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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.



Table of Contents
 
 
 
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Statements of Financial Condition - September 30, 2017 (Unaudited) and December 31, 2016
 
 
 
 
Consolidated Statements of Income (Unaudited) - Three and Nine Months Ended September 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Comprehensive Income (Unaudited) - Three and Nine Months Ended September 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) - Nine Months Ended September 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2017 and 2016
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
LEGAL PROCEEDINGS
 
 
 
Item 1A.
RISK FACTORS
 
 
 
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
 
Item 3.
DEFAULTS UPON SENIOR SECURITIES
 
 
 
Item 4.
MINE SAFETY DISCLOSURES
 
 
 
Item 5.
OTHER INFORMATION
 
 
 
Item 6.
EXHIBITS
 
 
 
 
 
 
INDEX TO EXHIBITS
 
 
 
SIGNATURES
 
 
 


2

Table of Contents

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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Table of Contents

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
 
(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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Table of Contents

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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Table of Contents

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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Table of Contents

 
 
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.

21

Table of Contents

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.

22

Table of Contents

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
 
 
(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
 
 
(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



23

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
 
 
(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
 
 
(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.

24

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

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

25

Table of Contents


 
 
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

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



26

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.



27

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

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


28

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.


29

Table of Contents

 
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.

30

Table of Contents

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


 

31

Table of Contents

 
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.

32

Table of Contents

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
 
 
(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
 
 
(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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Table of Contents

 
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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Table of Contents

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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Table of Contents

 
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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Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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

 



 

48

Table of Contents

 
 
 
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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Table of Contents

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
)


50

Table of Contents

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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Table of Contents

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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Table of Contents

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.

53

Table of Contents

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
%


54

Table of Contents

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

          

55

Table of Contents

 
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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Table of Contents

 
 
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.



57

Table of Contents


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.

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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
%
__________________________________
*
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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Table of Contents

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%.

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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
%
__________________________________
(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
%
__________________________________
* 
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
%
__________________________________
(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
%
__________________________________
*
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
 
 
 
 + 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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Table of Contents

INDEX TO EXHIBITS
 
Exhibit Number
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 

81