units was $5.2 million which is expected to be recognized over a weighted average vesting period of 2.61 years.

During the first quarter of 2017 the Company adopted ASU 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting”. With the adoption of ASU 2016-09 all of the Company’s excess tax benefits on share-based payment awards were recorded in income tax provision on the Consolidated Statements of Income for the three and nine months ended September 30, 2017.

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5. Earnings Per Share (“EPS”)

Basic EPS does not reflect the possibility of dilution that could result from the issuance of additional shares of common stock upon exercise or conversion of outstanding equity awards, and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted to common stock that would then share in earnings. For the three months ended September 30, 2017, stock options and restricted shares awards for 762,833 shares of common stock were excluded in computing diluted earnings per common share because they were anti-dilutive. For the nine months ended September 30, 2017, stock options and restricted shares awards for 484,426 shares of common stock were excluded in computing diluted earnings per common share because they were anti-dilutive. Stock options and restricted shares awards for 609,186 shares of common stock were excluded in computing diluted earnings per common share because they were anti-dilutive for the three months ended September 30, 2016. Stock options and restricted shares awards for 559,790 shares of common stock were excluded in computing diluted earnings per common share because they were anti-dilutive for the nine months ended September 30, 2016. Additionally, warrants issued pursuant to the Company’s participation in the U.S. Treasury’s TARP Capital Purchase Plan, to purchase 20,238 shares and 19,703 shares of common stock were anti-dilutive and excluded for the three and nine months ended September 30, 2017 and 2016, respectively.

The following tables show the computation of basic and diluted EPS for the three and nine months ended September 30, 2017 and 2016.



	Three Months Ended September 30,
	2017					2016
	Net Income (Numerator)		Weighted-Average Shares (Denominator)	Per Share (Amount)		Net Income (Numerator)		Weighted-Average Shares (Denominator)	Per Share (Amount)
	(Dollars in thousands, except share and per share data)
Basic EPS - common stock	$	44,564	135,382,457	$	0.33	$	26,105	116,622,920	$	0.22
Effect of dilutive securities:
Stock options, restricted stock, and ESPP shares			248,455					328,154
Diluted EPS - common stock	$	44,564	135,630,912	$	0.33	$	26,105	116,951,074	$	0.22



	Nine Months Ended September 30,
	2017					2016
	Net Income (Numerator)		Weighted-Average Shares (Denominator)	Per Share (Amount)		Net Income (Numerator)		Weighted-Average Shares (Denominator)	Per Share (Amount)
	(In thousands, except share and per share data)
Basic EPS - common stock	$	121,461	135,296,332	$	0.90	$	73,117	91,940,070	$	0.80
Effect of dilutive securities:
Stock options, restricted stock, and ESPP shares			365,633					326,175
Diluted EPS - common stock	$	121,461	135,661,965	$	0.90	$	73,117	92,266,245	$	0.79

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6. Securities Available for Sale

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



	At September 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in thousands)
Debt securities:
U.S. Government agency and U.S. Government sponsored enterprises:
Debt securities	$	5,000	$	—	$	(1	)	$	4,999
Collateralized mortgage obligations:
Residential	911,229		332		(9,679		)	901,882
Mortgage-backed securities:
Residential	600,155		1,566		(5,451		)	596,270
Commercial	245,972		128		(4,672		)	241,428
Corporate securities	4,571		4		—			4,575
Municipal securities	96,785		1,063		(796		)	97,052
Total debt securities	1,863,712		3,093		(20,599		)	1,846,206
Mutual funds	22,425		27		(349		)	22,103
Total investment securities available for sale	$	1,886,137	$	3,120	$	(20,948	)	$	1,868,309

	At December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in thousands)
Debt securities:
U.S. Government agency and U.S. Government sponsored enterprises:
Debt securities	$	12,005	$	3	$	—		$	12,008
Collateralized mortgage obligations:
Residential	715,981		349		(10,663		)	705,667
Mortgage-backed securities:
Residential	599,755		1,132		(9,311		)	591,576
Commercial	141,549		—		(5,084		)	136,465
Corporate securities	11,576		—		(449		)	11,127
Municipal securities	88,018		358		(1,537		)	86,839
Total debt securities	1,568,884		1,842		(27,044		)	1,543,682
Mutual funds	13,425		—		(367		)	13,058
Total investment securities available for sale	$	1,582,309	$	1,842	$	(27,411	)	$	1,556,740

As of September 30, 2017 and December 31, 2016, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

At September 30, 2017 and December 31, 2016, $10.2 million and $14.6 million, respectively, in unrealized losses on securities net of taxes were included in accumulated other comprehensive loss. Also included in accumulated other comprehensive loss at September 30, 2017 and December 31, 2016, were unrealized losses on interest only strip net of taxes of $40 thousand and $14 thousand, respectively. There were no reclassifications out of accumulated other comprehensive income into earnings for the three and nine months ended September 30, 2017. A total of $948 thousand ($572 thousand net of taxes) of net gains on sales of securities were reclassified out of accumulated other comprehensive income (loss) into earnings for the three and nine months ended September 30, 2016.

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The amortized cost and estimated fair value of investment securities at September 30, 2017, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.



	Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
Available for sale:
Due within one year	$	5,724	$	5,726
Due after one year through five years	11,567		11,875
Due after five years through ten years	39,563		40,060
Due after ten years	49,502		48,965
U.S. Government agency and U.S. Government sponsored enterprises
Collateralized mortgage obligations:
Residential	911,229		901,882
Mortgage-backed securities:
Residential	600,155		596,270
Commercial	245,972		241,428
Mutual funds	22,425		22,103
Total	$	1,886,137	$	1,868,309

Securities with carrying values of approximately $349.2 million and $382.1 million at September 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits, various borrowings and for other purposes as required or permitted by law.

The following tables show the Company’s investments’ gross unrealized losses and estimated fair value, aggregated by investment category and the length of time that the individual securities have been in a continuous unrealized loss position as of the dates indicated.



	As of September 30, 2017
	Less than 12 months						12 months or longer						Total
Description of Securities	Number of Securities	Fair Value		Gross Unrealized Losses			Number of Securities	Fair Value		Gross Unrealized Losses			Number of Securities	Fair Value		Gross Unrealized Losses
	(Dollars in thousands)
Debt securities*	1	$	4,999	$	(1	)	—	$	—	$	—		1	$	4,999	$	(1	)
Collateralized mortgage obligations:
Residential*	56	566,997		(4,406		)	26	228,250		(5,273		)	82	795,247		(9,679		)
Mortgage-backed securities:
Residential*	27	291,483		(1,922		)	13	116,490		(3,529		)	40	407,973		(5,451		)
Commercial*	8	86,608		(804		)	6	106,790		(3,868		)	14	193,398		(4,672		)
Municipal securities	14	13,521		(221		)	6	17,735		(575		)	20	31,256		(796		)
Mutual funds	3	15,607		(108		)	1	5,007		(241		)	4	20,614		(349		)
Total	109	$	979,215	$	(7,462	)	52	$	474,272	$	(13,486	)	161	$	1,453,487	$	(20,948	)

__________________________________

* Investments in U.S. Government agency and U.S. Government sponsored enterprises

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	As of December 31, 2016
	Less than 12 months						12 months or longer						Total
Description of Securities	Number of Securities	Fair Value		Gross Unrealized Losses			Number of Securities	Fair Value		Gross Unrealized Losses			Number of Securities	Fair Value		Gross Unrealized Losses
	(Dollars in thousands)
Collateralized mortgage obligations:
Residential*	66	$	615,803	$	(9,459	)	4	$	36,333	$	(1,204	)	70	$	652,136	$	(10,663	)
Mortgage-backed securities:
Residential*	48	486,332		(9,311		)	—	—		—			48	486,332		(9,311		)
Commercial*	9	136,465		(5,084		)	—	—		—			9	136,465		(5,084		)
Corporate securities	1	7,014		(2		)	1	4,113		(447		)	2	11,127		(449		)
Municipal securities	95	69,331		(1,537		)	—	—		—			95	69,331		(1,537		)
Mutual funds	3	13,058		(367		)	—	—		—			3	13,058		(367		)
Total	222	$	1,328,003	$	(25,760	)	5	$	40,446	$	(1,651	)	227	$	1,368,449	$	(27,411	)

__________________________________

* Investments in U.S. Government agency and U.S. Government sponsored enterprises

The Company evaluates securities for other-than-temporary-impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and the extent to which the fair values of the securities have been less than the cost of the securities, and management’s intention to sell, or whether it is more likely than not that management will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. In analyzing an issuer’s financial condition, the Company considers, among other considerations, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

The Company has certain collateralized mortgage obligations, mortgage backed securities, municipal securities, and mutual funds that were in a continuous unrealized loss position for twelve months or longer as of September 30, 2017. The collateralized mortgage obligations in a continuous loss position for twelve months or longer had an unrealized loss of $5.3 million at September 30, 2017 and total mortgage backed securities in a continuous loss position for twelve months or longer had a total unrealized loss of $7.4 million. These securities were issued by U.S. Government agency and U.S. Government sponsored enterprises and have high credit ratings of “AA” grade or better. Interest on U.S. Government agency and U.S. Government sponsored enterprise investments have been paid as agreed, and management believes this will continue in the future and that the securities will be repaid in full as scheduled. Municipal securities that were in a continuous loss position for twelve months or longer had an unrealized loss of $575 thousand at September 30, 2017. Mutual funds that were in a continuous loss position for twelve months or longer had an unrealized loss of $241 thousand at September 30, 2017. The market value declines for these securities were primarily due to movements in interest rates and are not reflective of management’s expectations of the Company’s ability to fully recover these investments, which may be at maturity. For these reasons, no OTTI was recognized on U.S. Government sponsored collateralized mortgage obligations and mortgage backed securities, municipal securities, and mutual funds that were in an unrealized loss position at September 30, 2017.

The Company considers the losses on the investments in unrealized loss positions at September 30, 2017 to be temporary based on: 1) the likelihood of recovery; 2) the information relative to the extent and duration of the decline in market value; and 3) the Company’s intention not to sell, and management’s determination that it is more likely than not that the Company will not be required to sell a security in an unrealized loss position before recovery of its amortized cost basis.

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7. Loans Receivable and Allowance for Loan Losses

The following is a summary of loans receivable by major category:



	September 30, 2017			December 31, 2016
	(Dollars in thousands)
Loan portfolio composition
Real estate loans:
Residential	$	55,072		$	57,884
Commercial	8,085,307			7,842,573
Construction	297,686			254,113
Total real estate loans	8,438,065			8,154,570
Commercial business	1,824,442			1,832,021
Trade finance	180,847			154,928
Consumer and other	521,459			403,470
Total loans outstanding	10,964,813			10,544,989
Deferred loan fees, net	(1,839		)	(1,657		)
Loans receivable	10,962,974			10,543,332
Allowance for loan losses	(83,633		)	(79,343		)
Loans receivable, net of allowance for loan losses	$	10,879,341		$	10,463,989

The loan portfolio is made up of four segments: real estate loans, commercial business, trade finance, and consumer and other. These segments are further segregated between loans accounted for under the amortized cost method (“Legacy Loans”) and previously acquired loans that were originally recorded at fair value with no carryover of the related pre-acquisition allowance for loan losses (“Acquired Loans”). Acquired Loans are further segregated between purchased credit impaired loans (loans with credit deterioration on the acquisition date and accounted for under ASC 310-30, or “PCIs”) and Acquired Performing Loans (loans that were pass graded on the acquisition date and the fair value adjustment is amortized over the contractual life under ASC 310-20, or “non-PCI loans”).

The following table presents changes in the accretable discount on the PCI loans for the three and nine months ended September 30, 2017 and 2016:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands)
Balance at beginning of period	$	53,657		$	20,150		$	43,611		$	23,777
Additions due to acquisitions during the period	—			41,271			—			41,271
Accretion	(5,815		)	(4,723		)	(16,375		)	(10,226		)
Reclassification from nonaccretable difference	6,696			40			27,302			1,916
Balance at end of period	$	54,538		$	56,738		$	54,538		$	56,738

On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the PCI loans is the “accretable yield.” The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans. The accretable yield will change from period to period due to the following: 1) estimates of the remaining life of acquired loans will affect the amount of future interest income; 2) indices for variable rates of interest on PCI loans may change; and 3) estimates of the amount of the contractual principal and interest that will not be collected (nonaccretable difference) may change.

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The following tables detail the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2017 and 2016:



	Legacy Loans												Acquired Loans											Total
	Real Estate			Commercial Business			Trade Finance			Consumer and Other			Real Estate			Commercial Business			Trade Finance		Consumer and Other			Total
	(Dollars in thousands)
Three Months Ended September 30, 2017
Balance, beginning of period	$	40,478		$	21,495		$	1,000		$	2,282		$	13,411		$	1,291		$	106	$	11		$	80,074
Provision (credit) for loan losses	3,664			1,499			418			664			(1,312		)	395			56		16			5,400
Loans charged off	(175		)	(3,870		)	—			(218		)	(162		)	(471		)	—		(17		)	(4,913		)
Recoveries of charge offs	23			3,020			2			—			—			25			—		2			3,072
Balance, end of period	$	43,990		$	22,144		$	1,420		$	2,728		$	11,937		$	1,240		$	162	$	12		$	83,633
Nine Months Ended September 30, 2017
Balance, beginning of period	$	38,956		$	23,430		$	1,897		$	2,116		$	12,791		$	117		$	—	$	36		$	79,343
Provision (credit) for loan losses	7,174			2,356			1,621			1,348			(406		)	1,517			162		(12		)	13,760
Loans charged off	(2,221		)	(7,485		)	(2,104		)	(738		)	(479		)	(596		)	—		(17		)	(13,640		)
Recoveries of charge offs	81			3,843			6			2			31			202			—		5			4,170
Balance, end of period	$	43,990		$	22,144		$	1,420		$	2,728		$	11,937		$	1,240		$	162	$	12		$	83,633



	Legacy Loans												Acquired Loans											Total
	Real Estate			Commercial Business			Trade Finance			Consumer and Other			Real Estate			Commercial Business			Trade Finance		Consumer and Other			Total
	(Dollars in thousands)
Three Months Ended September 30, 2016
Balance, beginning of period	$	43,666		$	16,576		$	2,449		$	926		$	12,607		$	148		$	—	$	53		$	76,425
Provision (credit) for loan losses	(2,474		)	7,444			(32		)	970			527			72			—		(7		)	6,500
Loans charged off	(132		)	(3,219		)	—			(162		)	(435		)	(10		)	—		—			(3,958		)
Recoveries of charge offs	432			539			—			2			8			27			—		1			1,009
Balance, end of period	$	41,492		$	21,340		$	2,417		$	1,736		$	12,707		$	237		$	—	$	47		$	79,976
Nine Months Ended September 30, 2016
Balance, beginning of period	$	42,829		$	16,332		$	3,592		$	556		$	12,823		$	214		$	—	$	62		$	76,408
Provision (credit) for loan losses	(2,318		)	9,792			(1,175		)	1,370			633			(82		)	—		(20		)	8,200
Loans charged off	(151		)	(5,845		)	—			(278		)	(758		)	(43		)	—		—			(7,075		)
Recoveries of charge offs	1,132			1,061			—			88			9			148			—		5			2,443
Balance, end of period	$	41,492		$	21,340		$	2,417		$	1,736		$	12,707		$	237		$	—	$	47		$	79,976

Table of Contents

The following tables break out the allowance for loan losses and the recorded investment of loans outstanding (not including accrued interest receivables and net deferred loan fees) by individually impaired, general valuation, and PCI impairment, by portfolio segment, at September 30, 2017 and December 31, 2016:



	September 30, 2017
	Legacy Loans								Acquired Loans								Total
	Real Estate		Commercial Business		Trade Finance		Consumer and Other		Real Estate		Commercial Business		Trade Finance		Consumer and Other		Total
	(Dollars in thousands)
Allowance for loan losses:
Individually evaluated for impairment	$	1,462	$	4,679	$	2	$	4	$	245	$	415	$	—	$	—	$	6,807
Collectively evaluated for impairment	42,528		17,465		1,418		2,724		1,081		825		162		12		66,215
PCI loans	—		—		—		—		10,611		—		—		—		10,611
Total	$	43,990	$	22,144	$	1,420	$	2,728	$	11,937	$	1,240	$	162	$	12	$	83,633

Loans outstanding:
Individually evaluated for impairment	$	48,535	$	35,494	$	4,201	$	1,048	$	10,155	$	4,885	$	3,384	$	758	$	108,460
Collectively evaluated for impairment	5,996,526		1,437,398		133,599		339,980		2,213,662		317,150		39,663		168,844		10,646,822
PCI loans	—		—		—		—		169,187		29,515		—		10,829		209,531
Total	$	6,045,061	$	1,472,892	$	137,800	$	341,028	$	2,393,004	$	351,550	$	43,047	$	180,431	$	10,964,813



	December 31, 2016
	Legacy Loans								Acquired Loans								Total
	Real Estate		Commercial Business		Trade Finance		Consumer and Other		Real Estate		Commercial Business		Trade Finance		Consumer and Other		Total
	(Dollars in thousands)
Allowance for loan losses:
Individually evaluated for impairment	$	1,889	$	4,420	$	864	$	50	$	113	$	73	$	—	$	—	$	7,409
Collectively evaluated for impairment	37,067		19,010		1,033		2,066		548		44		—		36		59,804
PCI loans	—		—		—		—		12,130		—		—		—		12,130
Total	$	38,956	$	23,430	$	1,897	$	2,116	$	12,791	$	117	$	—	$	36	$	79,343

Loans outstanding:
Individually evaluated for impairment	$	74,085	$	34,783	$	6,029	$	733	$	23,865	$	435	$	—	$	431	$	140,361
Collectively evaluated for impairment	5,271,262		1,079,348		75,365		179,961		2,597,200		650,710		70,535		206,802		10,131,183
PCI loans	—		—		—		—		188,158		66,745		2,999		15,543		273,445
Total	$	5,345,347	$	1,114,131	$	81,394	$	180,694	$	2,809,223	$	717,890	$	73,534	$	222,776	$	10,544,989

As of September 30, 2017 and December 31, 2016, the reserve for unfunded loan commitments recorded in other liabilities was $836 thousand and $3.2 million, respectively. For the three months ended September 30, 2017 and 2016, the recognized (credit) provision for unfunded commitments recorded in credit related expense was $(2.8) million and $270 thousand, respectively. For the nine months ended September 30, 2017 and 2016, the recognized credit for unfunded commitments was $(2.4) million and $(191) thousand, respectively. The credit for unfunded commitments recorded in the third quarter of 2017 was a result of updated information related to credit card commitments that was used in the calculation of allowance for off balance sheet unfunded commitments.

Table of Contents

The recorded investment of individually impaired loans and the total impaired loans net of specific allowance is presented in the following table:



	September 30, 2017			December 31, 2016
	(Dollars in thousands)
With allocated specific allowance
Without charge off	$	40,218		$	59,638
With charge off	879			1,120
With no allocated specific allowance
Without charge off	60,129			76,775
With charge off	7,234			2,828
Specific allowance on impaired loans	(6,807		)	(7,409		)
Impaired loans, net of specific allowance	$	101,653		$	132,952

The following tables detail the recorded investment of impaired loans (Legacy Loans and Acquired Loans that became impaired subsequent to being originated and acquired, respectfully) as of September 30, 2017 and December 31, 2016, and the average recorded investment and interest income recognized for the three and nine months ended September 30, 2017 and 2016. Loans with no related allowance are believed by management to be adequately collateralized.



	As of September 30, 2017						As of December 31, 2016
Total Impaired Loans	Recorded Investment*		Unpaid Contractual Principal Balance		Related Allowance		Recorded Investment*		Unpaid Contractual Principal Balance		Related Allowance
	(Dollars in thousands)
With related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	931		936		132		2,095		2,384		90
Hotel & motel	2,696		3,667		263		6,387		6,387		337
Gas station & car wash	—		—		—		215		228		41
Mixed use	169		727		7		206		732		27
Industrial & warehouse	988		1,670		135		530		530		—
Other	4,389		4,389		1,170		22,580		22,825		1,507
Real estate—construction	—		—		—		—		—		—
Commercial business	27,292		28,713		5,094		26,543		27,161		4,493
Trade finance	4,201		4,201		2		2,111		2,156		864
Consumer and other	431		431		4		91		91		50
Subtotal	$	41,097	$	44,734	$	6,807	$	60,758	$	62,494	$	7,409
With no related allowance:
Real estate—residential	$	498	$	1,488	$	—	$	3,562	$	3,562	$	—
Real estate—commercial
Retail	10,467		12,210		—		12,753		13,290		—
Hotel & motel	8,172		12,262		—		6,122		11,735		—
Gas station & car wash	2,939		6,646		—		5,043		7,449		—
Mixed use	1,319		3,732		—		7,303		7,822		—
Industrial & warehouse	8,054		8,140		—		9,673		9,748		—
Other	16,768		18,278		—		20,181		21,492		—
Real estate—construction	1,300		1,441		—		1,300		1,441		—
Commercial business	13,087		17,917		—		8,675		9,472		—
Trade finance	3,384		5,067		—		3,918		3,918		—
Consumer and other	1,375		1,453		—		1,073		1,136		—
Subtotal	$	67,363	$	88,634	$	—	$	79,603	$	91,065	$	—
Total	$	108,460	$	133,368	$	6,807	$	140,361	$	153,559	$	7,409

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*	Unpaid contractual principal balance less charge offs, interest collected applied to principal if on nonaccrual and purchase discounts.

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	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2017				2016				2017				2016
Total Impaired Loans	Average Recorded Investment*		Interest Income Recognized during Impairment		Average Recorded Investment*		Interest Income Recognized during Impairment		Average Recorded Investment*		Interest Income Recognized during Impairment		Average Recorded Investment*		Interest Income Recognized during Impairment
	(Dollars in thousands)
With related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	1,197		4		1,711		—		1,268		11		1,711		—
Hotel & motel	2,269		17		1,320		16		4,330		49		2,965		48
Gas station & car wash	—		—		1,052		9		54		—		1,051		28
Mixed use	228		2		208		2		228		5		386		5
Industrial & warehouse	746		—		542		6		1,226		—		551		18
Other	4,572		60		23,474		259		13,534		175		23,968		776
Real estate—construction	—		—		—		—		—		—		—		—
Commercial business	27,031		261		32,553		296		25,036		749		34,147		821
Trade finance	4,118		58		6,465		70		2,587		215		8,390		237
Consumer and other	251		1		548		1		169		3		338		2
Subtotal	$	40,412	$	403	$	67,873	$	659	$	48,432	$	1,207	$	73,507	$	1,935
With no related allowance:
Real estate—residential	$	249	$	20	$	—	$	—	$	1,381	$	57	$	—	$	—
Real estate—commercial
Retail	10,071		91		9,381		95		12,412		263		10,243		296
Hotel & motel	10,494		59		9,776		54		8,346		175		8,813		163
Gas station & car wash	3,022		114		4,855		25		3,812		317		4,760		75
Mixed use	1,274		109		2,195		9		4,095		324		2,279		28
Industrial & warehouse	8,390		68		10,905		89		8,738		191		10,396		268
Other	14,733		6		9,912		59		16,324		19		11,312		177
Real estate—construction	1,300		—		1,300		—		1,689		—		1,328		—
Commercial business	11,544		—		13,111		26		10,417		—		11,030		79
Trade finance	1,765		—		2,225		—		2,975		—		1,113		—
Consumer and other	1,305		—		800		7		1,147		—		1,014		23
Subtotal	$	64,147	$	467	$	64,460	$	364	$	71,336	$	1,346	$	62,288	$	1,109
Total	$	104,559	$	870	$	132,333	$	1,023	$	119,768	$	2,553	$	135,795	$	3,044

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*	Unpaid contractual principal balance less charge offs, interest collected applied to principal if on nonaccrual and purchase discounts.

Table of Contents



	As of September 30, 2017						As of December 31, 2016
Impaired Acquired Loans	Recorded Investment*		Unpaid Contractual Principal Balance		Related Allowance		Recorded Investment*		Unpaid Contractual Principal Balance		Related Allowance
	(Dollars in thousands)
With related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	661		666		127		1,826		2,114		85
Hotel & motel	87		87		2		—		—		—
Gas station & car wash	—		—		—		—		—		—
Mixed use	131		131		6		136		136		2
Industrial & warehouse	402		1,084		100		—		—		—
Other	279		279		10		337		341		26
Real estate—construction	—		—		—		—		—		—
Commercial business	1,787		2,919		415		294		339		73
Trade finance	—		—		—		—		—		—
Consumer and other	—		—		—		—		—		—
Subtotal	$	3,347	$	5,166	$	660	$	2,593	$	2,930	$	186
With no related allowance:
Real estate—residential	$	498	$	1,488	$	—	$	679	$	679	$	—
Real estate—commercial
Retail	1,962		2,279		—		3,148		3,214		—
Hotel & motel	536		2,388		—		4,767		7,171		—
Gas station & car wash	448		2,146		—		1,568		1,815		—
Mixed use	162		2,240		—		5,315		5,551		—
Industrial & warehouse	55		55		—		66		66		—
Other	4,934		5,800		—		6,023		6,752		—
Real estate—construction	—		—		—		—		—		—
Commercial business	3,098		3,453		—		141		386		—
Trade finance	3,384		5,067		—		—		—		—
Consumer and other	758		826		—		431		484		—
Subtotal	$	15,835	$	25,742	$	—	$	22,138	$	26,118	$	—
Total	$	19,182	$	30,908	$	660	$	24,731	$	29,048	$	186

__________________________________


*	Unpaid contractual principal balance less charge offs, interest collected applied to principal if on nonaccrual and purchase discounts.

Table of Contents



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2017				2016				2017				2016
Impaired Acquired Loans	Average Recorded Investment*		Interest Income Recognized during Impairment		Average Recorded Investment*		Interest Income Recognized during Impairment		Average Recorded Investment*		Interest Income Recognized during Impairment		Average Recorded Investment*		Interest Income Recognized during Impairment
	(Dollars in thousands)
With related allowance:
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	927		4		1,386		—		998		11		1,277		—
Hotel & motel	174		—		—		—		110		—		—		—
Gas station & car wash	—		—		—		—		—		—		254		—
Mixed use	190		2		139		2		191		5		316		5
Industrial & warehouse	452		—		—		—		226		—		—		—
Other	303		4		344		4		319		11		324		13
Real estate—construction	—		—		—		—		—		—		—		—
Commercial business	1,250		9		396		—		892		24		486		—
Trade finance	—		—		—		—		—		—		—		—
Consumer and other	—		—		80		—		—		—		40		—
Subtotal	$	3,296	$	19	$	2,345	$	6	$	2,736	$	51	$	2,697	$	18
With no related allowance:
Real estate—residential	$	249	$	20	$	—	$	—	$	294	$	57	$	—	$	—
Real estate—commercial
Retail	1,709		15		2,095		21		2,729		45		2,333		72
Hotel & motel	2,671		—		4,983		3		3,737		—		5,933		10
Gas station & car wash	454		—		1,589		25		774		—		1,490		75
Mixed use	104		—		166		—		2,701		—		219		—
Industrial & warehouse	60		1		1,038		2		63		2		1,075		7
Other	3,806		46		3,215		13		4,205		116		3,520		39
Real estate—construction	—		—		—		—		—		—		—		—
Commercial business	1,835		47		707		4		1,014		142		690		13
Trade finance	1,692		68		—		—		846		191		—		—
Consumer and other	684		2		361		2		518		6		459		7
Subtotal	$	13,264	$	199	$	14,154	$	70	$	16,881	$	559	$	15,719	$	223
Total	$	16,560	$	218	$	16,499	$	76	$	19,617	$	610	$	18,416	$	241

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*	Unpaid contractual principal balance less charge offs, interest collected applied to principal if on nonaccrual and purchase discounts.

Table of Contents

Generally, loans are placed on nonaccrual status if the principal and/or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by regulatory requirements. Loans to customers whose financial condition has deteriorated are considered for nonaccrual status whether or not the loan is 90 days or more past due. Generally, payments received on nonaccrual loans are recorded as principal reductions. Loans are returned to accrual status only when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Company did not recognize any cash basis interest income for the three and nine months ended September 30, 2017 or 2016.

The following tables present the recorded investment in past due loans by the number of days past due as of September 30, 2017 and December 31, 2016 by class of loans:



	As of September 30, 2017
									Nonaccrual Loans ⁽²⁾		Total Delinquent and Nonaccrual Loans
	Past Due and Accruing
	30-59 Days		60-89 Days		90 or More Days		Total
	(Dollars in thousands)
Legacy Loans:
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	1,168		—		—		1,168		3,259		4,427
Hotel & motel	329		1,895		—		2,224		8,966		11,190
Gas station & car wash	1,755		—		—		1,755		2,490		4,245
Mixed use	161		—		—		161		1,196		1,357
Industrial & warehouse	1,123		—		—		1,123		3,456		4,579
Other	1,418		—		—		1,418		6,332		7,750
Real estate—construction	—		—		—		—		1,300		1,300
Commercial business	2,660		960		150		3,770		9,485		13,255
Trade finance	—		—		—		—		—		—
Consumer and other	243		717		257		1,217		594		1,811
Subtotal	$	8,857	$	3,572	$	407	$	12,836	$	37,078	$	49,914
Acquired Loans: ⁽¹⁾
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	128		—		—		128		1,005		1,133
Hotel & motel	—		1,521		—		1,521		621		2,142
Gas station & car wash	—		—		—		—		448		448
Mixed use	—		—		—		—		161		161
Industrial & warehouse	338		—		—		338		402		740
Other	336		—		—		336		1,818		2,154
Real estate—construction	—		—		—		—		—		—
Commercial business	627		166		—		793		1,196		1,989
Trade finance	—		—		—		—		—		—
Consumer and other	—		—		—		—		594		594
Subtotal	$	1,429	$	1,687	$	—	$	3,116	$	6,245	$	9,361
TOTAL	$	10,286	$	5,259	$	407	$	15,952	$	43,323	$	59,275

__________________________________


⁽¹⁾	Acquired Loans exclude PCI loans.


⁽²⁾	Nonaccrual loans exclude guaranteed portion of delinquent SBA loans that are in liquidation totaling $21.5 million. Includes nonaccrual loans less than 30 days past due totaling $9.1 million.

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	As of December 31, 2016
									Nonaccrual Loans ⁽²⁾		Total Delinquent and Nonaccrual Loans
	Past Due and Accruing
	30-59 Days		60-89 Days		90 or More Days		Total
	(Dollars in thousands)
Legacy Loans:
Real estate—residential	$	—	$	—	$	—	$	—	$	—	$	—
Real estate—commercial
Retail	480		—		—		480		3,672		4,152
Hotel & motel	1,836		3,137		—		4,973		1,392		6,365
Gas station & car wash	362		—		—		362		3,690		4,052
Mixed use	—		—		—		—		1,305		1,305
Industrial & warehouse	—		697		—		697		1,922		2,619
Other	2,871		—		—		2,871		4,007		6,878
Real estate—construction	—		1,513		—		1,513		1,300		2,813
Commercial business	558		815		—		1,373		9,371		10,744
Trade finance	—		500		—		500		2,056		2,556
Consumer and other	146		58		305		509		229		738
Subtotal	$	6,253	$	6,720	$	305	$	13,278	$	28,944	$	42,222
Acquired Loans: ⁽¹⁾
Real estate—residential	$	—	$	—	$	—	$	—	$	679	$	679
Real estate—commercial
Retail	1,611		—		—		1,611		1,871		3,482
Hotel & motel	95		—		—		95		4,501		4,596
Gas station & car wash	68		340		—		408		993		1,401
Mixed use	—		—		—		—		48		48
Industrial & warehouse	257		—		—		257		—		257
Other	350		—		—		350		2,144		2,494
Real estate—construction	—		—		—		—		—		—
Commercial business	1,303		684		—		1,987		345		2,332
Trade finance	—		—		—		—		—		—
Consumer and other	331		25		—		356		549		905
Subtotal	$	4,015	$	1,049	$	—	$	5,064	$	11,130	$	16,194
TOTAL	$	10,268	$	7,769	$	305	$	18,342	$	40,074	$	58,416

__________________________________


⁽¹⁾	Acquired Loans exclude PCI loans.


⁽²⁾	Nonaccrual loans exclude guaranteed portion of delinquent SBA loans that are in liquidation totaling $15.9 million. Includes nonaccrual loans less than 30 days past due totaling $18.3 million.

Loans accounted for under ASC 310-30 are generally considered accruing and performing loans and the accretable discount is accreted to interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, PCI loans that are contractually past due are still considered to be accruing and performing loans. The loans may be classified as nonaccrual if the timing and amount of future cash flows is not reasonably estimable.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans. This analysis is performed at least on a quarterly basis. The definitions for risk ratings are as follows:


•	Pass: Loans that meet a preponderance or more of the Company’s underwriting criteria and evidence an acceptable level of risk.


•	Special Mention: Loans that have potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

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•	Substandard: Loans that are inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any. Loans in this classification have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.


•	Doubtful: Loans that have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following tables present the recorded investment of risk ratings for Legacy and Acquired Loans as of September 30, 2017 and December 31, 2016 by class of loans:



	As of September 30, 2017
	Pass/ Not Rated		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Legacy Loans:
Real estate—residential	$	36,488	$	1,035	$	1,447	$	—	$	38,970
Real estate—commercial
Retail	1,569,248		23,225		19,348		—		1,611,821
Hotel & motel	1,194,329		10,042		13,128		—		1,217,499
Gas station & car wash	729,531		12,382		4,246		—		746,159
Mixed use	400,074		4,612		1,544		—		406,230
Industrial & warehouse	568,172		15,999		22,032		—		606,203
Other	1,125,919		29,111		50,047		—		1,205,077
Real estate—construction	210,134		—		2,968		—		213,102
Commercial business	1,358,444		33,068		81,164		216		1,472,892
Trade finance	134,262		2,311		1,227		—		137,800
Consumer and other	340,187		—		841		—		341,028
Subtotal	$	7,666,788	$	131,785	$	197,992	$	216	$	7,996,781
Acquired Loans:
Real estate—residential	$	15,837	$	265	$	—	$	—	$	16,102
Real estate—commercial
Retail	649,572		8,974		21,643		—		680,189
Hotel & motel	285,539		9,289		20,423		2		315,253
Gas station & car wash	198,481		8,973		8,828		—		216,282
Mixed use	99,250		5,648		14,317		8		119,223
Industrial & warehouse	266,876		15,185		15,908		270		298,239
Other	600,411		36,607		26,114		—		663,132
Real estate—construction	84,584		—		—		—		84,584
Commercial business	310,220		7,782		33,528		20		351,550
Trade finance	39,663		—		3,384		—		43,047
Consumer and other	174,254		720		4,470		987		180,431
Subtotal	$	2,724,687	$	93,443	$	148,615	$	1,287	$	2,968,032
Total	$	10,391,475	$	225,228	$	346,607	$	1,503	$	10,964,813

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	As of December 31, 2016
	Pass/ Not Rated		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Legacy Loans:
Real estate—residential	$	34,283	$	223	$	2,883	$	—	$	37,389
Real estate—commercial
Retail	1,303,452		18,929		15,430		—		1,337,811
Hotel & motel	1,187,709		12,763		9,026		—		1,209,498
Gas station & car wash	643,282		7,259		3,690		—		654,231
Mixed use	375,312		—		1,467		—		376,779
Industrial & warehouse	478,528		29,830		13,745		—		522,103
Other	969,024		22,220		41,017		—		1,032,261
Real estate—construction	159,230		14,745		1,300		—		175,275
Commercial business	1,032,232		15,919		65,885		95		1,114,131
Trade finance	68,051		5,673		7,670		—		81,394
Consumer and other	179,864		1		829		—		180,694
Subtotal	$	6,430,967	$	127,562	$	162,942	$	95	$	6,721,566
Acquired Loans:
Real estate—residential	$	18,007	$	1,809	$	679	$	—	$	20,495
Real estate—commercial
Retail	772,465		9,860		21,110		—		803,435
Hotel & motel	328,396		5,419		18,233		—		352,048
Gas station & car wash	249,379		8,437		11,338		—		269,154
Mixed use	118,643		3,105		12,505		8		134,261
Industrial & warehouse	321,040		31,819		9,048		315		362,222
Other	736,385		23,286		29,099		—		788,770
Real estate—construction	78,838		—		—		—		78,838
Commercial business	649,186		31,340		37,265		99		717,890
Trade finance	70,535		61		2,938		—		73,534
Consumer and other	214,437		958		5,949		1,432		222,776
Subtotal	$	3,557,311	$	116,094	$	148,164	$	1,854	$	3,823,423
Total	$	9,988,278	$	243,656	$	311,106	$	1,949	$	10,544,989

The Company reclassifies loans held for investment to loans held for sale in the event that the Company plans to sell loans that were originated with the intent to hold to maturity. Loans transferred from held to investment to held for sale are carried at the lower of cost or fair value. The breakdown of loans by type that were reclassified from held to investment to held for sale for the three and nine months ended September 30, 2017 and 2016 is presented in the following table:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Transfer of loans receivable to held for sale	(Dollars in thousands)
Real estate - commercial	$	—	$	992	$	429	$	992
Consumer	—		—		—		400
Total	$	—	$	992	$	429	$	1,392

The adequacy of the allowance for loan losses is determined by management based upon an evaluation and review of the credit quality of the loan portfolio, consideration of historical loan loss experience, relevant internal and external factors that affect the collection of a loan, and other pertinent factors.

Migration analysis is a formula methodology derived from the Bank’s actual historical net charge off experience for each loan class (type) or pool and risk grade. The migration analysis is centered on the Bank’s internal credit risk rating system. Management’s internal loan review and external contracted credit review examinations are used to determine and validate loan risk grades. This credit review system takes into consideration factors such as: borrower’s background and experience; historical and current financial condition; credit history and payment performance; economic conditions and their impact on various industries; type, fair value and volatility of the fair value of collateral; lien position; and the financial strength of any guarantors.

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A general loan loss allowance is provided on loans not specifically identified as impaired (“non-impaired loans”). The Bank’s general loan loss allowance has two components: quantitative and qualitative risk factors. The quantitative risk factors are based on the migration analysis methodology described above. The loans are classified by class and risk grade, and the historical loss migration is tracked for the various classes. Loss experience is quantified for a specified period and then weighted to place more significance on the most recent losses. That loss experience is then applied to the stratified portfolio at the end of each quarter. For PCI loans, a general loan loss allowance is provided to the extent that there has been credit deterioration since the date of acquisition.

Additionally, in order to systematically quantify the credit risk impact of other trends and changes within the loan portfolio, the Bank utilizes qualitative adjustments to the migration analysis within established parameters. The parameters for making adjustments are established under a Credit Risk Matrix that provides seven possible scenarios for each of the factors below. The matrix allows for up to three positive (Major, Moderate, and Minor), three negative (Major, Moderate, and Minor), and one neutral credit risk scenarios within each factor for each loan type or pool. However, if information exists to warrant adjustment to the migration analysis, changes are made in accordance with the established parameters supported by narrative and/or statistical analysis. The Credit Risk Matrix and the nine possible scenarios enable the Bank to qualitatively adjust the Loss Migration Ratio by as much as 50 basis points in either direction (positive or negative) for each loan type pool. This matrix considers the following nine factors, which are patterned after the guidelines provided under the FFIEC Interagency Policy Statement on the Allowance for Loan and Lease Losses:


•	Changes in lending policies and procedures, including underwriting standards and collection, charge off, and recovery practices;


•	Changes in national and local economic and business conditions and developments, including the condition of various market segments;


•	Changes in the nature and volume of the loan portfolio;


•	Changes in the experience, ability and depth of lending management and staff;


•	Changes in the trends of the volume and severity of past due loans, classified loans, nonaccrual loans, troubled debt restructurings and other loan modifications;


•	Changes in the quality of the loan review system and the degree of oversight by the Directors;


•	Changes in the value of underlying collateral for collateral-dependent loans;


•	The existence and effect of any concentrations of credit and changes in the level of such concentrations; and


•	The effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated losses in the loan portfolio.

The Company also establishes specific loss allowances for loans that have identified potential credit risk conditions or circumstances related to a specific individual credit. The specific allowance amounts are determined in accordance with ASC 310-10-35-22, “Measurement of Impairment.” The loans identified as impaired will be accounted for in accordance with one of the three acceptable valuation methods: 1) the present value of future cash flows discounted at the loan’s effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral, if the loan is collateral dependent. For the collateral dependent impaired loans, management obtains a new appraisal to determine the amount of impairment as of the date that the loan became impaired. The appraisals are based on an “as is” valuation. To ensure that appraised values remain current, management either obtains updated appraisals every twelve months from a qualified independent appraiser or an internal evaluation of the collateral is performed by qualified personnel. If the third party market data indicates that the value of the collateral property has declined since the most recent valuation date, management adjusts the value of the property downward to reflect current market conditions. If the fair value of the collateral is less than the recorded amount of the loan, management recognizes impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses. If an impaired loan is expected to be collected through liquidation or operation of the underlying collateral, the loan is deemed to be collateral dependent and the amount of impairment is charged off against the allowance for loan losses.

The Company considers a loan to be impaired when it is probable that not all amounts due (principal and interest) will be collectible in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The significance of payment delays and payment shortfalls is determined on a case-by-case basis by taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

For commercial business loans, real estate loans, and certain consumer loans, management bases the measurement of loan impairment on the present value of the expected future cash flows, discounted at the loan’s effective interest rate, or on the fair value of the loan’s collateral if the loan is collateral dependent. Management evaluates most consumer loans for impairment on a collective basis because these loans generally have smaller balances and are homogeneous in the underwriting of terms and conditions and in the types of collateral.

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For PCI loans, the allowance for loan losses is based upon expected cash flows for these loans. To the extent that a deterioration in borrower’s credit quality results in a decrease in expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on an estimate of future credit losses over the remaining life of the loans. Credit for loan losses on acquired loans for the three months ended September 30, 2017 was $845 thousand of which included $610 thousand in provision for loan losses related to PCI loans. Provision for loan losses on acquired loans for the nine months ended September 30, 2017 was $1.3 million of which included $1.5 million in credit for loan losses related to PCI loans.

The following table presents breakdown of loans by impairment method at September 30, 2017 and December 31, 2016:



	As of September 30, 2017
	Real Estate - Residential			Real Estate - Commercial			Real Estate - Construction			Commercial Business			Trade Finance			Consumer and Other			Total
	(Dollars in thousands)
Impaired loans (gross carrying value)	$	498		$	56,892		$	1,300		$	40,379		$	7,585		$	1,806		$	108,460
Specific allowance	$	—		$	1,707		$	—		$	5,094		$	2		$	4		$	6,807
Specific allowance to impaired loans	N/A			3.00		%	N/A			12.62		%	0.03		%	0.22		%	6.28		%
Other loans	$	54,574		$	8,028,415		$	296,386		$	1,784,063		$	173,262		$	519,653		$	10,856,353
General allowance	$	161		$	52,573		$	1,486		$	18,290		$	1,580		$	2,736		$	76,826
General allowance to other loans	0.30		%	0.65		%	0.50		%	1.03		%	0.91		%	0.53		%	0.71		%
Total loans	$	55,072		$	8,085,307		$	297,686		$	1,824,442		$	180,847		$	521,459		$	10,964,813
Total allowance for loan losses	$	161		$	54,280		$	1,486		$	23,384		$	1,582		$	2,740		$	83,633
Total allowance to total loans	0.29		%	0.67		%	0.50		%	1.28		%	0.87		%	0.53		%	0.76		%



	As of December 31, 2016
	Real Estate - Residential			Real Estate - Commercial			Real Estate - Construction			Commercial Business			Trade Finance			Consumer and Other			Total
	(Dollars in thousands)
Impaired loans (gross carrying value)	$	3,562		$	93,088		$	1,300		$	35,218		$	6,029		$	1,164		$	140,361
Specific allowance	$	—		$	2,002		$	—		$	4,493		$	864		$	50		$	7,409
Specific allowance to impaired loans	N/A			2.15		%	N/A			12.76		%	14.33		%	4.30		%	5.28		%
Other loans	$	54,322		$	7,749,485		$	252,813		$	1,796,803		$	148,899		$	402,306		$	10,404,628
General allowance	$	209		$	47,915		$	1,621		$	19,054		$	1,033		$	2,102		$	71,934
General allowance to other loans	0.38		%	0.62		%	0.64		%	1.06		%	0.69		%	0.52		%	0.69		%
Total loans	$	57,884		$	7,842,573		$	254,113		$	1,832,021		$	154,928		$	403,470		$	10,544,989
Total allowance for loan losses	$	209		$	49,917		$	1,621		$	23,547		$	1,897		$	2,152		$	79,343
Total allowance to total loans	0.36		%	0.64		%	0.64		%	1.29		%	1.22		%	0.53		%	0.75		%

Under certain circumstances, the Company provides borrowers relief through loan modifications. These modifications are either temporary in nature (“temporary modifications”) or are more substantive. The temporary modifications generally consist of interest only payments for a three to six month period, whereby principal payments are deferred. At the end of the modification period, the remaining principal balance is re-amortized based on the original maturity date. Loans subject to temporary modifications are generally downgraded to Special Mention or Substandard. At the end of the modification period, the loan either 1) returns to the original contractual terms; 2) is further modified and accounted for as a troubled debt restructuring in accordance with ASC 310-10-35; or 3) is disposed of through foreclosure or liquidation.

Troubled Debt Restructurings (“TDRs”) of loans are defined by ASC 310-40, “Troubled Debt Restructurings by Creditors” and evaluated for impairment in accordance with ASC 310-10-35. The concessions may be granted in various forms, including

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reduction in the stated interest rate, reduction in the amount of principal amortization, forgiveness of a portion of a loan balance or accrued interest, or extension of the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed on the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s internal underwriting policy. At September 30, 2017, total TDR loans were $75.7 million, compared to $70.9 million at December 31, 2016.

A summary of the recorded investment of TDRs on accrual and nonaccrual status by type of concession as of September 30, 2017 and December 31, 2016 is presented below:



	As of September 30, 2017
	TDRs on Accrual Status								TDRs on Nonaccrual Status								Total
	Real Estate		Commercial Business		Other		Total		Real Estate		Commercial Business		Other		Total		Total
	(Dollars in thousands)
Payment concession	$	18,014	$	434	$	—	$	18,448	$	1,817	$	150	$	—	$	1,967	$	20,415
Maturity / amortization concession	3,397		25,187		8,203		36,787		2,084		5,394		323		7,801		44,588
Rate concession	5,497		4,075		—		9,572		1,109		20		—		1,129		10,701
Total	$	26,908	$	29,696	$	8,203	$	64,807	$	5,010	$	5,564	$	323	$	10,897	$	75,704



	As of December 31, 2016
	TDRs on Accrual Status								TDRs on Nonaccrual Status								Total
	Real Estate		Commercial Business		Other		Total		Real Estate		Commercial Business		Other		Total		Total
	(Dollars in thousands)
Payment concession	$	16,358	$	29	$	—	$	16,387	$	4,417	$	1,717	$	—	$	6,134	$	22,521
Maturity / amortization concession	1,840		17,471		4,600		23,911		1,313		6,130		2,287		9,730		33,641
Rate concession	6,856		1,665		55		8,576		5,590		387		155		6,132		14,708
Total	$	25,054	$	19,165	$	4,655	$	48,874	$	11,320	$	8,234	$	2,442	$	21,996	$	70,870

TDRs on accrual status are comprised of loans that were accruing at the time of restructuring and for which the Bank anticipates full repayment of both principal and interest under the restructured terms. TDRs that are on nonaccrual status can be returned to accrual status after a period of sustained performance, generally determined to be six months of timely payments as modified. Sustained performance includes the periods prior to the modification if the prior performance met or exceeded the modified terms. TDRs on accrual status at September 30, 2017 were comprised of 22 commercial real estate loans totaling $26.9 million, 26 commercial business loans totaling $29.7 million, and 6 other loans totaling $8.2 million. TDRs on accrual status at December 31, 2016 were comprised of 20 commercial real estate loans totaling $25.1 million, 23 commercial business loans totaling $19.2 million and 19 other loans totaling $4.7 million. The Company expects that TDRs on accrual status as of September 30, 2017, which were all performing in accordance with their restructured terms, to continue to comply with the restructured terms because of the reduced principal or interest payments on these loans. TDRs that were restructured at market interest rates and had sustained performance as agreed under the modified loan terms may be reclassified as non-TDRs after each year end but are reserved for under ASC 310-10.

The Company has allocated $4.1 million and $5.3 million of specific reserves to TDRs as of September 30, 2017 and December 31, 2016, respectively.

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The following table presents the recorded investment of loans classified as TDR within the three and nine months ended September 30, 2017 and September 30, 2016 by class of loans:



	Three Months Ended September 30, 2017					Three Months Ended September 30, 2016
	Number of Loans	Pre- Modification		Post- Modification		Number of Loans	Pre- Modification		Post- Modification
	(Dollars in thousands)
Legacy Loans:
Real estate—residential	—	$	—	$	—	—	$	—	$	—
Real estate—commercial
Retail	1	464		452		—	—		—
Hotel & motel	—	—		—		—	—		—
Gas station & car wash	—	—		—		—	—		—
Mixed use	—	—		—		—	—		—
Industrial & warehouse	—	—		—		—	—		—
Other	—	—		—		1	845		836
Real estate - construction	—	—		—		—	—		—
Commercial business	7	5,409		4,753		4	265		314
Trade finance	—	—		—		—	—		—
Consumer and other	—	—		—		—	—		—
Subtotal	8	$	5,873	$	5,205	5	$	1,110	$	1,150
Acquired Loans:
Real estate—residential	1	$	614	$	498	—	$	—	$	—
Real estate—commercial
Retail	—	—		—		1	1,377		1,344
Hotel & motel	—	—		—		—	—		—
Gas station & car wash	—	—		—		—	—		—
Mixed use	—	—		—		—	—		—
Industrial & warehouse	—	—		—		—	—		—
Other	1	851		2,265		1	81		79
Real estate—construction	—	—		—		—	—		—
Commercial business	5	4,478		3,535		2	31		27
Trade finance	1	2,938		3,384		—	—		—
Consumer and other	—	—		—		—	—		—
Subtotal	8	$	8,881	$	9,682	4	$	1,489	$	1,450
Total	16	$	14,754	$	14,887	9	$	2,599	$	2,600

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	Nine Months Ended September 30, 2017					Nine Months Ended September 30, 2016
	Number of Loans	Pre- Modification		Post- Modification		Number of Loans	Pre- Modification		Post- Modification
	(Dollars in thousands)
Legacy Loans:
Real estate—residential	—	$	—	$	—	—	$	—	$	—
Real estate—commercial
Retail	2	1,123		1,091		—	—		—
Hotel & motel	—	—		—		—	—		—
Gas station & car wash	—	—		—		—	—		—
Mixed use	—	—		—		—	—		—
Industrial & warehouse	—	—		—		—	—		—
Other	—	—		—		1	845		836
Real estate - construction	—	—		—		—	—		—
Commercial business	12	12,282		11,027		12	11,465		8,178
Trade finance	—	—		—		1	2,199		1,439
Consumer and other	—	—		—		1	—		101
Subtotal	14	$	13,405	$	12,118	15	$	14,509	$	10,554
Acquired Loans:
Real estate—residential	1	$	614	$	498	—	$	—	$	—
Real estate—commercial
Retail	2	221		218		1	1,377		1,344
Hotel & motel	—	—		—		—	—		—
Gas station & car wash	—	—		—		—	—		—
Mixed use	—	—		—		—	—		—
Industrial & warehouse	—	—		—		—	—		—
Other	1	851		2,265		1	81		79
Real estate—construction	—	—		—		—	—		—
Commercial business	6	4,678		3,688		2	31		27
Trade finance	1	2,938		3,384		—	—		—
Consumer and other	—	—		—		1	30		26
Subtotal	11	$	9,302	$	10,053	5	$	1,519	$	1,476
Total	25	$	22,707	$	22,171	20	$	16,028	$	12,030

For TDRs modified during the three months ended September 30, 2017, the Company recorded totaled $376 thousand in specific reserves. There were no charge offs of TDR loans modified during the three and nine months ended September 30, 2017. TDRs modified during the nine months ended September 30, 2017 had $1.3 million in specific reserves.

For TDR loans modified during the three and nine months ended September 30, 2016, the Company recorded totaled $183 thousand and $2.9 million, respectively in specific reserves. There were no charge offs of TDR loans modified during the three and nine months ended September 30, 2016.

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The following table presents loans modified as TDRs within the previous twelve months ended September 30, 2017 and September 30, 2016 that subsequently had payment defaults during the three and nine months ended September 30, 2017 and September 30, 2016:



	Three Months Ended September 30, 2017			Three Months Ended September 30, 2016
	Number of Loans	Balance		Number of Loans	Balance
	(Dollars in thousands)
Legacy Loans:
Real estate—commercial
Retail	—	$	—	—	$	—
Hotel & motel	—	—		—	—
Gas station & car wash	—	—		—	—
Mixed Use	—	—		—	—
Industrial & warehouse	—	—		—	—
Other	—	—		—	—
Real estate—construction	—	—		—	—
Commercial business	2	827		6	4,296
Trade finance	—	—		—	—
Consumer and other	—	—		—	—
Subtotal	2	$	827	6	$	4,296
Acquired Loans:
Real estate—commercial
Retail	—	$	—	—	$	—
Hotel & motel	—	—		—	—
Gas station & car wash	—	—		—	—
Mixed Use	—	—		—	—
Industrial & warehouse	—	—		—	—
Other	—	—		—	—
Real estate—construction	—	—		—	—
Commercial business	—	—		—	—
Trade finance	—	—		—	—
Consumer and other	—	—		1	26
Subtotal	—	$	—	1	$	26
Total	2	$	827	7	$	4,322

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	Nine Months Ended September 30, 2017				Nine Months Ended September 30, 2016
	Number of Loans		Balance		Number of Loans	Balance
	(Dollars in thousands)
Legacy Loans:
Real estate—commercial
Retail	—		$	—	—	$	—
Hotel & motel	—		—		—	—
Gas station & car wash	—		—		—	—
Mixed Use	—		—		—	—
Industrial & warehouse	—	—	—		—	—
Other	—		—		—	—
Real estate—construction	—		—		—	—
Commercial business	2		827		8	4,496
Trade finance	—		—		1	3,178
Consumer and other	—		—		—	—
Subtotal	2		$	827	9	$	7,674
Acquired Loans:
Real estate—commercial
Retail	—		$	—	—	$	—
Hotel & motel	—		—		—	—
Gas station & car wash	—		—		—	—
Mixed Use	—		—		—	—
Industrial & warehouse	—		—		—	—
Other	—		—		—	—
Real estate—construction	—		—		—	—
Commercial business	—		—		—	—
Trade finance	—		—		—	—
Consumer and other	—		—		1	26
Subtotal	—		$	—	1	$	26
Total	2		$	827	10	$	7,700

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. As of September 30, 2017, there were no specific reserves for the TDRs that had payment defaults during the three and nine months ended September 30, 2017. The total charge offs for the TDRs that had payment defaults during the three and nine months ended September 30, 2017 totaled $203 thousand.

There were two Legacy Loans that subsequently defaulted during the three and nine months ended September 30, 2017 that were modified as follows: two commercial business loans totaling $827 thousand were modified through maturity concessions.

As of September 30, 2016, the specific reserves totaled $1.0 million and $2.4 million for the TDRs that had payment defaults during the three and nine months ended September 30, 2016. The total charge offs for the TDRs that had payment defaults during the three and nine months ended September 30, 2016 were $85 thousand and $115 thousand respectively.

There were six Legacy Loans that subsequently defaulted during the three months ended September 30, 2016 that were modified as follows: three Commercial Business loans totaling $401 thousand were modified through payment concessions, and three Commercial Business loans totaling $4.1 million were modified through maturity concessions. There was one Consumer and other Acquired Loan totaling $26 thousand that defaulted during the three months ended September 30, 2016 that was modified through maturity concession.

There were nine Legacy Loans that subsequently defaulted during the nine months ended September 30, 2016 that were modified as follows: four Commercial Business loans totaling $401 thousand were modified through payment concessions, four Commercial Business loans totaling $4.1 million were modified through maturity concessions, and one Trade Finance loan totaling $3.2 million was modified through maturity concession. There was one Consumer and other Acquired Loan totaling $26 thousand that defaulted during the nine months ended September 30, 2016 that was modified through maturity concession.

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8. Deposits

The aggregate amount of time deposits in denominations of $250 thousand or more at September 30, 2017 and December 31, 2016, was $1.62 billion and $1.55 billion, respectively. Included in time deposits of $250 thousand or more were $300.0 million in California State Treasurer’s deposits at September 30, 2017 and December 31, 2016. The California State Treasurer’s deposits are subject to withdrawal based on the State’s periodic evaluations. The Company is required to pledge eligible collateral of at least 110% of outstanding deposits. At September 30, 2017 and December 31, 2016, securities with carrying values of approximately $330.3 million and $371.6 million, respectively, were pledged as collateral for the California State Treasurer’s deposit.

The Company also utilizes brokered deposits as a secondary source of funds. Total brokered deposits at September 30, 2017 and December 31, 2016, totaled $808.4 million and $724.7 million, respectively. Brokered deposits at September 30, 2017 consisted of $289.4 million in money market and NOW accounts and $519.0 million in time deposits accounts. Brokered deposits at December 31, 2016 consisted of $303.7 million in money market and NOW accounts and $421.0 million in time deposits accounts.

9. Borrowings

The Company maintains a line of credit with the FHLB of San Francisco for use as a secondary source of funds. The borrowing capacity with the FHLB is limited to the lower of 25% of the Bank’s total assets or the Bank’s collateral capacity, which was $3.34 billion at September 30, 2017, and $3.38 billion at December 31, 2016. The terms of this credit facility require the Company to pledge eligible collateral with the FHLB equal to at least 100% of outstanding advances.

At September 30, 2017 and December 31, 2016, real estate secured loans with a carrying amount of approximately $4.85 billion and $5.53 billion, respectively, were pledged at the FHLB. At September 30, 2017 and December 31, 2016, other than FHLB stock, no securities were pledged as collateral at FHLB. The purchase of FHLB stock is a prerequisite to become a member of the FHLB system, and the Company is required to own a certain amount of stock based on outstanding borrowings.

At September 30, 2017 and December 31, 2016, FHLB advances totaled $1.02 billion and $754.3 million, respectively had weighted average effective interest rates of 1.31% and 1.22%, respectively, and had various maturities through August 2022. The Company had a putable advance at December 31, 2016 totaling $20.2 million with a quarterly put date which matured in September 2017. The effective interest rate of FHLB advances as of September 30, 2017 ranged between 0.88% and 2.02%. At September 30, 2017, the Company’s remaining borrowing capacity with the FHLB was $2.32 billion.

At September 30, 2017, the contractual maturities for FHLB advances were as follows:



	Contractual Maturities		Maturity/ Put Date
	(Dollars in thousands)
Due within one year	$	480,000	$	480,000
Due after one year through five years	538,046		538,046
Total	$	1,018,046	$	1,018,046

As a member of the FRB system, the Bank may also borrow from the FRB of San Francisco. The maximum amount that the Bank may borrow from the FRB’s discount window is up to 95% of the outstanding principal balance of the qualifying loans and the fair value of the securities that are pledged. At September 30, 2017, the outstanding principal balance of the qualifying loans was $549.3 million, and the fair value of investment securities was $5.7 million. There were no borrowings outstanding at the FRB discount window as of September 30, 2017 and December 31, 2016.

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10. Subordinated Debentures

At September 30, 2017, the Company had nine wholly owned subsidiary grantor trusts that had issued $126.0 million of pooled trust preferred securities. Trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in the indentures. The trusts used the net proceeds from the offering to purchase a like amount of subordinated debentures (the “Debentures”). The Debentures are the sole assets of the trusts. The Company’s obligations under the subordinated debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. The Company now has the right to redeem the Debentures in whole (but not in part) on a quarterly basis at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date. The Company also has a right to defer consecutive payments of interest on the debentures for up to five years.

The following table is a summary of trust preferred securities and Debentures at September 30, 2017:



Issuance Trust	Issuance Date	Trust Preferred Security Amount		Carrying Value of Debentures		Rate Type	Current Rate	Maturity Date
		(Dollars in thousands)
Nara Capital Trust III	06/05/2003	$	5,000	$	5,155	Variable	4.47%	06/15/2033
Nara Statutory Trust IV	12/22/2003	5,000		5,155		Variable	4.15%	01/07/2034
Nara Statutory Trust V	12/17/2003	10,000		10,310		Variable	4.27%	12/17/2033
Nara Statutory Trust VI	03/22/2007	8,000		8,248		Variable	2.97%	06/15/2037
Center Capital Trust I	12/30/2003	18,000		13,778		Variable	4.15%	01/07/2034
Wilshire Statutory Trust II	03/17/2005	20,000		15,262		Variable	3.11%	03/17/2035
Wilshire Statutory Trust III	09/15/2005	15,000		10,723		Variable	2.72%	09/15/2035
Wilshire Statutory Trust IV	07/10/2007	25,000		17,411		Variable	2.70%	09/15/2037
Saehan Capital Trust I	03/30/2007	20,000		14,548		Variable	2.96%	06/30/2037
Total		$	126,000	$	100,590

The Company’s investment in the common trust securities of the issuer trusts was $3.9 million at September 30, 2017 and is included in other assets. Although the subordinated debt issued by the trusts are not included as a component of stockholders’ equity in the consolidated balance sheets, the debt is treated as capital for regulatory purposes. The trust preferred security debt issuances are includable in Tier I capital up to a maximum of 25% of capital on an aggregate basis. Any amount that exceeds 25% qualifies as Tier 2 capital.

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11. Derivative Financial Instruments

The Company offers a loan hedging program to certain loan customers. Through this program, the Company originates a variable rate loan with the customer. The Company and the customer will then enter into a fixed interest rate swap. Lastly, an identical offsetting swap is entered into by the Company with a correspondent bank. These “back-to-back” swap arrangements are intended to offset each other and allow the Company to book a variable rate loan, while providing the customer with a contract for fixed interest payments. In these arrangements, the Company’s net cash flow is equal to the interest income received from the variable rate loan originated with the customer. These customer swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. The changes in fair value are recognized in the income statement in other income and fees.

At September 30, 2017 and December 31, 2016, the following interest rate swaps related to the Company’s loan hedging program were outstanding:



	As of September 30, 2017			As of December 31, 2016
	(Dollars in thousands)
Interest rate swaps on loans with loan customers:
Notional amount	$	279,786		$	223,098
Weighted average remaining term	7.5 years			7.4 years
Received fixed rate (weighted average)	4.35		%	4.29		%
Pay variable rate (weighted average)	3.59		%	3.06		%
Estimated fair value	$	(175	)	$	(1,565	)
Back to back interest rate swaps with correspondent banks:
Notional amount	$	279,786		$	223,098
Weighted average remaining term	7.5 years			7.4 years
Received variable rate (weighted average)	3.59		%	3.06		%
Pay fixed rate (weighted average)	4.35		%	4.29		%
Estimated fair value	$	175		$	1,565

Subsequent to the acquisition of Wilshire, the Company began to enter into various stand-alone mortgage-banking derivatives in order to hedge the risk associated with the fluctuation of interest rates. Changes in fair value are recorded as mortgage banking revenue. Residential mortgage loans funded with interest rate lock commitments and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. At September 30, 2017, the Company had approximately $83.7 million in interest rate lock commitments and $11.5 million in total forward sales commitments for the future delivery of residential mortgage loans. At December 31, 2016, the Company had approximately $23.7 million in interest rate lock commitments and $13.0 million in total forward sales commitments for the future delivery of residential mortgage loans.

The following table reflects the notional amount and fair value of mortgage banking derivatives for the dates indicated:



	As of September 30, 2017				As of December 31, 2016
	Notional Amount		Fair Value		Notional Amount		Fair Value
	(Dollars in thousands)
Assets:
Interest rate lock commitments	$	10,734	$	60	$	11,168	$	130
Forward sale contracts related to mortgage banking	$	6,966	$	24	$	3,223	$	17

Liabilities:
Interest rate lock commitments	$	777	$	2	$	1,810	$	3
Forward sale contracts related to mortgage banking	$	4,545	$	23	$	9,755	$	38

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12. Commitments and Contingencies

In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk that are used to meet the financing needs of customers. These financial instruments include commitments to extend credit, standby letters of credit, commercial letters of credit, commitments to fund investments in affordable housing partnerships, mortgage derivatives, and operating lease commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The Company’s exposure to credit loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as the Company does for extending loan facilities to customers. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on the Company’s credit evaluation of the counterparty. The types of collateral that the Company may hold can vary and may include accounts receivable, inventory, property, plant and equipment, and income-producing properties.

Commitments at September 30, 2017 and December 31, 2016 are summarized as follows:



	September 30, 2017		December 31, 2016
	(Dollars in thousands)
Commitments to extend credit	$	1,571,460	$	1,592,221
Standby letters of credit	68,358		63,753
Other letters of credit	60,036		52,125
Commitments to fund investments in affordable housing partnerships	42,433		24,409
Interest rate lock	83,705		23,749
Forward sale commitments	11,511		12,978
Operating lease commitments	53,042		51,059

In the normal course of business, the Company is involved in various legal claims. The Company has reviewed all legal claims against us with counsel and have taken into consideration the views of such counsel as to the potential outcome of the claims. Loss contingencies for all legal claims totaled $428 thousand at September 30, 2017 and $557 thousand at December 31, 2016. It is reasonably possible the Company may incur losses in addition to the amounts currently accrued. However, at this time, the Company is unable to estimate the range of additional losses that are reasonably possible because of a number of factors, including the fact that certain of these litigation matters are still in their early stages and involve claims that the Company believes have little to no merit. Management has considered these and other possible loss contingencies and does not expect the amounts to be material to any of the consolidated financial statements.

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13. Goodwill, Intangible Assets, and Servicing Assets

Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. At December 31, 2016, management assessed the qualitative factors related to intangible assets and goodwill and for the year to determine whether it was more-likely-than-not that the fair value was less than its carrying amount. Based on the analysis of these factors, management determined that it was more-likely-than-not that intangible assets were not impaired and that the fair value of goodwill exceeded the carrying value and that the two-step goodwill impairment test was not needed. Goodwill is not amortized for book purposes and is not tax deductible.

The carrying amount of the Company’s goodwill as of September 30, 2017 and December 31, 2016 was $464.5 million and $463.0 million, respectively. There was no impairment of goodwill during the three and nine months ended September 30, 2017. Goodwill recorded in the third quarter of 2016 from the acquisition of Wilshire totaled $359.0 million. During the fourth quarter of 2016, the Company made a net adjustment of $1.4 million to the deferred tax assets and taxes receivable acquired from Wilshire which reduced the previous goodwill recorded from the transaction by $1.4 million. Subsequently in the first quarter of 2017, the Company made a net adjustment of $978 thousand to OREO and deferred tax assets acquired from Wilshire which increased goodwill recorded from the Wilshire transaction by this amount. During the second quarter of 2017, the Company made a final adjustment of $475 thousand to deferred tax assets which increased goodwill by the same amount. These adjustments were made to reflect new information obtained about facts and circumstances that existed as of the acquisition date in accordance with ASC 805-10-25-13. At September 30, 2017, goodwill related to the acquisition of Wilshire totaled $359.0 million.

Core deposit intangible assets are amortized over their estimated lives, which range from seven to ten years. Amortization expense related to core deposit intangible assets totaled $676 thousand and $565 thousand for the three months ended September 30, 2017 and 2016, respectively. The amortization expense related to core deposit intangible assets totaled $2.0 million and $990 thousand for the nine months ended September 30, 2017 and 2016, respectively. The following table provides information regarding the core deposit intangibles at September 30, 2017:



		As of September 30, 2017
Core Deposit Intangibles Related To:	Amortization Period	Gross Carrying Amount		Accumulated Amortization
		(Dollars in thousands)
Center Financial acquisition	7 years	$	4,100	$	(3,896	)
PIB acquisition	7 years	603		(517		)
Foster acquisition	10 years	2,763		(1,563		)
Wilshire acquisition	10 years	18,138		(2,430		)
Total		$	25,604	$	(8,406	)

Servicing assets are recognized when SBA or residential mortgage loans are sold with servicing retained with the income statement effect recorded in net gains on sales of SBA and other loans. Servicing assets are initially recorded at fair value based on the present value of the contractually specified servicing fee, net of servicing costs, over the estimated life of the loan, using a discount rate based on market conditions and implicit discount rates used by market participants in evaluating servicing transactions, which in turn reflect the yields expected to be earned on those transactions. The Company’s servicing costs approximates the industry average servicing costs. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

Management periodically evaluates servicing assets for impairment based upon the fair value of the rights as compared to the carrying amount. Impairment is determined by stratifying rights into groupings based on loan type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. As of September 30, 2017 and December 31, 2016, the Company did not have a valuation allowance for servicing assets.

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The changes in servicing assets for the three and nine months ended September 30, 2017 and 2016 were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands)
Balance at beginning of period	$	25,338		$	12,193		$	26,457		$	12,000
Additions through originations of servicing assets	1,484			385			4,096			2,472
Additions through acquisition of Wilshire	—			16,203			—			16,203
Amortization	(1,743		)	(2,252		)	(5,474		)	(4,146		)
Balance at end of period	$	25,079		$	26,529		$	25,079		$	26,529

Loans serviced for others are not reported as assets. The principal balances of loans serviced for other institutions were $1.48 billion as of September 30, 2017 and $1.55 billion as of December 31, 2016.

The Company utilizes the discounted cash flow method to calculate the initial excess servicing assets. The inputs used in determining the impairment of the servicing assets at September 30, 2017 and December 31, 2016 are presented below.



	September 30, 2017	December 31, 2016
SBA Servicing Assets:
Weighted-average discount rate	10.35%	9.85%
Constant prepayment rate	8.19%	8.05%
Mortgage Servicing Assets:
Weighted-average discount rate	9.50%	7.25%
Constant prepayment rate	9.12%	13.77%

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14. Income Taxes

For the third quarter of 2017, the Company had an income tax provision totaling $27.7 million on pretax income of $72.3 million, representing an effective tax rate of 38.34%, compared with an income tax provision of $17.2 million on pretax income of $43.3 million, representing an effective tax rate of 39.68% for the third quarter of 2016. For the nine months ended September 30, 2017, the Company had an income tax provision totaling $76.2 million on pretax income of $197.6 million, representing an effective tax rate of 38.54%, compared with an income tax provision of $50.2 million on pretax income of $123.3 million, representing an effective tax rate of 40.71% for the nine months ended September 30, 2016.

The reduction in effective tax rate for periods in 2017 compared to periods in 2016 was primarily due to the increase in affordable housing partnership investment tax credits for the three and nine months ended September 30, 2017 compared to the same periods in 2016.

A reconciliation of the difference between the federal statutory income tax rate and the effective tax rate is shown in the following table for the three and nine months ended September 30, 2017 and 2016:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Statutory tax rate	35.00	%	35.00	%	35.00	%	35.00	%
State taxes-net of federal tax effect	7.14	%	7.33	%	7.14	%	7.33	%
Affordable housing partnership investment tax credit	(3.15	)%	(2.40	)%	(3.15	)%	(2.40	)%
Bank owned life insurance	(0.16	)%	(0.22	)%	(0.16	)%	(0.22	)%
Municipal securities	(0.24	)%	(0.21	)%	(0.24	)%	(0.21	)%
Nondeductible transaction costs	(0.02	)%	0.86	%	(0.02	)%	0.86	%
Other	(0.23	)%	(0.68	)%	(0.03	)%	0.35	%
Effective income tax rate	38.34	%	39.68	%	38.54	%	40.71	%

The Company and its subsidiaries are subject to U.S. federal income tax, as well as state income taxes. The Company had total unrecognized tax benefits of $2.1 million at September 30, 2017 and $2.2 million at December 31, 2016, that relate to uncertainties associated with federal and state income tax matters. Other than the accrued interest of $67 thousand related to uncertain tax positions from an acquired entity, the Company recognizes interest and penalties on income tax matters in income tax expense. The Company recorded approximately $344 thousand and $306 thousand for accrued interest and penalties (no portion was related to penalties) at September 30, 2017 and December 31, 2016, respectively.

Management believes it is reasonably possible that the unrecognized tax benefits may decrease by approximately $1.0 million in the next twelve months.

The statute of limitations for the assessment of income taxes related to the consolidated Federal income tax returns is closed for all tax years up to and including 2013. The expiration of the statute of limitations for the assessment of income and franchise taxes related to the various state income and franchise tax returns varies by state. The Company is currently under examination by the California Franchise Tax Board for the 2011, 2012 and 2013 tax years and by the New York State Department of Taxation and Finance for the 2013, 2014, and 2015 tax years. Wilshire Bancorp, Inc., an acquired entity, is currently under examination by the California Franchise Tax Board for the 2011, 2012, and 2013 tax years. While the outcome of the examinations is unknown, the Company expects no material adjustments.

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on the analysis, the Company has determined that a valuation allowance for deferred tax assets was not required as of September 30, 2017.

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15. Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value. The fair value inputs of the instruments are classified and disclosed in one of the following categories pursuant to ASC 820:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. The quoted price shall not be adjusted for any blockage factor (i.e., size of the position relative to trading volume).

Level 2 - Pricing inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Fair value is determined through the use of models or other valuation methodologies, including the use of pricing matrices. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3 - Pricing inputs are unobservable for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. The inputs into the determination of fair value require significant management judgment or estimation.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The Company uses the following methods and assumptions in estimating fair value disclosures for financial instruments. Financial assets and liabilities recorded at fair value on a recurring and non-recurring basis are listed as follows:

Securities Available for Sale

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The fair values of the Company’s Level 3 securities available for sale were measured using an income approach valuation technique. The primary inputs and assumptions used in the fair value measurement were derived from the securities’ underlying collateral, which included discount rates, prepayment speeds, payment delays, and an assessment of the risk of default of the underlying collateral, among other factors. Significant increases or decreases in any of the inputs or assumptions would result in a significant increase or decrease in the fair value measurement.

Interest Rate Swaps

The Company offers interest rate swaps to certain loan customers to allow them to hedge the risk of rising interest rates on their variable rate loans. The Company originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an offsetting swap with a correspondent bank. These back-to-back agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. The fair value of these derivatives is based on a discounted cash flow approach. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of interest rate swaps is classified as Level 2.

Impaired Loans

The fair values of impaired loans are generally measured for impairment using the practical expedients permitted by FASB ASC 310-10-35 including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation, less costs to sell of 8.5%. For commercial and industrial and asset backed loans, independent valuations may be comprised of a 20-60% discount for eligible accounts receivable and a 50-70% discount for inventory. These result in a Level 3 classification.

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OREO

OREO is fair valued at the time the loan is foreclosed upon and the asset is transferred to OREO. The value is based primarily on third party appraisals, less costs to sell of 8.5% and result in a Level 3 classification of the inputs for determining fair value. OREO is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted to lower of cost or market accordingly, based on the same factors identified above.

Loans held for sale

Loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments from investors, or based on recent comparable sales (Level 2 inputs), if available, and if not available, are based on discounted cash flows using current market rates applied to the estimated life and credit risk (Level 3 inputs) or may be assessed based upon the fair value of the collateral, which is obtained from recent real estate appraisals (Level 3 inputs). These appraisals may utilize a single valuation approach or a combination of approaches including the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in Level 3 classification of the inputs for determining fair value.

Mortgage banking derivatives

Mortgage banking derivative instruments consist of interest rate lock commitments and forward sale contracts that trade in liquid markets. The fair value is based on the prices available from third party investors. Due to the observable nature of the inputs used in deriving the fair value, the valuation of mortgage banking derivatives are classified as Level 2.

Assets and liabilities measured at fair value on a recurring basis are summarized below:



				Fair Value Measurements at the End of the Reporting Period Using
	September 30, 2017			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets:
Securities available for sale:
U.S. Government agency and U.S. Government sponsored enterprises:
Debt securities	$	4,999		$	—	$	4,999		$	—
Collateralized mortgage obligations:
Residential	901,882			—		901,882			—
Mortgage-backed securities:
Residential	596,270			—		596,270			—
Commercial	241,428			—		241,428			—
Corporate securities	4,575			—		4,575			—
Municipal securities	97,052			—		95,932			1,120
Mutual funds	22,103			22,103		—			—
Interest rate swaps	(175		)	—		(175		)	—
Mortgage banking derivatives	84			—		84			—

Liabilities:
Interest rate swaps	(175		)	—		(175		)	—
Mortgage banking derivatives	25			—		25			—

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				Fair Value Measurements at the End of the Reporting Period Using
	December 31, 2016			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets:
Securities available for sale:
U.S. Government agency and U.S. Government sponsored enterprises:
Debt securities	$	12,008		$	—	$	12,008		$	—
Collateralized mortgage obligations:
Residential	705,667			—		705,667			—
Mortgage-backed securities:
Residential	591,576			—		591,576			—
Commercial	136,465			—		136,465			—
Corporate securities	11,127			—		11,127			—
Municipal securities	86,839			—		85,700			1,139
Mutual funds	13,058			13,058		—			—
Interest rate swaps	(1,565		)	—		(1,565		)	—
Mortgage banking derivatives	147			—		147			—

Liabilities:
Interest rate swaps	(1,565		)	—		(1,565		)	—
Mortgage banking derivatives	41			—		41			—

There were no transfers between Level 1, 2, and 3 during the three and nine months ended September 30, 2017 and 2016.

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2017 and 2016:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands)
Beginning Balance	$	1,127		$	1,234		$	1,139		$	1,166
Total (losses) gains included in other comprehensive income	(7		)	(5		)	(19		)	63
Ending Balance	$	1,120		$	1,229		$	1,120		$	1,229

The Company measures certain assets at fair value on a non-recurring basis including impaired loans (excluding PCI loans), loans held for sale, and OREO. These fair value adjustments result from impairments recognized during the period, application of the lower of cost or fair value on loans held for sale, and the application of fair value less cost to sell on OREO.

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Assets measured at fair value on a non-recurring basis are summarized below:



			Fair Value Measurements at the End of the Reporting Period Using
	September 30, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets:
Impaired loans at fair value:
Real estate loans	$	5,447	$	—	$	—	$	5,447
Commercial business	9,865		—		—		9,865
OREO	10,077		—		—		10,077



			Fair Value Measurements at the End of the Reporting Period Using
	December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets:
Impaired loans at fair value:
Real estate loans	$	58,882	$	—	$	—	$	58,882
Commercial business	6,563		—		—		6,563
Consumer	253		—		—		253
Loans held for sale, net	3,788		—		3,788		—
OREO	21,990		—		—		21,990

For assets measured at fair value on a non-recurring basis, the total net gains (losses), which include charge offs, recoveries, specific reserves, and recognized gains and losses on sales are summarized below:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands)
Assets:
Impaired loans at fair value:
Real estate loans	$	142		$	(154	)	$	(2,293	)	$	97
Commercial business	364			(3,108		)	(4,637		)	(5,956		)
Trade Finance	3			109			(1,236		)	1,190
Consumer	(206		)	(151		)	(701		)	(245		)
Loans held for sale, net	847			1,476			1,619			1,519
OREO	(640		)	(162		)	(1,967		)	(1,408		)

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Fair Value of Financial Instruments

Carrying amounts and estimated fair values of financial instruments, not previously presented, at September 30, 2017 and December 31, 2016 were as follows:



	September 30, 2017
	Carrying Amount		Estimated Fair Value		Fair Value Measurement Using
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	405,296	$	405,296	Level 1
Interest bearing deposits in other financial institutions and other investments	53,715		53,615		Level 2/3
Loans held for sale	11,425		11,964		Level 2
Loans receivable—net	10,879,341		10,985,397		Level 3
FHLB stock	28,426		N/A		N/A
Accrued interest receivable	29,145		29,145		Level 2/3
Servicing assets	25,079		28,152		Level 3
Customers’ liabilities on acceptances	1,433		1,433		Level 2
Financial Liabilities:
Noninterest bearing deposits	$	3,049,998	$	3,049,998	Level 2
Saving and other interest bearing demand deposits	3,929,015		3,929,015		Level 2
Time deposits	4,014,307		4,008,879		Level 2
FHLB advances	1,018,046		1,013,404		Level 2
Subordinated debentures	100,590		100,590		Level 2
Accrued interest payable	13,740		13,740		Level 2
Acceptances outstanding	1,433		1,433		Level 2

	December 31, 2016
	Carrying Amount		Estimated Fair Value		Fair Value Measurement Using
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	437,334	$	437,334	Level 1
Interest bearing deposits in other financial institutions and other investments	44,202		43,773		Level 2/3
Loans held for sale	22,785		24,492		Level 2
Loans receivable—net	10,463,989		10,666,642		Level 3
FHLB stock	21,964		N/A		N/A
Accrued interest receivable	26,880		26,880		Level 2/3
Servicing assets	26,457		26,457		Level 3
Customers’ liabilities on acceptances	2,899		2,899		Level 2
Financial Liabilities:
Noninterest bearing deposits	$	2,900,241	$	2,900,241	Level 2
Saving and other interest bearing demand deposits	3,703,352		3,703,352		Level 2
Time deposits	4,038,442		4,036,664		Level 2
FHLB advances	754,290		749,486		Level 2
Subordinated debentures	99,808		99,808		Level 2
Accrued interest payable	10,863		10,863		Level 2
Acceptances outstanding	2,899		2,899		Level 2

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The methods and assumptions used to estimate fair value are described as follows:

The carrying amount is the estimated fair value for cash and cash equivalents, savings and other interest bearing demand deposits, customer’s and Bank’s liabilities on acceptances, noninterest bearing deposits, short-term debt, secured borrowings and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. Fair value of SBA loans held for sale is based on market quotes. For fair value of non-SBA loans held for sale, see the measurement method discussed previously. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates, prepayment speeds, and delinquency rate assumptions as inputs. Fair value of time deposits and debt is based on current rates for similar financing. It was not practicable to determine the fair value of FRB stock or FHLB stock due to restrictions placed on their transferability. The fair value of commitments to fund loans represents fees currently charged to enter into similar agreements with similar remaining maturities and is not presented herein. The fair value of these financial instruments is not material to the consolidated financial statements.

16. Stockholders’ Equity

On July 29, 2016 the Company acquired Wilshire in an all-stock transaction. Pursuant to the merger agreement, Wilshire shareholders received 0.7034 shares of the Company’s common stock for each share of Wilshire stock owned. Based on this exchange ratio, 55.5 million shares of the Company’s common stock were issued to Wilshire shareholders at $15.37 per share, the closing price of the Company’s stock on July 29, 2016. As a result, $852.9 million in common stock was issued as consideration in the transaction and $3.4 million in additional paid-in capital was recorded to account for the fair value of stock options assumed. Total stockholders’ equity at September 30, 2017 was $1.93 billion, compared to $1.86 billion at December 31, 2016.

The Company assumed certain warrants (related to the TARP Capital Purchase Plan) to purchase shares of the Company’s common stock. On May 20, 2015, the U.S. Treasury Department completed an auction to sell certain warrant positions, and the Company submitted the winning bid to repurchase an outstanding warrant to purchase 350,767 shares of the Company’s common stock. The Company repurchased this warrant for $1.2 million. As of September 30, 2017, the U.S. Treasury Department held one remaining warrant for the purchase of 20,238 shares of the Company’s common stock.

The Company paid a quarterly dividend of $0.13 per common share for the third quarter of 2017 compared to $0.11 per common share for the third quarter of 2016. For the nine months ended September 30, 2017 and 2016, the Company paid total dividends of $0.37 and $0.33, respectively.

The following table presents the quarterly changes to accumulated other comprehensive (loss) income for the three and nine months ended September 30, 2017 and September 30, 2016:



	Three Months Ended,
	September 30, 2017			September 30, 2016
	(Dollars in thousands)
Balance at beginning of period	$	(10,089	)	$	10,974
Unrealized loss on securities available for sale and interest only strips	(211		)	(2,848		)
Reclassification adjustments for gains realized in income	—			(948		)
Less tax effect	(89		)	(1,239		)
Total other comprehensive loss	(122		)	(2,557		)
Balance at end of period	$	(10,211	)	$	8,417



	Nine Months Ended,
	September 30, 2017			September 30, 2016
	(Dollars in thousands)
Balance at beginning of period	$	(14,657	)	$	(1,832	)
Unrealized gains on securities available for sale and interest only strips	7,697			19,347
Reclassification adjustments for gains realized in income	—			(948		)
Less tax effect	3,251			8,150
Total other comprehensive income	4,446			10,249
Balance at end of period	$	(10,211	)	$	8,417

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For the three and nine months ended September 30, 2017 there were no reclassifications out of accumulated other comprehensive loss income. For the three and nine months ended September 30, 2016, reclassifications out of accumulated other comprehensive income (loss) totaled $948 thousand, consisting of net gains on the sales and calls of securities available for sale.

17. Regulatory Matters

The Company and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material and adverse effect on the Company’s and the Bank’s business, financial condition and results of operation, such as restrictions on growth or the payment of dividends or other capital distributions or management fees. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

In July, 2013, the federal bank regulatory agencies adopted final regulations, which revised their risk-based and leverage capital requirements for banking organizations to meet requirements of Dodd-Frank and to implement Basel III international agreements reached by the Basel Committee. The final rules began for the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019. The final rules that had an impact on the Company and the Bank include:


•	An increase in the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets;


•	A new category and a required 4.50% of risk-weighted assets ratio is established for “Common Equity Tier 1” as a subset of Tier 1 capital limited to common equity;


•	A minimum non-risk-based leverage ratio is set at 4.00%, eliminating a 3.00% exception for higher rated banks;


•	Changes in the permitted composition of Tier 1 capital to exclude trust preferred securities, mortgage servicing rights and certain deferred tax assets and include unrealized gains and losses on available for sale debt and equity securities;


•	The risk-weights of certain assets for purposes of calculating the risk-based capital ratios are changed for high volatility commercial real estate acquisition, development and construction loans, certain past due non-residential mortgage loans and certain mortgage-backed and other securities exposures; and

•

A new additional capital conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios is being phased in from 2016 to 2019 and must be met to avoid limitations on the ability of the Bank to pay dividends, repurchase shares, or pay discretionary bonuses. The capital conservation buffer for the Company was initially 0.625% in 2016, and increases 0.625% annually until 2019. As of September 30, 2017, the capital conservation buffer for the Company stood at 1.25%.

As of September 30, 2017, the ratios for the Company and the Bank are sufficient to meet the fully phased-in conservation buffer.

As of September 30, 2017 and December 31, 2016, the most recent regulatory notification categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. To generally be categorized as “well-capitalized”, the Bank must maintain minimum total risk-based, Tier I risk-based, common equity Tier 1, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since the most recent notification from regulators that management believes has changed the institution’s category. As of September 30, 2017 and December 31, 2016, the Company and the Bank met the capital adequacy requirements to which they are subject.

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The Company’s and the Bank’s capital amounts and ratios are presented in the table below for the dates indicated:



	Actual				Required For Capital Adequacy Purposes				Minimum Capital Adequacy With Capital Conservation Buffer				Required To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
As of September 30, 2017
Common equity Tier 1 capital (to risk weighted assets):
Company	$	1,467,385	12.29	%	$	537,100	4.50	%	$	686,295	5.75	%	N/A		N/A
Bank	$	1,543,700	12.94	%	$	536,883	4.50	%	$	685,953	5.75	%	$	775,425	6.50	%
Total capital (to risk-weighted assets):
Company	$	1,648,543	13.81	%	$	954,845	8.00	%	$	1,104,039	9.25	%	N/A		N/A
Bank	$	1,628,169	13.65	%	$	954,369	8.00	%	$	1,103,489	9.25	%	$	1,192,961	10.00	%
Tier I capital (to risk-weighted assets):
Company	$	1,564,074	13.10	%	$	716,134	6.00	%	$	865,328	7.25	%	N/A		N/A
Bank	$	1,543,700	12.94	%	$	715,777	6.00	%	$	685,953	7.25	%	$	954,369	8.00	%
Tier I capital (to average assets):
Company	$	1,564,074	11.78	%	$	530,885	4.00	%	N/A		N/A		N/A		N/A
Bank	$	1,543,700	11.63	%	$	530,807	4.00	%	N/A		N/A		$	663,508	5.00	%



	Actual				Required For Capital Adequacy Purposes				Minimum Capital Adequacy With Capital Buffer				Required To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
As of December 31, 2016
Common equity Tier 1 capital (to risk weighted assets):
Company	$	1,400,246	12.10	%	$	520,917	4.50	%	$	593,267	5.125	%	N/A		N/A
Bank	$	1,475,228	12.75	%	$	520,631	4.50	%	$	592,941	5.125	%	$	752,022	6.50	%
Total capital (to risk-weighted assets):
Company	$	1,578,690	13.64	%	$	926,076	8.00	%	$	998,425	8.625	%	N/A		N/A
Bank	$	1,557,765	13.46	%	$	925,566	8.00	%	$	997,876	8.625	%	$	1,156,957	10.00	%
Tier I capital (to risk-weighted assets):
Company	$	1,496,153	12.92	%	$	694,557	6.00	%	$	766,906	6.625	%	N/A		N/A
Bank	$	1,475,228	12.75	%	$	694,174	6.00	%	$	766,484	6.625	%	$	925,566	8.00	%
Tier I capital (to average assets):
Company	$	1,496,153	11.49	%	$	520,947	4.00	%	N/A		N/A		N/A		N/A
Bank	$	1,475,228	11.33	%	$	520,903	4.00	%	N/A		N/A		$	651,129	5.00	%

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Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

The following discussion and analysis should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016 and the unaudited consolidated financial statements and notes set forth elsewhere in this Quarterly Report on Form 10-Q.

GENERAL

Selected Financial Data

The following tables set forth a performance overview concerning the periods indicated and should be read in conjunction with the unaudited consolidated financial statements and notes set forth elsewhere in this Quarterly Report on Form 10-Q and the following Results of Operations and Financial Condition sections in the MD&A.



	At or for the Three Months Ended September 30,						At or for the Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands, except share and per share data)
Income Statement Data:
Interest income	$	147,643		$	119,552		$	418,919		$	286,547
Interest expense	24,380			16,078			63,931			40,401
Net interest income	123,263			103,474			354,988			246,146
Provision for loan losses	5,400			6,500			13,760			8,200
Net interest income after provision for loan losses	117,863			96,974			341,228			237,946
Noninterest income	16,246			14,146			49,964			33,627
Noninterest expense	61,837			67,846			193,573			148,244
Income before income tax provision	72,272			43,274			197,619			123,329
Income tax provision	27,708			17,169			76,158			50,212
Net income	$	44,564		$	26,105		$	121,461		$	73,117
Per Share Data:
Earnings per common share - basic	$	0.33		$	0.22		$	0.90		$	0.80
Earnings per common share - diluted	$	0.33		$	0.22		$	0.90		$	0.79
Book value per common share (period end)	$	14.28		$	13.73		$	14.28		$	13.73
Cash dividends declared per common share	$	0.13		$	—		$	0.37		$	0.33
Tangible book value per common share (period end)⁽⁹⁾	$	10.72		$	10.14		$	10.72		$	10.14
Number of common shares outstanding (period end)	135,467,176			135,109,641			135,467,176			135,109,641
Weighted average shares - basic	135,382,457			116,622,920			135,296,332			91,940,070
Weighted average shares - diluted	135,630,912			116,951,074			135,661,965			92,266,245
Tangible common equity to tangible assets	10.63		%	10.52		%	10.63		%	10.52		%

Average Balance Sheet Data:
Assets	$	13,737,532		$	11,777,564		$	13,516,139		$	9,279,438
Securities available for sale	1,743,610			1,406,919			1,640,784			1,171,816
Loans receivable and loans held for sale	10,712,856			9,292,814			10,544,898			7,347,740
Deposits	10,832,247			9,328,179			10,707,638			7,385,796
Stockholders’ equity	1,924,444			1,585,100			1,895,393			1,167,747

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	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2017			2016			2017		2016
Selected Performance Ratios:
Return on average assets ⁽¹⁾	1.30		%	0.89		%	1.20	%	1.05	%
Return on average stockholders’ equity⁽¹⁾	9.26		%	6.59		%	8.54	%	8.35	%
Return on average tangible equity ^{(1) (8)}	12.36		%	8.59		%	11.46	%	10.03	%
Dividend payout ratio (dividends per share / earnings per share)	39.39		%	50.00		%	41.11	%	41.25	%
Efficiency ratio⁽²⁾	44.32		%	57.68		%	47.80	%	52.99	%
Net interest spread	3.48		%	3.51		%	3.46	%	3.49	%
Net interest margin ⁽³⁾	3.83		%	3.77		%	3.78	%	3.76	%

	At September 30,
	2017			2016
	(Dollars in thousands)
Statement of Financial Condition Data - at Period End:
Assets	$	14,150,021		$	13,510,629
Securities available for sale	1,868,309			1,558,719
Loans receivable	10,962,974			10,561,197
Deposits	10,993,320			10,702,505
FHLB advances	1,018,046			754,739
Subordinated debentures	100,590			99,548
Stockholders’ equity	1,934,431			1,854,571

Regulatory Capital Ratios ⁽⁴⁾
Leverage capital ratio⁽⁵⁾	11.78		%	13.02		%
Tier 1 risk-based capital ratio	13.10		%	12.79		%
Total risk-based capital ratio	13.81		%	13.51		%
Common equity tier 1 capital ratio ⁽¹⁰⁾	12.29		%	11.96		%

Asset Quality Ratios:
Allowance for loan losses to loans receivable	0.76		%	0.76		%
Allowance for loan losses to nonaccrual loans	193.05		%	196.98		%
Allowance for loan losses to nonperforming loans⁽⁶⁾	77.05		%	89.36		%
Allowance for loan losses to nonperforming assets ⁽⁷⁾	66.51		%	68.38		%
Nonaccrual loans to loans receivable	0.40		%	0.38		%
Nonperforming loans to loans receivable ⁽⁶⁾	0.99		%	0.85		%
Nonperforming assets to loans receivable and OREO⁽⁷⁾	1.15		%	1.10		%
Nonperforming assets to total assets ⁽⁷⁾	0.89		%	0.87		%

__________________________________


⁽¹⁾	Annualized.


⁽²⁾	Efficiency ratio is defined as noninterest expense divided by the sum of net interest income before provision for loan losses and noninterest income.


⁽³⁾	Net interest margin is calculated by dividing annualized net interest income by average total interest earning assets.


⁽⁴⁾	The ratios generally required to meet the definition of a “well-capitalized” institution under certain banking regulations are 5.0% leverage capital, 8.0% tier I risk-based capital, 10.0% total risk-based capital, and 6.5% common equity tier 1 capital.


⁽⁵⁾	Calculations are based on average quarterly asset balances.


⁽⁶⁾	Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest, and accruing restructured loans (excluding PCI loans).


⁽⁷⁾	Nonperforming assets consist of nonperforming loans and OREO.


⁽⁸⁾	Average tangible equity is calculated by subtracting average goodwill and average core deposit intangibles assets from average stockholders’ equity. This is a non-GAAP measure that we believe provides investors with information that is useful in understanding our financial performance and position.

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands)
Net income	$	44,564		$	26,105		$	121,461		$	73,117

Average stockholders’ equity	$	1,924,444		$	1,585,100		$	1,895,393		$	1,167,747
Less: Average goodwill and core deposit intangible assets, net	(482,069		)	(370,003		)	(482,108		)	(195,984		)
Average tangible equity	$	1,442,375		$	1,215,097		$	1,413,285		$	971,763

Net income (annualized) to average tangible equity	12.36		%	8.59		%	11.46		%	10.03		%



	At September 30,
	2017			2016
	(Dollars in thousands, except share data)
Total stockholders’ equity	$	1,934,431		$	1,854,571
Less: Goodwill and core deposit intangible assets, net	(481,648		)	(484,387		)
Tangible common equity	$	1,452,783		$	1,370,184

Common shares outstanding	135,467,176			135,109,641

Tangible book value per common share⁽⁹⁾	$	10.72		$	10.14

__________________________________

⁽⁹⁾Tangible book value per common share is calculated by subtracting goodwill and core deposit intangible assets from total stockholders’ equity and dividing the difference by the number of shares of common stock outstanding. This is a non-GAAP measure that we believe provides investors with information that is useful in understanding our financial performance and position.



	At September 30,
	2017			2016
	(Dollars in thousands)
Tier 1 capital	$	1,564,074		$	1,469,699
Less: Trust preferred securities less unamortized acquisition discount	(96,689		)	(95,644		)
Common equity tier 1 capital	$	1,467,385		$	1,374,055

Total risk weighted assets less disallowed allowance for loan losses	$	11,935,561		$	11,491,204

Common equity tier 1 capital ratio⁽¹⁰⁾	12.29		%	11.96		%

__________________________________

⁽¹⁰⁾The Common equity tier 1 capital ratio is calculated by dividing Tier 1 capital less non-common elements, including perpetual preferred stock and related surplus, minority interest in subsidiaries, trust preferred securities and mandatory convertible preferred securities by total risk-weighted assets less the disallowed allowance for loan losses.

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Results of Operations

The mergers of Wilshire Bancorp, Inc. (“Wilshire”) with and into BBCN Bancorp, Inc. (“BBCN”) and Wilshire Bank with and into BBCN Bank were completed on July 29, 2016, and the combined companies began operations under the new banners of Hope Bancorp, Inc. and Bank of Hope effective July 30, 2016. The third quarter 2017 financial results reflect three full months of combined operations. The third quarter 2016 financial results reflects one month of stand-alone operations of the former BBCN and two months of combined operations. As a result, our third quarter 2017 financial results are not comparable to the financial results for the third quarter of 2016.

Overview

Total assets increased $708.6 million from $13.44 billion at December 31, 2016 to $14.15 billion at September 30, 2017. The increase in total assets was primarily due to an increase in net loans receivable of $415.4 million and an increase in securities available for sale of $311.6 million during the nine months ended September 30, 2017.

Net income for the third quarter of 2017 was $44.6 million, or $0.33 per diluted common share, compared to $26.1 million, or $0.22 per diluted common share, for the same period of 2016, which was an increase of $18.5 million, or 70.7%. The increase in net income was largely due to the addition of income from assets acquired in the merger with Wilshire during the third quarter of 2016 and an increase in interest income from the increase in loans receivable. Net interest income before provision for loan losses increased $19.8 million for the third quarter of 2017 to $123.3 million, compared to $103.5 million for the third quarter of 2016.

Net income for the nine months ended September 30, 2017 was $121.5 million, or $0.90 per diluted common share, compared to $73.1 million, or $0.79 per diluted common share, for the same period of 2016, which represents an increase of $48.4 million, or 66.1%. The increase in net income was largely due to the addition of income from the interest earning assets acquired in the merger with Wilshire.

The following table summarizes the accretion and amortization adjustments resulting from prior acquisitions that are included in net income for the three and nine months ended September 30, 2017 and 2016:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands)
Accretion of discounts on acquired performing loans	$	4,566		$	3,111		$	10,743		$	5,975
Accretion of discounts on purchased credit impaired loans	5,815			4,723			16,375			10,266
Amortization/accretion of premiums or discounts on low income housing tax credit investments	(84		)	(54		)	(253		)	(54		)
Amortization of premiums on assumed FHLB advances	357			1,940			1,244			2,134
Accretion of discounts on assumed subordinated debt	(262		)	(190		)	(782		)	(278		)
Amortization of premiums on assumed time deposits and savings	206			2,336			4,900			2,379
Amortization of core deposit intangibles	(676		)	(565		)	(2,028		)	(990		)
Total	$	9,922		$	11,301		$	30,199		$	19,432

The annualized return on average assets was 1.30% for the third quarter of 2017 compared to 0.89% for the same period of 2016. The annualized return on average stockholders’ equity was 9.26% for the third quarter of 2017 compared to 6.59% for the same period of 2016. The efficiency ratio was 44.32% for the third quarter of 2017 compared to 57.68% for the same period of 2016.

The annualized return on average assets was 1.20% for the nine months ended September 30, 2017 compared to 1.05% for the same period of 2016. The annualized return on average stockholders' equity was 8.54% for the nine months ended September 30, 2017 compared to 8.35% for the same period of 2016. The efficiency ratio was 47.80% for the nine months ended September 30, 2017 compared to 52.99% for the same period of 2016.

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Net Interest Income and Net Interest Margin

Net Interest Income

A principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and borrowed funds. Net interest income expressed as a percentage of average interest earning assets is referred to as the net interest margin. The net interest spread is the yield on average interest earning assets less the cost of average interest bearing liabilities. Net interest income is affected by changes in the balances of interest earning assets and interest bearing liabilities and changes in the yields earned on interest earning assets and the rates paid on interest bearing liabilities.

Comparison of Three Months Ended September 30, 2017 with the Three Months Ended September 30, 2016

Net interest income before provision for loan losses was $123.3 million for the third quarter of 2017 compared to $103.5 million for the same period of 2016, an increase of $19.8 million, or 19.1%. The increase in net interest income was due largely to an increase in interest earning assets that were acquired from Wilshire in the merger, which occurred during the third quarter of 2016, in addition to an increase in interest income from the growth in loans receivable and securities available for sale. The increase in interest rates in 2017 also contributed to the increase in net interest income.

Interest income for the third quarter of 2017 was $147.6 million, an increase of $28.1 million, or 23.5%, compared to $119.6 million for the same period of 2016. The increase in interest income was primarily attributable to the increase in loans and investments resulting from the merger with Wilshire and to a lesser extent the growth in loans receivable and securities available for sale. The increase in interest rates in 2017 also contributed to the increase in interest income.

Interest expense for the third quarter of 2017 was $24.4 million, an increase of $8.3 million, or 51.6% compared to $16.1 million for the same period of 2016. The increase in interest expense was primarily due to the acquisition of deposits and borrowings from the merger with Wilshire and to a lesser extent due to the rise in interest rates in 2017.

Comparison of Nine Months Ended September 30, 2017 with the Nine Months Ended September 30, 2016

Net interest income before provision for loan losses was $355.0 million for the nine months ended September 30, 2017, compared to $246.1 million for the same period of 2016, an increase of $108.9 million, or 44.2%. The increase in net interest income was due largely to an increase in interest earning assets that were acquired from Wilshire in the merger which occurred during the third quarter of 2016, in addition to an increase in interest income from the growth in loans receivable and securities available for sale.The increase in interest rates in 2017 also contributed to the increase in net interest income.

Interest income for the nine months ended September 30, 2017 was $418.9 million, an increase of $132.4 million, or 46.2%, compared to $286.5 million for the same period of 2016. The increase in interest income was primarily attributable to the increase in loans and investments resulting from the merger with Wilshire and to a lesser extent the growth in loan receivable and securities available for sale.The increase in interest rates in 2017 also contributed to the increase in interest income.

Interest expense for the nine months ended September 30, 2017 was $63.9 million, an increase of $23.5 million, or 58.2% compared to $40.4 million for the same period of 2016. The increase in interest expense was primarily due to the acquisition of deposits and borrowings from the merger with Wilshire and to a lesser extent due to the rise in interest rates in 2017.

Net Interest Margin

Our net interest margin is impacted by the weighted average rates we earn on interest earning assets and pay on interest bearing liabilities and the effect of acquisition accounting adjustments. The net interest margin for the third quarter of 2017 was 3.83%, an increase of 6 basis points from 3.77% for the same period of 2016. Net interest margin for the nine months ended September 30, 2017 was 3.78%, an increase of 2 basis point from 3.76% for the same period of 2016.

The weighted average yield on loans increased to 5.07% for the third quarter of 2017 from 4.80% for the third quarter of 2016. The weighted average yield on loans was 4.93% for the nine months ended September 30, 2017 compared to 4.84% for the nine months ended September 30, 2016. The change in loan yields for periods in 2017 compared to periods in 2016 was due to a combination of the impact of acquired loan discount accretion in connection with the merger with Wilshire and, the rise in interest rates in 2017, and an increase in large loan payoffs during the third quarter of 2017. The loan payoffs during the third quarter of 2017 included the payoff of a large non-accrual loan which resulted in an increase in interest income previously not accrued and payoffs of loans acquired from Wilshire which resulted in an increase in discount accretion income.

Table of Contents

The weighted average yield on securities available for sale for the third quarter of 2017 was 2.17% compared to 1.89% for the same period of 2016. The weighted average yield on securities available for sale for the nine months ended September 30, 2017 was 2.15% compared to 2.06% for the nine months ended September 30, 2016. The increase in weighted average yield on securities available for sale for the three and nine months ended September 30, 2017 compared to the same periods of 2016 was due to the purchase of $504.8 million in investment securities with higher yields during the nine months ended September 30, 2017. The investment securities purchased in 2017 had slightly longer durations then the existing portfolio and were purchased after the interest rates increases which resulted in higher yields compared to the portfolio at September 30, 2016.

The weighted average cost of deposits for the third quarter of 2017 was 0.75%, an increase of 19 basis points from 0.56% for the same period of 2016. The weighted average cost of deposits for the nine months ended September 30, 2017 was 0.66% compared to 0.60% for the nine months ended September 30, 2016. The premiums recorded for time and savings deposits acquired from Wilshire were fully amortized at the end of April 2017. The reduction in Wilshire premium amortizations in addition to the increase in interest rates in 2017, resulted in an increase in the weighted average cost of deposits for the third quarter of 2017 compared to the same period of 2016. The reduction in premium amortizations did not have as great an impact on the weighted average cost of deposits for the nine months ended September 30, 2017, which experienced an increase of only 6 basis points compared to the weighted average cost of deposits for the nine months ended September 30, 2016.

The weighted average cost of FHLB advances for the third quarter of 2017 was 1.40%, an increase of 17 basis points from 1.23% for the same period of 2016. The weighted average cost of FHLB advances for the nine months ended September 30, 2017 was 1.34%, an increase of 14 basis points from 1.20% for the nine months ended September 30, 2016. The increase in cost of FHLB advances was due to the increase in FHLB advance rates stemming from the increase in overall interest rates as a portion of our advances with the FHLB are overnight borrowings with rates that reset on a daily basis.

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The following table presents our consolidated average balance sheet information, together with interest rates earned and paid on the various sources and uses of funds for the periods indicated:



	Three Months Ended September 30, 2017						Three Months Ended September 30, 2016
	Average Balance		Interest Income/ Expense		Average Yield/ Rate*		Average Balance		Interest Income/ Expense		Average Yield/ Rate*
	(Dollars in thousands)
INTEREST EARNINGS ASSETS:
Loans^(1) (2)	$	10,712,856	$	136,822	5.07	%	$	9,292,814	$	112,132	4.80	%
Securities available for sale⁽³⁾	1,743,610		9,540		2.17	%	1,406,919		6,645		1.89	%
FRB and FHLB stock and other investments	299,305		1,281		1.70	%	237,981		775		1.30	%
Total interest earning assets	12,755,771		147,643		4.59	%	10,937,714		119,552		4.35	%
Total noninterest earning assets	981,761						839,850
Total assets	$	13,737,532					$	11,777,564

INTEREST BEARING LIABILITIES:
Deposits:
Demand, interest bearing	$	3,526,846	$	8,127	0.91	%	$	2,924,340	$	5,932	0.81	%
Savings	258,383		348		0.53	%	268,424		311		0.46	%
Time deposits	4,053,577		11,901		1.16	%	3,600,400		6,774		0.75	%
Total interest bearing deposits	7,838,806		20,376		1.03	%	6,793,164		13,017		0.76	%
FHLB advances	764,691		2,698		1.40	%	698,081		2,161		1.23	%
Other borrowings	96,524		1,306		5.29	%	78,828		900		4.47	%
Total interest bearing liabilities	8,700,021		24,380		1.11	%	7,570,073		16,078		0.84	%
Noninterest bearing liabilities and equity:
Noninterest bearing demand deposits	2,993,441						2,535,015
Other liabilities	119,626						87,376
Stockholders’ equity	1,924,444						1,585,100
Total liabilities and stockholders’ equity	$	13,737,532					$	11,777,564

Net interest income/net interest spread			$	123,263	3.48	%			$	103,474	3.51	%
Net interest margin					3.83	%					3.77	%
Cost of deposits					0.75	%					0.56	%

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*	Annualized


⁽¹⁾	Interest income on loans includes loan fees.


⁽²⁾	Average balances of loans consist of loans receivable and loans held for sale.


⁽³⁾	Interest income and yields are not presented on a tax-equivalent basis.

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	Nine Months Ended September 30, 2017						Nine Months Ended September 30, 2016
	Average Balance		Interest Income/ Expense		Average Yield/ Rate *		Average Balance		Interest Income/ Expense		Average Yield/ Rate *
	(Dollars in thousands)
INTEREST EARNINGS ASSETS:
Loans^(1) (2)	$	10,544,898	$	388,631	4.93	%	$	7,347,740	$	266,336	4.84	%
Securities available for sale⁽³⁾	1,640,784		26,394		2.15	%	1,171,816		18,051		2.06	%
FRB and FHLB stock and other investments	362,265		3,894		1.44	%	230,993		2,160		1.25	%
Total interest earning assets	12,547,947		418,919		4.46	%	8,750,549		286,547		4.37	%
Total noninterest earning assets	968,192						528,889
Total assets	$	13,516,139					$	9,279,438

INTEREST BEARING LIABILITIES:
Deposits:
Demand, interest bearing	$	3,474,077	$	23,291	0.90	%	$	2,310,000	$	14,083	0.81	%
Savings	277,264		914		0.44	%	211,255		962		0.61	%
Time deposits	4,025,360		28,796		0.96	%	2,916,868		18,231		0.83	%
Total interest bearing deposits	7,776,701		53,001		0.91	%	5,438,123		33,276		0.82	%
FHLB advances	714,048		7,176		1.34	%	598,672		5,370		1.20	%
Other borrowings	96,220		3,754		5.14	%	53,593		1,755		4.30	%
Total interest bearing liabilities	8,586,969		63,931		1.00	%	6,090,388		40,401		0.89	%
Noninterest bearing liabilities and equity:
Noninterest bearing demand deposits	2,930,937						1,947,673
Other liabilities	102,840						73,630
Stockholders’ equity	1,895,393						1,167,747
Total liabilities and stockholders’ equity	$	13,516,139					$	9,279,438

Net interest income/net interest spread			$	354,988	3.46	%			$	246,146	3.49	%
Net interest margin					3.78	%					3.76	%
Cost of deposits					0.66	%					0.60	%

__________________________________


*	Annualized


⁽¹⁾	Interest income on loans includes loan fees.


⁽²⁾	Average balances of loans consist of loans receivable and loans held for sale.


⁽³⁾	Interest income and yields are not presented on a tax-equivalent basis.

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Changes in net interest income are a function of changes in interest rates and volumes of interest earning assets and interest bearing liabilities. The following table sets forth information regarding the changes in interest income and interest expense for the periods indicated. The total change for each category of interest earning assets and interest bearing liabilities is segmented into the change attributable to variations in volume (changes in volume multiplied by the old rate) and the change attributable to variations in interest rates (changes in rates multiplied by the old volume). Nonaccrual loans are included in average loans used to compute this table.



	Three Months Ended September 30, 2017 over September 30, 2016
	Net Increase
			Change due to
			Rate		Volume
	(Dollars in thousands)
INTEREST INCOME:
Loans, including fees	$	24,690	$	6,583	$	18,107
Securities available for sale	2,895		1,112		1,783
FRB and FHLB stock and other investments	506		277		229
Total interest income	$	28,091	$	7,972	$	20,119
INTEREST EXPENSE:
Demand, interest bearing	$	2,195	$	861	$	1,334
Savings	37		49		(12		)
Time deposits	5,127		4,181		946
FHLB advances	537		316		221
Other borrowings	406		183		223
Total interest expense	$	8,302	$	5,590	$	2,712
NET INTEREST INCOME	$	19,789	$	2,382	$	17,407



	Nine Months Ended September 30, 2017 over September 30, 2016
	Net Increase (Decrease)
				Change due to
				Rate			Volume
	(Dollars in thousands)
INTEREST INCOME:
Loans, including fees	$	122,295		$	4,780		$	117,515
Securities available for sale	8,343			847			7,496
FRB and FHLB stock and other investments	1,734			363			1,371
Total interest income	$	132,372		$	5,990		$	126,382
INTEREST EXPENSE:
Demand, interest bearing	$	9,208		$	1,533		$	7,675
Savings	(48		)	(304		)	256
Time deposits	10,565			2,927			7,638
FHLB advances	1,806			698			1,108
Other borrowings	1,999			395			1,604
Total interest expense	$	23,530		$	5,249		$	18,281
NET INTEREST INCOME	$	108,842		$	741		$	108,101

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Provision for Loan Losses

The provision for loan losses reflects management’s judgment of the current period cost associated with credit risk inherent in our loan portfolio. The loan loss provision for each period is dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, assessments by management and third parties, regulators’ examination of the loan portfolio, the value of the underlying collateral for problem loans and the general economic conditions in our market areas. Specifically, the provision for loan losses represents the amount charged against current period earnings to achieve an allowance for loan losses that, in management’s judgment, is adequate to absorb probable incurred losses inherent in our loan portfolio. Periodic fluctuations in the provision for loan losses result from management’s assessment of the adequacy of the allowance for loan losses; however, actual loan losses may vary in material and adverse respects from current estimates. If the allowance for loan losses is inadequate, it may have a material adverse effect on our financial condition and results of operations.

The provision for loan losses for the third quarter of 2017 was $5.4 million, an decrease of $1.1 million from $6.5 million for the same period last year. The provision for loan losses for the nine months ended September 30, 2017 was $13.8 million, an increase of $5.6 million from $8.2 million for the nine months ended September 30, 2016. The decrease in provision for loan losses for the third quarter of 2017 compared to the same period in 2016 was due to a decline in net charge offs and a reduction in specific reserves on impaired loans while the increase in provision for loan losses for the nine months ended September 30, 2017 compared to the same period in 2016 was due to an increase in net charge offs and an increase in qualitative factors in the allowance for loan losses. The increase in net charge offs for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, was due primarily to one large customer relationship that had loans that were charged off during the first quarter of 2017.

See Financial Condition section of this MD&A for additional information and further discussion.

Noninterest Income

Noninterest income is primarily comprised of service fees on deposit accounts, fees received on trade finance letters of credit, loan servicing fees, wire transfer fees, net gains on sales of loans, net gains on sales or calls of securities and other income. Noninterest income for the third quarter of 2017 was $16.2 million compared to $14.1 million for the same quarter of 2016, an increase of $2.1 million, or 14.8%. Noninterest income for the nine months ended September 30, 2017 was $50.0 million compared to $33.6 million for the nine months ended September 30, 2016, an increase of $16.3 million, or 48.6%.

Table of Contents

Noninterest income by category is summarized in the table below:




	Three Months Ended September 30,				Increase (Decrease)
	2017		2016		Amount			Percent (%)
	(Dollars in thousands)
Service fees on deposit accounts	$	5,151	$	4,778	$	373		7.8	%
International service fees	1,107		1,010		97			9.6	%
Loan servicing fees, net	1,373		955		418			43.8	%
Wire transfer fees	1,287		1,158		129			11.1	%
Net gains on sales of SBA loans	3,631		230		3,401			1,478.7	%
Net gains on sales of other loans	847		1,476		(629		)	(42.6	)%
Net gains on sales of securities available for sale	—		948		(948		)	(100.0	)%
Other income and fees	2,850		3,591		(741		)	(20.6	)%
Total noninterest income	$	16,246	$	14,146	$	2,100		14.8	%

	Nine Months Ended September 30,				Increase (Decrease)
	2017		2016		Amount			Percent (%)
	(Dollars in thousands)
Service fees on deposit accounts	$	15,668	$	10,363	$	5,305		51.2	%
International service fees	3,334		2,601		733			28.2	%
Loan servicing fees, net	4,102		2,234		1,868			83.6	%
Wire transfer fees	3,816		2,966		850			28.7	%
Net gains on sales of SBA loans	10,148		5,090		5,058			99.4	%
Net gains on sales of other loans	1,619		1,519		100			6.6	%
Net gains on sales of securities available for sale	—		948		(948		)	(100.0	)%
Other income and fees	11,277		7,906		3,371			42.6	%
Total noninterest income	$	49,964	$	33,627	$	16,337		48.6	%

The increase in noninterest income for the third quarter of 2017 compared to the third quarter of 2016 was largely due to an increase in net gains on sale of SBA loans, offset by a decrease in net gains on sale of other loans and net gains on sales of securities available for sale. Subsequent to the merger with Wilshire in July 2016, we chose not to sell a significant portion of SBA loans held for sale during the third quarter of 2016 and instead chose to focus on integration efforts. We did not sell any investment securities during the third quarter of 2017, which resulted in a reduction in net gains on sales of securities compared to the third quarter of 2016.

The increase in noninterest income for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was largely due to an increase in service fees on deposit accounts, an increase in loan servicing fees, an increase in net gains on sale of SBA loans, and an increase in other income and fees. The increase in service fees on deposit accounts and the increase in loan servicing fees was primarily due to the increase in deposits accounts and the increase in loans previously sold with servicing, respectively, that were acquired from the merger with Wilshire. Gain on sale of SBA and other loans increased due to an increase in total SBA loans sold in during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we sold $140.9 million in SBA loans compared to $65.7 million sold during the nine months ended September 30, 2016. The increase in other income and fees was largely due to recoveries recorded on previously charged off loans that were acquired from Wilshire and other previous transactions.

Noninterest Expense

Noninterest expense for the third quarter of 2017 was $61.8 million, a decrease of $6.0 million, or 8.9%, from $67.8 million for the same period of 2016. Noninterest expense for the nine months ended September 30, 2017 was $193.6 million, an increase of $45.4 million, or 30.6%, from $148.2 million for the nine months ended September 30, 2016.

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The breakdown of changes in noninterest expense by category is shown in the following table:



	Three Months Ended September 30,						Increase (Decrease)
	2017			2016			Amount			Percent (%)
	(Dollars in thousands)
Salaries and employee benefits	$	35,987		$	30,456		$	5,531		18.2	%
Occupancy	7,131			6,889			242			3.5	%
Furniture and equipment	3,642			3,297			345			10.5	%
Advertising and marketing	2,217			2,306			(89		)	(3.9	)%
Data processing and communications	3,221			3,199			22			0.7	%
Professional fees	3,239			1,898			1,341			70.7	%
Investments in affordable housing partnership expenses	2,803			1,457			1,346			92.4	%
FDIC assessments	1,262			1,564			(302		)	(19.3	)%
Credit related expenses	(2,487		)	810			(3,297		)	N/A
OREO expense, net	678			(423		)	1,101			N/A
Merger and integration expenses	260			11,222			(10,962		)	(97.7	)%
Other	3,884			5,171			(1,287		)	(24.9	)%
Total noninterest expense	$	61,837		$	67,846		$	(6,009	)	(8.9	)%

	Nine Months Ended September 30,						Increase (Decrease)
	2017			2016			Amount			Percent (%)
	(Dollars in thousands)
Salaries and employee benefits	$	105,099		$	73,782		$	31,317		42.4	%
Occupancy	21,479			16,626			4,853			29.2	%
Furniture and equipment	10,611			7,921			2,690			34.0	%
Advertising and marketing	8,035			4,845			3,190			65.8	%
Data processing and communications	9,503			7,499			2,004			26.7	%
Professional fees	10,401			4,255			6,146			144.4	%
Investments in affordable housing partnership expenses	8,019			2,133			5,886			275.9	%
FDIC assessments	3,276			3,697			(421		)	(11.4	)%
Credit related expenses	(491		)	2,142			(2,633		)	N/A
OREO expense, net	2,863			1,138			1,725			151.6	%
Merger and integration expenses	1,769			13,962			(12,193		)	(87.3	)%
Other	13,009			10,244			2,765			27.0	%
Total noninterest expense	$	193,573		$	148,244		$	45,329		30.6	%

The decrease in noninterest expense for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 was due to a decline in merger and integration expenses, credit related expenses, and other noninterest expense items offset by an increase in salaries and employee benefits, professional fees, investment in affordable housing partnership expenses, and OREO expenses, net. The increase in noninterest expense for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was due to an increase in all expenses categories apart from FDIC assessments, credit related expenses, and merger and integration expenses. The increase in noninterest expenses for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was due to the merger with Wilshire, which resulted in additional expenditures in most expense categories aside from credit related expenses and FDIC assessment. Most of the merger and integration expense associated with the merger with Wilshire were recorded in 2016.

Salaries and employee benefits expense increased $5.5 million for the third quarter of 2017 compared to the same period in 2016, and increased $31.3 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increase in salaries and employee benefits expense for three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016 was due to an increase in the number of full-time equivalent employees primarily as a result of the merger with Wilshire, but also due to additional staff hired during the third quarter of 2017. The number of full-time equivalent employees increased from 1,400 at September 30, 2016 to 1,463 at September 30, 2017. Salaries and employee benefits for former Wilshire employees were recorded for only two months for the three and nine months ended September 30, 2016 as the merger closed on July 29, 2016.

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The increase in occupancy expense and furniture and equipment expense for the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016 was due to additional branches acquired in the merger with Wilshire. During the nine months ended September 30, 2017, we consolidated nine branches as part of its second phase consolidation plan. Occupancy expenses for the three and nine months ended September 30, 2017 included a portion of the savings from the branch consolidations. At September 30, 2017, total future lease commitments totaled $53.0 million with the last of the commitments ending in 2030.

Advertising and marketing expense experienced a small decrease for the third quarter of 2017 compared to the third quarter of 2016 due to a decline in advertising expenditures in 2017. We increased advertising and marketing to promote our name change and new brand subsequent to the merger with Wilshire. With the brand now somewhat established, we reduced its overall advertising expense during the third quarter of 2017. The increase in advertising and marketing expense for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, was due to additional expenses that resulted from the merger with Wilshire. Advertising and marketing expense for the nine months ended September 30, 2017 included $1.5 million in sponsorship fees paid to sponsor the Ladies Professional Golf Association (“LPGA”) Bank of Hope Founders Cup event in March 2017.

The increase in professional fees for the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016 was due to an increase in external auditor fees and legal fees as well as additional consulting costs associated with our new compliance requirements as a result of exceeding $10 billion in total assets. The increase in legal fees for periods in 2017 compared to periods in 2016 was due mostly to fees related to the merger with U & I Financial Corp. which was terminated in September 2017.

Investments in affordable housing partnership expenses are recorded based on the financial statements of the investment projects. We make investments in affordable housing partnerships and receives Community Reinvestment Act credit and tax credits which reduces our overall tax provision rate. Investments in affordable housing partnership expenses are based on the performance of the underlying investment. We receive updated financial information for our affordable housing partnerships investments and records losses based on the performance of the investment. These losses will eventually be offset by tax credits which reduce our tax provision expense. Investments in affordable housing partnerships increased from $69.0 million at September 30, 2016, to $88.5 million at September 30, 2017, due to additional investments funded in 2017.

Credit related expenses declined for periods in 2017 compared to periods in 2016 largely due to a $2.8 million credit provision for off balance sheet unfunded commitments recorded during the third quarter of 2017. Updated information related to off balance sheet unfunded commitments and utilization rates used in the calculation of the allowance for unfunded commitments resulted in a $2.8 million reduction in the required allowance for the third quarter of 2017. Credit for off balance sheet unfunded commitments for the nine months ended September 30, 2017 totaled $2.4 million.

OREO expenses, net experienced increases for periods in 2017 compared to periods in 2016 mostly due to additional expenses and valuations on OREO acquired from Wilshire in the merger.

Merger and integration expenses for the third quarter of 2017 consisted of $288 thousand in expenses related to the merger with Wilshire, a reversal of $52 thousand in expenses related to the now terminated U & I transaction, and $24 thousand in expenses related to other former acquisitions. Merger and integration expenses for the nine months ended September 30, 2017 consisted of $1.2 million in expenses related to the merger with Wilshire, $471 thousand in expenses related to the terminated U & I transaction, and $72 thousand in expenses related to other former acquisitions.

Other noninterest expense saw a decline for the third quarter of 2017 compared to the third quarter of 2016 due mostly to a decrease in our directors stock compensation expenses and a decrease in operating losses. Other noninterest expense for the nine months ended September 30, 2017 experienced an increase compared to the nine months ended September 30, 2016 due to additional expenses from the merger with Wilshire.

Provision for Income Taxes

Income tax provision expense was $27.7 million and $17.2 million for the quarters ended September 30, 2017 and 2016, respectively. The effective income tax rates were 38.34% and 39.68% for the quarters ended September 30, 2017 and 2016, respectively. Income tax provision expense was $76.2 million and $50.2 million for the nine months ended September 30, 2017 and 2016, respectively. The effective income tax rates for the nine months ended September 30, 2017 and 2016 were 38.54% and 40.71%, respectively. The decrease in tax rate was due to the increase in affordable housing partnership tax credits for the three and nine months ended September 30, 2017 compared to the same periods of the prior year.

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Financial Condition

At September 30, 2017, our total assets were $14.15 billion, an increase of $708.6 million, or 5.3% from $13.44 billion at December 31, 2016. The increase in assets was due to an increase in loans receivable and investment securities available for sale.

Investment Securities Portfolio

As of September 30, 2017 we had $1.87 billion in available for sale securities compared to $1.56 billion at December 31, 2016. The net unrealized loss on the available for sale securities at September 30, 2017 was $17.8 million compared to a net unrealized loss on securities of $25.6 million at December 31, 2016.

During the nine months ended September 30, 2017, $504.8 million in securities were purchased, $179.3 million in collateralized mortgage obligations or mortgage-backed securities were paid down, and there were $14.0 million in maturities. During the same period last year, $478.9 million in investment securities were acquired in the merger with Wilshire, $428.9 million in securities were purchased, $108.3 million in collateralized mortgage obligations or mortgage-backed securities were paid down, and $22.5 million in securities were sold.

Investments in Affordable Housing Partnerships

At September 30, 2017, we had $88.5 million in investments in affordable housing partnerships compared to $70.1 million at December 31, 2016. The increase in investments in affordable housing partnerships was due to additional commitments entered into during the nine months ended September 30, 2017 totaling $26.5 million less losses on investments in affordable housing partnerships and premium accretion recorded. Commitments to fund investments in affordable housing partnerships totaled $42.4 million at September 30, 2017 compared to $24.4 million at December 31, 2016.

Loan Portfolio

As of September 30, 2017, loans outstanding totaled $10.96 billion, an increase of $419.8 million from $10.54 billion at December 31, 2016. The following table summarizes our loan portfolio by amount and percentage of total loans outstanding in each major loan category at the dates indicated:



	September 30, 2017					December 31, 2016
	Amount			Percent (%)		Amount			Percent (%)
Loan portfolio composition				(Dollars in thousands)
Real estate loans:
Residential	$	55,072		0	%	$	57,884		1	%
Commercial	8,085,307			74	%	7,842,573			75	%
Construction	297,686			3	%	254,113			2	%
Total real estate loans	8,438,065			77	%	8,154,570			78	%
Commercial business	1,824,442			17	%	1,832,021			17	%
Trade finance	180,847			1	%	154,928			1	%
Consumer and other	521,459			5	%	403,470			4	%
Total loans outstanding	10,964,813			100	%	10,544,989			100	%
Deferred loan fees, net	(1,839		)			(1,657		)
Loans receivable	10,962,974					10,543,332
Allowance for loan losses	(83,633		)			(79,343		)
Loans receivable, net of allowance for loan losses	$	10,879,341				$	10,463,989

All of our loan types experienced an increase from December 31, 2016 to September 30, 2017 due to increased loan originations during the nine months ended September 30, 2017 aside from residential real estate and commercial business loans which experienced only small declines.

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We normally do not extend lines of credit or make loan commitments to business customers for periods in excess of one year. We use the same credit policies in making commitments and conditional obligations as we do for providing loan facilities to our customers. We perform annual reviews of such commitments prior to renewal.

The following table shows our loan commitments and letters of credit outstanding at the dates indicated:



	September 30, 2017		December 31, 2016
	(Dollars in thousands)
Commitments to extend credit	$	1,571,460	$	1,592,221
Standby letters of credit	68,358		63,753
Other commercial letters of credit	60,036		52,125
	$	1,699,854	$	1,708,099

Nonperforming Assets

Nonperforming assets, which consist of nonaccrual loans, loans 90 days or more past due and on accrual status, accruing restructured loans, and OREO totaled $125.7 million at September 30, 2017 compared to $111.2 million at December 31, 2016. The ratio of nonperforming assets to loans receivable and OREO was 1.15% and 1.05% at September 30, 2017 and December 31, 2016, respectively.

The following table summarizes the composition of our nonperforming assets as of the dates indicated.



	September 30, 2017			December 31, 2016
	(Dollars in thousands)
Nonaccrual loans ⁽¹⁾	$	43,323		$	40,074
Loans 90 days or more days past due, still accruing	407			305
Accruing restructured loans	64,807			48,874
Total nonperforming loans	108,537			89,253
OREO	17,208			21,990
Total nonperforming assets	$	125,745		$	111,243

Nonaccrual loans:
Legacy Portfolio	$	37,078		$	28,944
Acquired Portfolio	6,245			11,130
Total nonaccrual loans	$	43,323		$	40,074

Nonperforming loans:
Legacy Portfolio	$	89,358		$	74,890
Acquired Portfolio	19,179			14,363
Total nonperforming loans	$	108,537		$	89,253

Nonperforming loans to loans receivable	0.99		%	0.85		%
Nonperforming assets to loans receivable and OREO	1.15		%	1.05		%
Nonperforming assets to total assets	0.89		%	0.83		%
Allowance for loan losses to nonperforming loans	77.05		%	88.90		%
Allowance for loan losses to nonperforming assets	66.51		%	71.32		%

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⁽¹⁾	Nonaccrual loans exclude the guaranteed portion of delinquent SBA loans that are in liquidation totaling $21.5 million and $15.9 million as of September 30, 2017 and December 31, 2016, respectively.

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Allowance for Loan Losses

The allowance for loan and lease losses (“ALLL”) was $83.6 million at September 30, 2017 compared to $79.3 million at December 31, 2016. The ALLL was 0.76% of loans receivable at September 30, 2017, and 0.75% at December 31, 2016. Total ALLL to loans receivable ratio does not include discount on acquired loans. The ALLL impaired loan reserves decreased to $6.8 million at September 30, 2017 from $7.4 million at December 31, 2016.

The following table reflects our allocation of the ALLL by loan type and the ratio of each loan segment to total loans as of the dates indicated:



	Allocation of Allowance for Loan Losses
	September 30, 2017						December 31, 2016
	Allowance for Loan Losses		Loans Receivable*		Percent of Allowance to Loans Receivable		Allowance for Loan Losses		Loans Receivable*		Percent of Allowance to Loans Receivable
	(Dollars in thousands)
Loan Type
Real estate - residential	$	161	$	55,072	0.29	%	$	209	$	57,884	0.36	%
Real estate - commercial	54,280		8,085,307		0.67	%	49,917		7,842,573		0.64	%
Real estate - construction	1,486		297,686		0.50	%	1,621		254,113		0.64	%
Commercial business	23,384		1,824,442		1.28	%	23,547		1,832,021		1.29	%
Trade finance	1,582		180,847		0.87	%	1,897		154,928		1.22	%
Consumer and other	2,740		521,459		0.53	%	2,152		403,470		0.53	%
Total	$	83,633	$	10,964,813	0.76	%	$	79,343	$	10,544,989	0.75	%

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^*	Held-for-sale loans of $11.4 million and $22.8 million at September 30, 2017 and December 31, 2016, respectively, were excluded.

For a better understanding of the changes in the ALLL, the loan portfolio has been segmented for disclosure purposes between loans which are accounted for under the amortized cost method (Legacy Loans) and loans acquired from acquisitions (Acquired Loans). Acquired Loans have been further segregated between Purchase Credit Impaired Loans (loans with credit deterioration at the time they were acquired and accounted for under ASC 310-30, or “PCI loans”) and performing loans (loans that were pass graded at the time they were acquired, or “non-PCI loans”).

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The activity in the ALLL for the three and nine months ended September 30, 2017 is as follows:



				Acquired Loans⁽²⁾
Three Months Ended September 30, 2017	Legacy Loans ⁽¹⁾			PCI Loans			Non-PCI Loans			Total
	(Dollars in thousands)
Balance, beginning of period	$	65,255		$	12,066		$	2,753		$	80,074
Provision (credit) for loan losses	6,245			(1,455		)	610			5,400
Loans charged off	(4,263		)	—			(650		)	(4,913		)
Recoveries of loan charge offs	3,045			—			27			3,072
Balance, end of period	$	70,282		$	10,611		$	2,740		$	83,633

Total loans outstanding	$	7,996,781		$	209,531		$	2,758,501		$	10,964,813
Allowance to total loans receivable ratio	0.88		%	5.06		%	0.10		%	0.76		%
Net loan charge offs to beginning allowance	1.87		%	—		%	22.63		%	2.30		%
Net loan charge offs to provision for loan losses	19.50		%	—		%	102.13		%	34.09		%


				Acquired Loans ⁽²⁾
Nine Months Ended September 30, 2017	Legacy Loans ⁽¹⁾			PCI Loans			Non-PCI Loans			Total
	(Dollars in thousands)
Balance, beginning of period	$	66,399		$	12,130		$	814		$	79,343
Provision (credit) for loan losses	12,499			(1,519		)	2,780			13,760
Loans charged off	(12,548		)	—			(1,092		)	(13,640		)
Recoveries of loan charge offs	3,932			—			238			4,170
Balance, end of period	$	70,282		$	10,611		$	2,740		$	83,633

Total loans outstanding	$	7,996,781		$	209,531		$	2,758,501		$	10,964,813
Allowance to total loans receivable ratio	0.88		%	5.06		%	0.10		%	0.76		%
Net loan charge offs to beginning allowance	12.98		%	—		%	104.91		%	11.94		%
Net loan charge offs to provision for loan losses	68.93		%	—		%	30.72		%	68.82		%

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⁽¹⁾	Legacy Loans includes Acquired Loans that have been renewed or refinanced subsequent to the acquisition date.


⁽²⁾	Acquired loans were marked to fair value at the acquisition date and provisions for loan losses reflect credit deterioration subsequent to the acquisition date.

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The following table shows the provisions made for loan losses, the amount of loans charged off and the recoveries on loans previously charged off, together with the balance of the ALLL at the beginning and end of each period, the amount of average and loans receivable outstanding, and certain other ratios as of the dates and for the periods indicated:



	At or for the Three Months Ended September 30,						At or for the Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands)
LOANS:
Average loans, including loans held for sale	$	10,712,856		$	9,292,814		$	10,544,898		$	7,347,740
Loans receivable	$	10,962,974		$	10,561,197		$	10,962,974		$	10,561,197

ALLOWANCE:
Balance, beginning of period	$	80,074		$	76,425		$	79,343		$	76,408
Less loan charge offs:
Real estate - commercial	(337		)	(567		)	(2,700		)	(909		)
Commercial business	(4,341		)	(3,229		)	(8,081		)	(5,888		)
Trade finance	—			—			(2,104		)	—
Consumer and other	(235		)	(162		)	(755		)	(278		)
Total loan charge offs	(4,913		)	(3,958		)	(13,640		)	(7,075		)
Plus loan recoveries:
Real estate - commercial	23			440			112			1,141
Commercial business	3,045			566			4,045			1,209
Trade Finance	2			—			6			—
Consumer and other	2			3			7			93
Total loans recoveries	3,072			1,009			4,170			2,443
Net loan charge offs	(1,841		)	(2,949		)	(9,470		)	(4,632		)
Provision for loan losses	5,400			6,500			13,760			8,200
Balance, end of period	$	83,633		$	79,976		$	83,633		$	79,976

Net loan charge offs to average loans, including loans held for sale*	0.07		%	0.13		%	0.12		%	0.08		%
Allowance for loan losses to loans receivable at end of period	0.76		%	0.76		%	0.76		%	0.76		%
Net loan charge offs to allowance*	8.81		%	14.75		%	15.10		%	7.72		%
Net loan charge offs to provision for loan losses	34.09		%	45.37		%	68.82		%	56.49		%

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*	Annualized

We believe the ALLL as of September 30, 2017 was adequate to absorb probable incurred losses in the loan portfolio. However, no assurance can be given that actual losses will not exceed the estimated amounts, and if actual losses exceed the estimated amounts it could have a material and adverse effect on our financial condition and results of operations.

At September 30, 2017, we had $95.1 million in remaining discount on loans acquired from previous transactions compared to $110.8 million at December 31, 2016.

Deposits and Other Borrowings

Deposits

Deposits are our primary source of funds used in our lending and investment activities. At September 30, 2017, deposits increased $351.3 million, or 3.3%, to $10.99 billion from $10.64 billion at December 31, 2016. The increase in deposits was primarily due to an increase in demand deposits and money market accounts.

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At September 30, 2017, 27.7% of total deposits were noninterest bearing demand deposits, 36.5% were time deposits, and 35.8% were interest bearing demand and savings deposits. At December 31, 2016, 27.3% of total deposits were noninterest bearing demand deposits, 37.9% were time deposits, and 34.8% were interest bearing demand and savings deposits.

At September 30, 2017, we had $808.4 million in brokered deposits and $300.0 million in California State Treasurer deposits compared to $724.7 million in brokered deposits and $300.0 million in California State Treasurer deposits at December 31, 2016. The California State Treasurer deposits had three-month maturities with a weighted average interest rate of 1.08% at September 30, 2017 and were collateralized with securities with a carrying value of $330.3 million. Time deposits of $250 thousand or more at September 30, 2017 totaled $1.62 billion compared to $1.55 billion at December 31, 2016.

The following is a schedule of certificates of deposit maturities as of September 30, 2017:



	Balance		Percent (%)
	(Dollars in thousands)
Three months or less	$	991,555	25	%
Over three months through six months	842,945		21	%
Over six months through nine months	784,384		20	%
Over nine months through twelve months	1,017,666		25	%
Over twelve months	377,577		9	%
Total time deposits	$	4,014,127	100	%

Other Borrowings

From time to time we utilize FHLB advances as a secondary source of funds. FHLB advances are typically secured by a pledge of commercial real estate loans and/or securities with a market value at least equal to the outstanding advances plus our investment in FHLB stock.

At September 30, 2017, FHLB advances totaled $1.02 billion with an average weighted remaining maturity of 1.5 years compared to $754.3 million with average remaining maturities of 2.2 years at December 31, 2016. Total FHLB advances included $3.0 million in premiums recorded from prior acquisitions at September 30, 2017 compared to $4.3 million in premiums at December 31, 2016.

Subordinated debentures totaled $100.6 million at September 30, 2017 and $99.8 million at December 31, 2016. The Trust Preferred Securities accrue and pay distributions periodically at specified annual rates as provided in the related indentures for the securities. The trusts used the net proceeds from their respective offerings to purchase a like amount of subordinated debentures (the “Debentures”) issued by us. The Debentures are the sole assets of the trusts. Our obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by us of the obligations of the trusts. The Trust Preferred Securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. We have the right to redeem the Debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date.

Off-Balance-Sheet Activities and Contractual Obligations

We routinely engage in activities that involve, to varying degrees, elements of risk that are not reflected, in whole or in part, in the consolidated financial statements. These activities are part of our normal course of business and include traditional off-balance-sheet credit-related financial instruments, interest rate swap contracts, operating leases and long-term debt.

Traditional off-balance-sheet credit-related financial instruments are primarily commitments to extend credit and standby letters of credit. These activities could require us to make cash payments to third parties if certain specified future events occur. The contractual amounts represent the extent of our exposure in these off-balance-sheet activities. These activities are necessary to meet the financing needs of our customers.

We enter into interest rate swap contracts under which we are required to either receive cash from or pay cash to counterparties depending on changes in interest rates. We also purchase interest rate caps to protect against increases in market interest rates. We utilize interest rate swap contracts and interest rate caps to help manage the risk of changing interest rates.

We sell interest rate swaps to certain adjustable rate commercial loan customers to fix the interest rate on their floating rate loans. When the fixed rate swap is originated with the customer, an identical offsetting swap is also entered into by us with a correspondent bank.

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With the acquisition in the merger of Wilshire’s mortgage lending platform, we began utilizing mortgage banking derivatives during the third quarter of 2016. The first type of derivative, an interest rate lock commitment, is a commitment to originate loans whereby the interest rate on the loan is determined prior to funding. To mitigate interest rate risk on these rate lock commitments, we also enter into forward commitments, or commitments to deliver residential mortgage loans on a future date, also considered derivatives. Net change in the fair value of derivatives represents income recorded from changes of fair value for these mortgage derivatives instruments.

We do not anticipate that our current off-balance-sheet activities will have a material impact on our future results of operations or our financial condition. Further information regarding our financial instruments with off-balance-sheet risk can be found in Item 3 “Quantitative and Qualitative Disclosures about Market Risk.”

Stockholders’ Equity and Regulatory Capital

Historically, our primary source of capital has been the retention of earnings, net of dividend payments to stockholders. We seek to maintain capital at a level sufficient to assure our stockholders, our customers, and our regulators that we and the Bank are financially sound. For this purpose, we perform ongoing assessments of our components of capital, as well as projected sources and uses of capital in conjunction with projected increases in assets and levels of risks.

Total stockholders’ equity was $1.93 billion at September 30, 2017 compared to $1.86 billion at December 31, 2016.

The federal banking agencies require a minimum ratio of qualifying total capital to risk-weighted assets of 8.0%, a minimum ratio of Tier I capital to risk-weighted assets of 6.0%, and a minimum ratio of Tier I common equity capital to risk-weighted assets of 4.5% to generally be considered “adequately capitalized” under the Prompt Corrective Action regulations. In addition to the risk-based guidelines, federal banking agencies require banking organizations to maintain a minimum amount of Tier I capital to average total assets, referred to as the leverage ratio, of 4.0% to generally be considered “adequately capitalized” under the Prompt Corrective Action regulations. Beginning January 1, 2016, federal banking agencies required a capital conservation buffer of 0.625% in addition to the ratios required to generally be considered “adequately capitalized” under the Prompt Corrective Action regulations. The capital conservation buffer increases at an annual increment of 0.625% until January 2019 and stands at 1.25% as of September 30, 2017. Failure to maintain this capital conservation buffer results in limits or prohibitions on capital distributions and discretionary compensation payments. Capital requirements apply to us and the Bank separately. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

At September 30, 2017, our Common Equity Tier 1 capital was $1.47 billion compared to $1.40 billion at December 31, 2016. Our Tier I capital, defined as stockholders’ equity less intangible assets, was $1.56 billion at September 30, 2017 compared to $1.50 billion at December 31, 2016, representing an increase of $67.9 million, or 4.54%. At September 30, 2017, the Common Equity Tier 1 capital ratio was 12.29%. The total capital to risk-weighted assets ratio was 13.81% and the Tier I capital to risk-weighted assets ratio was 13.10%. The Tier I leverage capital ratio was 11.78%.

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As of September 30, 2017 and December 31, 2016, the most recent regulatory notification generally categorized the Bank as “well capitalized” under the general regulatory framework for prompt corrective action. To be generally categorized as “well-capitalized”, the Bank must maintain minimum common equity Tier 1 capital, total risk-based, Tier I risk-based and Tier I leverage capital ratios as set forth in the table below:



	As of September 30, 2017
	Actual				To Be Well-Capitalized				Excess
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Hope Bancorp, Inc.
Common equity Tier 1 capital ratio (to risk-weighted assets)	$	1,467,385	12.29	%	N/A		N/A		N/A		N/A
Total risk-based capital ratio (to risk-weighted assets)	$	1,648,543	13.81	%	N/A		N/A		N/A		N/A
Tier 1 risk-based capital ratio (to risk-weighted assets)	$	1,564,074	13.10	%	N/A		N/A		N/A		N/A
Tier 1 capital to total assets (to average assets)	$	1,564,074	11.78	%	N/A		N/A		N/A		N/A
Bank of Hope
Common equity Tier 1 capital ratio (to risk-weighted assets)	$	1,543,700	12.94	%	$	775,425	6.50	%	$	768,275	6.44	%
Total risk-based capital ratio (to risk-weighted assets)	$	1,628,169	13.65	%	$	1,192,961	10.00	%	$	435,208	3.65	%
Tier 1 risk-based capital ratio (to risk-weighted assets)	$	1,543,700	12.94	%	$	954,369	8.00	%	$	589,331	4.94	%
Tier 1 capital to total assets (to average assets)	$	1,543,700	11.63	%	$	663,508	5.00	%	$	880,192	6.63	%


	As of December 31, 2016
	Actual				To Be Well-Capitalized				Excess
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Hope Bancorp, Inc.
Common equity Tier 1 capital ratio (to risk-weighted assets)	$	1,400,246	12.10	%	N/A		N/A		N/A		N/A
Total risk-based capital ratio (to risk-weighted assets)	$	1,578,690	13.64	%	N/A		N/A		N/A		N/A
Tier 1 risk-based capital ratio (to risk-weighted assets)	$	1,496,153	12.92	%	N/A		N/A		N/A		N/A
Tier 1 capital to total assets (to average assets)	$	1,496,153	11.49	%	N/A		N/A		N/A		N/A
Bank of Hope
Common equity Tier 1 capital ratio (to risk-weighted assets)	$	1,475,228	12.75	%	$	752,022	6.50	%	$	723,206	6.25	%
Total risk-based capital ratio (to risk-weighted assets)	$	1,557,765	13.46	%	$	1,156,957	10.00	%	$	400,808	3.46	%
Tier 1 risk-based capital ratio (to risk-weighted assets)	$	1,475,228	12.75	%	$	925,566	8.00	%	$	549,662	4.75	%
Tier 1 capital to total assets (to average assets)	$	1,475,228	11.33	%	$	651,129	5.00	%	$	824,099	6.33	%

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Liquidity Management

Liquidity risk is the risk of reduction in our earnings or capital that would result if we were not able to meet our obligations when they come due without incurring unacceptable losses. Liquidity risk includes the risk of unplanned decreases or changes in funding sources and changes in market conditions that affect our ability to liquidate assets quickly and with minimum loss of value. Factors considered in liquidity risk management are the stability of the deposit base; the marketability, maturity, and pledging of our investments; the availability of alternative sources of funds; and our demand for credit. The objective of our liquidity management is to have funds available to meet cash flow requirements arising from fluctuations in deposit levels and the demands of daily operations, which include funding of securities purchases, providing for customers’ credit needs, and ongoing repayment of borrowings.

Our primary sources of liquidity are derived from financing activities, which include customer and broker deposits, federal funds facilities, and borrowings from the FHLB and the FRB Discount Window. These funding sources are augmented by payments of principal and interest on loans and securities, proceeds from sale of loans and the liquidation or sale of securities from our available for sale portfolio. Primary uses of funds include withdrawal of and interest payments on deposits, originations of loans, purchases of investment securities, and payment of operating expenses.

At September 30, 2017, our total borrowing capacity from the FHLB was $3.34 billion of which $2.32 billion was unused and available to borrow. At September 30, 2017, our total borrowing capacity from the FRB was $555.2 million, all of which was unused and available to borrow. In addition to these lines, our liquid assets, consisting of cash and cash equivalents, interest bearing cash deposits and time deposits with other banks, overnight federal funds sold to other banks, liquid investment securities available for sale, and loan repayments within 30 days, were $1.82 billion at September 30, 2017 compared to $1.53 billion at December 31, 2016. Cash and cash equivalents were $405.3 million at September 30, 2017 compared to $437.3 million at December 31, 2016. We believe our liquidity sources are sufficient to meet all reasonably foreseeable short-term and intermediate-term needs.

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Item 3.	Quantitative and Qualitative Disclosures About Market Risk

The objective of our asset and liability management activities is to maximize our earnings while maintaining adequate liquidity and an exposure to interest rate risk deemed by management to be acceptable by adjusting the type and mix of assets and liabilities to seek to effectively address changing conditions and risks. Through overall management of our balance sheet and by seeking to manage various risks, we seek to optimize our financial returns within safe and sound parameters. Our operating strategies for attaining this objective include managing net interest margin through appropriate risk/return pricing of assets and liabilities and emphasizing growth in retail deposits, as a percentage of interest bearing liabilities, to reduce our cost of funds. We also seek to improve earnings by controlling noninterest expense, and enhancing noninterest income. We also use risk management instruments to modify interest rate characteristics of certain assets and liabilities to hedge against our exposure to interest rate fluctuations with the objective of reducing the effects fluctuations might have on associated cash flows or values. Finally, we perform internal analysis to measure, evaluate, and monitor risk.

Interest Rate Risk

Interest rate risk is the most significant market risk impacting us. Interest rate risk occurs when interest rate sensitive assets and liabilities do not reprice simultaneously and in equal volume. A key objective of asset and liability management is to manage interest rate risk associated with changing asset and liability cash flows, values of our assets and liabilities, and market interest rate movements. The management of interest rate risk is governed by policies reviewed and approved annually by the Board of Directors. Our Board delegates responsibility for interest rate risk management to the Asset and Liability Committee of the Board (“ALCO”) and to the Asset and Liability Management Committee (“ALM”), which is composed of the Bank’s senior executives and other designated officers.

The fundamental objective of our ALM is to manage our exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. Our ALM meets regularly to monitor interest rate risk, the sensitivity of our assets and liabilities to interest rate changes, the book and market values of our assets and liabilities, and our investment activities. It also directs changes in the composition of our assets and liabilities. Our strategy has been to reduce the sensitivity of our earnings to interest rate fluctuations by more closely matching the effective maturities or repricing characteristics of our assets and liabilities. Certain assets and liabilities, however, may react in different degrees to changes in market interest rates. Furthermore, interest rates on certain types of assets and liabilities may fluctuate prior to changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. We consider the anticipated effects of these factors when implementing our interest rate risk management objectives.

Interest Rate Sensitivity

We monitor interest rate risk through the use of a simulation model that provides us with the ability to simulate our net interest income. In order to measure, at September 30, 2017, the sensitivity of our forecasted net interest income to changing interest rates, both rising and falling interest rate scenarios were projected and compared to base market interest rate forecasts. One application of our simulation model measures the impact of market interest rate changes on the net present value of estimated cash flows from our assets and liabilities, defined as our market value of equity. This analysis assesses the changes in market values of interest rate sensitive financial instruments that would occur in response to immediate and parallel changes in market interest rates.

The impacts on our net interest income and market value of equity exposed to immediate and parallel hypothetical changes in market interest rates as projected by the model we use for this purpose are illustrated in the following table:



	September 30, 2017				December 31, 2016
Simulated Rate Changes	Estimated Net Interest Income Sensitivity		Market Value Of Equity Volatility		Estimated Net Interest Income Sensitivity		Market Value Of Equity Volatility
Simulated Rate Changes	Estimated Net Interest Income Sensitivity		Market Value Of Equity Volatility		Estimated Net Interest Income Sensitivity		Market Value Of Equity Volatility
+ 200 basis points	0.93	%	(4.51	)%	2.58	%	(4.05	)%
+ 100 basis points	0.60	%	(2.08	)%	1.15	%	(1.91	)%
- 100 basis points	(2.02	)%	0.76	%	(0.60	)%	1.41	%
- 200 basis points	(9.29	)%	(0.11	)%	(9.66	)%	0.42	%

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Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We conducted an evaluation under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.

Based on the evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective due to the material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on May 18, 2017.

Changes in Internal Control over Financial Reporting

The Company has made enhancements to its internal control over financial reporting during the quarter ended September 30, 2017 as part of the Company’s remediation efforts for material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, but no other changes have been made that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company’s remediation efforts and internal control enhancements identified as of September 30, 2017 relate to, but are not limited to, the following:

•

Internal control over financial reporting related to the review process for the allowance for loan losses was enhanced by strengthening the review and approval process of the allowance for loan losses components, in particular the qualitative adjustment factors. The controls were also enhanced to include a detailed review of the allowance for loan losses by the Company’s Management Allowance Committee;

•

Internal control over financial reporting and documentation related to the review process for impaired loans on accrual status and the allowance for loan losses calculation was enhanced through an additional layer of monitoring and review. The Company also enhanced its policies and procedures so that impaired loans on accrual status are reviewed to ensure that the principal and interest is expected to be recovered; and


•	The Company hired additional staff in key areas of the Company including hiring a SOX Compliance Manager and a SOX Compliance Officer.

Management believes that the Company has made significant progress as of September 30, 2017 with respect to the remediation of material weaknesses identified as of December 31, 2016. However, our material weaknesses will not be considered remediated until our internal controls are operational for a period of time and are tested, and management concludes that these controls are operating effectively. Additionally, as it relates to the material weaknesses related to business combinations, to date there has been no such activity and it is not contemplated that such a transaction will be entered into during the year ending December 31, 2017. At the conclusion of the year, management will assess the severity of these deficiencies and the maximum potential impact to our consolidated financial statements.

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PART II

OTHER INFORMATION


Item 1.	Legal Proceedings

In the normal course of business, the Company is involved in various legal claims. The Company has reviewed all legal claims against us with counsel and have taken into consideration the views of such counsel as to the potential outcome of the claims in determining our accrued loss contingency. Accrued loss contingencies for all legal claims totaled approximately $428 thousand at September 30, 2017. It is reasonably possible the Company may incur losses in addition to the amounts currently accrued. However, at this time, the Company is unable to estimate the range of additional losses that are reasonably possible because of a number of factors, including the fact that certain of these litigation matters are still in their early stages and involve claims for which, at this point, the Company believes have little to no merit. Management has considered these and other possible loss contingencies and does not expect the amounts to be material to any of the consolidated financial statements.


Item 1A.	Risk Factors

Management is not aware of any material changes to the risk factors discussed in Part 1, Item 1A, of the Annual Report on Form 10-K for the year ended December 31, 2016 and in Part 2, Item 1A, of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part 1, Item 1A , of the Annual Report on Form 10-K for the year ended December 31, 2016 and in Part 2, Item 1A, of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, which could materially and adversely affect the Company’s business, financial condition, results of operations and stock price. The risks described in the Annual Report on Form 10-K and the Quarterly Report on Form 10-Q are not the only risks facing the Company. Additional risks and uncertainties not presently known to management or that management presently believes not to be material may also result in material and adverse effects on our business, financial condition and results of operations.


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

None.


Item 3.	Defaults Upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

Not Applicable.


Item 5.	Other Information

None


Item 6.	Exhibits

See “Index to Exhibits.”

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INDEX TO EXHIBITS



Exhibit Number		Description

10.1		Bank of Hope 2017 Employee Stock Purchase Program*+

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002*

32.2		Certification of Chief Financial Officer pursuant to section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002*

101.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema Document*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB		XBRL Taxonomy Extension Label Linkbase Document*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

__________________________________


*	Filed herewith


+	Management contract or compensatory plan or arrangement

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SIGNATURES

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



		HOPE BANCORP, INC.


Date:	November 8, 2017	/s/ Kevin S. Kim
		Kevin S. Kim
		President and Chief Executive Officer


Date:	November 8, 2017	/s/ Alex Ko
		Alex Ko
		Executive Vice President and Chief Financial Officer