HAFC 10-Q Quarterly Report June 30, 2016

HANMI FINANCIAL CORP

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10-Q 1 hafc2016q2main.htm 10-Q Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2016



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From To

Commission File Number: 000-30421

HANMI FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)



Delaware		95-4788120
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

3660 Wilshire Boulevard, Penthouse Suite A Los Angeles, California		90010
(Address of Principal Executive Offices)		(Zip Code)

(213) 382-2200

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer	x	Accelerated Filer	¨
Non-Accelerated Filer	¨ (Do Not Check if a Smaller Reporting Company)	Smaller Reporting Company	¨

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

As of August 5, 2016 , there were 32,263,445 outstanding shares of the Registrant’s Common Stock.

Hanmi Financial Corporation and Subsidiaries

Quarterly Report on Form 10-Q

Three and Six Months Ended June 30, 2016

Table of Contents



Part I – Financial Information

Item 1.	Financial Statements	3
	Consolidated Balance Sheets (Unaudited)	3

	Consolidated Statements of Income (Unaudited)	4

	Consolidated Statements of Comprehensive Income (Unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)	6

	Consolidated Statements of Cash Flows (Unaudited)	7

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	69

Item 4.	Controls and Procedures	69

Part II – Other Information
Item 1.	Legal Proceedings	70

Item 1A.	Risk Factors	70

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70

Item 3.	Defaults Upon Senior Securities	70

Item 4.	Mine Safety Disclosures	70

Item 5.	Other Information	70

Item 6.	Exhibits	71

Signatures		72

Part I — Financial Information

Item 1. Financial Statements

Hanmi Financial Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)



	(Unaudited) June 30, 2016			December 31, 2015
Assets
Cash and due from banks	$	156,632		$	164,364
Securities available for sale, at fair value (amortized cost of $622,459 as of June 30, 2016 and $700,627 as of December 31, 2015)	636,275			698,296
Loans held for sale, at the lower of cost or fair value	12,833			2,874
Loans receivable, net of allowance for loan losses of $39,707 as of June 30, 2016 and $42,935 as of December 31, 2015	3,409,603			3,140,381
Accrued interest receivable	10,552			9,501
Premises and equipment, net	29,752			29,834
Other real estate owned ("OREO"), net	11,846			8,511
Customers’ liability on acceptances	2,456			3,586
Servicing assets	11,337			11,744
Core deposit intangible, net	1,537			1,701
Federal Home Loan Bank ("FHLB") stock, at cost	16,385			16,385
Federal Reserve Bank ("FRB") stock, at cost	14,423			14,098
Income tax asset	52,161			57,174
Bank-owned life insurance	48,851			48,340
Prepaid expenses and other assets	26,690			27,732
Total assets	$	4,441,333		$	4,234,521
Liabilities and stockholders’ equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,189,528		$	1,155,518
Interest-bearing	2,399,761			2,354,458
Total deposits	3,589,289			3,509,976
Accrued interest payable	3,107			3,177
Bank’s liability on acceptances	2,456			3,586
FHLB advances	280,000			170,000
Servicing liabilities	3,921			4,784
Federal Deposit Insurance Corporation ("FDIC") loss sharing liability	18			1,289
Subordinated debentures	18,821			18,703
Accrued expenses and other liabilities	18,536			29,088
Total liabilities	3,916,148			3,740,603
Stockholders’ equity:
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 32,863,007 shares (32,260,320 shares outstanding) as of June 30, 2016 and issued 32,566,522 shares (31,974,359 shares outstanding) as of December 31, 2015	33			257
Additional paid-in capital	560,089			557,761
Accumulated other comprehensive income (loss), net of tax expense of $4,695 as of June 30, 2016 and tax benefit of $2,007 as of December 31, 2015	9,121			(315		)
Retained earnings	26,396			6,422
Less: treasury stock, at cost; 602,687 shares as of June 30, 2016 and 592,163 shares as of December 31, 2015	(70,454		)	(70,207		)
Total stockholders’ equity	525,185			493,918
Total liabilities and stockholders’ equity	$	4,441,333		$	4,234,521

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

(in thousands, except share and per share data)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Interest and dividend income:
Interest and fees on loans	$	40,645		$	36,915		$	79,712		$	73,949
Interest on securities	2,886			2,979			5,903			6,853
Dividends on FRB and FHLB stock	579			1,116			1,121			1,598
Interest on deposits in other banks	49			40			97			88
Total interest and dividend income	44,159			41,050			86,833			82,488
Interest expense:
Interest on deposits	3,684			3,802			7,410			7,582
Interest on subordinated debentures	196			151			379			296
Interest on FHLB advances	299			4			494			60
Total interest expense	4,179			3,957			8,283			7,938
Net interest income before provision for loan losses	39,980			37,093			78,550			74,550
Negative provision for loan losses	(1,515		)	(2,403		)	(3,040		)	(4,076		)
Net interest income after provision for loan losses	41,495			39,496			81,590			78,626
Noninterest income:
Service charges on deposit accounts	2,898			3,169			5,899			6,380
Trade finance and other service charges and fees	1,064			1,109			2,109			2,376
Gain on sales of Small Business Administration ("SBA") loans	1,774			1,573			2,632			3,257
Net gain on sales of securities	—			1,912			—			4,096
Disposition gains on Purchased Credit Impaired ("PCI") loans	1,963			2,470			2,622			3,693
Other operating income	1,674			900			3,072			2,181
Total noninterest income	9,373			11,133			16,334			21,983
Noninterest expense:
Salaries and employee benefits	16,061			15,542			31,759			31,926
Occupancy and equipment	3,938			4,224			7,434			8,527
Data processing	1,454			1,335			2,889			3,467
Professional fees	1,509			1,701			2,974			4,042
Supplies and communications	709			928			1,445			1,758
Advertising and promotion	1,094			1,046			1,616			1,569
OREO expense (income)	183			(13		)	648			404
Merger and integration costs	—			136			—			1,747
Other operating expenses	2,915			2,127			5,167			4,978
Total noninterest expense	27,863			27,026			53,932			58,418
Income before income tax expense	23,005			23,603			43,992			42,191
Income tax expense	8,857			9,619			15,040			17,153
Net income	$	14,148		$	13,984		$	28,952		$	25,038
Basic earnings per share	$	0.44		$	0.44		$	0.90		$	0.79
Diluted earnings per share	$	0.44		$	0.44		$	0.90		$	0.79
Weighted-average shares outstanding:
Basic	31,882,489			31,774,692			31,864,427			31,761,067
Diluted	32,029,910			31,908,719			32,001,163			31,874,484

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Net income	$	14,148		$	13,984		$	28,952		$	25,038
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during period	6,424			(8,041		)	16,147			4,002
Less: reclassification adjustment for net gain (loss) included in net income	—			(1,912		)	—			(4,096		)
Unrealized loss on interest-only strip of servicing assets	(9		)	—			(9		)
Income tax (expense) benefit related to items of other comprehensive income	(2,658		)	4,177			(6,702		)	54
Other comprehensive income (loss), net of tax	3,757			(5,776		)	9,436			(40		)
Comprehensive income	$	17,905		$	8,208		$	38,388		$	24,998

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(in thousands, except share data)



	Common Stock - Number of Shares					Stockholders’ Equity
	Shares Issued	Treasury Shares		Shares Outstanding		Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated (Deficit) Retained Earnings			Treasury Stock, at Cost			Total Stockholders’ Equity
Balance at January 1, 2015	32,488,097	(577,894	)	31,910,203		$	257		$	554,904	$	463		$	(32,379	)	$	(69,858	)	$	453,387
Stock options exercised	26,455	—		26,455		—			363		—			—			—			363
Restricted stock awards, net of forfeitures	38,184	—		38,184		—			—		—			—			—			—
Share-based compensation expense	—	—		—		—			1,022		—			—			—			1,022
Cash dividends declared	—	—		—		—			—		—			(7,030		)	—			(7,030		)
Net income	—	—		—		—			—		—			25,038			—			25,038
Change in unrealized gain on securities available for sale, net of income taxes	—	—		—		—			—		(40		)	—			—			(40		)
Balance at June 30, 2015	32,552,736	(577,894	)	31,974,842		$	257		$	556,289	$	423		$	(14,371	)	$	(69,858	)	$	472,740

Balance at January 1, 2016	32,566,522	(592,163	)	31,974,359		$	257		$	557,761	$	(315	)	$	6,422		$	(70,207	)	$	493,918
Correction of accounting for the 2011 1-for-8 stock split	—	—		—		(224		)	224		—			—			—			—
Stock options exercised	40,209	—		40,209		—			562		—			—			—			562
Restricted stock awards, net of forfeitures	256,276	—		256,276		—			—		—			—			—			—
Share-based compensation expense	—	—		—		—			1,542		—			—			—			1,542
Restricted stock surrendered due to employee tax liability	—	(10,524	)	(10,524	)	—			—		—			—			(247		)	(247		)
Cash dividends declared	—	—		—		—			—		—			(8,978		)	—			(8,978		)
Net income	—	—		—		—			—		—			28,952			—			28,952
Change in unrealized gain on securities available for sale and unrealized loss on interest-only strip of servicing assets, net of income taxes	—	—		—		—			—		9,436			—			—			9,436
Balance at June 30, 2016	32,863,007	(602,687	)	32,260,320		$	33		$	560,089	$	9,121		$	26,396		$	(70,454	)	$	525,185

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)



	Six Months Ended June 30,
	2016			2015
Cash flows from operating activities:
Net income	$	28,952		$	25,038
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,595			9,573
Share-based compensation expense	1,542			1,022
Negative provision for loan losses	(3,040		)	(4,076		)
Gain on sales of securities	—			(4,096		)
Gain on sales of SBA loans	(2,632		)	(3,257		)
Gain on sale of premises and equipment	(35		)	—
Disposition gains on PCI loans	(2,622		)	(3,693		)
Valuation adjustment on OREO	648			(228		)
Origination of SBA loans held for sale	(42,559		)	(37,942		)
Proceeds from sales of SBA loans	35,119			43,443
Change in accrued interest receivable	(1,051		)	1,616
Change in bank-owned life insurance	(511		)	(498		)
Change in prepaid expenses and other assets	882			4,225
Change in income tax asset	(1,689		)	1,606
Change in accrued interest payable	(70		)	(7		)
Change in FDIC loss sharing liability	(1,271		)	(1,958		)
Change in accrued expenses and other liabilities	(8,366		)	(14,809		)
Net cash provided by operating activities	10,892			15,959
Cash flows from investing activities:
Proceeds from redemption of FHLB stock	—			1,195
Proceeds from matured, called and repayment of securities	74,063			62,863
Proceeds from sales of securities available for sale	—			307,442
Proceeds from sales of OREO	1,297			6,096
Proceeds from sales of loans	—			360
Proceeds from bank-owned life insurance	—			1,323
Change in loans receivable, excluding purchases	(171,240		)	(23,135		)
Purchases of securities	—			(40,484		)
Purchases of premises and equipment	(1,393		)	(1,292		)
Purchases of loans receivable	(97,200		)	(64,553		)
Purchases of FRB stock	(325		)	(1,244		)
Net cash (used in) provided by provided by investing activities	(194,798		)	248,571
Cash flows from financing activities:
Change in deposits	79,313			(116,965		)
Change in overnight FHLB borrowings	110,000			(150,000		)
Redemption of rescinded stock obligation	—			(783		)
Proceeds from exercise of stock options	562			363
Cash paid for treasury shares acquired in respect of share-based compensation	(247		)	—
Cash dividends paid	(13,454		)	(2,234		)
Net cash provided by (used in) financing activities	176,174			(269,619		)
Net decrease in cash and cash equivalents	(7,732		)	(5,089		)
Cash and cash equivalents at beginning of year	164,364			158,320
Cash and cash equivalents at end of period	$	156,632		$	153,231



Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	8,353		$	7,945
Income taxes	$	16,486		$	14,338
Non-cash activities:
Transfer of loans receivable to OREO	$	4,318		$	2,711
Transfer of loans receivable to loans held for sale	$	—		$	360
Income tax (expense) benefit related to items in other comprehensive income	$	(6,702	)	$	54
Change in unrealized gain in accumulated other comprehensive income	$	(16,147	)	$	(4,002	)
Cash dividends declared	$	(8,978	)	$	(7,030	)

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Six Months Ended June 30, 2016 and 2015

Note 1 — Basis of Presentation

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

In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial and its subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended June 30, 2016 , but are not necessarily indicative of the results that will be reported for the entire year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The aforementioned unaudited consolidated financial statements are in conformity with GAAP. Such interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the “2015 Annual Report on Form 10-K”).

The preparation of interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates subject to change include, among other items, the determination of allowance for loan losses and various other assets and liabilities measured at fair value.

Certain prior period amounts have been reclassified to conform to current period presentation. Descriptions of our significant accounting policies are included in Note 1 - Summary of Significant Accounting Policies in our 2015 Annual Report on Form 10-K.

Note 2 — Securities

The following is a summary of securities available for sale as of June 30, 2016 and December 31, 2015 :



	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value
	(in thousands)
June 30, 2016
Mortgage-backed securities ^{(1) (2)}	$	262,223	$	4,129	$	77	$	266,275
Collateralized mortgage obligations ⁽¹⁾	85,678		554		91		86,141
U.S. government agency securities	15,491		53		—		15,544
SBA loan pool securities	56,553		62		190		56,425
Municipal bonds-tax exempt	160,951		8,475		—		169,426
Municipal bonds-taxable	13,476		616		—		14,092
Corporate bonds	5,014		—		13		5,001
U.S. treasury securities	157		1		—		158
Mutual funds	22,916		382		85		23,213
Total securities available for sale	$	622,459	$	14,272	$	456	$	636,275

December 31, 2015
Mortgage-backed securities ^{(1) (2)}	$	286,450	$	392	$	2,461	$	284,381
Collateralized mortgage obligations ⁽¹⁾	97,904		79		997		96,986
U.S. government agency securities	48,478		—		656		47,822
SBA loan pool securities	63,670		7		411		63,266
Municipal bonds-tax exempt	162,101		1,820		19		163,902
Municipal bonds-taxable	13,932		189		88		14,033
Corporate bonds	5,017		—		24		4,993
U.S. treasury securities	159		1		—		160
Mutual funds	22,916		—		163		22,753
Total securities available for sale	$	700,627	$	2,488	$	4,819	$	698,296


⁽¹⁾	Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.


⁽²⁾	Include securities collateralized by home equity conversion mortgages with total estimated fair value of $55.7 million and $58.6 million as of June 30, 2016 and December 31, 2015 , respectively.

The amortized cost and estimated fair value of securities as of June 30, 2016 , by contractual or expected maturity, are shown below. Collateralized mortgage obligations are included in the table shown below based on their expected maturities. Mutual funds do not have contractual maturities. However, they are included in the table shown below as over ten years since the Company intends to hold these securities for at least this duration. All other securities are included based on their contractual maturities.



	Available for Sale
	Amortized Cost		Estimated Fair Value
	(in thousands)
Within one year	$	1	$	1
Over one year through five years	93,040		93,762
Over five years through ten years	273,361		279,870
Over ten years	256,057		262,642
Total	$	622,459	$	636,275

Gross unrealized losses on securities available for sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of June 30, 2016 and December 31, 2015 :



	Holding Period
	Less Than 12 Months					12 Months or More					Total
	Gross Unrealized Loss		Estimated Fair Value		Number of Securities	Gross Unrealized Loss		Estimated Fair Value		Number of Securities	Gross Unrealized Loss		Estimated Fair Value		Number of Securities
	(in thousands, except number of securities)
June 30, 2016
Mortgage-backed securities	$	43	$	10,746	4	$	34	$	10,912	3	$	77	$	21,658	7
Collateralized mortgage obligations	10		12,778		6	81		13,879		7	91		26,657		13
SBA loan pool securities	117		35,639		10	73		14,518		5	190		50,157		15
Corporate bonds	—		—		—	13		5,001		1	13		5,001		1
Mutual funds	—		—		—	85		941		3	85		941		3
Total	$	170	$	59,163	20	$	286	$	45,251	19	$	456	$	104,414	39

December 31, 2015
Mortgage-backed securities	$	1,734	$	193,931	52	$	727	$	21,659	9	$	2,461	$	215,590	61
Collateralized mortgage obligations	335		48,970		18	662		32,964		13	997		81,934		31
U.S. government agency securities	201		23,289		8	455		24,533		8	656		47,822		16
SBA loan pool securities	161		50,499		12	250		7,036		3	411		57,535		15
Municipal bonds-tax exempt	19		8,922		6	—		—		—	19		8,922		6
Municipal bonds-taxable	88		7,106		4	—		—		—	88		7,106		4
Corporate binds	24		4,994		1	—		—		—	24		4,994		1
Mutual funds	66		21,820		3	97		928		3	163		22,748		6
Total	$	2,628	$	359,531	104	$	2,191	$	87,120	36	$	4,819	$	446,651	140

All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of June 30, 2016 and December 31, 2015 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status as of June 30, 2016 and December 31, 2015 . These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

The Company does not intend to sell these securities and it is more likely than not that we will not be required to sell the securities before the recovery of their amortized cost basis. In addition, the unrealized losses on municipal and corporate bonds are not considered other-than-temporarily impaired, as the bonds are rated investment grade and there are no credit

quality concerns with the issuers. Interest payments have been made as scheduled, and management believes this will continue in the future and that the bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of June 30, 2016 and December 31, 2015 were not other-than-temporarily impaired, and therefore, no impairment charges as of June 30, 2016 and December 31, 2015 were warranted.

Realized gains and losses on sales of securities and proceeds from sales of securities were as follows for the periods indicated:



	Three Months Ended June 30,					Six Months Ended June 30,
	2016		2015			2016		2015
	(in thousands)
Gross realized gains on sales of securities	$	—	$	2,067		$	—	$	4,262
Gross realized losses on sales of securities	—		(155		)	—		(166		)
Net realized gains on sales of securities	$	—	$	1,912		$	—	$	4,096
Proceeds from sales of securities	$	—	$	130,594		$	—	$	307,442

There were no sales of securities during the six-month period ended June 30, 2016 . For the three months ended June 30, 2015 , there was a $1.9 million net gain in earnings resulting from the sale of securities that had previously been recorded as net unrealized gains of $4.1 million in comprehensive income. For the six months ended June 30, 2015 , there was a $4.1 million net gain in earnings resulting from the sale of securities that had previously been recorded as net unrealized gains of $1.2 million in comprehensive income.

Securities available for sale with market values of $ 97.6 million and $ 72.0 million as of June 30, 2016 and December 31, 2015 , respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

Note 3 — Loans

Loans Receivable, Net

Loans receivable consisted of the following as of the dates indicated:



	June 30, 2016									December 31, 2015
	Non-PCI Loans			PCI Loans			Total			Non-PCI Loans			PCI Loans			Total
	(in thousands)
Real estate loans:
Commercial property ⁽¹⁾
Retail	$	790,968		$	2,543		$	793,511		$	735,501		$	4,849		$	740,350
Hospitality	602,826			3,250			606,076			539,345			4,080			543,425
Gas station	277,873			2,888			280,761			319,363			4,292			323,655
Other ⁽²⁾	1,123,195			5,151			1,128,346			973,243			5,418			978,661
Construction	26,382			—			26,382			23,387			—			23,387
Residential property	295,505			991			296,496			234,879			1,157			236,036
Total real estate loans	3,116,749			14,823			3,131,572			2,825,718			19,796			2,845,514
Commercial and industrial loans:
Commercial term	143,487			146			143,633			152,602			171			152,773
Commercial lines of credit	121,326			—			121,326			128,224			—			128,224
International loans	28,114			—			28,114			31,879			—			31,879
Total commercial and industrial loans	292,927			146			293,073			312,705			171			312,876
Consumer loans ⁽³⁾	24,614			51			24,665			24,879			47			24,926
Loans receivable	3,434,290			15,020			3,449,310			3,163,302			20,014			3,183,316
Allowance for loans losses	(34,259		)	(5,448		)	(39,707		)	(37,494		)	(5,441		)	(42,935		)
Loans receivable, net	$	3,400,031		$	9,572		$	3,409,603		$	3,125,808		$	14,573		$	3,140,381


⁽¹⁾	Includes owner-occupied property loans of $1.28 billion and $1.20 billion as of June 30, 2016 and December 31, 2015 , respectively.


⁽²⁾	Includes, among other property types, mixed-use, apartment, office, industrial, faith-based facilities and warehouse; the remaining real estate categories represent less than one percent of the Bank's total loans.


⁽³⁾	Consumer loans include home equity lines of credit of $20.6 million and $21.8 million as of June 30, 2016 and December 31, 2015 , respectively.

Accrued interest on loans receivable was $7.3 million and $7.9 million at June 30, 2016 and December 31, 2015 , respectively. At June 30, 2016 and December 31, 2015 , loans receivable of $758.4 million and $557.7 million , respectively, were pledged to secure borrowing facilities from the FHLB and the FRB's discount window.

Loans Held for Sale

The following table includes the activity for loans held for sale (excluding PCI loans) by portfolio segment for the three months ended June 30, 2016 and 2015 :



	Real Estate			Commercial and Industrial			Total Non-PCI
	(in thousands)
June 30, 2016
Loans held for sale, at beginning of period	$	1,824		$	759		$	2,583
Originations	22,376			8,031			30,407
Sales	(14,905		)	(5,247		)	(20,152		)
Principal payoffs and amortization	(1		)	(4		)	(5		)
Loans held for sale, at end of period	$	9,294		$	3,539		$	12,833

June 30, 2015
Loans held for sale, at beginning of period	$	7,226		$	1,451		$	8,677
Originations	6,807			8,027			14,834
Reclassification from loans receivable	360			—			360
Sales	(12,321		)	(7,368		)	(19,689		)
Principal payoffs and amortization	(5		)	(19		)	(24		)
Loans held for sale, at end of period	$	2,067		$	2,091		$	4,158

The following table includes the activity for loans held for sale (excluding PCI loans) by portfolio segment for the six months ended June 30, 2016 and 2015 :



	Real Estate			Commercial and Industrial			Total Non-PCI
	(in thousands)
June 30, 2016
Loans held for sale, at beginning of period	$	840		$	2,034		$	2,874
Originations	28,849			13,710			42,559
Sales	(20,393		)	(12,182		)	(32,575		)
Principal payoffs and amortization	(2		)	(23		)	(25		)
Loans held for sale, at end of period	$	9,294		$	3,539		$	12,833

June 30, 2015
Loans held for sale, at beginning of period	$	3,323		$	2,128		$	5,451
Originations	23,734			14,208			37,942
Reclassification from loans receivable	360			—			360
Sales	(25,335		)	(14,208		)	(39,543		)
Principal payoffs and amortization	(15		)	(37		)	(52		)
Loans held for sale, at end of period	$	2,067		$	2,091		$	4,158

Allowance for Loan Losses

Activity in the allowance for loan losses was as follows for the periods indicated:



	As of and for the Three Months Ended
	June 30, 2016									June 30, 2015
	Non-PCI Loans			PCI Loans			Total			Non-PCI Loans			PCI Loans			Total

Allowance for loan losses:
Balance at beginning of period	$	35,381		$	5,645		$	41,026		$	51,515		$	1,436		$	52,951
Charge-offs	(662		)	(137		)	(799		)	(1,221		)	52			(1,169		)
Recoveries on loans previously charged off	995			—			995			1,793			(352		)	1,441
Net loan (charge-offs) recoveries	333			(137		)	196			572			(300		)	272
(Negative provision) provision	(1,455		)	(60		)	(1,515		)	(2,619		)	216			(2,403		)
Balance at end of period	$	34,259		$	5,448		$	39,707		$	49,468		$	1,352		$	50,820



	As of and for the Six Months Ended
	June 30, 2016									June 30, 2015
	Non-PCI Loans			PCI Loans			Total			Non-PCI Loans			PCI Loans		Total

Allowance for loan losses:
Balance at beginning of period	$	37,494		$	5,441		$	42,935		$	51,640		$	1,026	$	52,666
Charge-offs	(1,299		)	(137		)	(1,436		)	(1,255		)	—		(1,255		)
Recoveries on loans previously charged off	1,248			—			1,248			3,485			—		3,485
Net loan (charge-offs) recoveries	(51		)	(137		)	(188		)	2,230			—		2,230
(Negative provision) provision	(3,184		)	144			(3,040		)	(4,402		)	326		(4,076		)
Balance at end of period	$	34,259		$	5,448		$	39,707		$	49,468		$	1,352	$	50,820

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

The following table details the information on the allowance for loan losses by portfolio segment as of and for the three months ended June 30, 2016 and 2015 :



	Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
	(in thousands)
June 30, 2016
Allowance for loan losses on Non-PCI loans:
Beginning balance	$	28,278		$	6,289		$	255		$	559		$	35,381
Charge-offs	(156		)	(506		)	—			—			(662		)
Recoveries on loans previously charged off	97			845			53			—			995
Negative provision	(103		)	(1,126		)	(66		)	(160		)	(1,455		)
Ending balance	$	28,116		$	5,502		$	242		$	399		$	34,259
Ending balance: individually evaluated for impairment	$	2,589		$	422		$	—		$	—		$	3,011
Ending balance: collectively evaluated for impairment	$	25,527		$	5,080		$	242		$	399		$	31,248
Non-PCI loans receivable:
Ending balance	$	3,116,749		$	292,927		$	24,614		$	—		$	3,434,290
Ending balance: individually evaluated for impairment	$	20,412		$	5,089		$	686		$	—		$	26,187
Ending balance: collectively evaluated for impairment	$	3,096,337		$	287,838		$	23,928		$	—		$	3,408,103
Allowance for loan losses on PCI loans:
Beginning balance	$	5,599		$	44		$	2		$	—		$	5,645
Charge-offs	(137		)	—			—			—			(137		)
(Negative provision) provision	(62		)	(3		)	5			—			(60		)
Ending balance: acquired with deteriorated credit quality	$	5,400		$	41		$	7		$	—		$	5,448

PCI loans receivable	$	14,823		$	146		$	51		$	—		$	15,020

June 30, 2015
Allowance for loan losses on Non-PCI loans:
Beginning balance	$	42,550		$	7,786		$	185		$	994		$	51,515
Charge-offs	(101		)	(1,120		)	—			—			(1,221		)
Recoveries on loans previously charged off	1,263			530			—			—			1,793
(Negative provision) provision	(3,814		)	1,049			(13		)	159			(2,619		)
Ending balance	$	39,898		$	8,245		$	172		$	1,153		$	49,468
Ending balance: individually evaluated for impairment	$	3,798		$	1,503		$	—		$	—		$	5,301
Ending balance: collectively evaluated for impairment	$	36,100		$	6,742		$	172		$	1,153		$	44,167
Non-PCI loans receivable:
Ending balance	$	2,553,068		$	260,922		$	26,274		$	—		$	2,840,264
Ending balance: individually evaluated for impairment	$	32,795		$	10,401		$	1,807		$	—		$	45,003
Ending balance: collectively evaluated for impairment	$	2,520,273		$	250,521		$	24,467		$	—		$	2,795,261
Allowance for loan losses on PCI loans:
Beginning balance	$	1,318		$	118		$	—		$	—		$	1,436
Charge-offs	52			—			—			—			52
Recoveries on loans previously charged off	—			(352		)	—			—			(352		)
(Negative provision) provision	(81		)	297			—			—			216
Ending balance: acquired with deteriorated credit quality	$	1,289		$	63		$	—		$	—		$	1,352

PCI loans receivable	$	33,598		$	267		$	43		$	—		$	33,908

The following table details the information on the allowance for loan losses by portfolio segment as of and for the six months ended June 30, 2016 and 2015 :



	Real Estate			Commercial and Industrial			Consumer			Unallocated		Total
	(in thousands)
June 30, 2016
Allowance for loan losses on Non-PCI loans:
Beginning balance	$	29,800		$	7,081		$	242		$	371	$	37,494
Charge-offs	(691		)	(608		)	—			—		(1,299		)
Recoveries on loans previously charged off	190			1,005			53			—		1,248
(Negative provision) provision	(1,183		)	(1,976		)	(53		)	28		(3,184		)
Ending balance	$	28,116		$	5,502		$	242		$	399	$	34,259
Ending balance: individually evaluated for impairment	$	2,589		$	422		$	—		$	—	$	3,011
Ending balance: collectively evaluated for impairment	$	25,527		$	5,080		$	242		$	399	$	31,248
Non-PCI loans receivable:
Ending balance	$	3,116,749		$	292,927		$	24,614		$	—	$	3,434,290
Ending balance: individually evaluated for impairment	$	20,412		$	5,089		$	686		$	—	$	26,187
Ending balance: collectively evaluated for impairment	$	3,096,337		$	287,838		$	23,928		$	—	$	3,408,103
Allowance for loan losses on PCI loans:
Beginning balance	$	5,397		$	42		$	2		$	—	$	5,441
Charge-offs	(137		)	—			—			—		(137		)
Provision (negative provision)	140			(1		)	5			—		144
Ending balance: acquired with deteriorated credit quality	$	5,400		$	41		$	7		$	—	$	5,448

PCI loans receivable	$	14,823		$	146		$	51		$	—	$	15,020

June 30, 2015
Allowance for loan losses on Non-PCI loans:
Beginning balance	$	41,194		$	9,142		$	220		$	1,084	$	51,640
Charge-offs	(101		)	(1,154		)	—			—		(1,255		)
Recoveries on loans previously charged off	1,295			2,190			—			—		3,485
(Negative provision) provision	(2,490		)	(1,933		)	(48		)	69		(4,402		)
Ending balance	$	39,898		$	8,245		$	172		$	1,153	$	49,468
Ending balance: individually evaluated for impairment	$	3,798		$	1,503		$	—		$	—	$	5,301
Ending balance: collectively evaluated for impairment	$	36,100		$	6,742		$	172		$	1,153	$	44,167
Non-PCI loans receivable:
Ending balance	$	2,553,068		$	260,922		$	26,274		$	—	$	2,840,264
Ending balance: individually evaluated for impairment	$	32,795		$	10,401		$	1,807		$	—	$	45,003
Ending balance: collectively evaluated for impairment	$	2,520,273		$	250,521		$	24,467		$	—	$	2,795,261
Allowance for loan losses on PCI loans:
Beginning balance	$	895		$	131		$	—		$	—	$	1,026
Provision (negative provision)	394			(68		)	—			—		326
Ending balance: acquired with deteriorated credit quality	$	1,289		$	63		$	—		$	—	$	1,352

PCI loans receivable	$	33,598		$	267		$	43		$	—	$	33,908

Loan Quality Indicators

As part of the on-going monitoring of the credit quality of our loan portfolio, we utilize an internal loan grading system to identify credit risk and assign an appropriate grade, from 0 to 8, for each loan in our loan portfolio. Third party loan reviews are performed throughout the year. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:

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

Special Mention: A special mention credit, grade 5, has potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses may result in deterioration of the repayment prospects of the debt and result in a Substandard classification. Loans that have significant actual, not potential, weaknesses are considered more severely classified.

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

Doubtful: A doubtful credit, grade 7, is one that has critical weaknesses that would make the collection or liquidation of the full amount due improbable. However, there may be pending events which may work to strengthen the credit, and therefore the amount or timing of a possible loss cannot be determined at the current time.

Loss: A loan classified as loss, grade 8, is considered uncollectible and of such little value that their continuance as an active bank asset is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans classified as loss are charged off in a timely manner.

Under regulatory guidance, loans graded special mention or worse are considered criticized loans and loans graded substandard or worse are considered classified loans.

As of June 30, 2016 and December 31, 2015 , pass/pass-watch, special mention and classified loans (excluding PCI loans), disaggregated by loan class, were as follows:



	Pass/Pass-Watch		Special Mention		Classified		Total
	(in thousands)
June 30, 2016
Real estate loans:
Commercial property
Retail	$	783,397	$	4,786	$	2,785	$	790,968
Hospitality	589,285		6,266		7,275		602,826
Gas station	269,141		3,260		5,472		277,873
Other	1,110,781		5,203		7,211		1,123,195
Construction	26,382		—		—		26,382
Residential property	294,906		53		546		295,505
Commercial and industrial loans:
Commercial term	138,316		2,064		3,107		143,487
Commercial lines of credit	121,108		195		23		121,326
International loans	25,994		2,120		—		28,114
Consumer loans	23,642		5		967		24,614
Total Non-PCI loans	$	3,382,952	$	23,952	$	27,386	$	3,434,290

December 31, 2015
Real estate loans:
Commercial property
Retail	$	722,483	$	9,519	$	3,499	$	735,501
Hospitality	517,462		9,604		12,279		539,345
Gas station	309,598		5,897		3,868		319,363
Other	953,839		8,662		10,742		973,243
Construction	23,387		—		—		23,387
Residential property	232,862		58		1,959		234,879
Commercial and industrial loans:
Commercial term	145,773		2,370		4,459		152,602
Commercial lines of credit	127,579		195		450		128,224
International loans	29,719		2,160		—		31,879
Consumer loans	22,707		91		2,081		24,879
Total Non-PCI loans	$	3,085,409	$	38,556	$	39,337	$	3,163,302

The following is an aging analysis of loans (excluding PCI loans), disaggregated by loan class, as of the dates indicated:



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
	(in thousands)
June 30, 2016
Real estate loans:
Commercial property
Retail	$	343	$	—	$	339	$	682	$	790,286	$	790,968
Hospitality	1,690		569		127		2,386		600,440		602,826
Gas station	—		—		4,286		4,286		273,587		277,873
Other	452		893		1,875		3,220		1,119,975		1,123,195
Construction	—		—		—		—		26,382		26,382
Residential property	—		—		104		104		295,401		295,505
Commercial and industrial loans:
Commercial term	112		50		444		606		142,881		143,487
Commercial lines of credit	—		—		23		23		121,303		121,326
International loans	—		—		—		—		28,114		28,114
Consumer loans	—		—		—		—		24,614		24,614
Total Non-PCI loans	$	2,597	$	1,512	$	7,198	$	11,307	$	3,422,983	$	3,434,290

December 31, 2015
Real estate loans:
Commercial property
Retail	$	441	$	343	$	399	$	1,183	$	734,318	$	735,501
Hospitality	1,250		49		3,840		5,139		534,206		539,345
Gas station	959		406		1,517		2,882		316,481		319,363
Other	1,144		661		1,636		3,441		969,802		973,243
Construction	—		—		—		—		23,387		23,387
Residential property	—		—		396		396		234,483		234,879
Commercial and industrial loans:
Commercial term	420		253		458		1,131		151,471		152,602
Commercial lines of credit	58		—		392		450		127,774		128,224
International loans	—		497		—		497		31,382		31,879
Consumer loans	250		5		—		255		24,624		24,879
Total Non-PCI loans	$	4,522	$	2,214	$	8,638	$	15,374	$	3,147,928	$	3,163,302

There were no loans that were 90 days or more past due and accruing interest as of June 30, 2016 and 2015.

Impaired Loans

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

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

considered impaired are specifically excluded from the quarterly migration analysis when determining the amount of the allowance for loan losses required for the period.

The allowance for collateral-dependent loans is determined by calculating the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as nonperforming. We continue to monitor the collateral coverage, using recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.

The following tables provide information on impaired loans (excluding PCI loans), disaggregated by loan class, as of the dates indicated:



	Recorded Investment		Unpaid Principal Balance		With No Related Allowance Recorded		With an Allowance Recorded		Related Allowance
	(in thousands)
June 30, 2016
Real estate loans:
Commercial property
Retail	$	2,421	$	2,723	$	1,997	$	424	$	31
Hospitality	3,357		3,774		3,255		102		2,496
Gas station	4,623		5,162		3,882		741		12
Other	7,482		8,696		7,088		394		50
Residential property	2,529		2,576		2,529		—		—
Commercial and industrial loans:
Commercial term	5,066		5,127		1,070		3,996		422
Commercial lines of credit	23		123		23		—		—
International loans	—		—		—		—		—
Consumer loans	686		748		686		—		—
Total Non-PCI loans	$	26,187	$	28,929	$	20,530	$	5,657	$	3,011

December 31, 2015
Real estate loans:
Commercial property
Retail	$	2,597	$	2,892	$	2,435	$	162	$	27
Hospitality	7,168		7,538		2,873		4,295		3,068
Gas station	5,393		5,815		4,400		993		112
Other	9,288		10,810		7,219		2,069		647
Residential property	2,895		3,081		2,608		287		4
Commercial and industrial loans:
Commercial term	5,257		5,621		1,858		3,399		457
Commercial lines of credit	381		493		280		101		100
International loans	1,215		1,215		647		568		30
Consumer loans	1,665		1,898		1,665		—		—
Total Non-PCI loans	$	35,859	$	39,363	$	23,985	$	11,874	$	4,445



	Three Months Ended				Six Months Ended
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
June 30, 2016
Real estate loans:
Commercial property
Retail	$	2,434	$	44	$	2,653	$	85
Hospitality	3,362		146		5,032		300
Gas station	4,653		99		4,880		261
Other	7,525		183		7,887		395
Construction	—		—		—		—
Residential property	2,537		27		2,653		57
Commercial and industrial loans:
Commercial term	5,089		87		5,151		164
Commercial lines of credit	28		4		37		9
International loans	—		—		630		—
Consumer loans	690		8		692		16
Total Non-PCI loans	$	26,318	$	598	$	29,615	$	1,287

June 30, 2015
Real estate loans:
Commercial property
Retail	$	4,278	$	126	$	5,134	$	198
Hospitality	7,128		118		6,700		300
Gas station	8,712		189		8,352		282
Other	11,294		196		10,774		404
Residential property	2,689		28		2,896		60
Commercial and industrial loans:
Commercial term	7,190		97		7,634		196
Commercial lines of credit	2,071		29		2,255		36
International loans	1,182		—		1,271		—
Consumer loans	1,812		17		1,821		34
Total Non-PCI loans	$	46,356	$	800	$	46,837	$	1,510

The following is a summary of interest foregone on impaired loans (excluding PCI loans) for the periods indicated:



	Three Months Ended						Six Months Ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
	(in thousands)
Interest income that would have been recognized had impaired loans performed in accordance with their original terms	$	718		$	1,177		$	1,611		$	1,917
Less: Interest income recognized on impaired loans	(598		)	(800		)	(1,287		)	(1,510		)
Interest foregone on impaired loans	$	120		$	377		$	324		$	407

There were no commitments to lend additional funds to borrowers whose loans are included in the table above.

Nonaccrual Loans and Nonperforming Assets

Loans are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on nonaccrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Nonaccrual loans may be restored to accrual status when principal and interest payments become current and full repayment is expected.

The following table details nonaccrual loans (excluding PCI loans), disaggregated by loan class, as of the dates indicated:



	June 30, 2016		December 31, 2015
	(in thousands)
Real estate loans:
Commercial property
Retail	$	832	$	946
Hospitality	1,956		5,790
Gas station	4,540		2,774
Other	3,366		4,068
Residential property	252		1,386
Commercial and industrial loans:
Commercial term	966		2,193
Commercial lines of credit	23		450
Consumer loans	406		1,511
Total nonaccrual Non-PCI loans	$	12,341	$	19,118

The following table details nonperforming assets (excluding PCI loans) as of the dates indicated:



	June 30, 2016		December 31, 2015
	(in thousands)
Nonaccrual Non-PCI loans	$	12,341	$	19,118
Loans 90 days or more past due and still accruing	—		—
Total nonperforming Non-PCI loans	12,341		19,118
OREO	11,846		8,511
Total nonperforming assets	$	24,187	$	27,629

As of June 30, 2016 , OREO consisted of 17 properties with a combined carrying value of $11.8 million . Of the $11.8 million , $6.7 million were OREO acquired in the Central Bancorp Inc. ("CBI") acquisition on August 31, 2014, or were obtained as a result of PCI loan collateral foreclosures subsequent to the acquisition date. As of December 31, 2015, OREO consisted of 14 properties with a combined carrying value of $8.5 million , including a $7.4 million OREO acquired in the CBI acquisition or were obtained as a result of PCI loan collateral foreclosures subsequent to the acquisition date.

Troubled Debt Restructurings

The following table details TDRs (excluding PCI loans), disaggregated by concession type and loan type, as of June 30, 2016 and December 31, 2015 :



	Nonaccrual TDRs										Accrual TDRs
	Deferral of Principal		Deferral of Principal and Interest		Reduction of Principal and Interest		Extension of Maturity		Total		Deferral of Principal		Deferral of Principal and Interest		Reduction of Principal and Interest		Extension of Maturity		Total
	(in thousands)
June 30, 2016
Real estate loans:
Commercial property
Retail	$	—	$	—	$	—	$	312	$	312	$	—	$	—	$	1,247			$	1,247
Hospitality	1,152		—		—		—		1,152		409		58		—				467
Gas station	886		—		—		—		886		—				—				—
Other	399		727		177		—		1,303		2,752				307		1,362		4,421
Residential property	—								—		795				—		294		1,089
Commercial and industrial loans:															—
Commercial term	39		6		148		466		659		180		207		2,561		969		3,917
Commercial lines of credit	—				—		23		23		—								—
Consumer loans					—				—		250				122				372
Total Non-PCI TDR loans	$	2,476	$	733	$	325	$	801	$	4,335	$	4,386	$	265	$	4,237	$	2,625	$	11,513

December 31, 2015
Real estate loans:
Commercial property
Retail	$	—	$	—	$	—	$	344	$	344	$	—	$	—	$	1,227	$	—	$	1,227
Hospitality	1,216		28		—		—		1,244		414		—		—		—		414
Gas station	959		—		—		—		959		—		—		—		—		—
Other	—		1,301		216		8		1,525		3,537		—		322		1,378		5,237
Residential property	689		—		—		—		689		—		—		—		299		299
Commercial and industrial loans:
Commercial term	45		—		997		679		1,721		40		214		1,673		945		2,872
Commercial lines of credit	222		—		—		58		280		—		—		—		—		—
Consumer loans	—		—		116		—		116		250		—		—		—		250
Total Non-PCI TDR loans	$	3,131	$	1,329	$	1,329	$	1,089	$	6,878	$	4,241	$	214	$	3,222	$	2,622	$	10,299

As of June 30, 2016 and December 31, 2015 , total TDRs were $15.8 million and $17.2 million , respectively. A debt restructuring is considered a TDR if we grant a concession, that we would not have otherwise considered to the borrower, for economic or legal reasons related to the borrower’s financial difficulties. Loans are considered to be TDRs if they were restructured through payment structure modifications such as reducing the amount of principal and interest due monthly and/or allowing for interest only monthly payments for three months or more. All TDRs are impaired and are individually evaluated for specific impairment using one of these three criteria: (1) the present value of expected 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. At June 30, 2016 and December 31, 2015 , $ 0.4 million and $1.0 million , respectively, of reserves relating to these loans were included in the allowance for loan losses.

The following table details TDRs (excluding PCI loans), disaggregated by loan class, for the three months ended June 30, 2016 and 2015 :



	June 30, 2016					June 30, 2015
	Number of Loans	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(in thousands, except number of loans)
Real estate loans:
Commercial property
Other ⁽¹⁾	—	$	—	$	—	1	$	313	$	313
Commercial and industrial loans:
Commercial term ⁽²⁾	2	21		9		1	9		9
Consumer loans ⁽³⁾	—	—		—		1	250		250
Total Non-PCI TDR loans	2	$	21	$	9	3	$	572	$	572


⁽¹⁾	Includes a modification of $313,000 through a payment deferral for the three months ended June 30, 2015.


⁽²⁾	Includes a modification of $6,000 through a payment deferral and $3,000 through an extension of maturity for the three months ended June 30, 2016 , and a modifications of $9,000 through a reduction of principal or accrued interest for the three months ended June 30, 2015.


⁽³⁾	Includes a modification of $250,000 through a payment deferral for the three months ended June 30, 2015.

The following table details TDRs (excluding PCI loans), disaggregated by loan class, for the six months ended June 30, 2016 and 2015 :



	June 30, 2016					June 30, 2015
	Number of Loans	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(in thousands, except number of loans)
Real estate loans:
Commercial property
Retail ⁽¹⁾	1	$	21	$	23	—	$	—	$	—
Other ⁽²⁾	—	—		—		1	313		313
Commercial and industrial loans:
Commercial term ⁽³⁾	4	235		214		5	553		486
Consumer loans ⁽⁴⁾	—	—		—		1	250		250
Total Non-PCI TDR loans	5	$	256	$	237	7	$	1,116	$	1,049


⁽¹⁾	Includes a modification of $23,000 through a reduction of principal or accrued interest for the six months ended June 30, 2016.


⁽²⁾	Includes a modification of $313,000 through a payment deferral for the six months ended June 30, 2015.


⁽³⁾	Includes modifications of $156,000 through payment deferrals, $3,000 through a reduction of principal or accrued interest and $55,000 through an extension of maturity for the six months ended June 30, 2016, and modifications of $476,000 through extensions of maturity and a modification of $9,000 through a reduction of principal or accrued interest for the six months ended June 30, 2015.


⁽⁴⁾	Includes a modification of $250,000 through a payment deferral for the six months ended June 30, 2015.

For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms are probable.

The following table details TDRs (excluding PCI loans) that defaulted subsequent to the modifications occurring within the previous 12 months, disaggregated by loan class, for the three months ended June 30, 2016 and 2015 , respectively:



	June 30, 2016			June 30, 2015
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
	(in thousands, except number of loans)
Real estate loans:
Commercial property
Hospitality	—	$	—	1	$	821
Gas station	—	—		1	1,856
Other	—	—		1	379
Commercial and industrial loans:
Commercial term	1	55		—	—
Total Non-PCI TDR loans	1	$	55	3	$	3,056

The following table details TDRs (excluding PCI loans) that defaulted subsequent to the modifications occurring within the previous 12 months, disaggregated by loan class, for the six months ended June 30, 2016 and 2015 , respectively:



	June 30, 2016			June 30, 2015
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
	(in thousands, except number of loans)
Real estate loans:
Commercial property
Retail	—	$	—	1	$	821
Gas station	—	—		1	1,856
Other	1	399		1	379
Commercial and industrial loans:
Commercial term	2	85		—	—
Total Non-PCI TDR loans	3	$	484	3	$	3,056

Purchased Credit Impaired Loans

As part of the acquisition of CBI, the Company purchased loans for which there was, at acquisition, evidence of deterioration of credit quality subsequent to origination and it was probable that all contractually required payments would not be collected. Outstanding balance of PCI loans, the undiscounted sum of all amounts including amounts deemed principal, interest, fees and penalties, were $ 19.1 million and $30.9 million , respectively as of June 30, 2016 and December 31, 2015.

For PCI loans, at the time of acquisition we (i) calculated the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”) and (ii) estimated the amount and timing of undiscounted expected principal and interest payments (the “undiscounted expected cash flows”). The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The nonaccretable difference represents an estimate of the loss exposure of principal and interest related to the PCI loan portfolios; such amount is subject to change over time based on the performance of such loans. The carrying value of PCI loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.

The excess of expected cash flows at acquisition over the initial fair value of acquired impaired loans is referred to as the “accretable yield” and is recorded as interest income over the estimated life of the loans using the effective yield. If estimated cash flows are indeterminable, the recognition of interest income will cease to be recognized.

At acquisition, the Company may aggregate PCI loans into pools having common credit risk characteristics such as product type, geographic location and risk rating. Increases in expected cash flows over those previously estimated increase the accretable yield and are recognized as interest income prospectively. Decreases in the amount and changes in the timing of expected cash flows compared to those previously estimated decrease the accretable yield and usually result in a provision for loan losses and the establishment of an allowance for loan losses. As the accretable yield increases or decreases from changes in

cash flow expectations, the offset is a decrease or increase to the nonaccretable difference. The accretable yield is measured at each financial reporting date based on information then currently available and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans.

The Company removes loans from loan pools when the Company receives payment in settlement with the borrower, sells the loan, or foreclose upon the collateral securing the loan. The Company recognizes "Disposition gain on Purchased Credit Impaired Loans" when the cash proceeds or the amount received are in excess of the loan's carrying amount. The removal of the loan from the loan pool and the recognition of disposition gains do not affect the then applicable loan pool accretable yield.

The following table summarizes the changes in carrying value of PCI loans during the six months ended June 30, 2016 and 2015:



	Carrying Amount			Accretable Yield
	(in thousands)
Balance at January 1, 2016	$	14,573		$	(5,944	)
Accretion	753			753
Payments received	(6,713		)	—
Disposal/transfer to OREO	1,103			—
Change in expected cash flows, net	—			683
Provision for credit losses	(144		)	—
Balance at June 30, 2016	$	9,572		$	(4,508	)

Balance at January 1, 2015	$	43,475		$	(11,025	)
Accretion	1,758			1,758
Payments received	(13,792		)	—
Disposal/transfer to OREO	1,441			—
Change in expected cash flows, net	—			92
Provision for credit losses	(326		)	—
Balance at June 30, 2015	$	32,556		$	(9,175	)

As of June 30, 2016 and December 31, 2015, pass/pass-watch, special mention and classified PCI loans, disaggregated by loan class, were as follows:



	Pass/Pass-Watch		Special Mention		Classified		Total		Allowance		Total
	(in thousands)
June 30, 2016
Real estate loans:
Commercial property
Retail	$	—			$	2,543	$	2,543	$	252	$	2,291
Hospitality	181				3,069		3,250		32		3,218
Gas station	79		153		2,656		2,888		527		2,361
Other	—				5,151		5,151		4,503		648
Residential property	985				6		991		86		905
Commercial and industrial loans:	—
Commercial term	—				146		146		41		105
Consumer loans	—				51		51		7		44
Total PCI loans	$	1,245	$	153	$	13,622	$	15,020	$	5,448	$	9,572

December 31, 2015
Real estate loans:
Commercial property
Retail	$	—	$	—	$	4,849	$	4,849	$	269	$	4,580
Hospitality	186		—		3,894		4,080		88		3,992
Gas station	—		176		4,116		4,292		477		3,815
Other	—		—		5,418		5,418		4,412		1,006
Residential property	999		—		158		1,157		151		1,006
Commercial and industrial loans:
Commercial term	—		—		171		171		42		129
Consumer loans	—		—		47		47		2		45
Total PCI loans	$	1,185	$	176	$	18,653	$	20,014	$	5,441	$	14,573

Loans accounted for as PCI are generally considered accruing and performing loans as 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. If the timing and amount of future cash flows is not reasonably estimable, the loans are classified as nonaccrual loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated. As of June 30, 2016 and December 31, 2015 , we had no PCI loans on nonaccrual status and included in the delinquency table below.

The following table presents a summary of the borrowers' underlying payment status of PCI loans as of the dates indicated:



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total		Allowance Amount		Total
	(in thousands)
June 30, 2016
Real estate loans:
Commercial property
Retail	$	190	$	58	$	945	$	1,193	$	1,350	$	2,543	$	252	$	2,291
Hospitality					91		91		3,159		3,250		32		3,218
Gas station	—				390		390		2,498		2,888		527		2,361
Other	2				4,985		4,987		164		5,151		4,503		648
Residential property					6		6		985		991		86		905
Commercial and industrial loans:
Commercial term			—		7		7		139		146		41		105
Consumer loans			11		40		51				51		7		44
Total PCI loans	$	192	$	69	$	6,464	$	6,725	$	8,295	$	15,020	$	5,448	$	9,572

December 31, 2015
Real estate loans:
Commercial property
Retail	$	—	$	267	$	1,109	$	1,376	$	3,473	$	4,849	$	269	$	4,580
Hospitality	—		9		154		163		3,917		4,080		88		3,992
Gas station	—		—		457		457		3,835		4,292		477		3,815
Other	4		—		4,996		5,000		418		5,418		4,412		1,006
Residential property	—		—		158		158		999		1,157		151		1,006
Commercial and industrial loans:
Commercial term	—		—		4		4		167		171		42		129
Consumer loans	—		—		47		47		—		47		2		45
Total PCI loans	$	4	$	276	$	6,925	$	7,205	$	12,809	$	20,014	$	5,441	$	14,573

Below is a summary of PCI as of June 30, 2016 and December 31, 2015 , respectively:



	Pooled PCI Loans							Non-pooled PCI Loans
	Number of Loans	Number of Pools	Carrying Amount (in thousands)			Percentage of Total		Number of Loans	Carrying Amount (in thousands)			Percentage of Total		Total PCI Loans (in thousands)
June 30, 2016
Real estate loans:
Commercial property	61	9	$	12,876		93.1	%	1	$	956		6.9	%	$	13,832
Residential property	1	1	6			0.6	%	2	985			99.4	%	991
Total real estate loans	62	10	12,882			86.9	%	3	1,941			13.1	%	14,823
Commercial and industrial loans	7	3	146			100.0	%	—	—			—	%	146
Consumer loans	1	1	51			100.0	%	—	—			—	%	51
Total acquired loans	70	14	13,079			87.1	%	3	1,941			12.9	%	15,020
Allowance for loan losses			(5,084		)				(364		)			(5,448		)
Total carrying amount			$	7,995					$	1,577				$	9,572



	Pooled PCI Loans							Non-pooled PCI Loans
	Number of Loans	Number of Pools	Carrying Amount (in thousands)			Percentage of Total		Number of Loans	Carrying Amount (in thousands)			Percentage of Total		Total PCI Loans (in thousands)
As of December 31, 2015
Real estate loans:
Commercial property	71	9	$	17,644		94.7	%	2	$	995		5.3	%	$	18,639
Residential property	2	2	119			10.3	%	2	1,038			89.7	%	1,157
Total real estate loans	73	11	17,763			89.7	%	4	2,033			10.3	%	19,796
Commercial and industrial loans	11	3	171			100.0	%	—	—			—	%	171
Consumer loans	1	1	47			100.0	%	—	—			—	%	47
Total acquired loans	85	15	17,981			89.8	%	4	2,033			10.2	%	20,014
Allowance for loan losses			(5,136		)				(305		)			(5,441		)
Total carrying amount			$	12,845					$	1,728				$	14,573

Note 4 — Servicing Assets and Liabilities

The changes in servicing assets and liabilities for the six months ended June 30, 2016 and 2015 were as follows:



	2016			2015
	(in thousands)
Servicing assets:
Balance at beginning of period	$	11,744		$	13,773
Addition related to sale of SBA loans	863			1,181
Amortization	(1,270		)	(1,829		)
Balance at end of period	$	11,337		$	13,125

Servicing liabilities:
Balance at beginning of period	$	4,784		$	5,971
Amortization	(863		)	(603		)
Balance at end of period	$	3,921		$	5,368

At June 30, 2016 and 2015 , we serviced loans sold to unaffiliated parties in the amounts of $481.4 million and $ 486.1 million , respectively. These represented loans that have been sold for which the Bank continues to provide servicing. These loans are maintained off balance sheet and are not included in the loans receivable balance. All of the loans serviced were SBA loans.

The Company recorded servicing fee income of $1.2 million for each of the three-month periods ended June 30, 2016 and 2015 , and $2.3 million for each of the six-month periods ended June 30, 2016 and 2015 . Servicing fee income, net of amortization of servicing assets and liabilities, is included in other operating income in the consolidated statements of income.

Note 5 — Income Taxes

The Company’s income tax expense was $8.9 million and $9.6 million for the three months ended June 30, 2016 and 2015 , respectively. The effective income tax rates were 38.5 percent and 40.8 percent , respectively, for the three months ended June 30, 2016 and 2015 . The Company’s income tax expense was $15.0 million and $17.2 million for the six months ended June 30, 2016 and 2015 , respectively. The effective income tax rates were 34.2 percent and 40.7 percent , respectively, for the six months ended June 30, 2016 and 2015 . Income tax expense for the six months ended June 30, 2016 includes a $1.8 million tax benefit recorded as a result of finalization of the Company's 2014 amended income tax returns. Management concluded that no valuation allowance is required for the deferred tax assets as of June 30, 2016 .

The Company is subject to examination by various federal and state tax authorities for the years ended December 31, 2008 through 2015. As of June 30, 2016 , the Company was subjected to audit or examination by Internal Revenue Service for the 2013 tax year and California Franchise Tax Board for the 2008 and 2009 tax years. Management does not anticipate any material changes in our financial statements as a result of the audits.

Note 6 — Debt

FHLB Borrowings

The Bank had $280.0 million and $170.0 million in advances (borrowings) from the FHLB as of June 30, 2016 and December 31, 2015 , respectively. The FHLB advances were all overnight borrowings at June 30, 2016 and December 31, 2015 . For the three months ended June 30, 2016 and 2015 , interest expense on FHLB advances was $299,000 and $4,000 , respectively, and the weighted-average interest rate was 0.43 percent and 0.21 percent , respectively. For the six months ended June 30, 2016 and 2015 , interest expense on FHLB advances was $494,000 and $60,000 , respectively, and the weighted-average interest rate was 0.43 percent and 0.18 percent , respectively.

The Bank maintains a secured credit facility with the FHLB, allowing the Bank to borrow on an overnight and term basis. The Bank had $723.5 million of loans pledged as collateral with the FHLB, which provides $529.6 million in borrowing capacity, of which $249.6 million remained available at June 30, 2016 .

The Bank also has $35.0 million in loans pledged with the FRB, which provides $24.3 million in available borrowing capacity through the Fed Discount Window. In addition, the Bank maintains an investment in the capital stock of the FRB. There were no outstanding borrowings with the FRB as of June 30, 2016 and December 31, 2015 .

Subordinated Debentures

The Company assumed Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) as a result of the acquisition of CBI with an unpaid principal balance of $26.8 million and an estimated fair value of $18.5 million . The $8.3 million discount is being amortized to interest expense through the debentures' maturity date of March 15, 2036. CBI formed a trust in 2005 and issued $26.0 million of Trust Preferred Securities (“TPS”) at 6.26 percent fixed rate for the first five years and a variable rate at the 3 month LIBOR plus 140 basis points thereafter and invested the proceeds in the Subordinated Debentures. The Company may redeem the Subordinated Debentures at an earlier date if certain conditions are met. The TPS will be subject to mandatory redemption if the Subordinated Debentures are repaid by the Company. Interest is payable quarterly , and the Company has the option to defer interest payments on the Subordinated Debentures from time to time for a period not to exceed five consecutive years. The amortization of discount was $ 62,000 and $41,000 for the three months ended June 30, 2016 , and 2015 , respectively, and $118,000 and $78,000 for the six months ended June 30, 2016 , and 2015 , respectively.

Note 7 — Earnings Per Share

Earnings per share (“EPS”) is calculated on both a basic and a diluted basis. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that then shared in earnings, excluding common shares in treasury.

For diluted EPS, weighted-average number of common shares included the impact of restricted stock under the treasury method. The Company amended all restricted stock agreements with time-based vesting criterion as of September 1, 2015 to allow for the payment of non-forfeitable dividends on unvested restricted stock, accordingly, we adopted the two-class method for EPS calculation pursuant to Accounting Standards Codification ("ASC") 260-10, Earnings Per Share. Unvested restricted stock containing rights to non-forfeitable dividends are considered participating securities prior to vesting and have been included in the earnings allocation in computing basic and diluted EPS under the two-class method. Basic EPS is computed by dividing net income, net of income allocated to participating securities, by the weighted-average number of common shares. For diluted EPS, weighted-average number of common shares include the diluted effect of stock options.

The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:



	Three Months Ended				Six Months Ended
	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
	(in thousands, except for share and per share data)
Basic EPS:
Net income	$	14,148	$	13,984	$	28,952	$	25,038
Less: income allocated to unvested restricted shares	98		—		178		—
Income allocated to common shares	$	14,050	$	13,984	$	28,774	$	25,038
Weighted-average shares for basic EPS	31,882,489		31,774,692		31,864,427		31,761,067
Basic EPS	$	0.44	$	0.44	$	0.90	$	0.79

Effect of dilutive securities - options and unvested restricted stock	147,421		134,027		136,736		113,417

Diluted EPS:
Income allocated to common shares	$	14,050	$	13,984	$	28,774	$	25,038
Weighted-average shares for diluted EPS	32,029,910		31,908,719		32,001,163		31,874,484
Diluted EPS	$	0.44	$	0.44	$	0.90	$	0.79

For the three months ended June 30, 2016 and 2015 , stock options of 52,332 and 83,500 , respectively, were not included in the computation of diluted EPS because their effect was anti-dilutive. For the six months ended June 30, 2016 and 2015 , stock options of 90,875 and 113,500 , respectively, were not included in the computation of diluted EPS because their effect was anti-dilutive.

Note 8 – Accumulated Other Comprehensive Income

Activity in accumulated other comprehensive income for the three months ended June 30, 2016 and 2015 was as follows:



	Unrealized Gains and Losses on Available for Sale Securities			Unrealized Gains and Losses on Interest-Only Strip			Tax Benefit (Expense)			Total
	(in thousands)
June 30, 2016
Balance at beginning of period	$	7,392		$	9		$	(2,037	)	$	5,364
Other comprehensive income (loss)	6,424			(9		)	(2,658		)	3,757
Balance at end of period	$	13,816		$	—		$	(4,695	)	$	9,121

June 30, 2015
Balance at beginning of period	$	8,874		$	16		$	(2,691	)	$	6,199
Other comprehensive loss before reclassification	(8,041		)	—			4,177			(3,864		)
Reclassification from accumulated other comprehensive income	(1,912		)	—			—			(1,912		)
Period change	(9,953		)	—			4,177			(5,776		)
Balance at end of period	$	(1,079	)	$	16		$	1,486		$	423

For the three months ended June 30, 2016 , there was no reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. For the three months ended June 30, 2015 , there was a $1.9 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $1.9 million reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities under noninterest income. Net unrealized gains of $4.1 million related to these sold securities had previously been recorded in accumulated other comprehensive income.

Activity in accumulated other comprehensive income for the six months ended June 30, 2016 and 2015 was as follows:



	Unrealized Gains and Losses on Available for Sale Securities			Unrealized Gains and Losses on Interest-Only Strip			Tax Benefit (Expense)			Total
	(in thousands)
June 30, 2016
Balance at beginning of period	$	(2,331	)	$	9		$	2,007		$	(315	)
Other comprehensive income	16,147			(9		)	(6,702		)	9,436
Balance at end of period	$	13,816		$	—		$	(4,695	)	$	9,121

June 30, 2015
Balance at beginning of period	$	(985	)	$	16		$	1,432		$	463
Other comprehensive income before reclassification	4,002			—			54			4,056
Reclassification from accumulated other comprehensive income	(4,096		)	—			—			(4,096		)
Period change	(94		)	—			54			(40		)
Balance at end of period	$	(1,079	)	$	16		$	1,486		$	423

For the six months ended June 30, 2016 , there was no reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. For the six months ended June 30, 2015 , there was a $4.1 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $4.1 million reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities under noninterest income. Net unrealized gains of $1.2 million related to these sold securities had previously been recorded in accumulated other comprehensive income.

Note 9 — Regulatory Matters

Risk-Based Capital

In July 2013, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the FDIC approved the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The rules also revise the regulatory capital elements, add a new common equity Tier I capital ratio, and increase the minimum Tier I capital ratio requirement. The revisions permit banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. Basel III rules, including certain transitional provisions, became effective January 1, 2015, and its requirements are included in the capital ratios presented in the table shown below.

In addition, a new capital conservation buffer of 2.5% began to be phased in effective January 1, 2016 through January 1, 2019, and must be met to avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. In January 2016, the new capital conservation buffer requirement was 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019.

The capital ratios of Hanmi Financial and the Bank as of June 30, 2016 and December 31, 2015 were as follows:



	Actual				Minimum Regulatory Requirement				Minimum to Be Categorized as “Well Capitalized”
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(in thousands)
June 30, 2016
Total capital (to risk-weighted assets):
Hanmi Financial	$	541,928	15.16	%	$	286,065	8.00	%	N/A		N/A
Hanmi Bank	$	520,759	14.58	%	$	285,653	8.00	%	$	357,066	10.00	%
Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	500,746	14.00	%	$	214,549	6.00	%	N/A		N/A
Hanmi Bank	$	479,577	13.43	%	$	214,240	6.00	%	$	285,653	8.00	%
Common equity Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	495,279	13.85	%	$	160,912	4.50	%	N/A		N/A
Hanmi Bank	$	479,577	13.43	%	$	160,680	4.50	%	$	232,093	6.50	%
Tier 1 capital (to average assets):
Hanmi Financial	$	500,746	11.69	%	$	171,329	4.00	%	N/A		N/A
Hanmi Bank	$	479,577	11.21	%	$	171,065	4.00	%	$	213,831	5.00	%

December 31, 2015
Total capital (to risk-weighted assets):
Hanmi Financial	$	499,076	14.91	%	$	267,760	8.00	%	N/A		N/A
Hanmi Bank	$	496,710	14.86	%	$	267,377	8.00	%	$	334,222	10.00	%
Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	456,941	13.65	%	$	200,820	6.00	%	N/A		N/A
Hanmi Bank	$	454,634	13.60	%	$	200,533	6.00	%	$	267,377	8.00	%
Common equity Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	456,941	13.65	%	$	150,615	4.50	%	N/A		N/A
Hanmi Bank	$	454,634	13.60	%	$	150,400	4.50	%	$	217,244	6.50	%
Tier 1 capital (to average assets):
Hanmi Financial	$	456,941	11.31	%	$	161,620	4.00	%	N/A		N/A
Hanmi Bank	$	454,634	11.27	%	$	161,399	4.00	%	$	201,749	5.00	%

Note 10 — Fair Value Measurements

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures , defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an 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. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:


•	Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.


•	Level 2 - Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.


•	Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.

We record securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, impaired loans, OREO, and core deposit intangible, are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument below:

Securities available for sale - The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely 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, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve, prepayment speeds, and default rates. Level 1 securities include U.S. treasury securities and mutual funds that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 securities primarily include mortgage-backed securities, collateralized mortgage obligations, U.S. government agency securities, SBA loan pool securities, municipal bonds and corporate bonds in markets that are active. In determining the fair value of the securities categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security held as of each reporting date. The broker-dealers use prices obtained from nationally recognized pricing services to value our fixed income securities. The fair value of the municipal securities is determined based on pricing data provided by nationally recognized pricing services. We review the prices obtained for reasonableness based on our understanding of the marketplace, and also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. Level 3 securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available, which necessitates the use of significant unobservable inputs.

Loans held for sale - Loans held for sale are all SBA loans and carried at the lower of cost or fair value. As of June 30, 2016 and December 31, 2015 , we had $12.8 million and $2.9 million SBA loans held for sale, respectively. Management obtains quotes, bids or pricing indication sheets on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At June 30, 2016 , the entire balance of SBA loans held for sale was recorded at its cost. We record SBA loans held for sale on a nonrecurring basis with Level 2 inputs.

Impaired loans (excluding PCI loans) - Nonaccrual loans and performing restructured loans are considered impaired for reporting purposes and are measured and recorded at fair value on a non-recurring basis. Nonaccrual Non-PCI loans with an unpaid principal balance over $100,000 and all performing restructured loans are reviewed individually for the amount of impairment, if any. Nonaccrual Non-PCI loans with an unpaid principal balance of $100,000 or less are evaluated for impairment collectively. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement.

OREO - Fair value of OREO is based primarily on third party appraisals, less costs to sell and result in a Level 2 classification of the inputs for determining fair value. Appraisals are required annually and may be updated more frequently as circumstances require and the fair value adjustments are made to OREO based on the updated appraised value of the property.

Nonperforming loans held for sale - We reclassify certain nonperforming loans as held for sale when we decide to sell those loans. The fair value of nonperforming loans held for sale is generally based upon the quotes, bids or sales contract prices

which approximate their fair value. Nonperforming loans held for sale are recorded at estimated fair value less anticipated liquidation cost. As of June 30, 2016 and December 31, 2015 , we did not have nonperforming loans held for sale, which are measured on a nonrecurring basis with Level 2 inputs.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of June 30, 2016 and December 31, 2015 , assets and liabilities measured at fair value on a recurring basis are as follows:



	Level 1		Level 2		Level 3
	Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs with No Active Market with Identical Characteristics		Significant Unobservable Inputs		Balance
	(in thousands)
June 30, 2016
Assets:
Securities available for sale:
Mortgage-backed securities	$	—	$	266,275	$	—	$	266,275
Collateralized mortgage obligations	—		86,141		—		86,141
U.S. government agency securities	—		15,544		—		15,544
SBA loan pools securities	—		56,425		—		56,425
Municipal bonds-tax exempt	—		169,426		—		169,426
Municipal bonds-taxable	—		14,092		—		14,092
Corporate bonds	—		5,001		—		5,001
U.S. treasury securities	158		—		—		158
Mutual funds	23,213		—		—		23,213
Total securities available for sale	$	23,371	$	612,904	$	—	$	636,275

December 31, 2015
Assets:
Securities available for sale:
Mortgage-backed securities	$	—	$	284,381	$	—	$	284,381
Collateralized mortgage obligations	—		96,986		—		96,986
U.S. government agency securities	—		47,822		—		47,822
SBA loan pools securities	—		63,266		—		63,266
Municipal bonds-tax exempt	—		163,902		—		163,902
Municipal bonds-taxable	—		14,033		—		14,033
Corporate bonds	—		4,993		—		4,993
U.S. treasury securities	160		—		—		160
Mutual funds	22,753		—		—		22,753
Total securities available for sale	$	22,913	$	675,383	$	—	$	698,296

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

As of June 30, 2016 and December 31, 2015 , assets and liabilities measured at fair value on a non-recurring basis are as follows:



	Level 1		Level 2		Level 3
	Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs With No Active Market With Identical Characteristics		Significant Unobservable Inputs		Loss During the Six Months Ended June 30, 2016
	(in thousands)
June 30, 2016
Assets:
Impaired loans (excluding PCI loans) ⁽¹⁾	$	—	$	15,097	$	2,503	$	63
OREO ⁽²⁾	$	—	$	11,846	$	—	$	—

	Level 1		Level 2		Level 3
	Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs With No Active Market With Identical Characteristics		Significant Unobservable Inputs		Loss During the Twelve Months Ended December 31, 2015
	(in thousands)
December 31, 2015
Assets:
Impaired loans (excluding PCI loans) ⁽³⁾	$	—	$	29,595	$	1,044	$	2,756
OREO ⁽⁴⁾	$	—	$	8,511	$	—	$	—


⁽¹⁾	Consists of real estate loans of $16.4 million , commercial and industrial loans of $500 thousand and consumer loans of $700 thousand .


⁽²⁾	Consists of properties obtained from the foreclosure of commercial property loans of $9.1 million and residential property loans of $2.7 million .


⁽³⁾	Consists of real estate loans of $27.9 million , commercial and industrial loans of $1.0 million , and consumer loans of $1.7 million .


⁽⁴⁾	Consists of properties obtained from the foreclosure of commercial property loans of $6.6 million and residential property loans of $1.9 million .

ASC 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured on a recurring basis or non-recurring basis are discussed above.

The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The estimated fair values of financial instruments were as follows:



	June 30, 2016
	Carrying		Fair Value
	Amount		Level 1			Level 2		Level 3
	(in thousands)
Financial assets:
Cash and due from banks	$	156,632	$	156,632		$	—	$	—
Securities available for sale	636,275		23,371			612,904		—
Loans receivable, net of allowance for loan losses	3,409,603		—			—		3,408,864
Loans held for sale	12,833		—			12,833		—
Accrued interest receivable	10,552		10,552		10,626	—		—
FHLB stock	16,385		—			16,385		—
FRB stock	14,423		—			14,423		—
Financial liabilities:
Noninterest-bearing deposits	1,189,528		—			1,189,528		—
Interest-bearing deposits	2,399,761		—			—		2,445,442
Borrowings	298,821		—			—		298,821
Accrued interest payable	3,107		3,107			—		—
Off-balance sheet items:
Commitments to extend credit	272,884		—			—		272,884
Standby letters of credit	7,658		—			—		7,658
Commercial letters of credit	5,524		—			—		5,524



	December 31, 2015
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and due from banks	$	164,364	$	164,364	$	—	$	—
Securities available for sale	698,296		22,913		675,383		—
Loans receivable, net of allowance for loan losses	3,140,381		—		—		3,127,172
Loans held for sale	2,874		—		2,874		—
Accrued interest receivable	9,501		9,501		—		—
FHLB stock	16,385		—		16,385		—
FRB stock	14,098		—		14,098		—
Financial liabilities:
Noninterest-bearing deposits	1,155,518		—		1,155,518		—
Interest-bearing deposits	2,354,458		—		—		2,329,335
Borrowings	188,703		—		—		188,703
Accrued interest payable	3,177		3,177		—		—
Off-balance sheet items:
Commitments to extend credit	262,680		—		—		262,680
Standby letters of credit	6,839		—		—		6,839
Commercial letters of credit	4,018		—		—		4,018

The methods and assumptions used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value are explained below:

Cash and cash equivalents - The carrying amounts of cash and cash equivalents approximate fair value due to the short-term nature of these instruments (Level 1).

Securities - The fair value of securities, consisting of securities available for sale, is generally obtained from market bids for similar or identical securities, from independent securities brokers or dealers, or from other model-based valuation techniques described above (Levels 1, 2 and 3).

Loans receivable, net of allowance for loan losses - Loans receivable include Non-PCI loans, PCI loans and Non-PCI impaired loans. The fair value of Non-PCI loans receivable is estimated based on the discounted cash flow approach. The discount rate was derived from the associated yield curve plus spreads and reflects the offering rates offered by the Bank for loans with similar financial characteristics. Yield curves are constructed by product type using the Bank’s loan pricing model for like-quality credits. The discount rates used in the Bank’s model represent the rates the Bank would offer to current borrowers for like-quality credits. These rates could be different from what other financial institutions could offer for these loans. No adjustments have been made for changes in credit within the loan portfolio. It is our opinion that the allowance for loan losses relating to performing and nonperforming loans results in a fair valuation of such loans. Additionally, the fair value of our loans may differ significantly from the values that would have been used had a ready market existed for such loans and may differ materially from the values that we may ultimately realize (Level 3).

The fair value of PCI loans receivable was estimated based on discounted expected cash flows. Increases in expected cash flows and improvements in the timing of cash flows over those previously estimated increase the amount of accretable yield and are recognized as an increase in yield and interest income prospectively. Decreases in the amount and delays in the timing of expected cash flows compared to those previously estimated decrease the amount of accretable yield and usually result in a provision for loan losses and the establishment of an allowance for loan losses (Level 3).

The fair value of impaired loans (excluding PCI loans) is estimated based on the net realizable fair value of the collateral or the observable market price of the most recent sale or quoted price from loans held for sale. The Company does not record loans at fair value on a recurring basis. Nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on the current appraised value of the collateral (Level 3).

Loans held for sale - Loans held for sale are carried at the lower of aggregate cost or fair market value, as determined based upon quotes, bids or sales contract prices, or as may be assessed based upon the fair value of the collateral which is obtained from recent real estate appraisals (Level 2). Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustment is typically significant and results in Level 3 classification of the inputs for determining fair value.

Accrued interest receivable - The carrying amount of accrued interest receivable approximates its fair value (Level 1).

FHLB and FRB stock - The carrying amounts of FHLB and FRB stock approximate fair value as such stock may be resold to the issuer at carrying value (Level 2).

Noninterest-bearing deposits - The fair value of noninterest-bearing deposits is the amount payable on demand at the reporting date (Level 2).

Interest-bearing deposits - The fair value of interest-bearing deposits, such as savings accounts, money market checking, and certificates of deposit, is estimated based on discounted cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).

Borrowings - Borrowings consist of FHLB advances, subordinated debentures and other borrowings. Discounted cash flows based on current market rates for borrowings with similar remaining maturities are used to estimate the fair value of borrowings (Level 3).

Accrued interest payable - The carrying amount of accrued interest payable approximates its fair value (Level 1).

Commitments to extend credit, standby letters of credit and commercial letters of credit - The fair values of commitments to extend credit and letters of credit are based upon the difference between the current value of similar loans and the price at which the Bank has committed to make the loans (Level 3).

Note 11 — Share-Based Compensation

Share-Based Compensation Expense

The Company adopted ASU 2016-09 during the three months ended March 31, 2016. Adoption of this ASU did not have a material impact on the Company's financial statements. As a result of adoption of this ASU, excess tax benefits related to the Company's share-based compensation were recognized as income tax expense in the consolidated statement of income during the six months ended June 30, 2016. For the three months ended June 30, 2016 , and 2015, share-based compensation expenses were $ 923,000 and $494,000 , respectively, and net tax benefits recognized from stock option exercises and restricted stock awards were $ 366,000 and $161,000 , respectively. For the six months ended June 30, 2016 , and 2015, share-based compensation expenses were $1.5 million and $1.0 million , respectively, and net tax benefits recognized from stock option exercises and restricted stock awards were $604,000 and $337,000 , respectively.

Unrecognized Share-Based Compensation Expense

As of June 30, 2016 , unrecognized share-based compensation expense was as follows:



	Unrecognized Expense		Average Expected Recognition Period
	(in thousands)
Stock option awards	$	252	0.9 years
Restricted stock awards	4,426		2.4 years
Total unrecognized share-based compensation expense	$	4,678	2.3 years

The table below provides stock option information for the three months ended June 30, 2016 :



	Number of Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value of In-the- Money Options
	(in thousands, except per share data)
Options outstanding at beginning of period	484,439		$	23.76	7.1 years	$	2,303	⁽¹⁾
Options exercised	(18,000	)	$	12.30	5.9 years	—
Options expired	(15,875	)	$	144.18	0.2 years	—
Options outstanding at end of period	450,564		$	19.97	7.2 years	$	2,727	⁽²⁾

Options exercisable at end of period	301,915		$	20.73	6.9 years	$	1,972	⁽²⁾


⁽¹⁾	Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $22.02 as of March 31, 2016, over the exercise price, multiplied by the number of options.


⁽²⁾	Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $23.49 as of June 30, 2016 , over the exercise price, multiplied by the number of options.

The table below provides stock option information for the six months ended June 30, 2016 :



	Number of Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value of In-the- Money Options
	(in thousands, except per share data)
Options outstanding at beginning of period	510,148		$	24.38	7.3 years	$	3,219	⁽¹⁾
Options exercised	(40,209	)	$	13.99	6.4 years	—
Options forfeited	(125	)	$	144.00	0.2 years	—
Options expired	(19,250	)	$	148.36	0.1 years	—
Options outstanding at end of period	450,564		$	19.97	7.2 years	$	2,727	⁽²⁾

Options exercisable at end of period	301,915		$	20.73	6.9 years	$	1,972	⁽²⁾


⁽¹⁾	Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $23.72 as of December 31, 2015, over the exercise price, multiplied by the number of options.


⁽²⁾	Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $23.49 as of June 30, 2016 , over the exercise price, multiplied by the number of options.

There were 18,000 and 6,874 stock options exercised during the three months ended June 30, 2016 and 2015 , respectively, and 40,209 and 26,455 stock options exercised during the six months ended June 30, 2016 and 2015 , respectively.

Restricted Stock Awards

Restricted stock awards under the Company’s 2007 and 2013 Equity Compensation Plans typically vest over three years and are subject to forfeiture if employment terminates prior to the lapse of restrictions. Hanmi Financial becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued. Forfeited shares of restricted stock become available for future grants upon forfeiture.

The table below provides information for restricted stock awards for the three and six months ended June 30, 2016 :



	Three Months Ended June 30, 2016				Six Months Ended June 30, 2016
	Number of Shares		Weighted- Average Grant Date Fair Value Per Share		Number of Shares		Weighted- Average Grant Date Fair Value Per Share
Restricted stock at beginning of period	387,860		$	16.52	136,795		$	20.74
Restricted stock granted	2,512		$	23.08	256,943		$	14.41
Restricted stock vested	(31,501	)	$	22.50	(34,200	)	$	22.48
Restricted stock forfeited	—		$	—	(667	)	$	22.25
Restricted stock at end of period	358,871		$	16.04	358,871		$	16.04

Note 12 — Off-Balance Sheet Commitments

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to the risk involved with on-balance sheet items recognized in the consolidated balance sheets.

The Bank’s exposure to loan losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the

same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, was based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-producing or borrower-occupied properties.

The following table shows the distribution of undisbursed loan commitments as of the dates indicated:



	June 30, 2016		December 31, 2015
	(in thousands)
Commitments to extend credit	$	272,884	$	262,680
Standby letters of credit	7,658		6,839
Commercial letters of credit	5,524		4,018
Total undisbursed loan commitments	$	286,066	$	273,537

The allowance for off-balance sheet items is maintained at a level believed to be sufficient to absorb probable losses related to these unfunded credit facilities. The determination of the allowance adequacy is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. Net adjustments to the allowance for off-balance sheet items are included in other operating expenses. Activity in the allowance for loan off-balance sheet items was as follows for the periods indicated:



	As of and for the Three Months Ended					As of and for the Six Months Ended
	June 30, 2016		June 30, 2015			June 30, 2016		June 30, 2015
	(in thousands)
Allowance for off-balance sheet items:
Balance at beginning of period	$	1,220	$	1,054		$	986	$	1,366
Provision (negative provision)	255		(92		)	489		(404		)
Balance at end of period	$	1,475	$	962		$	1,475	$	962

Note 13 — Subsequent Events

Management has evaluated subsequent events through the date of issuance of the financial data included herein. Except for disclosure included in the following paragraph, there have been no subsequent events that occurred during such period that would require disclosure in this Quarterly Report on Form 10-Q for the period ended June 30, 2016 , or would be required to be recognized in the Consolidated Financial Statements (Unaudited) as of June 30, 2016 .

Effective July 19, 2016, the Bank voluntarily withdrew from the Federal Reserve System. As a result, the Bank became a state non-member bank and will be regulated by the California Department of Business Oversight and the Federal Deposit Insurance Corporation. The Federal Reserve canceled the Bank's holdings of Federal Reserve stock for $14.4 million in cash representing the carrying amount at June 30, 2016.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three and six months ended June 30, 2016 . This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Annual Report on Form 10-K”) and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the period ended June 30, 2016 (this “Report”).

Forward-Looking Statements

Some of the statements under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report 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 (the “Exchange Act”). All statements in this Report other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial position and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs and availability, developments regarding our capital plans, plans and objectives of management for future operations, strategic alternatives for a possible business combination, merger or sale transactions, and other similar forecasts and statements of expectation and statements of assumption underlying any of the foregoing. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statement. These factors include the following: failure to maintain adequate levels of capital and liquidity to support our operations; the effect of potential future supervisory action against us or Hanmi Bank; general economic and business conditions internationally, nationally and in those areas in which we operate, including, but not limited to, California, Illinois and Texas; volatility and deterioration in the credit and equity markets; changes in consumer spending, borrowing and savings habits; availability of capital from private and government sources; demographic changes; competition for loans and deposits and failure to attract or retain loans and deposits; fluctuations in interest rates and a decline in the level of our interest rate spread; risks of natural disasters related to our real estate portfolio; risks associated with Small Business Administration loans; failure to attract or retain key employees; changes in governmental regulation; enforcement actions against us and litigation we may become a party to; ability of Hanmi Bank to make distributions to Hanmi Financial, which is restricted by certain factors, including Hanmi Bank's retained earnings, net income, prior distributions made, and certain other financial tests; ability to successfully and efficiently integrate the operations of banks and other institutions we acquire; adequacy of our allowance for loan losses; credit quality and the effect of credit quality on our provision for loan losses and allowance for loan losses; changes in the financial performance and/or condition of our borrowers and the ability of our borrowers to perform under the terms of their loans and other terms of credit agreements; our ability to control expenses; and changes in securities markets. In addition, for a discussion of some of the other factors that might cause such a difference, see the discussion contained in this Report under the heading “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Also see “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Interest Rate Risk Management” and “Capital Resources and Liquidity” in our 2015 Annual Report on Form 10-K, as well as other factors we identify from time to time in our periodic reports, including our Quarterly Reports on Form 10-Q, filed pursuant to the Exchange Act. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date, on which such statements were made, except as required by law.

Critical Accounting Policies

We have established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Our significant accounting policies are described in the Notes to Consolidated Financial Statements in our 2015 Annual Report on Form 10-K. We had no significant changes in our accounting policies since the filing of our 2015 Annual Report on Form 10-K.

Certain accounting policies require us to make significant estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities, and we consider these critical accounting policies. For a description of these critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in our 2015 Annual Report on Form 10-K. We use estimates and assumptions based on historical experience and other factors that we believe to be reasonable under the circumstances. Actual results could differ

significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of Hanmi Financial’s Board of Directors.

Selected Financial Data

The following table sets forth certain selected financial data for the periods indicated:



	As of or For the
	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in thousands, except share and per share data)
Summary balance sheets:
Cash and due from banks	$	156,632		$	153,231		$	156,632		$	153,231
Securities	636,275			728,683			636,275			728,683
Loans receivable ⁽¹⁾	3,409,603			2,826,086			3,409,603			2,826,086
Assets	4,441,333			3,970,770			4,441,333			3,970,770
Deposits	3,589,289			3,439,781			3,589,289			3,439,781
Liabilities	3,916,148			3,498,030			3,916,148			3,498,030
Stockholders’ equity	525,185			472,740			525,185			472,740,000
Tangible equity	523,648			470,850			523,648			470,850,000
Average loans receivable	3,328,416			2,839,601			3,260,625			2,829,813
Average securities	657,756			814,126			670,063			892,349
Average interest-earning assets	4,055,578			3,749,011			4,002,683			3,823,942
Average assets	4,325,500			4,023,750			4,273,288			4,101,420
Average deposits	3,479,365			3,484,267			3,481,176			3,505,379
Average borrowings	296,858			26,233			248,724			85,953
Average interest-bearing liabilities	2,605,737			2,467,440			2,575,246			2,554,301
Average stockholders’ equity	518,015			474,134			508,742			467,019
Average tangible equity	516,424			472,183			507,111			465,020
Per share data:
Earnings per share – basic ⁽²⁾	$	0.44		$	0.44		$	0.90		$	0.79
Earnings per share – diluted ⁽²⁾	$	0.44		$	0.44		$	0.90		$	0.79
Book value per share ⁽³⁾	$	16.28		$	14.78		$	16.28		$	14.78
Tangible book value per share ⁽⁴⁾	$	16.23		$	14.73		$	16.23		$	14.73
Cash dividends per share	$	0.14		$	0.11		$	0.28		$	0.22
Common shares outstanding	32,260,320			31,974,842			32,260,320			31,974,842
Performance ratios:
Return on average assets ^{(5) (6)}	1.32		%	1.39		%	1.36		%	1.23		%
Return on average stockholders’ equity ^{(5) (7)}	10.98		%	11.83		%	11.41		%	10.81		%
Return on average tangible equity ^{(5) (8)}	11.02		%	11.88		%	11.45		%	10.86		%
Net interest margin ⁽⁹⁾	4.02		%	3.97		%	4.00		%	3.93		%
Net interest margin excluding acquisition accounting ⁽⁹⁾	3.84		%	3.48		%	3.75		%	3.38		%
Efficiency ratio ⁽¹⁰⁾	56.46		%	56.04		%	56.84		%	60.52		%
Efficiency ratio excluding merger and integration costs ⁽¹⁰⁾	56.46		%	55.76		%	56.84		%	58.71		%
Dividend payout ratio ⁽¹¹⁾	31.77		%	25.14		%	31.01		%	28.06		%
Average stockholders’ equity to average assets	11.98		%	11.78		%	11.91		%	11.39		%



Capital ratios ⁽¹⁵⁾ :
Total risk-based capital:
Hanmi Financial	15.16		%	15.32		%	15.16		%	15.32		%
Hanmi Bank	14.58		%	15.25		%	14.58		%	15.25		%
Tier 1 risk-based capital:
Hanmi Financial	14.00		%	14.06		%	14.00		%	14.06		%
Hanmi Bank	13.43		%	13.99		%	13.43		%	13.99		%
Common equity Tier 1 capital:
Hanmi Financial	13.85		%	14.06		%	13.85		%	14.06		%
Hanmi Bank	13.43		%	13.99		%	13.43		%	13.99		%
Tier 1 leverage:
Hanmi Financial	11.69		%	10.99		%	11.69		%	10.99		%
Hanmi Bank	11.21		%	10.94		%	11.21		%	10.94		%
Asset quality ratios:
Nonperforming Non-PCI loans to loans ⁽¹²⁾	0.36		%	0.99		%	0.36		%	0.99		%
Nonperforming assets to assets ⁽¹³⁾	0.54		%	1.00		%	0.54		%	1.00		%
Net loan charge-offs (recoveries) to average loans	(0.02		)%	(0.04		)%	0.01		%	(0.16		)%
Allowance for loan losses to loans	1.15		%	1.77		%	1.15		%	1.77		%
Allowance for loan losses to non-performing Non-PCI loans ⁽¹²⁾ ⁽¹⁴⁾	277.60		%	176.53		%	277.60		%	176.53		%
Acquired loans:
PCI loans, net of discounts	$	15,020		$	33,857		$	15,020		$	33,857
Allowance for loan losses on PCI loans	5,448			1,352			5,448			1,352
Non-PCI loans, net of discounts	117,750			188,776			117,750			188,776
Unamortized acquisition discounts on Non-PCI loans	7,735			15,777			7,735			15,777


⁽¹⁾	Loans receivable, net of allowance for loan losses


⁽²⁾	Calculation based on net income allocated to common shares


⁽³⁾	Stockholders’ equity divided by common shares outstanding


⁽⁴⁾	Tangible equity divided by common shares outstanding


⁽⁵⁾	Calculation based on annualized net income


⁽⁶⁾	Net income divided by average assets


⁽⁷⁾	Net income divided by average stockholders’ equity


⁽⁸⁾	Net income divided by average tangible equity


⁽⁹⁾	Net interest income before provision for loan losses divided by average interest-earning assets


⁽¹⁰⁾	Noninterest expenses divided by the sum of net interest income before provision for loan losses and noninterest income


⁽¹¹⁾	Dividend declared per share divided by basic earnings per share


⁽¹²⁾	Excludes PCI loans


⁽¹³⁾	Nonperforming assets consist of nonperforming loans (see footnote (12) above) and OREO


⁽¹⁴⁾	Excludes allowance for loan losses allocated to PCI loans


⁽¹⁵⁾	Basel III rules, including certain transitional provisions, became effective January 1, 2015

Non-GAAP Financial Measures

Tangible Stockholders’ Equity to Tangible Assets Ratio

The Company calculates certain supplemental financial information determined by methods other than in accordance with U.S. GAAP including tangible stockholders' equity to tangible assets ratio, core interest income and yield, and net interest income and margin excluding acquisition accounting. These non-GAAP measures are used by management in analyzing Hanmi Financial’s capital strength, core loan interest income and yield, and net interest income and margin without the impact of our acquisition.

Tangible equity is calculated by subtracting goodwill and core deposit intangible from stockholders’ equity. Banking and financial institution regulators also exclude goodwill and core deposit intangible from stockholders’ equity when assessing

the capital adequacy of a financial institution. Core loan interest income and yield are calculated by subtracting accretion of discount on purchased loans. Net interest income and net interest margin are calculated by adjusting the reported amounts and rates for the impact of the CBI acquisition including accretion of discount on purchased loans, accretion of time deposit premium and amortization of subordinated debentures discount.

Management believes the presentation of these financial measures excluding the impact of items described in the preceding paragraph provide useful supplemental information that are essential to a proper understanding of the capital strength of Hanmi Financial and our core interest income and margin. These disclosures should not be viewed as a substitution for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

The following table reconciles this non-GAAP performance measure to the GAAP performance measure as of the dates indicated:



	June 30,
	2016			2015
	(in thousands, except share and per share data)
Assets	$	4,441,333		$	3,970,770
Less core deposit intangible	(1,537		)	(1,890		)
Tangible assets	$	4,439,796		$	3,968,880

Stockholders’ equity	$	525,185		$	472,740
Less core deposit intangible	(1,537		)	(1,890		)
Tangible stockholders' equity	$	523,648		$	470,850

Book value per share	$	16.28		$	14.78
Effect of core deposit intangible	(0.05		)	(0.05		)
Tangible book value per share	$	16.23		$	14.73

Core Loan Yield and Net Interest Margin

The impact of acquisition accounting adjustments on core loan yield and net interest margin are summarized in the following table:



	Three Months Ended
	June 30, 2016					June 30, 2015
	Amount			Rate		Amount			Rate
	(in thousands)
Core loan interest income and yield	$	39,554		4.78	%	$	33,842		4.78	%
Accretion of discount on purchased loans	1,091			0.13	%	3,073			0.43	%
As reported	$	40,645		4.91	%	$	36,915		5.21	%

Net interest income and net interest margin excluding acquisition accounting ⁽¹⁾	$	38,671		3.84	%	$	32,568		3.48	%
Accretion of discount on Non-PCI loans	994			0.10	%	2,606			0.28	%
Accretion of discount on PCI loans	97			0.01	%	467			0.05	%
Accretion of time deposits premium	791			0.08	%	1,504			0.16	%
Amortization of subordinated debentures discount	(62		)	(0.01	)%	(41		)	—	%
Net impact	1,820			0.18	%	4,536			0.49	%
As reported on a fully taxable equivalent basis	$	40,491		4.02	%	$	37,104		3.97	%


⁽¹⁾	Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.



	Six Months Ended
	June 30, 2016					June 30, 2015
	Amount			Rate		Amount			Rate
	(in thousands)
Core loan interest income and yield	$	76,590		4.72	%	$	66,522		4.74	%
Accretion of discount on purchased loans	3,122			0.20	%	7,427			0.53	%
As reported	$	79,712		4.92	%	$	73,949		5.27	%

Net interest income and net interest margin excluding acquisition accounting ⁽¹⁾	$	74,836		3.75	%	$	64,114		3.38	%
Accretion of discount on Non-PCI loans	2,748			0.14	%	6,117			0.32	%
Accretion of discount on PCI loans	374			0.02	%	1,310			0.07	%
Accretion of time deposits premium	1,733			0.09	%	3,110			0.16	%
Amortization of subordinated debentures discount	(118		)	—	%	(79		)	—	%
Net impact	4,737			0.25	%	10,458			0.55	%
As reported on a fully taxable equivalent basis	$	79,573		4.00	%	$	74,572		3.93	%


⁽¹⁾	Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.

Executive Overview

For the three months ended June 30, 2016, net income was $14.1 million, or $0.44 per diluted share, compared with $14.0 million, or $0.44 per diluted share, for the three months ended June 30, 2015. Net interest income, before provision for loan losses, for the 2016 second quarter increased 7.8 percent or $2.9 million from the same period last year principally because of an increase in loans receivable. The 2016 second quarter, however, had no gains from securities sales and a lower negative provision for loan losses compared with the 2015 second quarter which, combined, principally offset the increase in net interest income.

For the six months ended June 30, 2016, net income increased 15.9% to $29.0 million, or $0.90 per diluted share, compared with $25.0 million, or $0.79 per diluted share for the same period last year. Net income increased principally because of the increase in net interest income, the decrease in noninterest expenses and a lower effective tax rate. The first half of 2016, however, had no gains from securities sales and a lower negative provision compared with the first half of 2015 which, combined, principally offset the increases described above.

Other financial highlights include the following:


•	Loans receivable, before the allowance for loan losses, were $3.45 billion at the end of the second quarter of 2016, up $267.3 million or 8.4 percent, from $3.18 billion at the end of 2015.


•	Noninterest-bearing deposits at June 30, 2016 were $1.19 billion, an increase of $34.0 million or 2.9 percent, from $1.16 billion at December 31, 2015.


•	Asset quality at the end of the second quarter of 2016 improved with non-performing assets of $24.1 million, or 0.54 percent of total assets, compared with $27.6 million, or 0.65 percent of total assets at the end of 2015.

Results of Operations

Net Interest Income

Our primary source of revenue is net interest income, which is the difference between interest and fees derived from earning assets, and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes in the level and mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. Net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on loans are affected principally by changes to interest rates, the demand for such loans, the supply of money available for lending purposes, and other competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve.

The following tables show the average balances of assets, liabilities and stockholders’ equity; the amount of interest income, on a tax-equivalent basis, and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. All average balances are daily average balances.



	Three Months Ended
	June 30, 2016							June 30, 2015
	Average Balance			Interest Income / Expense		Average Yield / Rate		Average Balance			Interest Income / Expense		Average Yield / Rate
	(in thousands)
Assets
Interest-earning assets:
Loans receivable ⁽¹⁾	$	3,328,416		$	40,645	4.91	%	$	2,839,601		$	36,915	5.21	%
Securities ⁽²⁾	657,756			3,397		2.07	%	814,126			2,990		1.47	%
FRB and FHLB stock	30,808			579		7.52	%	29,938			1,116		14.91	%
Interest-bearing deposits in other banks	38,598			49		0.51	%	65,346			40		0.25	%
Total interest-earning assets	4,055,578			44,670		4.43	%	3,749,011			41,061		4.39	%
Noninterest-earning assets:
Cash and due from banks	114,247							89,313
Allowance for loan losses	(41,483		)					(53,159		)
Other assets	197,158							238,585
Total noninterest-earning assets	269,922							274,739
Total assets	$	4,325,500						$	4,023,750
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
Demand: interest-bearing	$	96,397		$	19	0.08	%	$	94,686		$	32	0.14	%
Money market and savings	944,355			1,212		0.52	%	821,498			1,002		0.49	%
Time deposits	1,268,127			2,453		0.78	%	1,525,023			2,768		0.73	%
FHLB advances	278,077			299		0.43	%	7,637			4		0.21	%
Subordinated debentures	18,781			196		4.20	%	18,596			151		3.26	%
Total interest-bearing liabilities	2,605,737			4,179		0.65	%	2,467,440			3,957		0.64	%
Noninterest-bearing liabilities:
Demand deposits: noninterest-bearing	1,170,486							1,043,060
Other liabilities	31,262							39,116
Total noninterest-bearing liabilities	1,201,748							1,082,176
Total liabilities	3,807,485							3,549,616
Stockholders’ equity	518,015							474,134
Total liabilities and stockholders’ equity	$	4,325,500						$	4,023,750
Net interest income (taxable equivalent)				$	40,491						$	37,104
Cost of deposits ⁽³⁾						0.43	%						0.44	%
Net interest spread ⁽⁴⁾						3.78	%						3.75	%
Net interest margin ⁽⁵⁾						4.02	%						3.97	%


⁽¹⁾	Loans include LHFS and exclude the allowance for loan losses. Nonaccrual loans are included in the average loan balance.


⁽²⁾	Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.


⁽³⁾	Represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits.


⁽⁴⁾	Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.


⁽⁵⁾	Represents net interest income as a percentage of average interest-earning assets.

The table below shows changes in interest income (on a tax equivalent basis) and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.



	Three Months Ended
	June 30, 2016 vs. June 30, 2015
	Increases (Decreases) Due to Change In
	Volume			Rate			Total
	(in thousands)
Interest and dividend income:
Loans receivable	$	5,978		$	(2,248	)	$	3,730
Securities	(649		)	1,056			407
FRB and FHLB stock	31			(568		)	(537		)
Interest-bearing deposits in other banks	(22		)	31			9
Total interest and dividend income	$	5,338		$	(1,729	)	$	3,609
Interest expense:
Demand: interest-bearing	$	1		$	(14	)	$	(13	)
Money market and savings	149			61			210
Time deposits	(494		)	179			(315		)
FHLB advances	287			8			295
Subordinated debentures	2			43			45
Total interest expense	$	(55	)	$	277		$	222
Change in net interest income (taxable equivalent)	$	5,393		$	(2,006	)	$	3,387

Interest income, on a taxable equivalent basis, increased $3.6 million, or 8.8 percent, to $44.7 million for the three months ended June 30, 2016 from $41.1 million for the same period in 2015. Interest expense increased $0.2 million or 5.0 percent, to $4.2 million for the three months ended June 30, 2016 from $4.0 million for the same period in 2015. For the three months ended June 30, 2016 and 2015, net interest income, on a taxable equivalent basis, was $40.5 million and $37.1 million, respectively. The increase in net interest income was primarily attributable to the growth in average loans and an increase in loan prepayment penalties including the pay-off of one large loan. The net interest spread and net interest margin, on a taxable equivalent basis, for the three months ended June 30, 2016 were 3.78 percent and 4.02 percent, respectively, compared with 3.75 percent and 3.97 percent, respectively, for the same period in 2015. Excluding the effects of acquisition accounting adjustments, net interest margin was 3.84 percent and 3.48 percent for the three months ended June 30, 2016 and 2015, respectively.

Average loans increased $488.8 million, or 17.2 percent, to $3.33 billion for the three months ended June 30, 2016 from $2.84 billion for the same period in 2015. Average securities decreased $156.4 million, or 19.2 percent, to $657.8 million for the three months ended June 30, 2016 from $814.1 million for the same period in 2015. Average interest-earning assets increased $306.6 million, or 8.2 percent, to $4.06 billion for the three months ended June 30, 2016 from $3.75 billion for the same period in 2015. The increase in average loans was due mainly to new loan production. Average loans were 82.1 percent of average interest-earning assets for the 2016 second quarter, up from 75.7 percent for the 2015 second quarter. Average interest-bearing liabilities increased $138.3 million, or 5.6 percent, to $2.61 billion for the three months ended June 30, 2016, compared with $2.47 billion for the same period in 2015. The increase in average interest-bearing liabilities resulted primarily from an increase in FHLB advances and growth in money market and savings deposits, offset by a decrease in average time deposits. In addition, average noninterest-bearing demand deposits increased $127.4 million, or 12.2 percent, to $1.17 billion for the 2016 second quarter from $1.04 billion for the 2015 second quarter.

The average yield on loans decreased to 4.91 percent for the three months ended June 30, 2016 from 5.21 percent for the same period in 2015, primarily due to a 30 basis point decrease in discount accretion on purchased loans. The average yield on securities, on a taxable equivalent basis, increased to 2.07 percent for the three months ended June 30, 2016 from 1.47 percent for the same period in 2015, attributable primarily to increases in tax-exempt municipal securities. The average yield on interest-earning assets, on a taxable equivalent basis, increased 4 basis points to 4.43 percent for the three months ended June 30, 2016 from 4.39 percent for the same period in 2015, due mainly to the higher percentage of loans in the mix of interest-

earning assets. The average cost of interest-bearing liabilities increased by 1 basis point to 0.65 percent for the three months ended June 30, 2016 from 0.64 percent for the same period in 2015.

The following table shows the average balances of assets, liabilities and stockholders’ equity; the amount of interest income, on a tax-equivalent basis, and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. All average balances are daily average balances.



	Six Months Ended
	June 30, 2016							June 30, 2015
	Average Balance			Interest Income / Expense		Average Yield / Rate		Average Balance			Interest Income / Expense		Average Yield / Rate
	(in thousands)
Assets
Interest-earning assets:
Loans receivable ⁽¹⁾	$	3,260,625		$	79,712	4.92	%	$	2,829,813		$	73,949	5.27	%
Securities ⁽²⁾	670,063			6,926		1.03	%	892,349			6,875		0.77	%
FRB and FHLB stock	30,652			1,121		3.66	%	29,896			1,598		5.35	%
Interest-bearing deposits in other banks	41,343			97		0.47	%	71,884			88		0.25	%
Total interest-earning assets	4,002,683			87,856		4.41	%	3,823,942			82,510		4.35	%
Noninterest-earning assets:
Cash and due from banks	114,455							87,842
Allowance for loan losses	(42,001		)					(53,238		)
Other assets	198,151							242,874
Total noninterest-earning assets	270,605							277,478
Total assets	$	4,273,288						$	4,101,420
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
Demand: interest-bearing	$	95,979		$	38	0.08	%	$	88,358		$	59	0.13	%
Money market and savings	923,196			2,295		0.50	%	821,113			1,974		0.48	%
Time deposits	1,307,347			5,077		0.78	%	1,558,877			5,549		0.72	%
FHLB advances	229,973			494		0.43	%	67,376			60		0.18	%
Subordinated debentures	18,751			379		4.06	%	18,577			296		3.21	%
Total interest-bearing liabilities	2,575,246			8,283		0.65	%	2,554,301			7,938		0.63	%
Noninterest-bearing liabilities:
Demand deposits: noninterest-bearing	1,154,654							1,037,031
Other liabilities	34,646							43,069
Total noninterest-bearing liabilities	1,189,300							1,080,100
Total liabilities	3,764,546							3,634,401
Stockholders’ equity	508,742							467,019
Total liabilities and stockholders’ equity	$	4,273,288						$	4,101,420
Net interest income (taxable equivalent)				$	79,573						$	74,572
Cost of deposits ⁽³⁾						0.43	%						0.44	%
Net interest spread ⁽⁴⁾						3.76	%						3.72	%
Net interest margin ⁽⁵⁾						4.00	%						3.93	%


⁽¹⁾	Loans include LHFS and exclude the allowance for loan losses. Nonaccrual loans are included in the average loan balance.


⁽²⁾	Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.


⁽³⁾	Represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits.


⁽⁴⁾	Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.


⁽⁵⁾	Represents net interest income as a percentage of average interest-earning assets.



	Six Months Ended
	June 30, 2016 vs. June 30, 2015
	Increases (Decreases) Due to Change In
	Volume			Rate			Total
	(in thousands)
Interest and dividend income:
Loans receivable	$	10,890		$	(5,127	)	$	5,763
Securities	(960		)	1,011			51
FRB and FHLB stock	2			(479		)	(477		)
Interest-bearing deposits in other banks	(48		)	57			9
Total interest and dividend income	$	9,884		$	(4,538	)	$	5,346
Interest expense:
Demand: interest-bearing	$	—		$	(21	)	$	(21	)
Money market and savings	240			81			321
Time deposits	(619		)	147			(472		)
FHLB advances	276			158			434
Subordinated debentures	2			81			83
Total interest expense	$	(101	)	$	446		$	345
Change in net interest income (taxable equivalent)	$	9,985		$	(4,984	)	$	5,001

Interest income, on a taxable equivalent basis, increased $5.4 million, or 6.5 percent, to $87.9 million for the six months ended June 30, 2016 from $82.5 million for the same period in 2015. Interest expense increased $0.4 million or 5.1 percent, to $8.3 million for the six months ended June 30, 2016 from $7.9 million for the same period in 2015. For the six months ended June 30, 2016 and 2015, net interest income, on a taxable equivalent basis, was $79.6 million and $74.6 million, respectively. The increase in net interest income was primarily attributable to the growth in average loans and the higher percentage of loans in the mix of interest-earning assets. The net interest spread and net interest margin, on a taxable equivalent basis, for the six months ended June 30, 2016 were 3.76 percent and 4.00 percent, respectively, compared with 3.72 percent and 3.93 percent, respectively, for the same period in 2015. Excluding the effects of acquisition accounting adjustments, net interest margin was 3.75 percent and 3.38 percent for the six months ended June 30, 2016 and 2015, respectively.

Average loans increased $430.8 million, or 15.2 percent, to $3.26 billion for the six months ended June 30, 2016 from $2.83 billion for the same period in 2015. Average securities decreased $222.2 million, or 24.9 percent, to $670.1 million for the six months ended June 30, 2016 from $892.3 million for the same period in 2015. Average interest-earning assets increased $178.8 million, or 4.7 percent, to $4.00 billion for the six months ended June 30, 2016 from $3.82 billion for the same period in 2015. The increase in average loans was due mainly to new loan production. Average loans were 81.5 percent of average interest-earning assets for 2016 second quarter, up from 74.0 percent for the 2015 second quarter. Average interest-bearing liabilities increases $20.9 million, or 0.8 percent, to $2.58 billion for the six months ended June 30, 2016, compared to $2.55 billion for the same period in 2015. The increase in average interest-bearing liabilities resulted primarily from an increase in FHLB advances and growth in money market and savings deposits, offset by a decrease in average time deposits. In addition, average noninterest-bearing demand deposits increased $117.7 million, or 11.4 percent, to $1.15 billion for the 2016 second quarter from $1.37 billion for the 2015 second quarter.

The average yield on loans decreased to 4.92 percent for the six months ended June 30, 2016 from 5.27 percent for the same period in 2015, primarily due to a 33 basis point decrease in discount accretion on purchased loans. The average yield on securities, on a taxable equivalent basis, increased to 1.03 percent for the six months ended June 30, 2016 from 0.77 percent for the same period in 2015, attributable primarily to increases in tax-exempt municipal securities. The average yield on interest-earning assets, on a taxable equivalent basis, increased 6 basis points to 4.41 percent for the six months ended June 30, 2016 from 4.35 percent for the same period in 2015, due mainly to the higher percentage of loans in the mix of interest-earning

assets. The average cost of interest-bearing liabilities increased by 2 basis points to 0.65 percent for the six months ended June 30, 2016 from 0.63 percent for the same period in 2015. The increase was due to increases in the cost of borrowings.

Provision for Loan Losses

In anticipation of credit risks inherent in our lending business, we set aside an allowance for loan losses through charges to earnings. These charges are made not only for our outstanding loan portfolio, but also for off-balance sheet items, such as commitments to extend credit, or letters of credit. The provisions for loan losses, whether a charge or a credit, made for our outstanding loan portfolio are recorded to the allowance for loan losses, whereas charges or credits to other noninterest expense for off-balance sheet items are recorded to the allowance for off-balance sheet items, and are presented as a component of other liabilities.

The negative provision for loan losses was $1.5 million for the second quarter of 2016, including a $60,000 negative provision for losses on PCI loans. For the same period in 2015, the negative provision for loans losses was $2.4 million, which included a $0.2 million positive provision for losses on PCI loans. The charge to other noninterest expense for losses on off-balance sheet items was $0.3 million for the three months ended June 30, 2016 compared to a credit of $0.1 million for the same period in 2015.

The negative provision for loan losses was $3.0 million for the first six months of 2016, which included a $0.1 million positive provision for losses on PCI loans. For the first six months of 2015, the negative provision for loans losses was $4.1 million, which included a $0.3 million positive provision for losses on PCI loans. The charge to other noninterest expense for losses on off-balance sheet items was $0.5 million for the first six months of 2016 quarter compared to a credit of $0.4 million for the same period in 2015.

See also “Allowance for Loan Losses and Allowance for Off-Balance Sheet Items" for further details.

Noninterest Income

The following table sets forth the various components of noninterest income for the periods indicated:



	Three Months Ended June 30,				Increase (Decrease)
	2016		2015		Amount			Percentage
	(in thousands)
Service charges on deposit accounts	$	2,898	$	3,169	$	(271	)	(8.6	)%
Trade finance and other service charges and fees	1,064		1,109		(45		)	(4.1	)%
Other operating income	1,674		900		774			86.0	%
Subtotal service charges, fees and other income	5,636		5,178		458			8.8	%
Gain on sale of SBA loans	1,774		1,573		201			12.8	%
Disposition gains on PCI loans	1,963		2,470		(507		)	(20.5	)%
Net gain on sales of securities	—		1,912		(1,912		)	(100.0	)%
Total noninterest income	$	9,373	$	11,133	$	(1,760	)	(15.8	)%

For the three months ended June 30, 2016, noninterest income was $9.4 million, a decrease of $1.8 million, or 15.8 percent, compared with $11.1 million for the same period in 2015. The decrease was primarily attributable to securities transactions and lower gains from the resolution or disposition of PCI loans. There were no securities transactions for the 2016 second quarter compared to gains of $1.9 million for the 2015 second quarter. When a PCI loan is removed from a loan pool and the cash proceeds or assets received from the settlement of the loan are in excess of its carrying amount, we recognize such gains as disposition gains. Disposition gains on PCI loans were $2.0 million for the three months of ended June 30, 2016 compared with $2.5 million the same period in 2015 as PCI loans declined $4.8 million for the 2016 second quarter compared with $7.2 million for the 2015 second quarter. Gains on SBA loan sales for the second quarter of 2016 were $1.8 million on $20.2 million of loan sales compared with $1.6 million of gains on $19.7 million of loan sales for the year ago period.

The following table sets forth the various components of noninterest income for the periods indicated:



	Six Months Ended June 30,				Increase (Decrease)
	2016		2015		Amount			Percentage
	(in thousands)
Service charges on deposit accounts	$	5,899	$	6,380	$	(481	)	(7.5	)%
Trade finance and other service charges and fees	2,109		2,376		(267		)	(11.2	)%
Other operating income	3,072		2,181		891			40.9	%
Subtotal service charges, fees and other income	11,080		10,937		143			1.3	%
Gain on sale of SBA loans	2,632		3,257		(625		)	(19.2	)%
Disposition gains on PCI loans	2,622		3,693		(1,071		)	(29.0	)%
Net gain on sales of securities	—		4,096		(4,096		)	(100.0	)%
Total noninterest income	$	16,334	$	21,983	$	(5,649	)	(25.7	)%

For the six months ended June 30, 2016, noninterest income was $16.3 million, a decrease of $5.6 million, or 25.7 percent, compared with $22.0 million for the same period in 2015. The decrease was primarily attributable to securities transactions and lower gains from the resolution or disposition of PCI loans. There were no securities transactions for the first six months of 2016 compared with gains of $4.1 million for the same period in 2015. When a PCI loan is removed from a loan pool and the cash proceeds or assets received from the settlement of the loan are in excess of its carrying amount, we recognize such gains as disposition gains. Disposition gains on PCI loans were $2.6 million for the six months of ended June 30, 2016 compared with $3.7 million the same period in 2015 as PCI loans declined $5.5 million for the first six months of 2016 compared with $10.6 million for the same period in 2015. Gains on SBA loan sales for the six months of ended June 30, 2016 were $2.6 million on $32.6 million of loan sales compared with $3.3 million of gains on $39.5 million of loan sales for the year ago period.

Noninterest Expense

The following table sets forth the components of noninterest expense for the periods indicated:



	Three Months Ended June 30,					Increase (Decrease)
	2016		2015			Amount			Percentage
	(in thousands)
Salaries and employee benefits	$	16,061	$	15,542		$	519		3.3	%
Occupancy and equipment	3,938		4,224			(286		)	-6.8	%
Data processing	1,454		1,335			119			8.9	%
Professional fees	1,509		1,701			(192		)	-11.3	%
Supplies and communications	709		928			(219		)	-23.6	%
Advertising and promotion	1,094		1,046			48			4.6	%
OREO expense (income)	183		(13		)	196			-1,507.7	%
Merger and integration costs	—		136			(136		)	-100.0	%
Other operating expenses	2,915		2,127			788			37.0	%
Total noninterest expense	$	27,863	$	27,026		$	837		3.1	%

For the three months ended June 30, 2016, noninterest expense was $27.9 million, an increase of $0.9 million or 3.1 percent, compared with $27.0 million for the same period in 2015. The increase was due primarily to an increase in salaries and employee benefits and higher other operating expenses, partially offset by lower occupancy and equipment expense from the branch closures and consolidations completed in the third quarter 2015.

The following table sets forth the components of noninterest expense for the periods indicated:



	Six Months Ended June 30,				Increase (Decrease)
	2016		2015		Amount			Percentage
	(in thousands)
Salaries and employee benefits	$	31,759	$	31,926	$	(167	)	-0.5	%
Occupancy and equipment	7,434		8,527		(1,093		)	-12.8	%
Data processing	2,889		3,467		(578		)	-16.7	%
Professional fees	2,974		4,042		(1,068		)	-26.4	%
Supplies and communications	1,445		1,758		(313		)	-17.8	%
Advertising and promotion	1,616		1,569		47			3.0	%
OREO expense (income)	648		404		244			60.4	%
Merger and integration costs	—		1,747		(1,747		)	-100.0	%
Other operating expenses	5,167		4,978		189			3.8	%
Total noninterest expense	$	53,932	$	58,418	$	(4,486	)	-7.7	%

For the six months ended June 30, 2016, noninterest expense was $53.9 million, a decrease of $4.5 million or 7.7 percent, compared with $58.4 million for the same period in 2015. The decrease was due primarily to reductions in merger and integration costs, professional fees and data processing fees related to the CBI acquisition, along with lower occupancy and equipment expense from the branch closures and consolidations completed in the third quarter 2015.

Income Tax Expense

Income tax expense was $8.9 million for the three months ended June 30, 2016, compared with $9.6 million for the same period in 2015. The effective income tax rate was 38.5 percent for the three months ended June 30, 2016, compared with 40.8 percent for the same period in 2015.

Income tax expense was $15.0 million for the six months ended June 30, 2016 compared with $17.2 million for the same period in 2015. The effective income tax rate was 34.2 percent for the six months ended June 30, 2016, compared with 40.7 percent for the same period in 2015. The six-month period in 2016 included a $1.8 million benefit arising from the finalization of the 2014 amended income tax returns. The effective income tax rate for the six month ended June 30, 2016 would have been 38.2 percent without this benefit.

Financial Condition

Securities

Securities are classified as held to maturity, available for sale, or trading in accordance with GAAP. There were no held to maturity or trading securities as of June 30, 2016 and December 31, 2015. Securities classified as available for sale are stated at fair value. The composition of our securities portfolio reflects our securities strategy of providing a relatively stable source of interest income while maintaining an appropriate level of liquidity. Our securities portfolio also provides a source of liquidity by pledging as collateral or through repurchase agreement and collateral for certain public funds deposits.

As of June 30, 2016, our securities portfolio was composed primarily of mortgage-backed securities, collateralized mortgage obligations and tax exempt municipal bonds. Most of the securities carried fixed interest rates. Other than holdings of U.S. government agency securities, there were no securities of any one issuer exceeding 10 percent of stockholders’ equity as of June 30, 2016 and December 31, 2015.

The following table summarizes the amortized cost, estimated fair value and unrealized gain (loss) on securities as of the dates indicated:



	June 30, 2016							December 31, 2015
	Amortized Cost		Estimated Fair Value		Unrealized Gain (Loss)			Amortized Cost		Estimated Fair Value		Unrealized Gain (Loss)
	(in thousands)
Securities available for sale:
Mortgage-backed securities ^{(1) (2)}	$	262,223	$	266,275	$	4,052		$	286,450	$	284,381	$	(2,069	)
Collateralized mortgage obligations ⁽¹⁾	85,678		86,141		463			97,904		96,986		(918		)
U.S. government agency securities	15,491		15,544		53			48,478		47,822		(656		)
SBA loan pool securities	56,553		56,425		(128		)	63,670		63,266		(404		)
Municipal bonds-tax exempt	160,951		169,426		8,475			162,101		163,902		1,801
Municipal bonds-taxable	13,476		14,092		616			13,932		14,033		101
Corporate bonds	5,014		5,001		(13		)	5,017		4,993		(24		)
U.S. treasury securities	157		158		1			159		160		1
Mutual funds	22,916		23,213		297			22,916		22,753		(163		)
Total securities available for sale	$	622,459	$	636,275	$	13,816		$	700,627	$	698,296	$	(2,331	)


⁽¹⁾	Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.


⁽²⁾	Include securities collateralized by home equity conversion mortgages with total estimated fair value of $55.7 million and $58.6 million as of June 30, 2016 and December 31, 2015 , respectively.

As of June 30, 2016, securities available for sale decreased 8.9 percent to $636.3 million, compared with $698.3 million as of December 31, 2015, due mainly to principal payments offset by an increase in unrealized gains. As of June 30, 2016, securities available for sale had a net unrealized gain of $13.8 million, comprised of $14.3 million of unrealized gains and $0.5 million of unrealized losses. As of December 31, 2015, securities available for sale had a net unrealized loss of $2.3 million, comprised of $2.5 million of unrealized gains and $4.8 million of unrealized losses.

The following table summarizes the contractual maturity schedule for securities, at amortized cost, and their weighted-average yields as of June 30, 2016:



					After One Year But				After Five Years But
	Within One Year				Within Five Years				Within Ten Years				After Ten Years				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
									(in thousands)
Securities available for sale:
Mortgage-backed securities	$	1	1.55	%	$	49,287	1.64	%	$	87,564	2.08	%	$	125,371	1.71	%	$	262,223	1.82	%
Collateralized mortgage obligations	—		—	%	857		1.38	%	15,391		1.83	%	69,430		1.35	%	85,678		1.59	%
U.S. government agency securities	—		—	%	6,000		1.35	%	9,491		2.10	%	—		—	%	15,491		1.81	%
SBA loan pool securities	—		—	%	—		—	%	49,652		1.36	%	6,901		1.76	%	56,553		1.41	%
Municipal bonds-tax exempt ⁽¹⁾	—		—	%	720		2.82	%	75,813		3.08	%	84,418		4.09	%	160,951		3.61	%
Municipal bonds-taxable	—		—	%	3,727		3.99	%	9,749		3.91	%	—		—	%	13,476		3.94	%
Corporate bonds	—		—	%	5,014		1.11	%	—		—	%	—		—	%	5,014		1.11	%
U.S. treasury securities	—		—	%	157		1.19	%	—		—	%	—		—	%	157		1.19	%
Mutual funds	—		—	%	—		—	%	—		—	%	22,916		2.11	%	22,916		2.11	%
Total securities available for sale	$	1	1.55	%	$	65,762	1.62	%	$	247,660	2.28	%	$	309,036	2.51	%	$	622,459	2.27	%


⁽¹⁾	The yield on municipal bonds has been computed on a federal tax-equivalent basis of 35 percent.

Loans Receivable, Net

The following table shows the loan composition by type as of the dates indicated:



	June 30, 2016			December 31, 2015
	(in thousands)
Real estate loans:
Commercial property ⁽¹⁾
Retail	$	793,511		$	740,350
Hospitality	606,076			543,425
Gas station	280,761			323,655
Other ⁽²⁾	1,128,346			978,662
Construction	26,382			23,387
Residential property	296,496			236,035
Total real estate loans	3,131,572			2,845,514
Commercial and industrial loans:
Commercial term	143,633			152,773
Commercial lines of credit	121,326			128,224
International loans	28,114			31,879
Total commercial and industrial loans	293,073			312,876
Consumer loans ⁽³⁾	24,665			24,926
Loans receivable	3,449,310			3,183,316
Allowance for loan losses	(39,707		)	(42,935		)
Loans receivable, net	$	3,409,603		$	3,140,381


⁽¹⁾	Includes owner-occupied property loans of $1.28 billion and $1.20 billion as of June 30, 2016 and December 31, 2015, respectively.


⁽²⁾	Includes, among other property types, mixed-use, apartment, office, industrial, faith-based facilities and warehouse; the remaining real estate categories represents less than one percent of the Bank's total loans.


⁽³⁾	Consumer loans include home equity lines of credit of $20.6 million and $21.8 million as of June 30, 2016 and December 31, 2015, respectively.

As of June 30, 2016 and December 31, 2015, loans receivable (excluding loans held for sale and net of deferred loan cost, discounts and the allowance for loan losses) were $3.41 billion and $3.14 billion, respectively, representing an increase of $269.2 million, or 8.6 percent. The increase in loans as of June 30, 2016 compared with December 31, 2015 was primarily attributable to new loan production of $473.9 million and residential mortgage loan purchases of $97.2 million, offset by loan pay-offs and pay-downs of $252.0 million and SBA loan sales of $32.6 million.

During the six months ended June 30, 2016, new loan production was comprised of $371.5 million in commercial real estate loans, $34.5 million in commercial and industrial loans, $64.2 million in SBA loans, and $3.7 million in consumer loans.

Our loan portfolio included the following concentrations of loans to one type of industry that were greater than 10 percent of loans outstanding (includes real estate loans and commercial and industrial loans):



	Balance as of June 30, 2016		Percentage of Loans Outstanding
	Balance as of June 30, 2016		Percentage of Loans Outstanding
Industry	(in thousands)
Lessor of nonresidential buildings	$	1,058,274	30.7	%
Hospitality	$	636,000	18.4	%

There was no other concentration of loans to any one type of industry exceeding 10.0 percent of loans outstanding.

Nonperforming Loans and Nonperforming Assets

Nonperforming loans (excluding PCI loans) consist of loans on nonaccrual status and loans 90 days or more past due and still accruing interest. Nonperforming assets consist of nonperforming loans and OREO. Non-purchased credit impaired (“Non-PCI”) loans are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless we believe the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on nonaccrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When an asset is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Nonaccrual assets may be restored to accrual status when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans not meeting the criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means that management intends to offer for sale.

Except for nonperforming loans set forth below and PCI loans, we are not aware of any loans as of June 30, 2016 and December 31, 2015 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan repayment terms, or any known events that would result in the loan being designated as nonperforming at some future date. We cannot, however, predict the extent to which a deterioration in general economic conditions, real estate values, increases in general rates of interest, or changes in the financial condition or business of borrower may adversely affect a borrower’s ability to pay.

The following table provides information with respect to the components of nonperforming assets (excluding PCI loans) as of the dates indicated:



	June 30, 2016			December 31, 2015			Increase (Decrease)
	June 30, 2016			December 31, 2015			Amount			Percentage
				(in thousands)
Nonperforming Non-PCI loans:
Real estate loans:
Commercial property
Retail	$	832		$	946		$	(114	)	-12.1	%
Hospitality	1,956			5,790			(3,834		)	-66.2	%
Gas station	4,540			2,774			1,766			63.7	%
Other	3,366			4,068			(702		)	-17.3	%
Residential property	252			1,386			(1,134		)	-81.8	%
Commercial and industrial loans:
Commercial term	966			2,193			(1,227		)	-56.0	%
Commercial lines of credit	23			450			(427		)	-94.9	%
Consumer loans	406			1,511			(1,105		)	-73.1	%
Total nonperforming Non-PCI loans	12,341			19,118			(6,777		)	-35.4	%
Loans 90 days or more past due and still accruing	—			—			—			—
Total nonperforming Non-PCI loans ⁽¹⁾	12,341			19,118			(6,777		)	-35.4	%
OREO	11,846			8,511			3,335			39.2	%
Total nonperforming assets	$	24,187		$	27,629		$	(3,442	)	-12.5	%

Nonperforming Non-PCI loans as a percentage of Non-PCI loans	0.36		%	0.60		%
Nonperforming assets as a percentage of assets	0.54		%	0.65		%
Troubled debt restructured performing Non-PCI loans	$	11,513		$	10,299


⁽¹⁾	Includes nonperforming TDRs of $4.3 million and $6.9 million as of June 30, 2016 and December 31, 2015, respectively.

Nonaccrual Non-PCI loans were $12.4 million as of June 30, 2016, compared with $19.1 million as of December 31, 2015, representing a decrease of $6.8 million, or 35.4 percent. There were no Non-PCI loans past due 90 days or more and still accruing as of June 30, 2016 and December 31, 2015. During the six months ended June 30, 2016, $5.3 million of loans were placed on nonaccrual status. These additions to nonaccrual loans were mainly offset by $3.4 million of nonaccrual loans restored to accrual status, $3.3 million in principal payoffs and paydowns, $1.2 million in charge-offs and $3.8 million in transfers to OREO.

Delinquent Non-PCI loans (defined as 30 to 89 days or more past due and still accruing) were $1.6 million as of June 30, 2016, compared with $4.1 million as of December 31, 2015.

The ratio of nonperforming Non-PCI loans to Non-PCI loans decreased to 0.36 percent at June 30, 2016 from 0.60 percent at December 31, 2015. Of the $12.3 million nonperforming Non-PCI loans, approximately $11.6 million were impaired based on the definition contained in ASC 310, Receivables , which resulted in aggregate impairment reserve of $2.7 million as of June 30, 2016. The allowance for collateral-dependent loans is calculated as the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals less estimated costs to sell. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as nonperforming. We continue to monitor the collateral coverage, based on recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.

As of June 30, 2016, OREO consisted of 17 properties with a combined carrying value of $11.8 million, as compared with 14 properties with a combined carrying value of $8.5 million as of December 31, 2015.

Impaired Loans

We evaluate loan impairment in accordance with GAAP. With the exception of PCI loans, loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as an expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific allocation will be established. Additionally, impaired loans are specifically excluded from the quarterly migration analysis when determining the amount of the allowance for loan losses required for the period.

The following table provides information on impaired loans (excluding PCI loans) as of the dates indicated:



	June 30, 2016				December 31, 2015
	Recorded Investment		Percentage		Recorded Investment		Percentage
	(in thousands)
Real estate loans:
Commercial property
Retail	$	2,421	9.2	%	$	2,597	7.2	%
Hospitality	3,357		12.8	%	7,168		20.0	%
Gas station	4,623		17.7	%	5,393		15.0	%
Other	7,482		28.6	%	9,288		25.9	%
Residential property	2,529		9.7	%	2,895		8.1	%
Commercial and industrial loans:							—
Commercial term	5,066		19.3	%	5,257		14.7	%
Commercial lines of credit	23		0.1	%	381		1.1	%
International loans	—		—	%	1,215		3.4	%
Consumer loans	686		2.6	%	1,665		4.6	%
Total Non-PCI loans	$	26,187	100.0	%	$	35,859	100.0	%

Total impaired loans decreased $9.7 million, or 26.7 percent, to $26.2 million as of June 30, 2016, as compared to $35.9 million at December 31, 2015. Specific reserve allocations associated with impaired loans were $3.0 million and $4.4 million as of June 30, 2016 and December 31, 2015, respectively.

During the three months ended June 30, 2016 and 2015, interest income that would have been recognized had impaired loans performed in accordance with their original terms totaled $0.7 million and $1.2 million, respectively. Of these amounts, actual interest recognized on impaired loans was both $0.6 million and 0.8 million for the three months ended June 30, 2016 and 2015, respectively.

During the six months ended June 30, 2016 and 2015, interest income that would have been recognized had impaired loans performed in accordance with their original terms totaled $1.6 million and $1.9 million, respectively. Of these amounts, actual interest recognized on impaired loans was both $1.3 million and $1.5 million for the six months ended June 30, 2016 and 2015, respectively.

The following table provides information on TDRs (excluding PCI loans) as of the dates indicated:



	June 30, 2016						December 31, 2015
	Nonaccrual TDRs		Accrual TDRs		Total		Nonaccrual TDRs		Accrual TDRs		Total
	(in thousands)
Real estate loans:
Commercial property
Retail	$	312	$	1,247	$	1,559	$	344	$	1,227	$	1,571
Hospitality	1,152		467		1,619		1,244		414		1,658
Gas station	886		—		886		959		—		959
Other	1,303		4,421		5,724		1,525		5,237		6,762
Residential property	—		1,089		1,089		689		299		988
Commercial and industrial loans:
Commercial term	659		3,917		4,576		1,721		2,872		4,593
Commercial lines of credit	23		—		23		280		—		280
Consumer loans	—		372		372		116		250		366
Total Non-PCI loans	$	4,335	$	11,513	$	15,848	$	6,878	$	10,299	$	17,177

For the three months ended June 30, 2016, we restructured monthly payments for two loans, with a net carrying value of $21,000 at the time of modification, which we subsequently classified as TDRs. For the six months ended June 30, 2016, we restructured monthly payments for five loans, with a net carrying value of $256,000 at the time of modification, which we subsequently classified as TDRs. Temporary payment structure modifications included, but were not limited to, extending the maturity date, reducing the amount of principal and/or interest due monthly, and/or allowing for interest only monthly payments for nine months or less.

As of June 30, 2016, TDRs on accrual status were $11.5 million, all of which were temporary interest rate and payment reductions or extensions of maturity, and a $0.2 million allowance relating to these loans was included in the allowance for loan losses. For the TDRs on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms is probable. As of June 30, 2016, TDRs on nonaccrual status were $4.3 million, and a $0.1 million allowance relating to these loans was included in the allowance for loan losses.

As of December 31, 2015, TDRs on accrual status were $10.3 million, all of which were temporary interest rate and payment reductions or extensions of maturity, and a $0.9 million allowance reserve relating to these loans was included in the allowance for loan losses. For the TDRs on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms is probable. As of December 31, 2015, TDRs on nonaccrual status were $6.9 million, and a $0.1 million allowance relating to these loans was included in the allowance for loan losses.

Allowance for Loan Losses and Allowance for Off-Balance Sheet Items

The Bank charges or credits operating expenses for provisions to the allowance for loan losses and the allowance for off-balance sheet items at least quarterly based upon the allowance need. The allowance is determined through an analysis involving quantitative calculations based on historic loss rates and qualitative adjustments for general reserves and individual impairment calculations for specific allocations. The Bank charges the allowance for actual losses and credits the allowance for recoveries on loans previously charged-off.

The Bank evaluates the allowance methodology at least annually. In the fourth quarter of 2015, based upon an evaluation of the look-back periods, the loss-emergence periods and the qualitative adjustments, the Bank utilized a 20-quarter look-back period with equal weighting to all quarters in order to reflect the lengthening of the business cycle and to capture sufficient loss observations for the estimate of a reliable loss rate. In addition, the Bank determined that there were no indications that the loss migration analysis changed significantly; however, these factors do not materially affect the estimated loss rates. In addition, the Bank re-evaluated the qualitative adjustments, reducing their affect in light of the lengthening of the business cycle and the continued improvement in credit metrics. Improving credit metrics included, among other things, net loan recoveries, a low level of nonperforming, non-PCI loans to loans and a low level of classified loans to loans.

From first quarter of 2014 to the third quarter of 2015, based upon a similar evaluation, the Bank utilized a 16-quarter look-back period, weighing the loss factors 46 percent for the most recent four-quarter period and 31 percent, 15 percent and 8 percent for each of the following four-quarter periods, respectively.

To determine general reserve requirements, existing loans are divided into fourteen general loan pools of risk-rated loans, as well as three homogeneous loan pools. For risk-rated loans, migration analysis allocates historical losses by loan pool and risk grade to determine risk factors for potential loss inherent in the current outstanding loan portfolio. As three homogeneous loans are bulk graded, the risk grade is not factored into the historical loss analysis. In addition, specific reserves are allocated for loans deemed “impaired.”

When determining the appropriate level for allowance for loan losses, management considers qualitative adjustments for any factors that are likely to cause estimated loan losses associated with the Bank’s current portfolio to differ from historical

loss experience, including, but not limited to, national and local economic and business conditions, volume and geographic

concentrations, and problem loan trends.

To systematically quantify the credit risk impact of trends and changes within the loan portfolio, a credit risk matrix is

utilized. The qualitative factors are considered on a loan pool by loan pool basis subsequent to, and in conjunction with, a loss

migration analysis. The credit risk matrix provides various scenarios with positive or negative impact on the portfolio along

with corresponding basis points for qualitative adjustments.

The following tables reflect our allocation of allowance for loan losses by loan category as well as the loans receivable for each loan type:



	June 30, 2016						December 31, 2015
	Allowance Amount		Percentage		Non- PCI Loans		Allowance Amount		Percentage		Non- PCI Loans
	(in thousands)
Real estate loans:
Commercial property
Retail	$	5,375	15.7	%	$	790,968	$	5,164	13.8	%	$	735,501
Hospitality	7,692		22.5	%	602,826		8,175		21.8	%	539,345
Gas station	2,187		6.4	%	277,873		2,631		7.0	%	319,363
Other	9,255		27.0	%	1,123,195		9,977		26.6	%	973,243
Construction	881		2.6	%	26,382		1,732		4.6	%	23,387
Residential property	2,726		8.0	%	295,505		2,121		5.7	%	234,879
Total real estate loans	28,116		82.1	%	3,116,749		29,800		79.5	%	2,825,718
Commercial and industrial loans:
Commercial term	3,996		11.7	%	143,487		4,734		12.6	%	152,602
Commercial lines of credit	1,097		3.2	%	121,326		1,954		5.2	%	128,224
International loans	409		1.2	%	28,114		393		1.0	%	31,879
Total commercial and industrial loans	5,502		16.1	%	292,927		7,081		18.8	%	312,705
Consumer loans	242		0.7	%	24,614		242		0.6	%	24,879
Unallocated	399		1.2	%	—		371		1.1	%	—
Total	$	34,259	100.0	%	$	3,434,290	$	37,494	100.0	%	$	3,163,302



	June 30, 2016						December 31, 2015
	Allowance Amount		Percentage		PCI Loans		Allowance Amount		Percentage		PCI Loans
	(in thousands)
Real estate loans:
Commercial property
Retail	$	252	4.6	%	$	4,264	$	269	4.9	%	$	4,849
Hospitality	32		0.6	%	4,099		88		1.6	%	4,080
Gas station	527		9.7	%	4,613		477		8.8	%	4,292
Other	4,503		82.7	%	5,495		4,412		81.1	%	5,419
Residential property	86		1.6	%	1,154		151		2.8	%	1,156
Total real estate loans	5,400		99.2	%	19,625		5,397		99.2	%	19,796
Commercial and industrial loans:			—	%
Commercial term	41		0.8	%	161		42		0.8	%	171
Consumer loans	7		—	%	49		2		—	%	47
Total	$	5,448	100.0	%	$	19,835	$	5,441	100.0	%	$	20,014

The following tables set forth certain information regarding allowance for loan losses and allowance for off-balance sheet items for the periods presented. Allowance for off-balance sheet items is determined by applying reserve factors according to loan pool and grade as well as actual current commitment usage figures by loan type to existing contingent liabilities.



	As of and for the Three Months Ended,
	June 30, 2016									December 31, 2015									June 30, 2015
	Non-PCI Loans			PCI Loans			Total			Non-PCI Loans			PCI Loans			Total			Non-PCI Loans			PCI Loans			Total
										(in thousands)
Allowance for loan losses:
Balance at beginning of period	$	35,381		$	5,645		$	41,026		$	43,222		$	3,138		$	46,360		$	51,515		$	1,436		$	52,951
Actual charge-offs	(662		)	(137		)	(799		)	(527		)	—			(527		)	(1,221		)	52			(1,169		)
Recoveries on loans previously charged off	995			—			995			937			—			937			1,793			(352		)	1,441
Net loan recoveries	333			(137		)	196			410			—			410			572			(300		)	272
(Negative provision) provision	(1,455		)	(60		)	(1,515		)	(6,138		)	2,303			(3,835		)	(2,619		)	216			(2,403		)
Balance at end of period	$	34,259		$	5,448		$	39,707		$	37,494		$	5,441		$	42,935		$	49,468		$	1,352		$	50,820

Allowance for off-balance sheet items:
Balance at beginning of period	$	1,220		$	—		$	1,220		$	556		$	—		$	556		$	1,054		$	—		$	1,054
Provision (negative provision)	255			—			255			430			—			430			(92		)	—			(92		)
Balance at end of period	$	1,475		$	—		$	1,475		$	986		$	—		$	986		$	962		$	—		$	962

Ratios:
Net loan (recoveries) charge-offs to average loans ⁽¹⁾	(0.04		)%	3.14		%	(0.02		)%	(0.06		)%	—		%	(0.05		)%	(0.08		)%	3.21		%	(0.04		)%
Net loan (recoveries) charge-offs to loans ⁽¹⁾	(0.04		)%	3.65		%	(0.02		)%	(0.06		)%	—		%	(0.05		)%	(0.08		)%	3.54		%	(0.04		)%
Allowance for loan losses to average loans	1.02		%	31.26		%	1.19		%	1.27		%	18.14		%	1.41		%	1.76		%	3.61		%	1.79		%
Allowance for loan losses to loans	1		%	36.27		%	1.15		%	1.19		%	27.18		%	1.35		%	1.74		%	3.99		%	1.77		%
Net loan charge-offs (recoveries) to allowance for loan losses ⁽¹⁾	(3.89		)%	10.06		%	(1.97		)%	(5.05		)%	—		%	(3.82		)%	(4.63		)%	88.76		%	(2.14		)%
Allowance for loan losses to nonperforming loans	277.6		%	—		%	321.75		%	196.12		%	—		%	224.58		%	176.53		%	0.00		%	181.35		%
Balance:
Average loans during period	$	3,360,467		$	17,428		$	3,328,416		$	3,091,615		$	22,580		$	3,049,544		$	2,807,940		$	37,425		$	2,839,601
Loans at end of period	$	3,434,290		$	15,020		$	3,449,310		$	3,163,302		$	20,014		$	3,183,316		$	2,840,264		$	33,908		$	2,874,172
Nonperforming loans at end of period	$	12,341		$	—		$	12,341		$	19,118		$	—		$	19,118		$	28,023		$	—		$	28,023


⁽¹⁾	Net loan charge-offs (recoveries) are annualized to calculate the ratios.



	As of and for the Six Months Ended,
	June 30, 2016									June 30, 2015
	Non-PCI Loans			PCI Loans			Total			Non-PCI Loans			PCI Loans			Total

Allowance for loan losses:
Balance at beginning of period	$	37,494		$	5,441		$	42,935		$	51,640		$	1,026		$	52,666
Actual charge-offs	(1,299		)	(137		)	(1,436		)	(1,255		)	—			(1,255		)
Recoveries on loans previously charged off	1,248			—			1,248			3,485			—			3,485
Net loan recoveries	(51		)	(137		)	(188		)	2,230			—			2,230
(Negative provision) provision	(3,184		)	144			(3,040		)	(4,402		)	326			(4,076		)
Balance at end of period	$	34,259		$	5,448		$	39,707		$	49,468		$	1,352		$	50,820

Allowance for off-balance sheet items:
Balance at beginning of period	$	986		$	—		$	986		$	1,366		$	—		$	1,366
Provision (negative provision)	489			—			489			(404		)	—			(404		)
Balance at end of period	$	1,475		$	—		$	1,475		$	962		$	—		$	962

Ratios:
Net loan charge-offs (recoveries) to average loans ⁽¹⁾	—		%	1.56		%	0.01		%	(0.16		)%	0.00		%	(0.16		)%
Net loan charge-offs (recoveries) to loans ⁽¹⁾	—		%	1.82		%	0.01		%	(0.16		)%	0.00		%	(0.16		)%
Allowance for loan losses to average loans	1.04		%	31.1		%	1.22		%	1.78		%	3.40		%	1.80		%
Allowance for loan losses to loans	1		%	36.27		%	1.15		%	1.74		%	3.99		%	1.77		%
Net loan charge-offs (recoveries) to allowance for loan losses ⁽¹⁾	0.3		%	5.03		%	0.95		%	(9.02		)%	0.00		%	(8.78		)%
Allowance for loan losses to nonperforming loans	277.6		%	—		%	321.75		%	176.53		%	0.00		%	181.35		%
Balance:
Average loans during period	$	3,298,796		$	17,517		$	3,260,625		$	2,785,547		$	39,783		$	2,829,813
Loans at end of period	$	3,434,290		$	15,020		$	3,449,310		$	2,840,264		$	33,908		$	2,874,172
Nonperforming loans at end of period	$	12,341		$	—		$	12,341		$	28,023		$	—		$	28,023


⁽¹⁾	Net loan charge-offs (recoveries) are annualized to calculate the ratios.

Allowance for loan losses was $39.7 million, $42.9 million and $50.8 million, as of June 30, 2016, December 31, 2015, and June 30, 2015, respectively. The decrease of $3.2 million, or 7.5 percent in the allowance for loan losses as of June 30, 2016, compared with December 31, 2015 was due primarily to the decline in estimated loss factors and improvements in classified loans. Accordingly, the non-PCI loan loss allowance decreased by $3.2 million to $34.3 million as of June 30, 2016, compared with $37.5 million at December 31, 2015. The PCI loan loss allowance remained unchanged at $5.4 million as of June 30, 2016 and December 31, 2015.

An allowance for off-balance sheet exposure, primarily unfunded loan commitments, as of June 30, 2016, December 31, 2015 and June 30, 2015 was $1.5 million, $1.0 million and $1.0 million, respectively. The increase in the allowance for off-balance sheet exposure as of June 30, 2016, compared with December 31, 2015 was due primarily to the increase in unfunded loan commitments to $272.9 million as of June 30, 2016, from $262.7 million as of December 31, 2015. The Bank closely monitors the borrower’s repayment capabilities, while funding existing commitments to ensure losses are minimized.

Based on management’s evaluation and analysis of portfolio credit quality and prevailing economic conditions, we believe these allowances are adequate for losses inherent in the loan portfolio and for off-balance sheet exposures as of June 30, 2016.

The following table presents a summary of net recoveries (charge-offs) by the loan portfolio:



	As of and for the Three Months Ended								As of and for the Six Months Ended
	Charge-offs			Recoveries		Net Recoveries (Charge-offs)			Charge-offs			Recoveries		Net Recoveries (Charge-offs)
	(in thousands)
June 30, 2016
Real estate loans:
Commercial property
Retail	$	—		$	24	$	24		$	—		$	27	$	27
Hospitality	(103		)	33		(70		)	(638		)	33		(605		)
Gas station				5		5			—			86		86
Other	(53		)	35		(18		)	(53		)	44		(9		)
Commercial and industrial loans:
Commercial term	(506		)	840		334			(508		)	994		486
Commercial lines of credit	—			5		5			(100		)	11		(89		)
Consumer loans	—			53		53			—			53		53
Total Non-PCI loans	$	(662	)	$	995	$	333		$	(1,299	)	$	1,248	$	(51	)

June 30, 2015
Real estate loans:
Commercial property
Retail	$	(22	)	$	8	$	(14	)	$	(22	)	$	16	$	(6	)
Hospitality	(79		)	1,074		995			(79		)	1,073		994
Other	—			181		181			—			206		206
Commercial and industrial loans:
Commercial term	(921		)	506		(415		)	(955		)	2,120		1,165
Commercial lines of credit	—			24		24			—			55		55
International loans	(199		)	—		(199		)	(199		)	15		(184		)
Total Non-PCI loans	$	(1,221	)	$	1,793	$	572		$	(1,255	)	$	3,485	$	2,230

For the three months ended June 30, 2016, total charge-offs were $0.6 million, a decrease of $0.6 million, or 50.0 percent from $1.2 million for the same period in 2015, and total recoveries were $1.0 million, a decrease of $0.8 million, or 44.5 percent, from $1.8 million for the same period in 2015. For the six months ended June 30, 2016, total charge-offs were $1.3 million, same as total charge-offs for the same period last year, and total recoveries were $1.2 million, a decrease of $2.3 million, or 65.7 percent, from $3.5 million for the same period in 2015.

Deposits

The following table shows the composition of deposits by type as of the dates indicated:



	June 30, 2016				December 31, 2015
	Balance		Percent		Balance		Percent
	(in thousands)
Demand – noninterest-bearing	$	1,189,528	33.1	%	$	1,155,518	32.9	%
interest-bearing	92,776		2.6	%	94,583		2.7	%
Interest-bearing:			—	%			—	%
Money market and savings	1,023,421		28.5	%	871,863		24.8	%
Time deposits of $100,000 or more ⁽¹⁾	861,921		24.0	%	881,082		25.1	%
Other time deposits	421,643		11.8	%	506,931		14.5	%
Total deposits	$	3,589,289	100.0	%	$	3,509,977	100.0	%


⁽¹⁾	Includes $392.4 million and $377.1 million of time deposits of $250,000 or more as of June 30, 2016 and December 31, 2015, respectively.

Deposits increased $79.3 million, or 2.3 percent, to $3.59 billion as of June 30, 2016 from $3.51 billion as of December 31, 2015. The increase in deposits was mainly attributable to the $34.0 million and $151.6 million increase in noninterest-bearing demand deposits and money market and savings deposits, respectively, offset by $104.4 million decrease in time deposits. The decrease in time deposits were primarily due to maturities of higher rate time deposits assumed from CBI acquisition.

Core deposits (defined as demand, money market and savings and other time deposits) increased $99.0 million, or 3.8 percent, to $2.73 billion at June 30, 2016 from $2.63 billion at December 31, 2015. Noninterest-bearing demand deposits as a percentage of deposits increased to 33.1 percent at June 30, 2016 from 32.9 percent at December 31, 2015.

Borrowings

At June 30, 2016 and December 31, 2015, there were $280.0 million and $170.0 million in overnight advances from the FHLB, respectively. The increase in FHLB advances supported loan growth for the 2016 second quarter. In addition, subordinated debentures were $18.8 million and $18.7 million , respectively, at June 30, 2016 and December 31, 2015, the change representing the accretion of acquisition discount.

Interest Rate Risk Management

Interest rate risk indicates our exposure to market interest rate fluctuations. The movement of interest rates directly and inversely affects the economic value of fixed-income assets, which is the present value of future cash flow discounted by the current interest rate; under the same conditions, the higher the current interest rate, the higher the denominator of discounting. Interest rate risk management is intended to decrease or increase the level of our exposure to market interest rates. The level of interest rate risk can be managed through such means as the changing of gap positions and the volume of fixed-income assets. For successful management of interest rate risk, we use various methods to measure existing and future interest rate risk exposures, giving effect to historical attrition rates of core deposits. In addition to regular reports used in business operations, repricing gap analysis, stress testing and simulation modeling are the main measurement techniques used to quantify interest rate risk exposure.

The following table shows the status of our gap position as of June 30, 2016:



	Less Than Three Months			More Than Three Months But Less Than One Year			More Than One Year But Less Than Five Years			More Than Five Years			Noninterest- Sensitive			Total
	(in thousands)
Assets
Cash and due from banks	$	—		$	—		$	—		$	—		$	116,343		$	116,343
Interest-bearing deposits in other banks	40,289			—			—			—			—			40,289
Securities:
Fixed rate	29,186			47,372			194,015			250,697			—			521,270
Floating rate	100,021			1,315			—			—			—			101,336
Fair value adjustments	—			—			—			—			13,669			13,669
Loans:
Fixed rate	66,100			159,157			701,380			35,326			—			961,963
Floating rate	934,461			242,556			1,287,993			26,514			—			2,491,524
Nonaccrual	—			—			—			—			25,468			25,468
Deferred loan costs, discount, and allowance for loan losses	—			—			—			—			(56,519		)	(56,519		)
FHLB and FRB stock	—			—			—			30,808			—			30,808
Other assets	48,851			—			—			17,470			128,861			195,182
Total assets	$	1,218,908		$	450,400		$	2,183,388		$	360,815		$	227,822		$	4,441,333
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Demand – noninterest-bearing	$	—		$	—		$	—		$	—		$	1,189,528		$	1,189,528
– interest-bearing	4,327			7,983			25,390			55,076			—			92,776
Money market and savings	72,080			172,487			450,510			328,344			—			1,023,421
Time deposits	353,050			731,603			196,308			2,603			—			1,283,564
FHLB advances	280,000			—			—			—			—			280,000
Subordinated debentures	18,821			—			—			—			—			18,821
Other liabilities	—			—			—			—			28,038			28,038
Stockholders’ equity	—			—			—			—			525,185			525,185
Total liabilities and stockholders’ equity	$	728,278		$	912,073		$	672,208		$	386,023		$	1,742,751		$	4,441,333
Repricing gap	490,630			(461,673		)	1,511,180			(25,208		)	(1,514,929		)
Cumulative repricing gap	490,630			28,957			1,540,137			1,514,929			—
Cumulative repricing gap as a percentage of assets	11.05		%	0.65		%	34.68		%	34.11		%	—
Cumulative repricing gap as a percentage of interest-earning assets	11.79		%	0.70		%	37.01		%	36.41		%	—
Interest-earning assets																$	4,161,149

The repricing gap analysis measures the static timing of repricing risk of assets and liabilities (i.e., a point-in-time analysis measuring the difference between assets maturing or repricing in a period and liabilities maturing or repricing within the same period). Assets are assigned to maturity and repricing categories based on their expected repayment or repricing dates, and liabilities are assigned based on their repricing or maturity dates. Interest-bearing core deposits that have no maturity dates (savings, and money market checking and NOW accounts) are assigned to categories based on expected decay rates.

As of June 30, 2016, the cumulative repricing gap for the three-month period was at an asset-sensitive position and was 11.79 percent of interest-earning assets, which decreased from 13.56 percent as of December 31, 2015. This decrease was due mainly to a $35.7 million decrease in interest-bearing deposits in other banks, a $41.5 million increase in time deposits and a $110.0 million increase in FHLB advances, mainly offset by a $122.5 million increase in floating rate loans and a $22.1 million increase in floating rate securities.

As of June 30, 2016, the cumulative repricing gap for the twelve-month period was at an asset-sensitive position and was 0.70 percent of interest-earning assets, which decreases from 1.79 percent of an asset-sensitive position as of December 31, 2015. This decrease was due mainly to a $35.7 million decrease in interest-bearing deposits in other banks, a $18.9 million increase in money market and savings deposits and a $110.0 million increase in FHLB advances, mainly offset by a $122.5 million increase in fixed rate loans and a $73.4 million decrease in time deposits.

The following table summarizes the status of the cumulative gap position as of the dates indicated:



	Less Than Three Months						Less Than Twelve Months
	June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015
	(in thousands)
Cumulative repricing gap	$	490,630		$	533,628		$	28,957		$	70,573
Percentage of assets	11.05		%	12.68		%	0.65		%	1.68		%
Percentage of interest-earning assets	11.79		%	13.56		%	0.70		%	1.79		%

The spread between interest income on interest-earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and interest rate changes substantially affect our financial performance. We emphasize capital protection through stable earnings rather than maximizing yield. In order to achieve stable earnings, we prudently manage our assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits established within our guidelines.

To supplement traditional gap analysis, we perform simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the market value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated below). This sensitivity analysis is compared to policy limits, which specify the maximum tolerance level for net interest income exposure over a one-year horizon, given the basis point adjustment in interest rates reflected below.



	Percentage Changes		Change in Amount
Change in Interest Rate	Net Interest Income	Economic Value of Equity	Net Interest Income		Economic Value of Equity
	(in thousands)
300%	0.99%	(5.26)%	$	1,607	$	(25,852	)
200%	0.67%	(3.02)%	$	1,088	$	(14,848	)
100%	0.51%	(0.13)%	$	839	$	(660	)
-100%	⁽¹⁾	⁽¹⁾	⁽¹⁾		⁽¹⁾


⁽¹⁾	Results are not meaningful in a low interest rate environment.

The estimated sensitivity does not necessarily represent our forecast, and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions, including how customer preferences or competitor influences might change.

Capital Resources

Historically, our primary source of capital has been the retention of operating earnings. In order to ensure adequate levels of capital, the Board continually assesses projected sources and uses of capital in conjunction with projected increases in assets and levels of risk. Management considers, among other things, earnings generated from operations, and access to capital from financial markets through the issuance of additional securities, including common stock or notes, to meet our capital needs.

At June 30, 2016 , the Bank’s total risk-based capital ratio of 14.58 percent, Tier 1 risk-based capital ratio of 13.43 percent, common equity Tier 1 capital ratio of 13.43 percent and Tier 1 leverage capital ratio of 11.21 percent, placed the Bank in the “well capitalized” category pursuant to new capital rule, which is defined as institutions with total risk-based capital ratio equal to or greater than 10.00 percent, Tier 1 risk-based capital ratio equal to or greater than 8.00 percent, common equity Tier 1 capital ratios equal to or greater than 6.50 percent and Tier 1 leverage capital ratio equal to or greater than 5.00 percent.

For a discussion of implemented changes to the capital adequacy framework prompted by Basel III and the Dodd-Frank Wall Street Reform and Consumer Protection Act, see Note 9 - Regulatory Matters of Notes to Consolidated Financial Statements (Unaudited) in this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

For a discussion of off-balance sheet arrangements, see Note 12 - Off-Balance Sheet Commitments of Notes to Consolidated Financial Statements (Unaudited) in this Quarterly Report on Form 10-Q and “Item 1. Business - Off-Balance Sheet Commitments” in our 2015 Annual Report on Form 10-K.

Contractual Obligations

There have been no material changes to the contractual obligations described in our 2015 Annual Report on Form 10-K.

Recently Issued Accounting Standards

In January, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). Changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The classification and measurement guidance will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. All entities can early adopt the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. Early adoption of these provisions can be elected for all financial statements of fiscal years and interim periods that have not yet been issued (for public business entities) or that have not yet been made available for issuance. The classification and measurement guidance is the first ASU issued under the FASB’s financial instruments project. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

In February, 2016, the FASB issued ASU 2016-02, Leases . While both lessees and lessors are affected by the new guidance, the effects on the lessees are much more significant. The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. By definition, a short-term lease is one in which: (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which right-of-use assets and lease liabilities are not recognized and lease payments are generally recognized as expense over the lease term on a straight-line basis. Adoption of this ASU will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under existing lease accounting guidance. For many entities, this could significantly affect the financial ratios they use for external reporting and other purposes, such as debt covenant compliance. Examples of changes in the new guidance affecting both lessees and lessors include: (a) defining initial direct costs to only include those incremental costs that would not have been incurred if the lease had not been entered into, (b) requiring related party leases to be accounted for based on their legally enforceable terms and conditions, (c) eliminating the additional requirements that currently must be applied to leases involving real estate and (d) revising the circumstances under which the transfer contract in a sale-leaseback transaction should be accounted for as the sale of an asset by the seller-lessee and the purchase of an asset by the buyer-lessor. In addition, both lessees and lessors are subject to new disclosure requirements. ASU 2016-02 is effective for public entities for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , to reduce the complexity of certain aspects of the accounting for employee share-based payment transactions. As a result of this ASU, changes applicable to all entities include: 1) minimum statutory

withholding requirements; under the ASU, the threshold to qualify for equity classification would permit withholding up to the maximum individual statutory tax rate in the applicable jurisdictions. Also, the ASU provides that cash paid by an employer when directly withholding shares for tax-withholding purposes would be classified as a financing activity on the statement of cash flows; 2) accounting for forfeitures; the ASU would allow an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur; 3) accounting for income taxes; under the ASU, all excess tax benefits and tax deficiencies would be recognized as income tax expense or benefit in the income statement. An entity also would recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Further, excess tax benefits would not be separated from other income tax cash flows and thus would be classified along with other cash flows as an operating activity. ASU 2016-09 is effective for public entities for interim and annual periods beginning after December 15, 2016. The Company adopted this ASU effective January 1, 2016 and it did not have a material impact on its consolidated financial statements.

On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) , which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. Current expected credit losses (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost; and (2) certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees, and net investments in leases, as well as reinsurance and trade receivables. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating expected credit losses. The ASU does not prescribe a specific method to make the estimate so its application will require significant judgment. ASU 2016-13 is effective for public entities for interim and annual periods beginning after December 15, 2019. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures regarding market risks in Hanmi Bank’s portfolio, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk Management” and “- Capital Resources” in this Report.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of June 30, 2016, Hanmi Financial carried out an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, under the supervision and with the participation of our senior management, including our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial and accounting officer). The purpose of the disclosure controls and procedures is to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that Hanmi Financial’s disclosure controls and procedures were effective as of June 30, 2016.

Changes in Internal Control Over Financial Reporting

During the most recent fiscal quarter, there has been no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that has materially affected or is reasonably likely to materially affect Hanmi Financial's internal control over financial reporting.

Part II — Other Information

Item 1. Legal Proceedings

From time to time, Hanmi Financial and its subsidiaries are parties to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of Hanmi Financial and its subsidiaries. In the opinion of management, the resolution of any such issues would not have a material adverse impact on the financial condition, results of operations, or liquidity of Hanmi Financial or its subsidiaries.

Item 1A. Risk Factors

There have been no material changes in the risk factors previously disclosed under Part I, Item 1A Risk Factors of our 2015 Annual Report on Form 10-K.

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



Exhibit Number	Document
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document *
101.SCH	XBRL Taxonomy Extension Schema Document *
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document *
101.LAB	XBRL Taxonomy Extension Label Linkbase Document *
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document *
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document *

* Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language).

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.



			Hanmi Financial Corporation

Date:	August 8, 2016	By:	/s/ C. G. Kum
			C. G. Kum
			President and Chief Executive Officer (Principal Executive Officer)

		By:	/s/ Romolo C. Santarosa
			Romolo C. Santarosa
			Senior Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

TABLE OF CONTENTS

Part I Financial Information Item 1. Financial Statements Note 1 Basis Of Presentation Note 2 Securities Note 3 Loans Note 4 Servicing Assets and Liabilities Note 5 Income Taxes Note 6 Debt Note 7 Earnings Per Share Note 8 Accumulated Other Comprehensive Income Note 9 Regulatory Matters Note 10 Fair Value Measurements Note 11 Share-based Compensation Note 12 Off-balance Sheet Commitments Note 13 Subsequent Events Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Other Information 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

HAFC 10-Q Quarter ended June 30, 2016