Annual Statements Open main menu

HOPE BANCORP INC - Quarter Report: 2017 June (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 June 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 August 2, 2017, there were 135,349,745 outstanding shares of Hope Bancorp, Inc. common stock, $0.001 par value.



Table of Contents
 
 
 
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Statements of Financial Condition - June 30, 2017 (Unaudited) and December 31, 2016
 
 
 
 
Consolidated Statements of Income (Unaudited) - Three and Six Months Ended June 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Comprehensive Income (Unaudited) - Three and Six Months Ended June 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) - Six Months Ended June 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 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
 
 
 
 
 
 
SIGNATURES
 
 
 
INDEX TO EXHIBITS
 
 
 


2

Table of Contents

Forward-Looking Statements

Some statements in this Quarterly Report on Form 10-Q 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, our anticipated merger with U & I Financial Corp., 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: inability to consummate our proposed merger with U & I Financial Corp. on the terms we have proposed or at all; failure to realize the benefits from the merger with U & I Financial Corp. that we currently expect if the merger is consummated; 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 and Part II, Item 1A. Risk Factors, contained in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.
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.


3

Table of Contents

PART I
FINANCIAL INFORMATION

Item 1.
Financial Statements

HOPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
 
 
 
 
(Unaudited)
 
 
 
June 30,
2017
 
December 31,
2016
ASSETS
(Dollars in thousands, except share data)
Cash and cash equivalents:
 
 
 
Cash and due from banks
$
180,987

 
$
168,827

Interest bearing cash in other banks
265,428

 
268,507

Total cash and cash equivalents
446,415

 
437,334

Interest bearing deposits in other financial institutions and other investments
43,962

 
44,202

Securities available for sale, at fair value
1,680,382

 
1,556,740

Loans held for sale, at the lower of cost or fair value
16,927

 
22,785

Loans receivable (net of allowance for loan losses of $80,074 and $79,343 at
June 30, 2017 and December 31, 2016, respectively)
10,736,345

 
10,463,989

Other real estate owned (“OREO”), net
21,839

 
21,990

Federal Home Loan Bank (“FHLB”) stock, at cost
22,351

 
21,964

Premises and equipment, net
52,565

 
55,316

Accrued interest receivable
25,640

 
26,880

Deferred tax assets, net
81,488

 
88,110

Customers’ liabilities on acceptances
1,669

 
2,899

Bank owned life insurance (“BOLI”)
74,113

 
73,696

Investments in affordable housing partnerships
91,343

 
70,059

Goodwill
464,450

 
462,997

Core deposit intangible assets, net
17,874

 
19,226

Servicing assets
25,338

 
26,457

Other assets
56,516

 
46,778

Total assets
$
13,859,217

 
$
13,441,422

 
 
 
 
(Continued)
 

4

Table of Contents


HOPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
 
 
 
 
(Unaudited)
 
 
 
June 30,
2017
 
December 31,
2016
LIABILITIES AND STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share data)
LIABILITIES:
 
 
 
Deposits:
 
 
 
Noninterest bearing
$
3,016,538

 
$
2,900,241

Interest bearing:
 
 
 
Money market and NOW accounts
3,563,404

 
3,401,446

Savings deposits
275,272

 
301,906

Time deposits
4,099,887

 
4,038,442

Total deposits
10,955,101

 
10,642,035

FHLB advances
793,403

 
754,290

Subordinated debentures
100,328

 
99,808

Accrued interest payable
11,855

 
10,863

Acceptances outstanding
1,669

 
2,899

Commitments to fund investments in affordable housing partnerships
43,929

 
24,409

Other liabilities
46,638

 
51,645

Total liabilities
11,952,923

 
11,585,949

STOCKHOLDERS’ EQUITY:
 
 
 
Common stock, $0.001 par value; authorized 150,000,000 shares at June 30, 2017 and December 31, 2016; issued and outstanding, 135,297,678 and 135,240,079 shares at June 30, 2017 and December 31, 2016, respectively
135

 
135

Additional paid-in capital
1,402,303

 
1,400,490

Retained earnings
513,945

 
469,505

Accumulated other comprehensive loss, net
(10,089
)
 
(14,657
)
Total stockholders’ equity
1,906,294

 
1,855,473

Total liabilities and stockholders’ equity
$
13,859,217

 
$
13,441,422


See accompanying Notes to Consolidated Financial Statements (Unaudited).

5

Table of Contents

HOPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands, except per share data)
INTEREST INCOME:
 
 
 
 
 
 
 
Loans, including fees
$
128,515

 
$
77,086

 
$
251,809

 
$
154,204

Securities
8,741

 
5,729

 
16,854

 
11,406

Interest bearing deposits in other banks and other investments
1,277

 
719

 
2,613

 
1,385

Total interest income
138,533

 
83,534

 
271,276

 
166,995

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
18,114

 
10,352

 
32,625

 
20,259

FHLB advances
2,338

 
1,686

 
4,477

 
3,209

Other borrowings
1,261

 
432

 
2,449

 
856

Total interest expense
21,713

 
12,470

 
39,551

 
24,324

NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES
116,820

 
71,064

 
231,725

 
142,671

PROVISION FOR LOAN LOSSES
2,760

 
1,200

 
8,360

 
1,700

NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES
114,060

 
69,864

 
223,365

 
140,971

NONINTEREST INCOME:
 
 
 
 
 
 
 
Service fees on deposit accounts
5,179

 
2,902

 
10,517

 
5,585

International service fees
1,119

 
816

 
2,227

 
1,591

Loan servicing fees, net
1,291

 
589

 
2,729

 
1,280

Wire transfer fees
1,343

 
893

 
2,529

 
1,807

Net gains on sales of SBA loans
3,267

 
3,035

 
6,517

 
4,860

Net gains on sales of other loans
352

 
43

 
772

 
43

Other income and fees
3,564

 
2,429

 
8,427

 
4,316

Total noninterest income
16,115

 
10,707

 
33,718

 
19,482

NONINTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
34,946

 
21,757

 
69,112

 
43,326

Occupancy
7,154

 
4,920

 
14,348

 
9,737

Furniture and equipment
3,556

 
2,337

 
6,969

 
4,624

Advertising and marketing
2,394

 
1,402

 
5,818

 
2,538

Data processing and communications
2,676

 
2,129

 
6,282

 
4,300

Professional fees
3,260

 
1,273

 
7,162

 
2,356

Investments in affordable housing partnership expenses
3,055

 
271

 
5,216

 
676

FDIC assessments
1,004

 
1,095

 
2,014

 
2,133

Credit related expenses
113

 
911

 
1,996


1,332

OREO expense, net
1,188

 
133

 
2,185

 
1,561

Merger and integration expenses
562

 
1,533

 
1,509

 
2,740

Other
4,129

 
2,587

 
9,125

 
5,074

Total noninterest expense
64,037

 
40,348

 
131,736

 
80,397

INCOME BEFORE INCOME TAX PROVISION
66,138

 
40,223

 
125,347

 
80,056

INCOME TAX PROVISION
25,451

 
16,833

 
48,450

 
33,043

NET INCOME
$
40,687

 
$
23,390

 
$
76,897

 
$
47,013

EARNINGS PER COMMON SHARE
 
 
 
 
 
 
 
Basic
$
0.30

 
$
0.29

 
$
0.57

 
$
0.59

Diluted
$
0.30

 
$
0.29

 
$
0.57

 
$
0.59


See accompanying Notes to Consolidated Financial Statements (Unaudited).

6

Table of Contents



HOPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Net income
$
40,687

 
$
23,390

 
$
76,897

 
$
47,013

Other comprehensive income:
 
 
 
 
 
 
 
Change in unrealized net holding gains
  on securities available for sale
4,768

 
6,606

 
7,949

 
22,238

Change in unrealized net holding gains
  (losses) on interest only strips
8

 
(3
)
 
(41
)
 
(44
)
Less tax effect
2,016

 
2,785

 
3,340

 
9,388

Other comprehensive income,
  net of tax
2,760

 
3,818

 
4,568

 
12,806

Total comprehensive income
$
43,447

 
$
27,208

 
$
81,465

 
$
59,819



See accompanying Notes to Consolidated Financial Statements (Unaudited).


7

Table of Contents


HOPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
Additional paid-in capital
 
Retained
earnings
 
Accumulated other
comprehensive
 income (loss), 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
 
40,465

 

 
(6
)
 

 

 
(6
)
Stock-based compensation
 

 

 
98

 

 

 
98

Cash dividends declared on common stock
 
 
 
 
 
 
 
(26,266
)
 
 
 
(26,266
)
Comprehensive income:
 

 

 

 

 

 
 
Net income
 

 

 

 
47,013

 

 
47,013

Other comprehensive income
 

 

 

 

 
12,806

 
12,806

BALANCE, JUNE 30, 2016
 
79,606,821

 
$
80

 
$
541,688

 
$
418,998

 
$
10,974

 
$
971,740

 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
57,599

 

 
649

 


 


 
649

Stock-based compensation
 


 


 
1,164

 


 


 
1,164

Cash dividends declared on common stock
 


 


 


 
(32,457
)
 


 
(32,457
)
Comprehensive income:
 


 


 


 


 


 


Net income
 


 


 


 
76,897

 


 
76,897

Other comprehensive income
 


 


 


 


 
4,568

 
4,568

BALANCE, JUNE 30, 2017
 
135,297,678

 
$
135

 
$
1,402,303

 
$
513,945

 
$
(10,089
)
 
$
1,906,294


See accompanying Notes to Consolidated Financial Statements (Unaudited).


8

Table of Contents

HOPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
 
 
 
Six Months Ended June 30,
 
2017
 
2016
 
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES

 

Net income
$
76,897

 
$
47,013

Adjustments to reconcile net income to net cash from operating activities:

 


Depreciation, amortization, net of discount accretion
(6,244
)
 
394

Stock-based compensation expense
1,506

 
98

Provision for loan losses
8,360

 
1,700

Valuation adjustment of premises held for sale
1,084

 

Valuation adjustment of OREO
1,410

 
924

Net gains on sales of SBA and other loans
(7,289
)
 
(4,903
)
Earnings on BOLI
(417
)
 
(544
)
Net change in fair value of derivatives
65

 

Net gain on sale and disposal of premise and equipment
(338
)
 

Net gain (loss) on sales of OREO
(82
)
 
145

Loss on investments in affordable housing partnership
5,047

 
676

Net change in deferred income taxes
2,544

 
6,122

Proceeds from sales of loans held for sale
138,413

 
71,817

Originations of loans held for sale
(111,742
)
 
(72,564
)
Originations of servicing assets
(2,612
)
 
(2,087
)
Net change in accrued interest receivable
1,240

 
(592
)
Net change in other assets
(9,916
)
 
(24,980
)
Net change in accrued interest payable
992

 
1,157

Net change in other liabilities
(5,007
)
 
4,097

Net cash provided by operating activities
93,911

 
28,473

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of other investments
(8,820
)
 

Redemption of other investments
9,060

 

Purchase of securities available for sale
(245,198
)
 
(155,411
)
Proceeds from matured, called, or paid-down of securities available for sale
124,381

 
88,514

Proceeds from sales of other loans held for sale
259

 

Net change in loans receivable
(285,348
)
 
(331,713
)
Proceeds from sales of OREO
3,606

 
5,435

Purchase of FHLB stock
(1,148
)
 

Redemption of FHLB stock
761

 

Purchase of premises and equipment
(4,622
)
 
(6,587
)
Proceeds from sales and disposals of premise and equipment held for sale
3,267

 

Investments in affordable housing partnerships
(6,980
)
 

Net cash used in investing activities
(410,782
)
 
(399,762
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net change in deposits
317,760

 
296,589

Proceeds from FHLB advances
425,000

 
475,000

Repayment of FHLB advances
(385,000
)
 
(395,000
)
Cash dividends paid on common stock
(32,457
)
 
(17,510
)
Issuance of additional stock pursuant to various stock plans
649

 
(6
)
Net cash provided by financing activities
325,952

 
359,073

NET CHANGE IN CASH AND CASH EQUIVALENTS
9,081

 
(12,216
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
437,334

 
298,389

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
446,415

 
$
286,173

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
      Interest paid
$
43,620

 
$
23,167

      Income taxes paid
$
61,314

 
$
35,701

SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES
 
 
 
Transfer from loans receivable to OREO
$
7,173

 
$
2,188

Transfer from loans receivable to loans held for sale
$
14,590

 
$
400

Transfer from loans held for sale to loans receivable
$
394

 
$

Transfer from premises and equipment to premises held for sale
$
3,300

 
$

New commitments to fund affordable housing partnership investments
$
26,500

 
$

See accompanying Notes to Consolidated Financial Statements (Unaudited).

9

Table of Contents
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 June 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 Georgia, Virginia, Texas, Colorado, Oregon, Washington, 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 June 30, 2017 and December 31, 2016 and the results of operations for the three and six months ended June 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.


10

Table of Contents

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 it consolidated financial statements.

11

Table of Contents


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.
Pending 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 will merge 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, will merge with and into the Bank. Under the U & I Merger Agreement, at the effective time of the merger (the “Effective Time”), each outstanding share of U & I common stock will be converted into shares of the Company’s common stock based on a value of $9.50 for the U & I common stock, which value will be subject to adjustment if U & I’s financial advisory and legal fees exceed certain amounts as provided in the U & I Merger Agreement (the “Merger Consideration”). The number of shares of Company common stock to be issued for the Merger Consideration will be based on the 10-trading day, volume weighted average price of the Company’s common stock as of the closing as determined in accordance with the Merger Agreement (as so determined, the “Closing Stock Price”); provided that:
(i) if the Closing Stock Price is less than $17.28832, the Company may terminate the U & I Merger Agreement unless U & I elects to accept an adjustment to the Merger Consideration through the issuance of fewer shares based on the $17.28832 instead of the lower Closing Stock Price; and
(ii) if the Closing Stock Price is greater than $25.93248, U & I may terminate the U & I Merger Agreement unless the Company elects to accept an adjustment to the Merger Consideration through the issuance of additional shares based on the $25.93248 price instead of the higher Closing Stock Price.
Each outstanding U & I stock option held by an U & I employee who will be retained by the Company after the Effective Time (each, a “Covered Employee”) shall cease to represent the right to acquire shares of U & I common stock and shall instead be converted automatically into an option to acquire shares of the Company’s common stock, and such assumed options will be assumed by the Company on substantially the same terms and conditions as were applicable under the corresponding U & I stock options. Each U & I stock option held by a U & I employee who will not be a Covered Employee shall become fully vested and be converted into the right to receive an amount in cash equal to the product obtained by multiplying (i) the excess, if any, of the per share Merger Consideration over the exercise price per share of such stock option by (ii) the total number of shares of U & I common stock subject to such stock option.
The U & I Merger Agreement contains representations and warranties customary for transactions of this type from the Company and U & I, and each party has agreed to customary covenants, including, among others, covenants relating to the conduct of its business during the interim period between the execution of the U & I Merger Agreement and the Effective Time and, in the case of U & I, its obligation, subject to certain exceptions, to recommend that its stockholders adopt the U & I Merger Agreement and its non-solicitation obligations relating to alternative acquisition proposals.
The consummation of the merger with U & I is subject to customary conditions, including receipt of regulatory approvals, receipt of the requisite approval of the stockholders of U & I, the absence of any law or order prohibiting the closing, and effectiveness of the registration statement to be filed by the Company with respect to the Company’s common stock to be issued in the merger with U & I, and the absence of the occurrence of a material adverse effect upon the Company or U & I. In addition, each party’s obligation to consummate the merger is subject to certain other conditions, including the accuracy of the representations and warranties of the other party and compliance of the other party with its covenants, in each case subject to certain materiality standards. The Company expects to close the acquisition by the end of 2017, subject to satisfaction of the conditions set forth in the U & I Merger Agreement.
The U & I Merger Agreement provides certain termination rights for both the Company and U & I and further provides that a termination fee of $2 million will be payable by U & I to the Company upon termination of the U & I Merger Agreement under certain circumstances.

12

Table of Contents

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. The Company merged with Wilshire in order to expand its network of branch locations and to provide enhanced products and services to our customers. 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 63 branches in nine different states throughout the United States, has loan production offices throughout the Unites States, 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.
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 increase goodwill by the same amount.

13

Table of Contents

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 outstanding principal balances and the related carrying amounts of the acquired loans included in the Statement of Financial Condition at June 30, 2017 and were $5.02 billion and $3.27 billion, respectively, for loans acquired from Wilshire. The outstanding principal balances and the related carrying amounts of the acquired loans included in the Statement of Financial Condition at December 31, 2016 were $5.67 billion and $3.59 billion, respectively, for loans acquired from Wilshire.

Merger-Related Expenses
The following table presents merger-related expenses associated with the merger with Wilshire, the pending 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Wilshire
$
538

 
$
1,509

 
$
939

 
$
2,692

U & I

 

 
522

 

Other
24

 
24

 
48

 
48

Total merger and integration expenses
$
562

 
$
1,533

 
$
1,509

 
$
2,740




14

Table of Contents

4.     Stock-Based Compensation
The Company has a stock-based incentive plan (the “2016 Plan”) to award equity as 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, 1,328,988 shares were available for future grants as of June 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 six months ended June 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
1,624,227

 
$
15.30

 
 
 
 
Granted

 

 
 
 
 
Exercised
(70,183
)
 
8.89

 
 
 
 
Expired
(230,900
)
 
21.77

 
 
 
 
Forfeited

 

 
 
 
 
Outstanding - June 30, 2017
1,323,144

 
$
14.51

 
7.46
 
$
5,590

Options exercisable - June 30, 2017
638,874

 
$
11.84

 
5.87
 
$
4,467



15

Table of Contents

The following is a summary of restricted stock and performance unit activity under the 2007 Plan and 2016 Plan for the six months ended June 30, 2017:
 
 
Number of
Shares
 
Weighted-
Average Grant Date
Fair Value
Outstanding - January 1, 2017
403,658

 
$
16.17

Granted
66,012

 
18.79

Vested
(67,359
)
 
15.10

Forfeited
(7,259
)
 
14.67

Outstanding - June 30, 2017
395,052

 
$
16.82


The total fair value of restricted stock and performance units vested for the six months ended June 30, 2017 and 2016 was $1.3 million and $675 thousand, respectively.
The amount charged against income related to stock-based payment arrangements was $760 thousand and $76 thousand for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, $1.5 million and $98 thousand, respectively, of stock-based payment arrangements were charged against income.
The income tax benefit recognized was approximately $292 thousand and $32 thousand for the three months ended June 30, 2017 and 2016, respectively. The income tax benefit recognized for the six months ended June 30, 2017 and 2016, was approximately$582 thousand and $40 thousand, respectively.
At June 30, 2017, the unrecognized compensation expense related to non-vested stock option grants was $1.6 million which is expected to be recognized over a weighted average vesting period of 3.04 years. Unrecognized compensation expense related to non-vested restricted stock and performance units was $4.7 million which is expected to be recognized over a weighted average vesting period of 2.66 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 six months ended June 30, 2017.

16

Table of Contents

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 our earnings. For the three months ended June 30, 2017, stock options and restricted shares awards for 530,334 shares of common stock were excluded in computing diluted earnings per common share because they were anti-dilutive. For the six months ended June 30, 2017, stock options and restricted shares awards for 542,328 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 451,670 shares of common stock were excluded in computing diluted earnings per common share because they were anti-dilutive for the three months ended June 30, 2016. Stock options and restricted shares awards for 445,113 shares of common stock were excluded in computing diluted earnings per common share because they were anti-dilutive for the six months ended June 30, 2016. Additionally, warrants issued pursuant to the Company’s participation in the U.S. Treasury’s TARP Capital Purchase Plan, to purchase 20,087 shares and 19,552 shares of common stock were anti-dilutive and excluded for the three and six months ended June 30, 2017 and 2016, respectively.
The following tables show the computation of basic and diluted EPS for the three and six months ended June 30, 2017 and 2016.
 
Three Months Ended June 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
$
40,687

 
135,257,044

 
$
0.30

 
$
23,390

 
79,604,673

 
$
0.29

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options and restricted stock
 
 
356,137

 
 
 
 
 
30,089

 
 
Diluted EPS - common stock
$
40,687

 
135,613,181

 
$
0.30

 
$
23,390

 
79,634,762

 
$
0.29


 
Six Months Ended June 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
$
76,897

 
135,252,556

 
$
0.57

 
$
47,013

 
79,595,599

 
$
0.59

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options and restricted stock
 
 
432,508

 
 
 
 
 
30,074

 
 
Diluted EPS - common stock
$
76,897

 
135,685,064

 
$
0.57

 
$
47,013

 
79,625,673

 
$
0.59




17

Table of Contents

6.    Securities Available for Sale
The following is a summary of securities available for sale as of the dates indicated:
 
 
At June 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
$
10,001

 
$

 
$
(6
)
 
$
9,995

Collateralized mortgage obligations (residential)
791,774

 
351

 
(8,531
)
 
783,594

Mortgage-backed securities (residential)
780,937

 
1,580

 
(10,974
)
 
771,543

Corporate securities
4,567

 
39

 

 
4,606

Municipal securities
97,298

 
1,078

 
(864
)
 
97,512

Total debt securities
1,684,577

 
3,048

 
(20,375
)
 
1,667,250

Mutual funds
13,425

 
25

 
(318
)
 
13,132

Total investment securities available for sale
$
1,698,002

 
$
3,073

 
$
(20,693
)
 
$
1,680,382

 
 
 
 
 
 
 
 
 
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)
741,304

 
1,132

 
(14,395
)
 
728,041

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 June 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 June 30, 2017 and December 31, 2016, $10.1 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 June 30, 2017 and December 31, 2016, were unrealized losses on interest only strip net of taxes of $38 thousand and $14 thousand, respectively. There were no reclassifications out of accumulated other comprehensive (loss) during the three and six months ended June 30, 2017 and 2016.

18

Table of Contents

The amortized cost and estimated fair value of investment securities at June 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
$
10,724

 
$
10,722

Due after one year through five years
7,603

 
7,774

Due after five years through ten years
41,483

 
42,101

Due after ten years
52,056

 
51,516

U.S. Government agency and U.S. Government sponsored enterprises
 
 
 
Collateralized mortgage obligations (residential)
791,774

 
783,594

Mortgage-backed securities (residential)
780,937

 
771,543

Mutual funds
13,425

 
13,132

Total
$
1,698,002

 
$
1,680,382


Securities with carrying values of approximately $362.1 million and $382.1 million at June 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 our 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 June 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*
 
3

 
$
9,995

 
$
(6
)
 

 
$

 
$

 
3

 
$
9,995

 
$
(6
)
Collateralized mortgage obligations (residential)*
 
64

 
609,323

 
(6,834
)
 
9

 
73,507

 
(1,697
)
 
73

 
682,830

 
(8,531
)
Mortgage-backed securities (residential)*
 
58

 
608,637

 
(10,974
)
 

 

 

 
58

 
608,637

 
(10,974
)
Municipal securities
 
21

 
32,835

 
(849
)
 
1

 
519

 
(15
)
 
22

 
33,354

 
(864
)
Mutual funds
 
2

 
6,643

 
(73
)
 
1

 
5,002

 
(245
)
 
3

 
11,645

 
(318
)
Total
 
148

 
$
1,267,433

 
$
(18,736
)
 
11

 
$
79,028

 
$
(1,957
)
 
159

 
$
1,346,461

 
$
(20,693
)
__________________________________    
* Investments in U.S. Government agency and U.S. Government sponsored enterprises
 
 
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)*
 
57

 
622,797

 
(14,395
)
 

 

 

 
57

 
622,797

 
(14,395
)
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

19

Table of Contents

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, municipal securities, and mutual funds that were in a continuous unrealized loss position for twelve months or longer as of June 30, 2017. The collateralized mortgage obligations in a continuous loss position for twelve months or longer had an unrealized loss of $1.7 million at June 30, 2017. 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 $15 thousand at June 30, 2017. Mutual funds that were in a continuous loss position for twelve months or longer had an unrealized loss of $245 thousand at June 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, municipal securities, and mutual funds that were in an unrealized loss position at June 30, 2017.
The Company considers the losses on the investments in unrealized loss positions at June 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.

20

Table of Contents

7.    Loans Receivable and Allowance for Loan Losses
The following is a summary of loans receivable by major category:
 
June 30, 2017
 
December 31, 2016
 
(Dollars in thousands)
Loan portfolio composition
 
 
 
Real estate loans:
 
 
 
Residential
$
60,544

 
$
57,884

Commercial
8,065,057

 
7,842,573

Construction
306,794

 
254,113

Total real estate loans
8,432,395

 
8,154,570

Commercial business
1,744,103

 
1,832,021

Trade finance
181,400

 
154,928

Consumer and other
460,446

 
403,470

Total loans outstanding
10,818,344

 
10,544,989

      Deferred loan fees, net
(1,925
)
 
(1,657
)
Loans receivable
10,816,419

 
10,543,332

      Allowance for loan losses
(80,074
)
 
(79,343
)
Loans receivable, net of allowance for loan losses
$
10,736,345

 
$
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 six months ended June 30, 2017 and 2016:
 
Three Months Ended June 30,

Six Months Ended June 30,

2017

2016

2017

2016

(Dollars in thousands)
Balance at beginning of period
$
51,651


$
22,097


$
38,591


$
23,777

Accretion
(5,212
)

(2,474
)

(10,560
)

(5,503
)
Reclassification from nonaccretable difference
7,218


527


25,626


1,876

Balance at end of period
$
53,657


$
20,150


$
53,657


$
20,150

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.

21

Table of Contents

The following tables detail the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 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 June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
43,929

 
$
17,479

 
$
624

 
$
2,022

 
$
13,455

 
$
944

 
$
187

 
$
19

 
$
78,659

Provision (credit) for loan losses
(2,596
)
 
3,741

 
900

 
500

 
(69
)
 
374

 
(81
)
 
(9
)
 
2,760

Loans charged off
(892
)
 
(425
)
 
(528
)
 
(241
)
 
19

 
(55
)
 

 

 
(2,122
)
Recoveries
37

 
700

 
4

 
1

 
6

 
28

 

 
1

 
777

Balance, end of period
$
40,478

 
$
21,495

 
$
1,000

 
$
2,282

 
$
13,411

 
$
1,291

 
$
106

 
$
11

 
$
80,074

Six Months Ended June 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
3,510

 
857

 
1,203

 
684

 
906

 
1,122

 
106

 
(28
)
 
8,360

Loans charged off
(2,046
)
 
(3,615
)
 
(2,104
)
 
(520
)
 
(317
)
 
(125
)
 

 

 
(8,727
)
Recoveries of charge offs
58

 
823

 
4

 
2

 
31

 
177

 

 
3

 
1,098

Balance, end of period
$
40,478

 
$
21,495

 
$
1,000

 
$
2,282

 
$
13,411

 
$
1,291

 
$
106

 
$
11

 
$
80,074


 
 
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 June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
42,115

 
$
19,048

 
$
2,085

 
$
768

 
$
12,626

 
$
154

 
$

 
$
60

 
$
76,856

Provision (credit) for loan losses
1,375

 
(798
)
 
364

 
123

 
187

 
(42
)
 

 
(9
)
 
1,200

Loans charged off

 
(2,005
)
 

 
(50
)
 
(207
)
 
(33
)
 

 

 
(2,295
)
Recoveries
176

 
331

 

 
85

 
1

 
69

 

 
2

 
664

Balance, end of period
$
43,666

 
$
16,576

 
$
2,449

 
$
926

 
$
12,607

 
$
148

 
$

 
$
53

 
$
76,425

Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
42,829

 
$
16,332

 
$
3,592

 
$
556

 
$
12,823

 
$
214

 
$

 
$
62

 
$
76,408

Provision (credit) for loan losses
157

 
2,349

 
(1,143
)
 
399

 
105

 
(154
)
 

 
(13
)
 
1,700

Loans charged off
(19
)
 
(2,626
)
 

 
(115
)
 
(323
)
 
(33
)
 

 

 
(3,116
)
Recoveries of charge offs
699

 
521

 

 
86

 
2

 
121

 

 
4

 
1,433

Balance, end of period
$
43,666

 
$
16,576

 
$
2,449

 
$
926

 
$
12,607

 
$
148

 
$

 
$
53

 
$
76,425



22

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 June 30, 2017 and December 31, 2016:
 
June 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
$
1,907

 
$
6,303

 
$
3

 
$
30

 
$
256

 
$
451

 
$

 
$

 
$
8,950

Collectively evaluated for impairment
38,571

 
15,192

 
997

 
2,252

 
1,089

 
840

 
106

 
11

 
59,058

PCI loans

 

 

 

 
12,066

 

 

 

 
12,066

Total
$
40,478

 
$
21,495

 
$
1,000

 
$
2,282

 
$
13,411

 
$
1,291

 
$
106

 
$
11

 
$
80,074

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
46,357

 
$
35,487

 
$
4,182

 
$
697

 
$
12,045

 
$
1,285

 
$

 
$
610

 
$
100,663

Collectively evaluated for impairment
5,829,796

 
1,235,783

 
105,921

 
264,028

 
2,365,273

 
419,050

 
68,108

 
183,065

 
10,471,024

PCI loans

 

 

 

 
178,924

 
52,498

 
3,189

 
12,046

 
246,657

Total
$
5,876,153

 
$
1,271,270

 
$
110,103

 
$
264,725

 
$
2,556,242

 
$
472,833

 
$
71,297

 
$
195,721

 
$
10,818,344


 
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 June 30, 2017 and December 31, 2016, the reserve for unfunded loan commitments recorded in other liabilities was $3.6 million and $3.2 million, respectively. For the three months ended June 30, 2017 and 2016, the recognized provision for unfunded commitments recorded in credit related expense was $201 thousand and $109 thousand, respectively. For the six months ended June 30, 2017 and 2016, the recognized provision (credit) for unfunded commitments was $442 thousand and $(461) thousand, respectively.

23

Table of Contents

The recorded investment of individually impaired loans was as follows:
 
June 30, 2017
 
December 31, 2016
 
(Dollars in thousands)
With allocated specific allowance
 
 
 
Without charge off
$
37,636

 
$
59,638

With charge off
2,093

 
1,120

With no allocated specific allowance
 
 
 
Without charge off
54,707

 
76,775

With charge off
6,227

 
2,828

Specific allowance on impaired loans
(8,950
)
 
(7,409
)
Impaired loans, net of specific allowance
$
91,713

 
$
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 June 30, 2017 and December 31, 2016 and average recorded investment and interest income recognized for the three and six months ended June 30, 2017 and 2016. Loans with no related allowance are believed by management to be adequately collateralized.
 
 
As of June 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
 
1,464

 
1,583

 
134

 
2,095

 
2,384

 
90

Hotel & motel
 
1,843

 
2,606

 
109

 
6,387

 
6,387

 
337

Gas station & car wash
 

 

 

 
215

 
228

 
41

Mixed use
 
287

 
2,695

 
3

 
206

 
732

 
27

Industrial & warehouse
 
503

 
1,198

 
101

 
530

 
530

 

Other
 
4,755

 
5,000

 
1,816

 
22,580

 
22,825

 
1,507

Real estate—construction
 

 

 

 

 

 

Commercial business
 
26,770

 
27,146

 
6,754

 
26,543

 
27,161

 
4,493

Trade finance
 
4,035

 
4,035

 
3

 
2,111

 
2,156

 
864

Consumer and other
 
72

 
72

 
30

 
91

 
91

 
50

Subtotal
 
$
39,729

 
$
44,335

 
$
8,950

 
$
60,758

 
$
62,494

 
$
7,409

With no related allowance:
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—residential
 
$

 
$

 
$

 
$
3,562

 
$
3,562

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
9,675

 
11,057

 

 
12,753

 
13,290

 

Hotel & motel
 
12,817

 
18,499

 

 
6,122

 
11,735

 

Gas station & car wash
 
3,106

 
6,321

 

 
5,043

 
7,449

 

Mixed use
 
1,229

 
1,773

 

 
7,303

 
7,822

 

Industrial & warehouse
 
8,725

 
8,800

 

 
9,673

 
9,748

 

Other
 
12,698

 
13,870

 

 
20,181

 
21,492

 

Real estate—construction
 
1,300

 
1,441

 

 
1,300

 
1,441

 

Commercial business
 
10,002

 
13,452

 

 
8,675

 
9,472

 

Trade finance
 
147

 
147

 

 
3,918

 
3,918

 

Consumer and other
 
1,235

 
1,259

 

 
1,073

 
1,136

 

Subtotal
 
$
60,934

 
$
76,619

 
$

 
$
79,603

 
$
91,065

 
$

Total
 
$
100,663

 
$
120,954

 
$
8,950

 
$
140,361

 
$
153,559

 
$
7,409

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


24

Table of Contents

 
 
For the Three Months Ended June 30, 2017
 
For the Three Months Ended June 30, 2016
 
For the Six Months Ended June 30, 2017
 
For the Six Months Ended June 30, 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
 
1,022

 
4

 
1,486

 

 
1,380

 
7

 
1,614

 

Hotel & motel
 
4,119

 
16

 
2,925

 
16

 
4,875

 
32

 
3,515

 
32

Gas station & car wash
 

 

 
794

 
9

 
72

 

 
1,052

 
19

Mixed use
 
268

 
2

 
386

 
2

 
247

 
3

 
445

 
3

Industrial & warehouse
 
1,692

 

 
552

 
6

 
1,305

 

 
555

 
12

Other
 
13,584

 
60

 
24,257

 
274

 
16,583

 
117

 
24,372

 
550

Real estate—construction
 

 

 

 

 

 

 

 

Commercial business
 
23,154

 
233

 
35,826

 
271

 
24,284

 
456

 
34,393

 
481

Trade finance
 
2,018

 
106

 
6,286

 
16

 
2,049

 
157

 
8,373

 
57

Consumer and other
 
77

 
1

 
408

 
10

 
82

 
2

 
317

 
17

Subtotal
 
$
45,934

 
$
422

 
$
72,920

 
$
604

 
$
50,877

 
$
774

 
$
74,636

 
$
1,171

With no related allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—residential
 
$
732

 
$

 
$

 
$

 
$
1,675

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
13,214

 
82

 
10,029

 
79

 
13,060

 
161

 
10,454

 
160

Hotel & motel
 
9,545

 

 
8,922

 
49

 
8,404

 

 
8,479

 
98

Gas station & car wash
 
3,633

 

 
5,268

 
25

 
4,103

 

 
4,763

 
50

Mixed use
 
3,879

 

 
2,331

 
12

 
5,020

 

 
2,348

 
24

Industrial & warehouse
 
8,612

 
58

 
10,957

 
89

 
8,965

 
116

 
10,294

 
179

Other
 
14,173

 
81

 
10,676

 
43

 
16,176

 
162

 
11,534

 
85

Real estate—construction
 
2,078

 

 
1,321

 

 
1,819

 

 
1,337

 

Commercial business
 
9,953

 
41

 
13,022

 
140

 
9,527

 
83

 
12,034

 
281

Trade finance
 
2,298

 
2

 
2,225

 
56

 
2,838

 
3

 
1,484

 
109

Consumer and other
 
1,070

 
6

 
820

 

 
1,071

 
13

 
991

 
1

Subtotal
 
$
69,187

 
$
270

 
$
65,571

 
$
493

 
$
72,658

 
$
538

 
$
63,718

 
$
987

Total
 
$
115,121

 
$
692

 
$
138,491

 
$
1,097

 
$
123,535

 
$
1,312

 
$
138,354

 
$
2,158

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



25

Table of Contents

 
 
As of June 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
 
1,194

 
1,313

 
128

 
1,826

 
2,114

 
85

Hotel & motel
 
260

 
1,005

 
2

 

 

 

Gas station & car wash
 

 

 

 

 

 

Mixed use
 
248

 
2,099

 
2

 
136

 
136

 
2

Industrial & warehouse
 
503

 
1,198

 
101

 

 

 

Other
 
328

 
332

 
23

 
337

 
341

 
26

Real estate—construction
 

 

 

 

 

 

Commercial business
 
714

 
764

 
451

 
294

 
339

 
73

Trade finance
 

 

 

 

 

 

Consumer and other
 

 

 

 

 

 

Subtotal
 
$
3,247

 
$
6,711

 
$
707

 
$
2,593

 
$
2,930

 
$
186

With no related allowance:
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—residential
 
$

 
$

 
$

 
$
679

 
$
679

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
1,456

 
1,508

 

 
3,148

 
3,214

 

Hotel & motel
 
4,807

 
7,285

 

 
4,767

 
7,171

 

Gas station & car wash
 
460

 
903

 

 
1,568

 
1,815

 

Mixed use
 
46

 
274

 

 
5,315

 
5,551

 

Industrial & warehouse
 
64

 
64

 

 
66

 
66

 

Other
 
2,679

 
3,234

 

 
6,023

 
6,752

 

Real estate—construction
 

 

 

 

 

 

Commercial business
 
571

 
641

 

 
141

 
386

 

Trade finance
 

 

 

 

 

 

Consumer and other
 
610

 
624

 

 
431

 
484

 

Subtotal
 
$
10,693

 
$
14,533

 
$

 
$
22,138

 
$
26,118

 
$

Total
 
$
13,940

 
$
21,244

 
$
707

 
$
24,731

 
$
29,048

 
$
186

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



26

Table of Contents

 
 
For the Three Months Ended June 30, 2017
 
For the Three Months Ended June 30, 2016
 
For the Six Months Ended June 30, 2017
 
For the Six Months Ended June 30, 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
 
753

 
4

 
1,103

 

 
1,110

 
7

 
1,125

 

Hotel & motel
 
176

 

 

 

 
117

 

 

 

Gas station & car wash
 

 

 

 

 

 

 
339

 

Mixed use
 
249

 
2

 
316

 
2

 
212

 
3

 
375

 
3

Industrial & warehouse
 
251

 

 

 

 
168

 

 

 

Other
 
330

 
4

 
324

 
4

 
333

 
8

 
318

 
9

Real estate—construction
 

 

 

 

 

 

 

 

Commercial business
 
744

 

 
506

 
3

 
594

 

 
526

 
6

Trade finance
 

 

 

 

 

 

 

 

Consumer and other
 

 

 
80

 
2

 

 

 
53

 
4

Subtotal
 
$
2,503

 
$
10

 
$
2,329

 
$
11

 
$
2,534

 
$
18

 
$
2,736

 
$
22

With no related allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—residential
 
$

 
$

 
$

 
$

 
$
226

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
2,903

 
15

 
2,491

 
26

 
2,985

 
30

 
2,542

 
52

Hotel & motel
 
4,823

 

 
5,903

 
3

 
4,805

 

 
6,273

 
7

Gas station & car wash
 
539

 

 
1,593

 
25

 
882

 

 
1,458

 
50

Mixed use
 
2,664

 

 
271

 
3

 
3,548

 

 
272

 
5

Industrial & warehouse
 
65

 
1

 
1,090

 
2

 
65

 
2

 
1,103

 
5

Other
 
2,931

 
8

 
3,761

 
13

 
3,961

 
16

 
3,799

 
26

Real estate—construction
 

 

 

 

 

 

 

 

Commercial business
 
408

 
7

 
675

 
8

 
319

 
14

 
673

 
17

Trade finance
 

 

 

 

 

 

 

 

Consumer and other
 
441

 
2

 
371

 

 
437

 
4

 
467

 
1

Subtotal
 
$
14,774

 
$
33

 
$
16,155

 
$
80

 
$
17,228

 
$
66

 
$
16,587

 
$
163

Total
 
$
17,277

 
$
43

 
$
18,484

 
$
91

 
$
19,762

 
$
84

 
$
19,323

 
$
185

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


27

Table of Contents

Generally, loans are placed on nonaccrual status if the principal and/or interest payments become 90 days 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 six ended June 30, 2017 or 2016.
The following tables present the recorded investment of past due loans by the number of days past due as of June 30, 2017 and December 31, 2016 by class of loans:
 
As of June 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
555

 
457

 

 
1,012

 
3,392

 
4,404

Hotel & motel
343

 
1,902

 
1,433

 
3,678

 
8,305

 
11,983

Gas station & car wash

 

 

 

 
2,646

 
2,646

Mixed use
539

 

 

 
539

 
1,221

 
1,760

Industrial & warehouse

 

 

 

 
3,472

 
3,472

Other
3,331

 

 

 
3,331

 
4,092

 
7,423

Real estate—construction

 
7,000

 

 
7,000

 
1,300

 
8,300

Commercial business
919

 
2,245

 

 
3,164

 
12,114

 
15,278

Trade finance
92

 

 

 
92

 

 
92

Consumer and other
131

 
137

 
246

 
514

 
300

 
814

     Subtotal
$
5,910

 
$
11,741

 
$
1,679

 
$
19,330

 
$
36,842

 
$
56,172

Acquired Loans: (1)
 
 
 
 
 
 
 
 
 
 
 
Real estate—residential
$

 
$

 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
 
 
 
Retail

 
137

 

 
137

 
1,022

 
1,159

Hotel & motel

 

 

 

 
5,067

 
5,067

Gas station & car wash

 

 

 

 
460

 
460

Mixed use
30

 

 

 
30

 
161

 
191

Industrial & warehouse
33

 

 

 
33

 
503

 
536

Other
5,491

 

 
77

 
5,568

 
1,861

 
7,429

Real estate—construction
95

 

 

 
95

 

 
95

Commercial business
660

 
859

 

 
1,519

 
761

 
2,280

Trade finance

 

 

 

 

 

Consumer and other
64

 

 
94

 
158

 
684

 
842

     Subtotal
$
6,373

 
$
996

 
$
171

 
$
7,540

 
$
10,519

 
$
18,059

TOTAL
$
12,283

 
$
12,737

 
$
1,850

 
$
26,870

 
$
47,361

 
$
74,231

__________________________________
(1) 
Acquired Loans exclude PCI loans.
(2) 
Nonaccrual loans exclude guaranteed portion of delinquent SBA loans that are in liquidation totaling $15.5 million. Includes nonaccrual loans less than 30 days past due totaling $14.7 million.


28

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.

29

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 June 30, 2017 and December 31, 2016 by class of loans:
 
As of June 30, 2017
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
 
(Dollars in thousands)
Legacy Loans:
 
 
 
Real estate—residential
$
39,957

 
$
1,497

 
$
1,456

 
$

 
$
42,910

Real estate—commercial
 
 
 
 
 
 
 
 
 
Retail
1,468,439

 
23,024

 
20,725

 

 
1,512,188

Hotel & motel
1,185,023

 
10,770

 
12,243

 

 
1,208,036

Gas station & car wash
675,710

 
11,422

 
6,244

 

 
693,376

Mixed use
400,257

 
438

 
1,380

 

 
402,075

Industrial & warehouse
570,413

 
21,390

 
9,924

 

 
601,727

Other
1,103,423

 
38,537

 
45,035

 

 
1,186,995

Real estate—construction
212,195

 
13,774

 
2,877

 

 
228,846

Commercial business
1,165,079

 
27,779

 
76,204

 
2,208

 
1,271,270

Trade finance
106,218

 
3,738

 
147

 

 
110,103

Consumer and other
263,859

 
4

 
862

 

 
264,725

Subtotal
$
7,190,573

 
$
152,373

 
$
177,097

 
$
2,208

 
$
7,522,251

Acquired Loans:
 
 
 
 
 
 
 
 
 
Real estate—residential
$
17,368

 
$
266

 
$

 
$

 
$
17,634

Real estate—commercial
 
 
 
 
 
 
 
 
 
Retail
695,235

 
10,389

 
20,013

 

 
725,637

Hotel & motel
302,653

 
12,599

 
17,979

 

 
333,231

Gas station & car wash
237,757

 
8,135

 
9,444

 

 
255,336

Mixed use
108,020

 
5,942

 
11,002

 
8

 
124,972

Industrial & warehouse
293,708

 
13,475

 
16,158

 
273

 
323,614

Other
639,150

 
38,599

 
20,121

 

 
697,870

Real estate—construction
77,948

 

 

 

 
77,948

Commercial business
432,487

 
8,592

 
31,302

 
452

 
472,833

Trade finance
68,108

 

 
3,189

 

 
71,297

Consumer and other
188,840

 
687

 
5,267

 
927

 
195,721

Subtotal
$
3,061,274

 
$
98,684

 
$
134,475

 
$
1,660

 
$
3,296,093

Total
$
10,251,847

 
$
251,057

 
$
311,572

 
$
3,868

 
$
10,818,344


 

30

Table of Contents

 
As of December 31, 2016
 
Pass
 
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 six months ended June 30, 2017 and 2016 is presented in the following table:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Transfer of loans receivable to held for sale
(Dollars in thousands)
Real estate - commercial
$
2,671

 
$

 
$
11,370

 
$

Commercial business
2,243

 

 
2,995

 

Consumer
225

 

 
225

 
400

     Total
$
5,139

 
$

 
$
14,590

 
$
400


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.

31

Table of Contents

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.
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 our 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 our 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.

32

Table of Contents

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.
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. Provision for loan losses on acquired loans for the three months ended June 30, 2017 was $215 thousand of which included $70 thousand in credit for loan losses related to PCI loans. Provision for loan losses on acquired loans for the six months ended June 30, 2017 was $2.1 million of which included $64 thousand in credit for loan losses related to PCI loans.
The following table presents breakdown of loans by impairment method at June 30, 2017 and December 31, 2016:
 
As of June 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)
$

 
$
57,102

 
$
1,300

 
$
36,772

 
$
4,182

 
$
1,307

 
$
100,663

Specific allowance
$

 
$
2,163

 
$

 
$
6,754

 
$
3

 
$
30

 
$
8,950

Allowance coverage ratio
N/A

 
3.79
%
 
%
 
18.37
%
 
0.07
%
 
2.30
%
 
8.89
%
Other loans
$
60,544

 
$
8,007,955

 
$
305,494

 
$
1,707,331

 
$
177,218

 
$
459,139

 
$
10,717,681

General allowance
$
171

 
$
49,739

 
$
1,816

 
$
16,032

 
$
1,103

 
$
2,263

 
$
71,124

Allowance coverage ratio
0.28
%
 
0.62
%
 
0.59
%
 
0.94
%
 
0.62
%
 
0.49
%
 
0.66
%
Total loans
$
60,544

 
$
8,065,057

 
$
306,794

 
$
1,744,103

 
$
181,400

 
$
460,446

 
$
10,818,344

Total allowance for loan losses
$
171

 
$
51,902

 
$
1,816

 
$
22,786

 
$
1,106

 
$
2,293

 
$
80,074

Allowance coverage ratio
0.28
%
 
0.64
%
 
0.59
%
 
1.31
%
 
0.61
%
 
0.50
%
 
0.74
%
 
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

Allowance coverage ratio
%
 
2.15
%
 
%
 
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

Allowance coverage ratio
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

Allowance coverage ratio
0.36
%
 
0.64
%
 
0.64
%
 
1.29
%
 
1.22
%
 
0.53
%
 
0.75
%

33

Table of Contents

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 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 June 30, 2017, total TDR loans were $69.0 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 June 30, 2017 and December 31, 2016 is presented below:
 
As of June 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
$
16,099

 
$
201

 
$

 
$
16,300

 
$
1,858

 
$
1,249

 
$

 
$
3,107

 
$
19,407

Maturity / amortization concession
2,925

 
22,545

 
4,676

 
30,146

 
1,691

 
4,834

 
324

 
6,849

 
36,995

Rate concession
5,546

 
1,152

 
146

 
6,844

 
5,395

 
369

 

 
5,764

 
12,608

Total
$
24,570

 
$
23,898

 
$
4,822

 
$
53,290

 
$
8,944

 
$
6,452

 
$
324

 
$
15,720

 
$
69,010

 
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 June 30, 2017 were comprised of 20 commercial real estate loans totaling $24.6 million, 20 commercial business loans totaling $23.9 million, and 28 other loans totaling $4.8 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 June 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 $5.6 million and $5.3 million of specific reserves to TDRs as of June 30, 2017 and December 31, 2016, respectively. 

34

Table of Contents

The following table presents the recorded investment of loans classified as TDR within the three and six months ended June 30, 2017 and June 30, 2016 by class of loans:
 
Three Months Ended June 30, 2017
 
Three Months Ended June 30, 2016
 
Number of
Loans 
 
Pre-
Modification
 
Post-
Modification 
 
Number of
Loans 
 
Pre-
Modification
 
Post-
Modification 
 
(Dollars in thousands)
Legacy Loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate—commercial
 
 
 

 
 

 
 
 
 
 
 
Retail
1

 
$
660

 
$
641

 

 
$

 
$

Hotel & motel

 

 

 

 

 

Gas station & car wash

 

 

 

 

 

Mixed use

 

 

 

 

 

Industrial & warehouse

 

 

 

 

 

Other

 

 

 

 

 

Real estate - construction

 

 

 

 

 

Commercial business
3

 
5,193

 
5,163

 
2

 
113

 
114

Trade finance

 

 

 

 

 

Consumer and other

 

 

 
1

 

 
111

Subtotal
4

 
$
5,853

 
$
5,804

 
3

 
$
113

 
$
225

Acquired Loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate—commercial
 
 
 

 
 

 
 
 
 

 
 

Retail
1

 
$
128

 
$
125

 

 
$

 
$

Hotel & motel

 

 

 

 

 

Gas station & car wash

 

 

 

 

 

Mixed use

 

 

 

 

 

Industrial & warehouse

 

 

 

 

 

Other

 

 

 

 

 

Real estate—construction

 

 

 

 

 

Commercial business

 

 

 

 

 

Trade finance

 

 

 

 

 

Consumer and other

 

 

 

 

 

Subtotal
1

 
$
128

 
$
125

 

 
$

 
$

Total
5

 
$
5,981

 
$
5,929

 
3

 
$
113

 
$
225



35

Table of Contents

 
Six Months Ended June 30, 2017
 
Six Months Ended June 30, 2016
 
Number of
Loans 
 
Pre-
Modification
 
Post-
Modification 
 
Number of
Loans 
 
Pre-
Modification
 
Post-
Modification 
 
(Dollars in thousands)
Legacy Loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate—commercial
 
 
 

 
 

 
 
 
 
 
 
Retail
1

 
$
660

 
$
641

 

 
$

 
$

Hotel & motel

 

 

 

 

 

Gas station & car wash

 

 

 

 

 

Mixed use

 

 

 

 

 

Industrial & warehouse

 

 

 

 

 

Other

 

 

 

 

 

Real estate - construction

 

 

 

 

 

Commercial business
5

 
6,873

 
6,379

 
8

 
11,201

 
7,755

Trade finance

 

 

 
1

 
2,199

 
1,458

Consumer and other

 

 

 
1

 

 
111

Subtotal
6

 
$
7,533

 
$
7,020

 
10

 
$
13,400

 
$
9,324

Acquired Loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate—commercial
 
 
 

 
 

 
 
 
 

 
 

Retail
2

 
$
221

 
$
220

 

 
$

 
$

Hotel & motel

 

 

 

 

 

Gas station & car wash

 

 

 

 

 

Mixed use

 

 

 

 

 

Industrial & warehouse

 

 

 

 

 

Other

 

 

 

 

 

Real estate—construction

 

 

 

 

 

Commercial business
2

 
649

 
503

 

 

 

Trade finance

 

 

 

 

 

Consumer and other

 

 

 
1

 
30

 
27

Subtotal
4

 
$
870

 
$
723

 
1

 
$
30

 
$
27

Total
10

 
$
8,403

 
$
7,743

 
11

 
$
13,430

 
$
9,351

For TDRs modified during the three months ended June 30, 2017, the Company recorded totaled $1.1 million in specific reserves. There were no charge offs of TDR loans modified during the three months ended June 30, 2017. TDRs modified during the six months ended June 30, 2017 had $1.1 million in specific reserves. Charge offs for TDR loans modified during the six months ended June 30, 2017 totaled $131 thousand.
TDR loans modified during the three and six months ended June 30, 2016 had specific reserves of $69 thousand. There were no charge offs of TDR loans modified during the three and six months ended June 30, 2016.

36

Table of Contents

The following table presents loans modified as TDRs within the previous twelve months ended June 30, 2017 and June 30, 2016 that subsequently had payment defaults during the three and six months ended June 30, 2017 and June 30, 2016:
 
Three Months Ended June 30, 2017
 
Three Months Ended June 30, 2016
 
Number of Loans
 
Balance
 
Number of Loans
 
Balance
 
(Dollars In thousands)
Legacy Loans:
 
 
 
 
 
 
 
Real estate—commercial
 
 
 
 
 
 
 
Retail

 
$

 
1

 
$
489

Hotel & motel

 

 

 

Gas station & car wash

 

 

 

Mixed Use

 

 

 

Industrial & warehouse

 

 

 

Other
1

 
796

 

 

Real estate—construction

 

 

 

Commercial business
2

 
846

 
8

 
5,210

Trade finance

 

 
1

 
2,886

Consumer and other

 

 

 

Subtotal
3

 
$
1,642

 
10

 
$
8,585

Acquired Loans:
 
 
 
 
 
 
 
Real estate—commercial
 

 
 

 
 
 
 
Retail

 
$

 

 
$

Hotel & motel

 

 

 

Gas station & car wash

 

 

 

Mixed Use

 

 

 

Industrial & warehouse

 

 

 

Other

 

 

 

Real estate—construction

 

 

 

Commercial business
1

 
10

 

 

Trade finance

 

 

 

Consumer and other

 

 
1

 
27

Subtotal
1

 
$
10

 
1

 
$
27

Total
4

 
$
1,652

 
11

 
$
8,612


37

Table of Contents

 
Six Months Ended June 30, 2017
 
Six Months Ended June 30, 2016
 
Number of Loans
 
Balance
 
Number of Loans
 
Balance
 
(Dollars In thousands)
Legacy Loans:
 
 
 
 
 
 
 
Real estate—commercial
 
 
 
 
 
 
 
Retail

 
$

 
1

 
$
489

Hotel & motel

 

 

 

Gas station & car wash

 

 

 

Mixed Use

 

 

 

Industrial & warehouse



 

 

Other
1

 
796

 

 

Real estate—construction

 

 

 

Commercial business
2

 
846

 
8

 
5,210

Trade finance

 

 
1

 
2,886

Consumer and other

 

 

 

Subtotal
3

 
$
1,642

 
10

 
$
8,585

Acquired Loans:
 
 
 
 
 
 
 
Real estate—commercial
 

 
 

 
 
 
 
Retail

 
$

 

 
$

Hotel & motel

 

 

 

Gas station & car wash

 

 

 

Mixed Use

 

 

 

Industrial & warehouse

 

 

 

Other

 

 

 

Real estate—construction

 

 

 

Commercial business
1

 
10

 

 

Trade finance

 

 

 

Consumer and other

 

 
1

 
27

Subtotal
1

 
$
10

 
1

 
$
27

Total
4

 
$
1,652

 
11

 
$
8,612

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. As of June 30, 2017, the specific reserves totaled $181 thousand for the TDRs that had payment defaults during the three and six months ended June 30, 2017. The total charge offs for the TDRs that had payment defaults during the three and six months ended June 30, 2017 were $0 and $131 thousand, respectively.
There were three Legacy Loans that subsequently defaulted during the three and six months ended June 30, 2017 that were modified as follows: one Real Estate Commercial loan totaling $796 thousand was modified through payment concession, two commercial business loans totaling $846 thousand were modified through maturity concessions. There was one commercial business Acquired Loan totaling $10 thousand that subsequently defaulted during the three and six months ended June 30, 2017 that was modified through payment concession.
As of June 30, 2016, the specific reserves totaled $2.5 million for the TDRs that had payment defaults during the three and six months ended June 30, 2016. The total charge offs for the TDRs that had payment defaults during the three and six months ended June 30, 2016 were $30 thousand.
There were ten Legacy Loans that subsequently defaulted during the three and six months ended June 30, 2016 that were modified as follows: four Commercial Business loans totaling $496 thousand were modified through payment concessions, four Commercial Business loans totaling $4.7 million were modified through maturity concessions, one Real Estate Commercial loan totaling $489 thousand was modified through maturity concession, and one Trade Finance loan totaling $2.9 million was modified through maturity concession. There was one Consumer and other Acquired Loan totaling $27 thousand that defaulted during the three and six months ended June 30, 2016 that was modified through maturity concession.

38

Table of Contents

8.    Deposits
The aggregate amount of time deposits in denominations of $250,000 or more at June 30, 2017 and December 31, 2016, was $1.58 billion and $1.55 billion, respectively. Included in time deposits of $250,000 or more were $300.0 million in California State Treasurer’s deposits at June 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 June 30, 2017 and December 31, 2016, securities with carrying values of approximately $342.3 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 June 30, 2017 and December 31, 2016, totaled $814.7 million and $724.7 million, respectively.
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 $3.24 billion at June 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 June 30, 2017 and December 31, 2016, real estate secured loans with a carrying amount of approximately $4.74 billion and $5.53 billion, respectively, were pledged at the FHLB. At June 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 June 30, 2017 and December 31, 2016, FHLB advances totaled $793.4 million and $754.3 million, respectively, had weighted average effective interest rates of 1.34% and 1.22%, respectively, and had various maturities through June 2022. The Company had a putable advance at June 30, 2017 and December 31, 2016, totaling $20.0 million and $20.2 million, respectively, with a quarterly put date. The effective interest rate of FHLB advances as of June 30, 2017 ranged between 0.84% and 2.02%. At June 30, 2017, the Company’s remaining borrowing capacity with the FHLB was $2.44 billion.
At June 30, 2017, the contractual maturities for FHLB advances were as follows:

Contractual
Maturities

Maturity/
Put Date
 
(Dollars in thousands)
Due within one year
$
280,004

 
$
280,004

Due after one year through five years
513,399

 
513,399

Total
$
793,403

 
$
793,403


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 June 30, 2017, the outstanding principal balance of the qualifying loans was $680.3 million, and the fair value of investment securities was $5.7 million. There were no borrowings outstanding at the FRB discount window as of June 30, 2017 and December 31, 2016.


39

Table of Contents

10.    Subordinated Debentures
At June 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 June 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

4.40%

06/15/2033
Nara Statutory Trust IV

12/22/2003

5,000


5,155


Variable

4.01%

01/07/2034
Nara Statutory Trust V

12/17/2003

10,000


10,310


Variable

4.22%

12/17/2033
Nara Statutory Trust VI

03/22/2007

8,000


8,248


Variable

2.90%

06/15/2037
Center Capital Trust I

12/30/2003

18,000


13,731


Variable

4.01%

01/07/2034
Wilshire Statutory Trust II
 
03/17/2005
 
20,000

 
15,210

 
Variable
 
3.06%
 
03/17/2035
Wilshire Statutory Trust III
 
09/15/2005
 
15,000

 
10,679

 
Variable
 
2.65%
 
09/15/2035
Wilshire Statutory Trust IV
 
07/10/2007
 
25,000

 
17,343

 
Variable
 
2.63%
 
09/15/2037
Saehan Capital Trust I
 
03/30/2007
 
20,000

 
14,497

 
Variable
 
2.92%
 
06/30/2037
Total



$
126,000


$
100,328








The Company’s investment in the common trust securities of the issuer trusts was $3.9 million at June 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.

40

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 June 30, 2017 and December 31, 2016, the following interest rate swaps related to our loan hedging program were outstanding:
 
 
As of June 30, 2017
 
As of December 31, 2016
 
 
(Dollars in thousands)
Interest rate swaps on loans with loan customers:
 
 
 
 
Notional amount
 
$
274,049

 
$
223,098

Weighted average remaining term
 
7.7 years

 
7.4 years

Received fixed rate (weighted average)
 
4.34
%
 
4.29
%
Pay variable rate (weighted average)
 
3.44
%
 
3.06
%
Estimated fair value
 
$
(216
)
 
$
(1,565
)
Back to back interest rate swaps with correspondent banks:
 
 
 
 
Notional amount
 
$
274,049

 
$
223,098

Weighted average remaining term
 
7.7 years

 
7.4 years

Received variable rate (weighted average)
 
3.44
%
 
3.06
%
Pay fixed rate (weighted average)
 
4.34
%
 
4.29
%
Estimated fair value
 
$
216

 
$
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 June 30, 2017, we had approximately $24.5 million in interest rate lock commitments and $6.9 million in total forward sales commitments for the future delivery of residential mortgage loans. At December 31, 2016, we 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 June 30, 2017
 
As of December 31, 2016
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Interest rate lock commitments
$
4,207

 
$
31

 
$
11,168

 
$
130

Forward sale contracts related to mortgage banking
$
6,143

 
$
19

 
$
3,223

 
$
17

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate lock commitments
$
2,732

 
$
(7
)
 
$
1,810

 
$
(3
)
Forward sale contracts related to mortgage banking
$
796

 
$
(2
)
 
$
9,755

 
$
(38
)


41

Table of Contents

12.    Commitments and Contingencies
In the normal course of business, we are a party to financial instruments with off-balance sheet risk that are used to meet the financing needs of our 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. Our 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. We use the same credit policies in making commitments and conditional obligations as we do for extending loan facilities to customers. We evaluate 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 our credit evaluation of the counterparty. The types of collateral that we may hold can vary and may include accounts receivable, inventory, property, plant and equipment, and income-producing properties.
Commitments at June 30, 2017 and December 31, 2016 are summarized as follows:

 
June 30, 2017
 
December 31, 2016
 
(Dollars in thousands)
Commitments to extend credit
$
1,567,393

 
$
1,592,221

Standby letters of credit
75,941

 
63,753

Other letters of credit
67,202

 
52,125

Commitments to fund investments in affordable housing partnerships
43,929

 
24,409

Interest rate lock
24,533

 
23,749

Forward sale commitments
6,939

 
12,978

Operating lease commitments
52,124

 
51,059

In the normal course of business, we are involved in various legal claims. We have 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 $472 thousand at June 30, 2017 and $557 thousand at December 31, 2016. It is reasonably possible we may incur losses in addition to the amounts we have accrued. However, at this time, we are 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 we believe 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.

42

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 goodwill 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 the fair value of goodwill exceeded the carrying value and that the two-step 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 June 30, 2017 and December 31, 2016 was $464.5 million and $463.0 million, respectively. There was no impairment of goodwill during the three or six months ended June 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 $978 thousand. 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. 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 June 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 $212 thousand for the three months ended June 30, 2017 and 2016, respectively. The amortization expense related to core deposit intangible assets totaled $1.4 million and $425 thousand for the six months ended June 30, 2017 and 2016, respectively. The following table provides information regarding the core deposit intangibles at June 30, 2017:
 
 
 
As of June 30, 2017
 
Amortization period
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
 
 
 (Dollars in thousands)
Core deposit—Center Financial acquisition
7 years
 
$
4,100

 
$
(3,825
)
Core deposit—PIB acquisition
7 years
 
603

 
(500
)
Core deposit—Foster acquisition
10 years
 
2,763

 
(1,490
)
Core deposit—Wilshire acquisition
10 years
 
18,138

 
(1,915
)
Total
 
 
$
25,604

 
$
(7,730
)

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 the related note rate. 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 June 30, 2017 and December 31, 2016, the Company did not have a valuation allowance for servicing assets.

43

Table of Contents

The changes in servicing assets for the three and six months ended June 30, 2017 and 2016 were as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Dollars in thousands)
Balance at beginning of period
 
$
25,941

 
$
11,856

 
$
26,457

 
$
12,000

Additions through originations of servicing assets
 
1,316

 
1,309

 
2,612

 
2,087

Amortization
 
(1,919
)
 
(972
)
 
(3,731
)
 
(1,894
)
Balance at end of period
 
$
25,338

 
$
12,193

 
$
25,338

 
$
12,193


Loans serviced for others are not reported as assets. The principal balances of loans serviced for other institutions were $1.50 billion as of June 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 June 30, 2017 and December 31, 2016 are presented below.
 
 
June 30, 2017
 
December 31, 2016
SBA Servicing Assets:
 
 
 
 
Weighted-average discount rate
 
10.13%
 
9.85%
Constant prepayment rate
 
8.20%
 
8.05%
Mortgage Servicing Assets:
 
 
 
 
Weighted-average discount rate
 
9.63%
 
7.25%
Constant prepayment rate
 
9.13%
 
13.77%

44

Table of Contents

14.    Income Taxes
For the second quarter of 2017, the Company had an income tax provision totaling $25.5 million on pretax income of $66.1 million, representing an effective tax rate of 38.48%, compared with an income tax provision of $16.8 million on pretax income of $40.2 million, representing an effective tax rate of 41.85% for the second quarter of 2016. For the six months ended June 30, 2017, the Company had an income tax provision totaling $48.5 million on pretax income of $125.3 million, representing an effective tax rate of 38.65%, compared with an income tax provision of $33.0 million on pretax income of $80.1 million, representing an effective tax rate of 41.28% for the six months ended June 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 six months ended June 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 six months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Statutory tax rate
 
35.00
 %
 
35.00
 %
 
35.00
 %
 
35.00
 %
State taxes-net of federal tax effect
 
7.16
 %
 
7.27
 %
 
7.16
 %
 
7.27
 %
Affordable housing partnership investment tax credit
 
(3.15
)%
 
(1.30
)%
 
(3.15
)%
 
(1.30
)%
Bank owned life insurance
 
(0.16
)%
 
(0.24
)%
 
(0.16
)%
 
(0.24
)%
Municipal securities
 
(0.25
)%
 
(0.21
)%
 
(0.25
)%
 
(0.21
)%
Nondeductible transaction costs
 
0.08
 %
 
0.52
 %
 
0.08
 %
 
0.52
 %
Other
 
(0.20
)%
 
0.81
 %
 
(0.03
)%
 
0.24
 %
Effective income tax rate
 
38.48
 %
 
41.85
 %
 
38.65
 %
 
41.28
 %
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 June 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 $319 thousand and $306 thousand for accrued interest and penalties (no portion was related to penalties) at June 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 2012. 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 and by the New York State Department of Taxation and Finance for the 2011, 2012, 2013, and 2014 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 June 30, 2017.

45

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. Our 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.
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.

46

Table of Contents

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
 
June 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:







GSE debt securities
$
9,995

 
$

 
$
9,995

 
$

GSE collateralized mortgage obligations (residential)
783,594




783,594



GSE mortgage-backed securities (residential)
771,543




771,543



Corporate securities
4,606




4,606



Municipal securities
97,512




96,385


1,127

Mutual funds
13,132


13,132





Interest rate swaps
(216
)
 

 
(216
)
 

Mortgage banking derivatives
50

 

 
50

 

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate swaps
(216
)
 

 
(216
)
 

Mortgage banking derivatives
9

 

 
9

 



 

47

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:
 
 
 
 
 
 
 
GSE debt securities
$
12,008

 
$

 
$
12,008

 
$

GSE collateralized mortgage obligations (residential)
705,667

 

 
705,667

 

GSE mortgage-backed securities (residential)
728,041

 

 
728,041

 

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 six months ended June 30, 2017 and 2016.
The following table reflects the notional amount and fair value of mortgage banking derivatives for the date indicated:
 
As of June 30, 2017
 
As of December 31, 2016
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Interest rate lock commitments
$
4,207

 
$
31

 
$
11,168

 
$
130

Forward sale contracts related to mortgage banking
$
6,143

 
$
19

 
$
3,223

 
$
17

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate lock commitments
$
2,732

 
$
(7
)
 
$
1,810

 
$
(3
)
Forward sale contracts related to mortgage banking
$
796

 
$
(2
)
 
$
9,755

 
$
(38
)

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 six months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Dollars in thousands)
Beginning Balance
 
$
1,128

 
$
1,209

 
$
1,139

 
$
1,166

Total (losses) gains included in other
comprehensive income
 
(1
)
 
25

 
(12
)
 
68

Ending Balance
 
$
1,127

 
$
1,234

 
$
1,127

 
$
1,234




48

Table of Contents

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, the application of fair value less cost to sell on OREO.
Assets measured at fair value on a non-recurring basis are summarized below:
 
 

Fair Value Measurements at the End of the Reporting Period Using
 
June 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
$
11,764


$


$


$
11,764

Commercial business
6,152






6,152

Loans held for sale, net
773




773



OREO
12,231






12,231


 
 
 
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 June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Impaired loans at fair value:
 
 
 
 
 
 
 
Real estate loans
$
(433
)
 
$
(58
)
 
$
(2,435
)
 
$
251

Commercial business
(4,027
)
 
(176
)
 
(5,001
)
 
(2,848
)
Trade Finance
(527
)
 
(215
)
 
(1,239
)
 
1,081

Consumer
(229
)
 
(32
)
 
(495
)
 
(94
)
Loans held for sale, net
353

 
43

 
772

 
43

OREO
(733
)
 
(668
)
 
(1,328
)
 
(1,245
)


49

Table of Contents

Fair Value of Financial Instruments
Carrying amounts and estimated fair values of financial instruments, not previously presented, at June 30, 2017 and December 31, 2016 were as follows:
 
June 30, 2017
 
Carrying
Amount

Estimated
Fair Value
 
Fair Value Measurement Using
 
(Dollars in thousands)
Financial Assets:



 

Cash and cash equivalents
$
446,415


$
446,415

 
Level 1
Interest bearing deposits in other financial institutions and
  other investments
43,962

 
43,238

 
Level 2/3
Loans held for sale
16,927


17,861

 
Level 2
Loans receivable—net
10,736,345


10,833,880

 
Level 3
FHLB stock
22,351


N/A

 
N/A
Accrued interest receivable
25,640


25,640

 
Level 2/3
Servicing assets
25,338

 
25,338

 
Level 3
Customers’ liabilities on acceptances
1,669


1,669

 
Level 2
Financial Liabilities:
 
 
 
 
 
Noninterest bearing deposits
$
3,016,538


$
3,016,538

 
Level 2
Saving and other interest bearing demand deposits
3,838,676


3,838,676

 
Level 2
Time deposits
4,099,887


4,094,549

 
Level 2
FHLB advances
793,403


789,347

 
Level 2
Subordinated debentures
100,328


100,328

 
Level 2
Accrued interest payable
11,855


11,855

 
Level 2
Acceptances outstanding
1,669


1,669

 
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


50

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 June 30, 2017 was $1.91 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 June 30, 2017, the U.S. Treasury Department held one remaining warrant for the purchase of 20,087 shares of the Company’s common stock.
The Company paid a quarterly dividend of $0.12 per common share for the second quarter of 2017 compared to $0.11 per common share for the second quarter of 2016. For the six months ended June 30, 2017 and 2016, the Company paid total dividends of $0.24 and $0.22, respectively.
The following table presents the quarterly changes to accumulated other comprehensive (loss) income for the three and six months ended June 30, 2017 and June 30, 2016:
 
Three Months Ended,
 
June 30, 2017
 
June 30, 2016
 
(Dollars in thousands)
Balance at beginning of period
$
(12,849
)
 
$
7,155

Unrealized gains on securities available for sale and interest only strips
4,776

 
6,603

Less tax effect
2,016

 
2,784

Total other comprehensive income
2,760

 
3,819

Balance at end of period
$
(10,089
)
 
$
10,974

 
Six Months Ended,
 
June 30, 2017
 
June 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
7,908

 
22,195

Less tax effect
3,340

 
9,389

Total other comprehensive income
4,568

 
12,806

Balance at end of period
$
(10,089
)
 
$
10,974

For the three and six months ended June 30, 2017 and June 30, 2016 there were no reclassifications out of accumulated other comprehensive (loss) income.


51

Table of Contents

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 June 30, 2017, the capital conservation buffer for the Company stood at 1.25%.
As of June 30, 2017, the ratios for the Company and the Bank are sufficient to meet the fully phased-in conservation buffer.
As of June 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 notification from regulators that management believes has changed the institution’s category. As of June 30, 2017 and December 31, 2016, the Company and the Bank met the capital adequacy requirements to which they are subject.

52

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 Buffer
 
Required
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
As of June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital
(to risk weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
Company
$
1,438,907

 
12.18
%
 
$
531,657

 
4.50
%
 
$
679,340

 
5.750
%
 
N/A

 
N/A

Bank
$
1,514,997

 
12.83
%
 
$
531,376

 
4.50
%
 
$
678,980

 
5.750
%
 
$
767,543

 
6.50
%
Total capital
(to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
Company
$
1,619,043

 
13.70
%
 
$
945,169

 
8.00
%
 
$
1,092,851

 
9.250
%
 
N/A

 
N/A

Bank
$
1,598,707

 
13.54
%
 
$
944,668

 
8.00
%
 
$
1,092,273

 
9.250
%
 
$
1,180,835

 
10.00
%
Tier I capital
(to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
Company
$
1,535,333

 
13.00
%
 
$
708,876

 
6.00
%
 
$
856,559

 
7.250
%
 
N/A

 
N/A

Bank
$
1,514,997

 
12.83
%
 
$
708,501

 
6.00
%
 
$
678,980

 
7.250
%
 
$
944,668

 
8.00
%
Tier I capital
(to average assets):
 
 
 
 
 
 
 
 
 
 
 
 
Company
$
1,535,333

 
11.80
%
 
$
520,617

 
4.00
%
 
N/A

 
N/A

 
N/A

 
N/A

Bank
$
1,514,997

 
11.64
%
 
$
520,527

 
4.00
%
 
N/A

 
N/A

 
$
650,659

 
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
%


53

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 June 30,
 
At or for the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands, except share and per share data)
Income Statement Data:
 
 
 
 
 
 
 
Interest income
$
138,533

 
$
83,534

 
$
271,276

 
$
166,995

Interest expense
21,713

 
12,470

 
39,551

 
24,324

Net interest income
116,820

 
71,064

 
231,725

 
142,671

Provision for loan losses
2,760

 
1,200

 
8,360

 
1,700

Net interest income after provision for loan losses
114,060

 
69,864

 
223,365

 
140,971

Noninterest income
16,115

 
10,707

 
33,718

 
19,482

Noninterest expense
64,037

 
40,348

 
131,736

 
80,397

Income before income tax provision
66,138

 
40,223

 
125,347

 
80,056

Income tax provision
25,451

 
16,833

 
48,450

 
33,043

Net income
$
40,687

 
$
23,390

 
$
76,897

 
$
47,013

Per Share Data:
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.30

 
$
0.29

 
$
0.57

 
$
0.59

Earnings per common share - diluted
$
0.30

 
$
0.29

 
$
0.57

 
$
0.59

Book value per common share (period end)
$
14.09

 
$
12.21

 
$
14.09

 
$
12.21

Cash dividends declared per common share
$
0.12

 
$
0.11

 
$
0.24

 
$
0.22

Tangible book value per common share
(period end) (9)
$
10.52

 
$
10.85

 
$
10.52

 
$
10.85

Number of common shares outstanding
(period end)
135,297,678

 
79,606,821

 
135,297,678

 
79,606,821

Weighted average shares - basic
135,257,044

 
79,604,673

 
135,252,556

 
79,595,599

Weighted average shares - diluted
135,613,181

 
79,634,762

 
135,685,064

 
79,625,673

Tangible common equity to tangible assets
10.64
%
 
10.50
%
 
10.64
%
 
10.50
%
 
 
 
 
 
 
 
 
Average Balance Sheet Data:
 
 
 
 
 
 
 
Assets
$
13,470,745

 
$
8,157,358

 
$
13,403,609

 
$
8,016,649

Securities available for sale
1,609,310

 
1,089,080

 
1,588,519

 
1,052,972

Loans receivable and loans held for sale
10,536,428

 
6,457,883

 
10,459,527

 
6,363,656

Deposits
10,680,094

 
6,517,159

 
10,644,302

 
6,403,931

Stockholders’ equity
1,892,126

 
967,919

 
1,880,626

 
956,777

          

54

Table of Contents

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Selected Performance Ratios:
 
 
 
 
 
 
 
Return on average assets (1)
1.21
%
 
1.15
%
 
1.15
%
 
1.17
%
Return on average stockholders’ equity (1)
8.60
%
 
9.67
%
 
8.18
%
 
9.83
%
Return on average tangible equity (1) (8)
11.54
%
 
10.88
%
 
11.00
%
 
11.08
%
Dividend payout ratio
(dividends per share / earnings per share)
40.00
%
 
37.93
%
 
42.35
%
 
37.29
%
Efficiency ratio (2)
48.17
%
 
49.34
%
 
49.63
%
 
49.58
%
Net interest spread
3.42
%
 
3.39
%
 
3.46
%
 
3.47
%
Net interest margin (3)
3.75
%
 
3.67
%
 
3.76
%
 
3.75
%
 
 
 
 
 
 
 
 
 
At June 30,
 
 
 
 
 
2017
 
2016
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
Statement of Financial Condition Data - at Period End:
 
 
 
 
 
 
Assets
$
13,859,217

 
$
8,336,826

 
 
 
 
Securities available for sale
1,680,382

 
1,099,944

 
 
 
 
Loans receivable
10,816,419

 
6,584,237

 
 
 
 
Deposits
10,955,101

 
6,637,522

 
 
 
 
FHLB advances
793,403

 
610,398

 
 
 
 
Subordinated debentures
100,328

 
42,415

 
 
 
 
Stockholders’ equity
1,906,294

 
971,740

 
 
 
 
 
 
 
 
 
 
 
 
Regulatory Capital Ratios (4)
 
 
 
 
 
 
 
Leverage capital ratio (5)
11.80
%
 
11.14
%
 
 
 
 
Tier 1 risk-based capital ratio
13.00
%
 
12.22
%
 
 
 
 
Total risk-based capital ratio
13.70
%
 
13.28
%
 
 
 
 
Common equity tier 1 capital ratio (10)
12.18
%
 
11.66
%
 
 
 
 
 
 
 
 
 
 
 
 
Asset Quality Ratios:
 
 
 
 
 
 
 
Allowance for loan losses to loans receivable
0.74
%
 
1.16
%
 
 
 
 
Allowance for loan losses to nonaccrual loans
169.07
%
 
180.26
%
 
 
 
 
Allowance for loan losses to nonperforming loans (6)
78.12
%
 
81.84
%
 
 
 
 
Allowance for loan losses to nonperforming assets (7)
64.40
%
 
69.62
%
 
 
 
 
Nonaccrual loans to loans receivable
0.44
%
 
0.64
%
 
 
 
 
Nonperforming loans to loans receivable (6)
0.95
%
 
1.42
%
 
 
 
 
Nonperforming assets to loans receivable and OREO (7)
1.15
%
 
1.66
%
 
 
 
 
Nonperforming assets to total assets (7)
0.90
%
 
1.32
%
 
 
 
 
__________________________________
(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.

55

Table of Contents

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Dollars in thousands)
Net income
 
$
40,687

 
$
23,390

 
$
76,897

 
$
47,013

 
 
 
 
 
 
 
 
 
Average stockholders’ equity
 
1,892,126

 
$
967,919

 
$
1,880,626

 
$
956,777

Less: Average goodwill and core deposit intangible assets, net
 
(482,270
)
 
(107,916
)
 
(482,128
)
 
(108,018
)
Average tangible equity
 
$
1,409,856

 
$
860,003

 
$
1,398,498

 
$
848,759

 
 
 
 
 
 
 
 
 
Net income (annualized) to average tangible equity
 
11.54
%
 
10.88
%
 
11.00
%
 
11.08
%

 
 
June 30, 2017
 
June 30, 2016
 
 
(Dollars in thousands, except share data)
Total stockholders’ equity
 
$
1,906,294

 
$
971,740

Less: Goodwill and core deposit intangible assets, net
 
(482,324
)
 
(107,796
)
Tangible common equity
 
$
1,423,970

 
$
863,944

 
 
 
 
 
Common shares outstanding
 
135,297,678

 
79,606,821

 
 
 
 
 
Tangible book value per common share9
 
$
10.52

 
$
10.85

__________________________________
(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.

 
 
June 30, 2017
 
June 30, 2016
 
 
(Dollars in thousands)
Tier 1 capital
 
$
1,535,333

 
$
895,429

Less: Trust preferred securities less unamortized acquisition discount
 
(96,426
)
 
(40,991
)
Common equity tier 1 capital
 
$
1,438,907

 
$
854,438

 
 
 
 
 
Total risk weighted assets less disallowed allowance for loan losses
 
$
11,814,607

 
$
7,329,482

 
 
 
 
 
Common equity tier 1 capital ratio10
 
12.18
%
 
11.66
%
__________________________________
(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.



56

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 2017 first and second quarter financial results reflect full quarters of combined operations. The 2016 second quarter reflects stand-alone operations of the former BBCN. As a result, the Company’s 2017 second quarter may not be comparable to financial results for the year-ago second quarter.
Overview
Total assets increased $417.8 million from $13.44 billion at December 31, 2016 to $13.86 billion at June 30, 2017. The increase in total assets was primarily due to an increase in loans receivable of $272.4 million and an increase in securities available for sale of $123.6 million during the six months ended June 30, 2017.
Net income for the second quarter of 2017 was $40.7 million, or $0.30 per diluted common share, compared to $23.4 million, or $0.29 per diluted common share, for the same period of 2016, which was an increase of $17.3 million, or 74.0%. 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. Net interest income before provision for loan losses increased $45.8 million for the second quarter of 2017 compared to the second quarter of 2016. This increase was partially offset by an increase in noninterest expense of $23.7 million for the same period.
Net income for the six months ended June 30, 2017 was $76.9 million, or $0.57 per diluted common share, compared to $47.0 million, or $0.59 per diluted common share, for the same period of 2016, which represents an increase of $29.9 million, or 63.6%. The increase in net income was again 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 six months ended June 30, 2017 and 2016:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Accretion of discounts on acquired performing loans
$
3,501

 
$
898

 
$
6,177

 
$
2,864

Accretion of discounts on purchased credit impaired loans
5,212

 
2,474

 
10,560

 
5,503

Amortization/accretion of premiums or discounts on low income
   housing tax credit investments
(85
)
 
6

 
(169
)
 
12

Amortization of premiums on assumed FHLB advances
446

 
97

 
887

 
194

Accretion of discounts on assumed subordinated debt
(261
)
 
(44
)
 
(520
)
 
(88
)
Amortization of premiums on assumed time deposits
   and savings
1,218

 
19

 
4,694

 
43

Amortization of core deposit intangibles
(676
)
 
(212
)
 
(1,352
)
 
(425
)
Total
$
9,355

 
$
3,238

 
$
20,277

 
$
8,103

The annualized return on average assets was 1.21% for the second quarter of 2017 compared to 1.15% for the same period of 2016. The annualized return on average stockholders’ equity was 8.60% for the second quarter of 2017 compared to 9.67% for the same period of 2016. The efficiency ratio was 48.17% for the second quarter of 2017 compared to 49.34% for the same period of 2016.
The annualized return on average assets was 1.15% for the six months ended June 30, 2017, compared to 1.17% for the same period of 2016. The annualized return on average stockholders' equity was 8.18% for the six months ended June 30, 2017 compared to 9.83% for the same period of 2016. The efficiency ratio was 49.63% for the six months ended June 30, 2017 compared to 49.58% for the same period of 2016.

57

Table of Contents

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 June 30, 2017 with the Three Months Ended June 30, 2016
Net interest income before provision for loan losses was $116.8 million for the second quarter of 2017, compared to $71.1 million for the same period of 2016, an increase of $45.7 million, or 64.4%. The increase in net interest income was due largely to interest earning assets acquired from Wilshire in the merger, which closed during the third quarter of 2016.
Interest income for the second quarter of 2017 was $138.5 million, an increase of $55.0 million, or 65.8%, compared to $83.5 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.
Interest expense for the second quarter of 2017 was $21.7 million, an increase of $9.2 million, or 74.1% compared to $12.5 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.
Comparison of Six Months Ended June 30, 2017 with the Six Months Ended June 30, 2016
Net interest income before provision for loan losses was $231.7 million for the six months ended June 30, 2017, compared to $142.7 million for the same period of 2016, an increase of $89.0 million, or 62.4%. The increase in net interest income was due largely to interest earning assets acquired from Wilshire in the merger.
Interest income for the six months ended June 30, 2017 was $271.3 million, an increase of $104.3 million, or 62.5%, compared to $167.0 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.
Interest expense for the six months ended June 30, 2017 was $39.6 million, an increase of $15.3 million, or 62.6% compared to $24.3 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.
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 second quarter of 2017 was 3.75%, an increase of 8 basis points from 3.67% for the same period of 2016. Net interest margin for the six months ended June 30, 2017 was 3.76%, an increase of 1 basis point from 3.75% for the same period of 2016.
The weighted average yield on loans increased to 4.89% for the second quarter of 2017 from 4.80% for the second quarter of 2016. The weighted average yield on loans was 4.85% for the six months ended June 30, 2017 compared to 4.87% for the six months ended June 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.
The weighted average yield on securities available for sale for the second quarter of 2017 was 2.18% compared to 2.10% for the same period of 2016. The weighted average yield on securities available for sale for the six months ended June 30, 2017 was 2.14% compared to 2.17% for the six months ended June 30, 2016. The increase in weighted average yield on securities available for sale for the second quarter of 2017 compared to the same period of 2016 was due to the purchase of $150.3 million in investment securities at an average rate of 2.62% during the second quarter of 2017. The decrease in weighted average yield for six months ended June 30, 2017 compared to the six months ended June 30, 2016 was primarily attributable to the inclusion of the investment portfolio acquired from Wilshire, which had a lower average fair value yield compared to the Company’s investment portfolio prior to the merger.

58

Table of Contents

The weighted average cost of deposits for the second quarter of 2017 was 0.68%, an increase of 4 basis points from 0.64% for the same period of 2016. The weighted average cost of deposits for the six months ended June 30, 2017 was 0.62% compared to 0.64% for the six months ended June 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 second 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 six months ended June 30, 2017, which experienced a decline of 2 basis points compared to the weighted average cost of deposits for the six months ended June 30, 2016.
The weighted average cost of FHLB advances for the second quarter of 2017 was 1.31%, an increase of 11 basis points from 1.20% for the same period of 2016. The weighted average cost of FHLB advances for the six months ended June 30, 2017 was 1.31%, an increase of 13 basis points from 1.18% for the six months ended June 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.
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 June 30, 2017
 
Three Months Ended June 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)
$
10,536,428

 
$
128,515

 
4.89
%
 
$
6,457,883

 
$
77,086

 
4.80
%
Securities available for sale(3)
1,609,310

 
8,741

 
2.18
%
 
1,089,080

 
5,729

 
2.10
%
FRB and FHLB stock and other investments
364,906

 
1,277

 
1.40
%
 
237,872

 
719

 
1.20
%
Total interest earning assets
12,510,644

 
138,533

 
4.44
%
 
7,784,835

 
83,534

 
4.32
%
Total noninterest earning assets
960,101

 
 
 
 
 
372,523

 
 
 
 
Total assets
$
13,470,745

 
 
 
 
 
$
8,157,358

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INTEREST BEARING LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand, interest bearing
$
3,457,412

 
$
7,974

 
0.93
%
 
$
2,030,272

 
$
4,147

 
0.82
%
Savings
280,188

 
279

 
0.40
%
 
178,249

 
285

 
0.64
%
Time deposits
4,012,838

 
9,861

 
0.99
%
 
2,636,652

 
5,920

 
0.90
%
Total interest bearing deposits
7,750,438

 
18,114

 
0.94
%
 
4,845,173

 
10,352

 
0.86
%
FHLB advances
713,858

 
2,338

 
1.31
%
 
564,637

 
1,686

 
1.20
%
Other borrowings
96,218

 
1,261

 
5.18
%
 
40,861

 
432

 
4.18
%
Total interest bearing liabilities
8,560,514

 
21,713

 
1.02
%
 
5,450,671

 
12,470

 
0.92
%
Noninterest bearing liabilities and equity:
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing demand deposits
2,929,656

 
 
 
 
 
1,671,986

 
 
 
 
Other liabilities
88,449

 
 
 
 
 
66,782

 
 
 
 
Stockholders’ equity
1,892,126

 
 
 
 
 
967,919

 
 
 
 
Total liabilities and stockholders’ equity
$
13,470,745

 
 
 
 
 
$
8,157,358

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income/net interest spread
 
 
$
116,820

 
3.42
%
 
 
 
$
71,064

 
3.39
%
Net interest margin
 
 
 
 
3.75
%
 
 
 
 
 
3.67
%
Cost of deposits
 
 
 
 
0.68
%
 
 
 
 
 
0.64
%
__________________________________
*
Annualized
(1) 
Interest income on loans includes loan fees.

59

Table of Contents

(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.


 
Six Months Ended June 30, 2017
 
Six Months Ended June 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)
$
10,459,527

 
$
251,809

 
4.85
%
 
$
6,363,656

 
$
154,204

 
4.87
%
Securities available for sale(3)
1,588,519

 
16,854

 
2.14
%
 
1,052,972

 
11,406

 
2.17
%
FRB and FHLB stock and other investments
394,267

 
2,613

 
1.34
%
 
227,460

 
1,385

 
1.20
%
Total interest earning assets
12,442,313

 
271,276

 
4.40
%
 
7,644,088

 
166,995

 
4.39
%
Total noninterest earning assets
961,296

 
 
 
 
 
372,561

 
 
 
 
Total assets
$
13,403,609

 
 
 
 
 
$
8,016,649

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INTEREST BEARING LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand, interest bearing
$
3,447,254

 
$
15,164

 
0.89
%
 
$
1,999,454

 
$
8,151

 
0.82
%
Savings
286,862

 
567

 
0.40
%
 
182,356

 
651

 
0.72
%
Time deposits
4,011,019

 
16,894

 
0.85
%
 
2,571,346

 
11,457

 
0.90
%
Total interest bearing deposits
7,745,135

 
32,625

 
0.85
%
 
4,753,156

 
20,259

 
0.86
%
FHLB advances
688,307

 
4,477

 
1.31
%
 
548,421

 
3,209

 
1.18
%
Other borrowings
96,065

 
2,449

 
5.07
%
 
40,837

 
856

 
4.14
%
Total interest bearing liabilities
8,529,507

 
39,551

 
0.94
%
 
5,342,414

 
24,324

 
0.92
%
Noninterest bearing liabilities and equity:
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing demand deposits
2,899,167

 
 
 
 
 
1,650,775

 
 
 
 
Other liabilities
94,309

 
 
 
 
 
66,683

 
 
 
 
Stockholders’ equity
1,880,626

 
 
 
 
 
956,777

 
 
 
 
Total liabilities and stockholders’ equity
$
13,403,609

 
 
 
 
 
$
8,016,649

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income/net interest spread
 
 
$
231,725

 
3.46
%
 
 
 
$
142,671

 
3.47
%
Net interest margin
 
 
 
 
3.76
%
 
 
 
 
 
3.75
%
Cost of deposits
 
 
 
 
0.62
%
 
 
 
 
 
0.64
%
__________________________________
*
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.

60

Table of Contents

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
June 30, 2017 over June 30, 2016
 
Net
Increase
(Decrease)
 
 
 
 
Change due to
 
Rate
 
Volume
 
(Dollars in thousands)
INTEREST INCOME:
 
 
 
 
 
Loans, including fees
$
51,429

 
$
1,504

 
$
49,925

Securities
3,012

 
230

 
2,782

Interest bearing deposits in other banks and other investments
558

 
137

 
421

Total interest income
$
54,999

 
$
1,871

 
$
53,128

INTEREST EXPENSE:
 
 
 
 
 
Demand, interest bearing
$
3,827

 
$
582

 
$
3,245

Savings
(6
)
 
(133
)
 
127

Time deposits
3,941

 
588

 
3,353

FHLB advances
652

 
171

 
481

Other borrowings
829

 
125

 
704

Total interest expense
$
9,243

 
$
1,333

 
$
7,910

NET INTEREST INCOME
$
45,756

 
$
538

 
$
45,218

 
Six Months Ended
June 30, 2017 over June 30, 2016
 
Net
Increase
(Decrease)
 
 
 
 
 
Change due to
 
Rate
 
Volume
 
(Dollars in thousands)
INTEREST INCOME:
 
 
 
 
 
Loans, including fees
$
97,605

 
$
(579
)
 
$
98,184

Securities
5,448

 
(154
)
 
5,602

Interest bearing deposits in other banks and other investments
1,228

 
160

 
1,068

Total interest income
$
104,281

 
$
(573
)
 
$
104,854

INTEREST EXPENSE:
 
 
 
 
 
Demand, interest bearing
$
7,013

 
$
714

 
$
6,299

Savings
(84
)
 
(362
)
 
278

Time deposits
5,437

 
(626
)
 
6,063

FHLB advances
1,268

 
393

 
875

Other borrowings
1,593

 
228

 
1,365

Total interest expense
$
15,227

 
$
347

 
$
14,880

NET INTEREST INCOME
$
89,054

 
$
(920
)
 
$
89,974



61

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 second quarter of 2017 was $2.8 million, an increase of $1.6 million from $1.2 million for the same period last year. The provision for loan losses for the six months ended June 30, 2017 was $8.4 million, an increase of $6.7 million from $1.7 million for the six months ended June 30, 2016. The increase in provision for loan losses for periods in 2017 compared to periods in 2016 was primarily due to an increase in charge offs during the six months ended June 30, 2017 which led to an increase in loss rates used in our allowance calculation. The increase in charge offs was due primarily to one 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, and other income. Noninterest income for the second quarter of 2017 was $16.1 million compared to $10.7 million for the same quarter of 2016, an increase of $5.4 million, or 50.5%. Noninterest income for the six months ended June 30, 2017 was $33.7 million compared to $19.5 million for the six months ended June 30, 2016, an increase of $14.2 million, or 73.1%.
Noninterest income by category is summarized in the table below:
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Increase
 
2017

2016
 
Amount
 
Percent (%)
 
(Dollars in thousands)
Service fees on deposit accounts
$
5,179

 
$
2,902

 
$
2,277

 
78.5
%
International service fees
1,119

 
816

 
303

 
37.1
%
Loan servicing fees, net
1,291

 
589

 
702

 
119.2
%
Wire transfer fees
1,343

 
893

 
450

 
50.4
%
Net gains on sales of SBA loans
3,267

 
3,035

 
232

 
7.6
%
Net gains on sales of other loans
352

 
43

 
309

 
718.6
%
Other income and fees
3,564

 
2,429

 
1,135

 
157.7
%
Total noninterest income
$
16,115

 
$
10,707

 
$
5,408

 
50.5
%
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Increase
 
2017
 
2016
 
Amount
 
Percent (%)
 
(Dollars in thousands)
Service fees on deposit accounts
$
10,517

 
$
5,585

 
$
4,932

 
88.3
%
International service fees
2,227

 
1,591

 
636

 
40.0
%
Loan servicing fees, net
2,729

 
1,280

 
1,449

 
113.2
%
Wire transfer fees
2,529

 
1,807

 
722

 
40.0
%
Net gains on sales of SBA loans
6,517

 
4,860

 
1,657

 
34.1
%
Net gains on sales of other loans
772

 
43

 
729

 
1,695.3
%
Other income and fees
8,427

 
4,316

 
4,111

 
95.3
%
Total noninterest income
$
33,718

 
$
19,482

 
$
14,236

 
73.1
%

62

Table of Contents

The increase in noninterest income for the second quarter of 2017 compared to the second quarter of 2016 was largely due to an increase in service fees on deposit accounts of $2.3 million, an increase in loan servicing fees of $702 thousand, and an increase in other income and fees of $1.1 million. The increase in service fees on deposits accounts and 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 in the merger with Wilshire. The increase in other income and fees was largely due to recoveries recorded on previously charged off loans that were acquired in the merger with Wilshire as well as from other transactions.
The increase in noninterest income for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 was largely due to an increase in service fees on deposit accounts of $4.9 million, an increase in loan servicing fees of $1.4 million, an increase in gain on sale of SBA and other loans of $2.4 million, and an increase in other income and fees of $4.1 million. 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 increase in total SBA and mortgage loans sold in the first half of 2017 compared to the first half of 2016. During the six months ended June 30, 2017, the Company sold $91.0 million and $40.1 million, in SBA loans and mortgage loans, respectively. During the six months ended June 30, 2016, the Company sold $63.4 million and $2.8 million, in SBA loans and mortgage loans, respectively. 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 transactions.
The merger with Wilshire during the third quarter of 2016, resulted in an increase in all noninterest income line items for the three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016.
Noninterest Expense
Noninterest expense for the second quarter of 2017 was $64.0 million, an increase of $23.7 million, or 58.7%, from $40.3 million for the same period of 2016. Noninterest expense for the six months ended June 30, 2017 was $131.7 million, an increase of $51.3 million, or 63.9%, from $80.4 million for the six months ended June 30, 2016.
The breakdown of changes in noninterest expense by category is shown in the following table:

63

Table of Contents

 
Three Months Ended June 30,
 
Increase (Decrease)
 
2017
 
2016
 
Amount
 
Percent (%)
 
(Dollars in thousands)
Salaries and employee benefits
$
34,946

 
$
21,757

 
$
13,189

 
60.6
 %
Occupancy
7,154

 
4,920

 
2,234

 
45.4
 %
Furniture and equipment
3,556

 
2,337

 
1,219

 
52.2
 %
Advertising and marketing
2,394

 
1,402

 
992

 
70.8
 %
Data processing and communications
2,676

 
2,129

 
547

 
25.7
 %
Professional fees
3,260

 
1,273

 
1,987

 
156.1
 %
Investments in affordable housing partnership expenses
3,055

 
271

 
2,784

 
1,027.3
 %
FDIC assessment
1,004

 
1,095

 
(91
)
 
(8.3
)%
Credit related expenses
113

 
911

 
(798
)
 
(87.6
)%
OREO expense, net
1,188

 
133

 
1,055

 
793.2
 %
Merger and integration expenses
562

 
1,533

 
(971
)
 
(63.3
)%
Other
4,129

 
2,587

 
1,542

 
59.6
 %
Total noninterest expense
$
64,037

 
$
40,348

 
$
23,689

 
58.7
 %
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Increase (Decrease)
 
2017
 
2016
 
Amount
 
Percent (%)
 
(Dollars in thousands)
Salaries and employee benefits
$
69,112

 
$
43,326

 
$
25,786

 
59.5
 %
Occupancy
14,348

 
9,737

 
4,611

 
47.4
 %
Furniture and equipment
6,969

 
4,624

 
2,345

 
50.7
 %
Advertising and marketing
5,818

 
2,538

 
3,280

 
129.2
 %
Data processing and communications
6,282

 
4,300

 
1,982

 
46.1
 %
Professional fees
7,162

 
2,356

 
4,806

 
204.0
 %
Investments in affordable housing partnership expenses
5,216

 
676

 
4,540

 
671.6
 %
FDIC assessment
2,014

 
2,133

 
(119
)
 
(5.6
)%
Credit related expenses
1,996

 
1,332

 
664

 
49.8
 %
OREO expense, net
2,185

 
1,561

 
624

 
40.0
 %
Merger and integration expenses
1,509

 
2,740

 
(1,231
)
 
(44.9
)%
Other
9,125

 
5,074

 
4,051

 
79.8
 %
Total noninterest expense
$
131,736

 
$
80,397

 
$
51,339

 
63.9
 %

The increase in noninterest expense for the three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016 was due to the increase in salaries and employee benefits, occupancy, furniture and equipment, advertising and marketing, professional fees, loss on investments in affordable housing partnerships, and other noninterest expenses. The overall increase in these expenses for periods in 2017 compared to periods in 2016 was due to the merger with Wilshire which resulted in additional expenditures in most expense categories.
Salaries and employee benefits expense increased $13.2 million during the second quarter of 2017 compared to the same period in 2016 and increased $25.8 million for the first half of 2017 compared to the first half of 2016. The increase in salaries and employee benefits expense for three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016 was due to an increase in the number of full-time equivalent employees primarily as a result of the merger with Wilshire. The number of full-time equivalent employees increased from 918 at June 30, 2016 to 1,378 at June 30, 2017.
The increase in occupancy expense and furniture and equipment expense for the three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016 was due to additional branches acquired from the merger with Wilshire. During the first half of 2017, the Company consolidated nine branches as part of its second phase consolidation plan. Occupancy expenses for the three and six months ended June 30, 2017 included a portion of the savings from the branch consolidations. At June 30, 2017, total future lease commitments totaled $52.1 million with the last of the commitments ending in 2030.

64

Table of Contents

Advertising and marketing expense experienced increases for periods in 2017 compared to periods in 2016 due to an increase in advertising and marketing to promote the Company’s name change and new brand subsequent to the merger with Wilshire. Advertising and marketing expense for the six months ended June 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. This was the first year that the Company sponsored the LPGA event.
The increase in professional fees for the three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016 was due to an increase in external auditor fees and legal fees. The increase in legal fees for periods in 2017 compared to periods in 2016 was due mostly to fees related to the pending merger with U & I Financial Corp.
Investments in affordable housing partnership expenses are recorded based on financial statements of the investment projects. The Company makes investments in affordable housing partnerships to received Community Reinvestment Act credit and to receive tax credits which reduces the Company’s overall tax provision rate. Investments in affordable housing partnership expenses are based on the performance of the underlying investment. The Company receives updated financial information for its affordable housing partnerships investments and records losses based on the performance of the investment. These losses will eventually be offset as tax credits which lowers the Company’s tax provision expense. Investments in affordable housing partnerships increased from $24.0 million at June 30, 2016, to $91.3 million at June 30, 2017, due to investments acquired from Wilshire and additional investments funded in 2017.
Other noninterest expense increased $1.5 million for the second quarter of 2017 compared to the same period in 2016, and increased $4.1 million for the six months ended June 30, 2017 compared to the six months ended June 30, 2016, mostly due to additional expenses that were recorded as result of the merger with Wilshire.
Total assets increased 66% at June 30, 2017 compared to June 30, 2016 largely due to the merger with Wilshire, which increase is comparable with the increase in noninterest expense of 59% for the three month ended June 30, 2017 compared to the same period of the prior year, and the increase in noninterest expense of 64% for the six months ended June 30, 2017 compared to the same period of the prior year.
Merger and integration expenses for the second quarter of 2017 consisted of $538 thousand in expenses related to the acquisition of Wilshire and $24 thousand in expenses related to other former acquisitions. Merger and integration expenses for the six months ended June 30, 2017 consisted of $939 thousand in expenses related to the acquisition of Wilshire, $522 thousand in expenses related to the pending acquisition of U & I, and $48 thousand in expenses related to other former acquisitions.

Provision for Income Taxes
Income tax provision expense was $25.5 million and $16.8 million for the quarters ended June 30, 2017 and 2016, respectively. The effective income tax rates were 38.48% and 41.84% for the quarters ended June 30, 2017 and 2016, respectively. Income tax provision expense was $48.5 million and $33.0 million for the six months ended June 30, 2017 and 2016, respectively. The effective income tax rates for the six months ended June 30, 2017 and 2016 were 38.65% and 41.28%, respectively.
The decrease in tax rate was due to the increase in affordable housing partnership tax credits for the three and six months ended June 30, 2017 compared to the same periods of the prior year.

65

Table of Contents

Financial Condition
At June 30, 2017, our total assets were $13.86 billion, an increase of $417.8 million, or 3.1% 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 June 30, 2017, we had $1.68 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 June 30, 2017 was $17.6 million compared to a net unrealized loss on securities of $25.6 million at December 31, 2016.
During the six months ended June 30, 2017, $245.2 million in securities were purchased, $115.4 million in collateralized mortgage obligations or mortgage-backed securities were paid down, and there were $9.0 million in maturities. During the same period last year, $155.4 million in securities were purchased and $85.1 million in collateralized mortgage obligations or mortgage-backed securities were paid down.
Investments in Affordable Housing Partnerships
At June 30, 2017 we had $91.3 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 six months ended June 30, 2017 totaling $26.5 million less losses and amortization recorded on these investments. Commitments to fund investments in affordable housing partnerships totaled $43.9 million at June 30, 2017 compared to $24.4 million at December 31, 2016.
Loan Portfolio
As of June 30, 2017, loans outstanding totaled $10.82 billion, an increase of $273.1 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:
 
June 30, 2017
 
December 31, 2016
 
Amount
 
Percent (%)
 
Amount
 
Percent (%)
Loan portfolio composition
 
 
(Dollars in thousands)
 
 
Real estate loans:
 
 
 
 
 
 
 
Residential
$
60,544

 
1
%
 
$
57,884

 
1
%
Commercial
8,065,057

 
74
%
 
7,842,573

 
75
%
Construction
306,794

 
3
%
 
254,113

 
2
%
Total real estate loans
8,432,395

 
78
%
 
8,154,570

 
78
%
Commercial business
1,744,103

 
16
%
 
1,832,021

 
17
%
Trade finance
181,400

 
2
%
 
154,928

 
1
%
Consumer and other
460,446

 
4
%
 
403,470

 
4
%
Total loans outstanding
10,818,344

 
100
%
 
10,544,989

 
100
%
Deferred loan fees, net
(1,925
)
 
 
 
(1,657
)
 
 
Loans receivable
10,816,419

 
 
 
10,543,332

 
 
Allowance for loan losses
(80,074
)
 
 
 
(79,343
)
 
 
Loans receivable, net of allowance for loan losses
$
10,736,345

 
 
 
$
10,463,989

 
 
Real estate secured, trade finance, and consumer and other loans increased from December 31, 2016 to June 30, 2017 while commercial business loans experienced a decline. The decline in commercial business loans from December 31, 2016 to June 30, 2017 was primarily due to the $99.2 million decrease in warehouse lines of credit.

66

Table of Contents

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:
 
June 30, 2017
 
December 31, 2016
 
(Dollars in thousands)
Commitments to extend credit
$
1,567,393

 
$
1,592,221

Standby letters of credit
75,941

 
63,753

Other commercial letters of credit
67,202

 
52,125

 
$
1,710,536

 
$
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 $124.3 million at June 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 June 30, 2017 and December 31, 2016, respectively.
The following table summarizes the composition of our nonperforming assets as of the dates indicated.
 
June 30, 2017
 
December 31, 2016
 
(Dollars in thousands)
Nonaccrual loans (1)
$
47,361

 
$
40,074

Loans 90 days or more days past due, still accruing
1,850

 
305

Accruing restructured loans
53,290

 
48,874

Total nonperforming loans
102,501

 
89,253

OREO
21,839

 
21,990

Total nonperforming assets
$
124,340

 
$
111,243

 
 
 
 
Nonaccrual loans:
 
 
 
Legacy Portfolio
$
36,842

 
$
28,944

Acquired Portfolio
10,519

 
11,130

Total nonaccrual loans
$
47,361

 
$
40,074

 
 
 
 
Nonperforming loans:
 
 
 
Legacy Portfolio
$
88,147

 
$
74,890

Acquired Portfolio
14,354

 
14,363

Total nonperforming loans
$
102,501

 
$
89,253

 
 
 
 
Nonperforming loans to loans receivable
0.95
%
 
0.85
%
Nonperforming assets to loans receivable and OREO
1.15
%
 
1.05
%
Nonperforming assets to total assets
0.90
%
 
0.83
%
Allowance for loan losses to nonperforming loans
78.12
%
 
88.90
%
Allowance for loan losses to nonperforming assets
64.40
%
 
71.32
%
__________________________________
(1) 
Nonaccrual loans exclude the guaranteed portion of delinquent SBA loans that are in liquidation totaling $15.5 million and $15.9 million as of June 30, 2017 and December 31, 2016, respectively.


67

Table of Contents

Allowance for Loan Losses
The allowance for loan and lease losses (“ALLL”) was $80.1 million at June 30, 2017 compared to $79.3 million at December 31, 2016. The ALLL was 0.74% of loans receivable at June 30, 2017, and 0.75% at December 31, 2016. The ALLL coverage ratio does not include discount on acquired loans. The ALLL impaired loan reserves increased to $9.0 million at June 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
 
June 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
$
171

 
$
60,544

 
0.28
%
 
$
209

 
$
57,884

 
0.36
%
Real estate - commercial
51,902

 
8,065,057

 
0.64
%
 
49,917

 
7,842,573

 
0.64
%
Real estate - construction
1,816

 
306,794

 
0.59
%
 
1,621

 
254,113

 
0.64
%
Commercial business
22,786

 
1,744,103

 
1.31
%
 
23,547

 
1,832,021

 
1.29
%
Trade finance
1,106

 
181,400

 
0.61
%
 
1,897

 
154,928

 
1.22
%
Consumer and other
2,293

 
460,446

 
0.50
%
 
2,152

 
403,470

 
0.53
%
Total
$
80,074

 
$
10,818,344

 
0.74
%
 
$
79,343

 
$
10,544,989

 
0.75
%
__________________________________
* 
Held-for-sale loans of $16.9 million and $22.8 million at June 30, 2017 and December 31, 2016, respectively, were excluded from the total.

For a better understanding of the changes in the ALLL, the loan portfolio has been segmented for disclosures 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”). The activity in the ALLL for the three months ended June 30, 2017 is as follows:

68

Table of Contents

 
 
 
 
Acquired Loans(2)
 
 
Three Months Ended June 30, 2017
 
Legacy Loans (1)
 
PCI Loans
 
Non-PCI Loans
 
Total
 
 
(Dollars in thousands)
Balance, beginning of period
 
$
64,054

 
$
12,136

 
$
2,469

 
$
78,659

Provision (credit) for loan losses
 
2,545

 
(70
)
 
285

 
2,760

Loans charged off
 
(2,086
)
 

 
(36
)
 
(2,122
)
Recoveries of loan charge offs
 
742

 

 
35

 
777

Balance, end of period
 
$
65,255

 
$
12,066

 
$
2,753

 
$
80,074

 
 
 
 
 
 
 
 
 
Total loans outstanding
 
$
7,522,251

 
$
246,657

 
$
3,049,436

 
$
10,818,344

Allowance coverage ratio
 
0.87
%
 
4.89
%
 
0.09
%
 
0.74
%
Net loan charge offs to beginning allowance
 
2.10
%
 
%
 
0.04
%
 
1.71
%
Net loan charge offs to provision for loan losses
 
52.81
%
 
%
 
0.35
%
 
48.73
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired Loans (2)
 
 
Six Months Ended June 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
 
6,254

 
(64
)
 
2,170

 
8,360

Loans charged off
 
(8,285
)
 

 
(442
)
 
(8,727
)
Recoveries of loan charge offs
 
887

 

 
211

 
1,098

Balance, end of period
 
$
65,255

 
$
12,066

 
$
2,753

 
$
80,074

 
 
 
 
 
 
 
 
 
Total loans outstanding
 
$
7,522,251


$
246,657


$
3,049,436


$
10,818,344

Loss coverage ratio
 
0.87
%

4.89
%

0.09
%

0.74
%
Net loan charge offs to beginning allowance
 
11.14
%
 
%
 
28.38
%
 
9.62
%
Net loan charge offs to provision for loan losses
 
118.29
%
 
%
 
10.65
%
 
91.26
%
__________________________________
(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.

69

Table of Contents

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 in 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 June 30,
 
At or for the Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Dollars in thousands)
LOANS:
 
 
 
 
 
 
 
 
Average loans, including loans held for sale
 
$
10,536,428

 
$
6,457,883

 
$
10,459,527

 
$
6,363,656

Loans receivable
 
$
10,816,419

 
$
6,584,237

 
$
10,816,419

 
$
6,584,237

ALLOWANCE:
 
 
 
 
 
 
 
 
Balance, beginning of period
 
$
78,659

 
$
76,856

 
$
79,343

 
$
76,408

Less loan charge offs:
 
 
 
 
 
 
 
 
Real estate - commercial
 
(873
)
 
(207
)
 
(2,363
)
 
(342
)
Commercial business
 
(480
)
 
(2,038
)
 
(3,740
)
 
(2,659
)
Trade finance
 
(528
)
 

 
(2,104
)
 

Consumer and other
 
(241
)
 
(50
)
 
(520
)
 
(115
)
Total loan charge offs
 
(2,122
)
 
(2,295
)
 
(8,727
)
 
(3,116
)
Plus loan recoveries:
 
 
 
 
 
 
 
 
Real estate - commercial
 
43

 
177

 
89

 
701

Commercial business
 
728

 
400

 
1,000

 
642

Trade Finance
 
4

 

 
4

 

Consumer and other
 
2

 
87

 
5

 
90

Total loans recoveries
 
777

 
664

 
1,098

 
1,433

Net loan charge offs
 
(1,345
)
 
(1,631
)
 
(7,629
)
 
(1,683
)
Provision for loan losses
 
2,760

 
1,200

 
8,360

 
1,700

Balance, end of period
 
$
80,074

 
$
76,425

 
$
80,074

 
$
76,425

 
 
 
 
 
 
 
 
 
Net loan charge offs to average loans, including loans held for sale*
 
0.05
%
 
0.10
%
 
0.29
%
 
0.11
%
Allowance for loan losses to loans receivable at end of period
 
0.74
%
 
1.16
%
 
0.74
%
 
1.16
%
Net loan charge offs to allowance*
 
6.72
%
 
8.54
%
 
38.11
%
 
8.81
%
Net loan charge offs to provision for loan losses
 
48.73
%
 
135.92
%
 
91.26
%
 
99.00
%
__________________________________
*
Annualized
We believe the ALLL as of June 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 June 30, 2017, the Company had $101.8 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 June 30, 2017, deposits increased $313.1 million, or 2.9%, to $10.96 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.
At June 30, 2017, 27.5% of total deposits were noninterest bearing demand deposits, 37.5% were time deposits, and 35.0% 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.

70

Table of Contents

At June 30, 2017, we had $814.7 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 0.64% at June 30, 2017 and were collateralized with securities with a carrying value of $342.3 million. Time deposits of $250 thousand or more at June 30, 2017 totaled $1.58 billion compared to $1.55 billion at December 31, 2016.
The following is a schedule of certificates of deposit maturities as of June 30, 2017:
 
Balance
 
Percent (%)
 
(Dollars in thousands)
Three months or less
$
1,281,047

 
31
%
Over three months through six months
821,633

 
20
%
Over six months through nine months
760,153

 
19
%
Over nine months through twelve months
808,436

 
20
%
Over twelve months
428,618

 
10
%
Total time deposits
$
4,099,887

 
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 June 30, 2017, FHLB advances totaled $793.4 million with average remaining maturities of 1.9 years compared to $754.3 million with average remaining maturities of 2.2 years at December 31, 2016. Total FHLB advances included $3.4 million in premiums recorded from prior acquisitions at June 30, 2017 compared to $4.3 million in premiums at December 31, 2016.
Subordinated debentures totaled $100.3 million at June 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.
With the acquisition 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.

71

Table of Contents

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 subsidiary 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 $1.91 billion at June 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 June 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 the Company 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 June 30, 2017, our Common Equity Tier 1 capital was $1.44 billion compared to $1.40 billion at December 31, 2016. Our Tier I capital, defined as stockholders’ equity less intangible assets, was $1.54 billion at June 30, 2017 compared to $1.50 billion at December 31, 2016, representing an increase of $39.2 million, or 2.62%. At June 30, 2017, the Common Equity Tier 1 capital ratio was 12.18%. The total capital to risk-weighted assets ratio was 13.70% and the Tier I capital to risk-weighted assets ratio was 13.00%. The Tier I leverage capital ratio was 11.80%.

72

Table of Contents

As of June 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 June 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)
$
1,438,907

 
12.18
%
 
N/A

 
N/A

 
N/A

 
N/A

Total risk-based capital ratio
(to risk-weighted assets)
$
1,619,043

 
13.70
%
 
N/A

 
N/A

 
N/A

 
N/A

Tier 1 risk-based capital ratio
(to risk-weighted assets)
$
1,535,333

 
13.00
%
 
N/A

 
N/A

 
N/A

 
N/A

Tier 1 capital to total assets
(to average assets)
$
1,535,333

 
11.80
%
 
N/A

 
N/A

 
N/A

 
N/A

Bank of Hope
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital ratio
(to risk-weighted assets)
$
1,514,997

 
12.83
%
 
$
767,543

 
6.50
%
 
$
747,454

 
6.33
%
Total risk-based capital ratio
(to risk-weighted assets)
$
1,598,707

 
13.54
%
 
$
1,180,835

 
10.00
%
 
$
417,872

 
3.54
%
Tier 1 risk-based capital ratio
(to risk-weighted assets)
$
1,514,997

 
12.83
%
 
$
944,668

 
8.00
%
 
$
570,329

 
4.83
%
Tier 1 capital to total assets
(to average assets)
$
1,514,997

 
11.64
%
 
$
650,659

 
5.00
%
 
$
864,338

 
6.64
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
%

73

Table of Contents

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 June 30, 2017, our total borrowing capacity from the FHLB was $3.24 billion of which $2.44 billion was unused and available to borrow. At June 30, 2017, our total borrowing capacity from the FRB was $520.0 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 $1.64 billion at June 30, 2017 compared to $1.53 billion at December 31, 2016. Cash and cash equivalents were $446.4 million at June 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.


74

Table of Contents

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 June 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:
 
 
June 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
1.49
 %
 
(3.48
)%
 
2.58
 %
 
(4.05
)%
 + 100 basis points
0.81
 %
 
(1.61
)%
 
1.15
 %
 
(1.91
)%
 - 100 basis points
(2.13
)%
 
0.49
 %
 
(0.60
)%
 
1.41
 %
 - 200 basis points
(9.84
)%
 
(0.95
)%
 
(9.66
)%
 
0.42
 %


75

Table of Contents

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
There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, although our remediation efforts with respect to the identified material weaknesses are well underway, our material weaknesses will not be considered remediated until new internal controls are operational for a period of time and are tested, and management concludes that these controls are operating effectively. With respect to the identified material weaknesses, other than those that arose in conjunction with the acquisition of Wilshire, management presently believes that such material weaknesses will be remediated within twelve months of when the remediation efforts commenced. The timing of the testing and validation of the remediation of the material weaknesses that arose in conjunction with the acquisition of Wilshire may depend on the timing of the Company’s next material business combination.

76

Table of Contents


PART II
OTHER INFORMATION

Item 1.
Legal Proceedings
    
In the normal course of business, we are involved in various legal claims. We have 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 $472 thousand at June 30, 2017. It is reasonably possible we may incur losses in addition to the amounts we have accrued. However, at this time, we are 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, we believe 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.”


77

Table of Contents

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:
August 9, 2017
/s/ Kevin S. Kim
 
 
 
Kevin S. Kim
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
 
 
 
Date:
August 9, 2017
/s/ Douglas J. Goddard
 
 
 
Douglas J. Goddard
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
 
 
 
 
 

78

Table of Contents

INDEX TO EXHIBITS
 
Exhibit Number
 
Description
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002**
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002**
 
 
 
101.INS
 
XBRL Instance Document**
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document**
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document**
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document**
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document**
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document**
__________________________________
*
Filed herewith
**
Furnished herewith
+
Management contract or compensatory plan or arrangement


79