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Table of Contents

 

 

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 September 30, 2014

or

 

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

For the Transition Period From                      To                     

Commission File Number: 000-30421

 

 

HANMI FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   95-4788120

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3660 Wilshire Boulevard, Penthouse Suite A

Los Angeles, California

  90010
(Address of Principal Executive Offices)   (Zip Code)

(213) 382-2200

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

 

 

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

Indicate by check mark whether the Registrant has submitted electronically 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   ¨    Accelerated Filer   x
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 October 31, 2014, there were 31,904,031 outstanding shares of the Registrant’s Common Stock.

 

 

 


Table of Contents

Hanmi Financial Corporation and Subsidiaries

Quarterly Report on Form 10-Q

Three and Nine Months Ended September 30, 2014

Table of Contents

 

Part 1 – 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

     46   

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

     70   

Signatures

       72   

 

2


Table of Contents

Part I — Financial Information

 

Item 1. Financial Statements

Hanmi Financial Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)

 

     September 30,
2014
    December 31,
2013
 

Assets

    

Cash and cash equivalents

   $ 197,016      $ 179,357   

Securities available for sale, at fair value (amortized cost of $1,139,173 as of September 30, 2014 and $549,113 as of December 31, 2013)

     1,128,624        530,926   

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

     7,757        —     

Loans receivable, net of allowance for loan losses of $51,179 as of September 30, 2014 and $57,555 as of December 31, 2013

     2,628,091        2,177,498   

Accrued interest receivable

     9,880        7,055   

Premises and equipment, net

     31,187        14,221   

Other real estate owned, net

     24,781        756   

Customers’ liability on acceptances

     2,428        2,018   

Servicing assets

     7,844        6,833   

FDIC loss sharing asset

     7,696        —     

Other intangible assets, net

     2,179        1,171   

Investment in federal home loan bank stock, at cost

     17,579        14,060   

Investment in federal reserve bank stock, at cost

     12,273        11,196   

Income tax assets

     72,330        63,841   

Bank-owned life insurance

     48,670        29,699   

Prepaid expenses

     2,753        1,415   

Other assets

     27,244        14,333   
  

 

 

   

 

 

 

Total assets

   $ 4,228,332      $ 3,054,379   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing

   $ 1,029,343      $ 819,015   

Interest-bearing

     2,568,811        1,693,310   
  

 

 

   

 

 

 

Total deposits

     3,598,154        2,512,325   

Accrued interest payable

     3,030        3,366   

Bank’s liability on acceptances

     2,428        2,018   

Federal home loan bank advances

     110,000        127,546   

Rescinded stock obligation

     15,720        —     

Subordinated debentures

     18,509        —     

Accrued expenses and other liabilities

     45,297        9,047   
  

 

 

   

 

 

 

Total liabilities

     3,793,138        2,654,302   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock, $0.001 par value; authorized 62,500,000 shares; issued 32,472,323 shares (31,894,429 shares outstanding) as of September 30, 2014 and 32,339,444 shares (31,761,550 shares outstanding) as of December 31, 2013

     257        257   

Additional paid-in capital

     554,446        552,270   

Accumulated other comprehensive loss, net of tax benefit of $5,469 as of September 30, 2014 and $8,791 as of December 31, 2013

     (5,065     (9,380

Accumulated deficit

     (44,586     (73,212

Less: treasury stock, at cost; 577,894 shares as of September 30, 2014 and December 31, 2013

     (69,858     (69,858
  

 

 

   

 

 

 

Total stockholders’ equity

     435,194        400,077   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,228,332      $ 3,054,379   
  

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

3


Table of Contents

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

(In thousands, except share and per share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014      2013     2014     2013  

Interest and Dividend Income:

         

Interest and fees on loans

   $ 30,499       $ 29,098      $ 87,044      $ 83,736   

Taxable interest on investment securities

     3,138         2,040        8,050        6,256   

Tax-exempt interest on investment securities

     20         69        116        237   

Interest on federal funds sold

     —           —          —          6   

Interest on interest-bearing deposits in other banks

     29         28        67        140   

Dividends on federal reserve bank stock

     173         198        513        577   

Dividends on federal home loan bank stock

     290         194        762        449   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     34,149         31,627        96,552        91,401   
  

 

 

    

 

 

   

 

 

   

 

 

 

Interest Expense:

         

Interest on deposits

     3,278         3,117        9,653        9,376   

Interest on federal home loan bank advances

     37         36        116        115   

Interest on subordinated debentures

     73         —          73        678   

Interest on rescinded stock obligation

     87         —          87        —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

     3,475         3,153        9,929        10,169   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income before provision for credit losses

     30,674         28,474        86,623        81,232   

Negative provision for credit losses

     —           —          (7,166     —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     30,674         28,474        93,789        81,232   
  

 

 

    

 

 

   

 

 

   

 

 

 

Noninterest Income:

         

Bargain purchase gain, net of deferred taxes

     6,593         —          6,593        —     

Service charges on deposit accounts

     2,883         2,730        7,924        8,662   

Remittance fees

     459         481        1,388        1,519   

Trade finance fees

     314         248        873        801   

Other service charges and fees

     380         349        1,080        1,082   

Bank-owned life insurance income

     225         230        672        693   

Gain on sales of SBA loans guaranteed portion

     1,221         994        2,267        6,064   

Net loss on sales of other loans

     —           —          —          (557

Net gain on sales of investment securities

     67         611        1,852        923   

Other operating income

     2,179         416        2,588        758   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest income

     14,321         6,059        25,237        19,945   
  

 

 

    

 

 

   

 

 

   

 

 

 

Noninterest Expense:

         

Salaries and employee benefits

     12,847         9,101        33,386        26,126   

Occupancy and equipment

     3,098         2,561        7,964        7,532   

Merger and integration costs

     3,415         —          3,572        —     

Unconsummated acquisition costs

     —           307        —          1,331   

Deposit insurance premiums and regulatory assessments

     513         308        1,349        1,059   

Data processing

     1,476         1,146        3,746        3,436   

Other real estate owned expense

     78         (59     84        (47

Professional fees

     1,386         599        2,786        4,095   

Directors and officers liability insurance

     191         219        574        657   

Supplies and communications

     628         533        1,725        1,593   

Advertising and promotion

     809         1,039        2,142        2,419   

Loan-related expense

     58         91        203        328   

Amortization of other intangible assets

     33         —          33        —     

Other operating expenses

     2,231         1,791        6,031        5,369   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest expense

     26,763         17,636        63,595        53,898   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuting operations before provision for income taxes

     18,232         16,897        55,431        47,279   

Provision for income taxes

     4,968         6,582        19,667        17,510   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuting operations, net of taxes

   $ 13,264       $ 10,315      $ 35,764      $ 29,769   

Discontinued operations

         

Income from operations of discontinued subsidiaries (including gain on disposal of $51 in the second quarter of 2014)

   $ —         $ 112      $ 37      $ 242   

Income tax expense

     —           42        481        81   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

     —           70        (444     161   

Net income

   $ 13,264       $ 10,385      $ 35,320      $ 29,930   
  

 

 

    

 

 

   

 

 

   

 

 

 

Basic earnings per share:

         

Income from continuing operations, net of taxes

   $ 0.42       $ 0.33      $ 1.13      $ 0.94   

Income from discontinued operations, net of taxes

     —           —          (0.02     0.01   
  

 

 

    

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.42       $ 0.33      $ 1.11      $ 0.95   

Diluted earnings per share:

         

Income from continuing operations, net of taxes

   $ 0.41       $ 0.33      $ 1.12      $ 0.94   

Income from discontinued operations, net of taxes

     —           —          (0.01     0.01   
  

 

 

    

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.41       $ 0.33      $ 1.10      $ 0.95   

Weighted-average shares outstanding:

         

Basic

     31,708,581         31,621,049        31,683,288        31,583,897   

Diluted

     32,001,419         31,733,004        31,967,876        31,652,795   

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

4


Table of Contents

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Net Income

   $ 13,264      $ 10,385      $ 35,320      $ 29,930   

Other comprehensive income, net of tax

        

Unrealized gain (loss) on securities

        

Unrealized holding (loss) gain arising during period

     (4,947     (10,020     9,491        (16,141

Less: reclassification adjustment for net gain included in net income

     (67     (611     (1,852     (923

Unrealized (loss) gain on interest-only strip of servicing assets

     (3     —          (2     1   

Income tax benefit (expense) related to items of other comprehensive income

     2,102        4,528        (3,322     7,176   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (2,915     (6,103     4,315        (9,887
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 10,349      $ 4,282      $ 39,635      $ 20,043   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

5


Table of Contents

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
    Treasury
Stock,

at Cost
    Total
Stockholders’
Equity
 

Balance at January 1, 2013

     32,074,434         (577,894     31,496,540       $ 257       $ 550,066       $ 5,418      $ (107,519   $ (69,858   $ 378,364   

Adjustment for the cumulative effect on prior years of retrospectively applying the new method of accounting

     —           —          —           —           —           —          (1,112     —          (1,112

Exercises of stock options

     40,678         —          40,678         —           139         —          —          —          139   

Exercises of stock warrants

     106,315         —          106,315         —           1,289         —          —          —          1,289   

Restricted stock awards

     110,582         —          110,582         —           —           —          —          —          —     

Share-based compensation expense

     —           —          —           —           387         —          —          —          387   

Comprehensive income:

                      

Net income

     —           —          —           —           —           —          19,545        —          19,545   

Change in unrealized gain on securities available for sale and interest-only strips, net of income taxes

     —           —          —           —           —           (9,887     —          —          (9,887
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

     32,332,009         (577,894     31,754,115       $ 257       $ 551,881       $ (4,469   $ (89,086   $ (69,858   $ 388,725   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2014

     32,339,444         (577,894     31,761,550       $ 257       $ 552,270       $ (9,380   $ (73,212   $ (69,858   $ 400,077   

Exercises of stock options

     34,382         —          34,382         —           427         —          —          —          427   

Exercises of stock warrants

     429         —          429         —           2         —          —          —          2   

Restricted stock awards

     98,068         —          98,068         —           —           —          —          —          —     

Share-based compensation expense

     —           —          —           —           1,747         —          —          —          1,747   

Cash dividends

     —           —          —           —           —           —          (6,694     —          (6,694

Comprehensive income:

                      

Net income

     —           —          —           —           —           —          35,320        —          35,320   

Change in unrealized loss on securities available for sale and interest-only strips, net of income taxes

     —           —          —           —           —           4,315        —          —          4,315   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

     32,472,323         (577,894     31,894,429       $ 257       $ 554,446       $ (5,065   $ (44,586   $ (69,858   $ 435,194   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

6


Table of Contents

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

     Nine Months Ended
September 30,
 
     2014     2013  

Cash flows from operating activities:

    

Net income

   $ 35,320      $ 29,930   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization of premises and equipment

     1,418        1,525   

Amortization of premiums and accretion of discounts on investment securities, net

     2,754        1,961   

Amortization of other intangible assets

     33        123   

Amortization of servicing assets

     1,318        1,152   

Amortization of investment in affordable housing partnerships

     592        552   

Amortization of subordinated debentures

     36        —     

Share-based compensation expense

     1,747        387   

Negative provision for credit losses

     (7,166     —     

Gain on sales of investment securities

     (1,852     (923

Gain on sales of loans

     (2,267     (5,507

Bargain purchase gain on acquisition

     (6,593     —     

Gain (loss) on sales of other real estate owned

     2        (71

Loss on sales of subsidiaries

     419        —     

Valuation adjustment on other real estate owned

     —          7   

Origination of loans held for sale

     (34,798     (63,113

Proceeds from sales of SBA loans guaranteed portion

     29,826        77,338   

Change in restricted cash

     —          5,350   

Change in accrued interest receivable

     609        624   

Change in FDIC loss sharing asset

     1,996        —     

Change in bank-owned life insurance

     (672     (693

Change in prepaid expenses

     (1,338     98   

Change in other assets

     (4,462     767   

Change in income tax assets

     (3,066     5,038   

Change in accrued interest payable

     (821     (9,070

Change in stock warrants payable

     —          80   

Change in other liabilities

     11,670        2,422   
  

 

 

   

 

 

 

Net cash provided by operating activities

     24,705        47,977   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from redemption of federal home loan bank and federal reserve bank stock

     —          3,740   

Proceeds from matured or called securities available for sale

     61,145        62,104   

Proceeds from sales of securities available for sale

     135,834        41,560   

Proceeds from sales of other real estate owned

     9,932        1,645   

Proceeds from sales of loans held for sale

     —          5,380   

Proceeds from insurance settlement on bank-owned life insurance

     —          279   

Cash acquired in acquisition, net of cash consideration paid

     116,967        —     

Net proceeds from sales of subsidiaries

     398        —     

Change in loans receivable

     (157,988     (131,169

Purchases of securities available for sale

     (124,442     (53,762

Purchases of premises and equipment

     (739     (567

Purchases of federal reserve bank stock

     (3,403     (978
  

 

 

   

 

 

 

Net cash provided by (used) in investing activities

     37,704        (71,768
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Change in deposits

     (13,168     33,744   

Change in short-term federal home loan bank advances

     (25,135     —     

Redemption of Federal Home Loan Bank advances

     (2,411     (290

Redemption of subordinated debentures

     —          (82,406

Proceeds from exercise of stock options

     427        460   

Proceeds from exercise of stock warrants

     —          305   

Cash dividends paid

     (4,463     (2,215
  

 

 

   

 

 

 

Net cash used in financing activities

     (44,750     (50,402
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     17,659        (74,193

Cash and cash equivalents at beginning of year

     179,357        268,047   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 197,016      $ 193,854   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 10,750      $ 19,239   

Income taxes

   $ 20,930      $ 11,910   

Non-cash activities:

    

Transfer of loans receivable to other real estate owned

   $ 7,501      $ 1,090   

Transfer of loans receivable to loans held for sale

   $ —        $ 8,010   

Transfer of loans held for sale to loans receivable

   $ —        $ 2,534   

Note receivable from sale of insurance subsidiaries

   $ 1,394      $ —     

Conversion of stock warrants into common stock

   $ 2      $ 981   

Income tax (expense) benefit related to items of other comprehensive income

   $ (3,322   $ 7,176   

Change in unrealized (gain) loss in accumulated other comprehensive income

   $ (9,489   $ 16,140   

Cash dividend declared

   $ (2,231   $ —     

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Table of Contents

Hanmi Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

Note 1 — Basis of Presentation

Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we” or “us”) is a Delaware corporation and is subject to the Bank Holding Company Act of 1956, as amended. Hanmi Bank (the “Bank”), a California state chartered bank, is a wholly owned subsidiary of Hanmi Financial. During the second quarter of 2014, we disposed of two subsidiaries, Chun-Ha Insurance Services, Inc., a California corporation (“Chun-Ha”), and All World Insurance Services, Inc., a California corporation (“All World”). See “Note 4 — Sale of Insurance Subsidiaries and Discontinued Operations.” On August 31, 2014, Hanmi Financial completed its acquisition of Central Bancorp, Inc. See “Note 2 — Acquisition.”

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 September 30, 2014, 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, 2013 (the “2013 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 fair value estimates of assets acquired and liabilities assumed in Central Bancorp, Inc. (“CBI”) acquisition as discussed in “Note 2 – Acquisition.” The acquired assets and assumed liabilities of Central Bancorp, Inc. were measured at their estimated fair values. The Company made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and assumed liabilities.

Descriptions of our significant accounting policies are included in “Note 1 Summary of Significant Accounting Policies” in our 2013 Annual Report on Form 10-K. During the three months ended June 30, 2014, we adopted an accounting policy related to accounting for investments in low-income housing tax credit according to Financial Accounting Standards Board (“FASB”) ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. See “Note 3 Accounting for Investments in Qualified Affordable Housing Projects.” During the three months ended September 30, 2014, we completed acquisition of CBI and our acquisition was accounted for using the acquisition method of accounting. See “Note 2 —Acquisition” for more information about the CBI acquisition and “Note 6 — Loans” for accounting policies regarding purchased loans.

Note 2 — Acquisition

Acquisition of Central Bancorp, Inc.

On August 31, 2014, Hanmi Financial completed its acquisition of CBI, the parent company of United Central Bank (“UCB”). In the merger with CBI, each share of CBI common stock was exchanged for $17.64 per share or $50 million in the aggregate. In addition, Hanmi Financial paid $28.7 million to redeem CBI preferred stock and cumulative unpaid dividends and $1.6 million for accrued interest payable on CBI subordinated debentures immediately prior to the consummation of the merger. The merger consideration was funded from consolidated cash of Hanmi Financial. At August 31, 2014, CBI had total assets, liabilities and equity of $1.26 billion, $1.17 billion and $86.8 million, respectively. Total loans and deposits were $294.0 million and $1.1 billion, respectively, at August 31, 2014.

CBI was headquartered in Garland, Texas and through UCB, operated 23 branch locations within Texas, Illinois, Virginia, New York, New Jersey and California. The combined companies operate as Hanmi Financial Corporation and Hanmi Bank, respectively, with banking operations under the Hanmi Bank brand. Following the acquisition, Hanmi Bank has expanded its geographic presence through a network of 49 branches located throughout the United States. Key strategic benefits of the merger include 1) access to highly attractive markets with large Asian-American communities, creating business opportunities by leveraging Hanmi Bank’s brand and business strategies, 2) ability to realize significant cost savings and operational efficiencies for the combined company, and 3) opportunity to prudently deploy capital at an attractive return for our shareholders.

 

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Table of Contents

In connection with the acquisition, the consideration paid, the provisional estimate of the fair value of the assets acquired and the liabilities assumed as of August 31, 2014 are summarized in the following table:

 

     (In thousands)  

Consideration paid:

  

CBI Stockholders

   $ 50,000   

Redemption of preferred stock and cumulative unpaid dividends

     28,675   

Accrued interest on subordinated debentures

     1,566   
  

 

 

 
     80,241   

Assets acquired:

  

Cash and cash equivalents

     197,209   

Securities available for sale

     663,497   

Loans

     294,032   

Premises and equipment

     17,735   

Other real estate owned

     28,027   

Income tax assets, net

     8,800   

Core deposit intangible

     2,213   

FDIC loss sharing assets

     9,692   

Bank-owned life insurance

     18,296   

Other assets

     16,428   
  

 

 

 

Total assets acquired

     1,255,929   

Liabilities assumed:

  

Deposits

     1,098,997   

Subordinated debentures

     18,473   

Rescinded stock obligation

     15,720   

FHLB advances

     10,000   

Other liabilities

     25,905   
  

 

 

 

Total liabilities assumed

     1,169,095   
  

 

 

 

Total identifiable net assets

   $ 86,834   
  

 

 

 

Bargain purchase gain, net of deferred taxes

   $ 6,593   
  

 

 

 

The CBI acquisition was accounted for under the acquisition method of accounting pursuant to ASC 805, Business Combinations. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of acquisition date. The Company made significant estimates and exercised significant judgment in estimating the fair values and accounting for such acquired assets and assumed liabilities. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. The fair values are based on provisional valuation estimates of the fair values of the acquired assets and assumed liabilities. The valuation of acquired loans, income taxes and the core deposit intangibles are based on a preliminary estimate and are subject to change as the provisional amounts are finalized. The provisional application of the acquisition method of accounting resulted in a bargain purchase gain of $6.6 million. The operations of CBI are included in our operating results since the acquisition date for the third quarter of 2014. Acquisition-related costs of $3.6 million for the nine months ended September 30, 2014 are expensed as incurred as merger and integration costs. These expenses are comprised primarily of system conversion costs and professional fees.

The $294.0 million estimated fair value of loans acquired from CBI was determined by utilizing a discounted cash flow methodology considering credit and interest rate risk. Cash flows were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value based on a current market rate for similar loans. There was no carryover of CBI’s allowance for loan losses associated with the loans acquired as loans were initially recorded at fair value.

The following table summarizes the accretable yield on the purchased credit impaired loans acquired from the CBI merger at August 31, 2014.

 

     (In thousands)  

Undiscounted contractual cash flows

   $ 117,301   

Nonaccretable discount

     (18,565
  

 

 

 

Undiscounted cash flow to be collected

     98,736   

Estimated fair value of PCI loans

     75,878   
  

 

 

 

Accretable yield

   $ 22,858   
  

 

 

 

 

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Table of Contents

The core deposit intangible (“CDI”) of $2.2 million was recognized for the core deposits acquired from CBI. The CDI is amortized over its useful life of approximately ten years on an accelerated basis and reviewed for impairment at least quarterly. The amortization expense for the third quarter of 2014 was $33,000.

The fair value of savings and transactional deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Expected cash flows were utilized for fair value calculation of the certificates of deposit based on the contractual terms of the certificates of deposit and the cash flows were discounted based on a current market rate for certificates of deposit with corresponding maturities. The premium for certificates of deposit was $11.3 million with $591,000 amortized in the third quarter of 2014.

The fair value of subordinated debentures was determined by estimating projected future cash flows and discounting them at a market rate of interest. A discount of $8.3 million was recognized for subordinated debentures, which will be amortized over their contractual term. The amortization for the third quarter of 2014 was $35,000.

Unaudited Pro Forma Results of Operations

The following table presents our unaudited pro forma results of operations for the periods presented as if the CBI acquisition had been completed on January 1, 2013. The unaudited pro forma results of operations include the historical accounts of Hanmi Financial and CBI and pro forma adjustments as may be required, including the amortization of intangibles with definite lives and the amortization or accretion of any premiums or discounts arising from fair value adjustments for assets acquired and liabilities assumed. The unaudited pro forma information is intended for informational purposes only and is not necessarily indicative of our future operating results or operating results that would have occurred had the CBI acquisition been completed at the beginning of 2013. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions.

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  
     (In thousands, except per share data)  

Pro forma revenues (net interest income plus noninterest income)

   $ 62,427       $ 55,727       $ 170,923       $ 182,135   

Pro forma net income from continuing operations

   $ 18,359       $ 12,826       $ 43,546       $ 47,201   

Pro forma earnings per share from continuing operations:

           

Basic

   $ 0.58       $ 0.41       $ 1.37       $ 1.49   

Diluted

   $ 0.57       $ 0.40       $ 1.36       $ 1.49   

Note 3 — Accounting for Investments in Qualified Affordable Housing Projects

The Bank invests in qualified affordable housing projects (low income housing) and previously accounted for them under the equity method of accounting. The Bank recognized its share of partnership losses in other operating expenses with the tax benefits recognized in the income tax provision. In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, which amends ASC 323 to provide the ability to elect the proportional amortization method with the amortization expense and tax benefits recognized through the income tax provision. This ASU is effective for the annual period beginning after December 15, 2014, with early adoption being permitted. The Bank elected to early adopt the provisions of the ASU in the second quarter of 2014 and elected the proportional amortization method as retrospective transition. This accounting change in the amortization methodology resulted in changes to account for amortization recognized in prior periods, which impacted the balance of tax credit investments and related tax accounts. The investment amortization expense is presented as a component of the income tax provision.

The cumulative effect of the retrospective application of this accounting principle as of January 1, 2012 was a negative $1.1 million. Net income in the three and nine months ended September 30, 2013 increased by $135,000 and $51,000, respectively, due to the change in accounting principle.

 

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Table of Contents

The following tables present the effect of the retrospective application of this change in accounting principle on the Company’s Consolidated Balance Sheets, Statements of Income and Statement of Cash Flows for the respective periods:

Hanmi Financial Corporations and Subsidiaries

Consolidated Balance Sheet (Unaudited)

 

     As of December 31, 2013  
     As Previously
Reported
     Effect of Change in
Accounting Principle
    As
Adjusted
 
     (In thousands)  

Assets

       

Cash and cash equivalents

   $ 179,357       $ —        $ 179,357   

Securities available for sale

     530,926         —          530,926   

Loans receivable

     2,177,498         —          2,177,498   

Income tax assets

     63,536         305        63,841   

Other assets

     104,222         (1,465     102,757   
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,055,539       $ (1,160   $ 3,054,379   
  

 

 

    

 

 

   

 

 

 

Liabilities and stockholders’ equity

       

Liabilities

   $ 2,654,302       $ —        $ 2,654,302   

Stockholders’ equity

     401,237         (1,160     400,077   
  

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,055,539       $ (1,160   $ 3,054,379   
  

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Hanmi Financial Corporations and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

     For the Three Months Ended September 30, 2013  
     As Previously
Reported
     Effect of Change in
Accounting Principle
    As
Adjusted
 
     (In thousands, except per share data)  

Interest and dividend income

   $ 31,627       $ —        $ 31,627   

Interest expense

     3,153         —          3,153   
  

 

 

    

 

 

   

 

 

 

Net interest income

   $ 28,474       $ —        $ 28,474   

Noninterest income

     6,059         —          6,059   

Noninterest expense

     17,811         (175     17,636   
  

 

 

    

 

 

   

 

 

 

Income before provision for income taxes

   $ 16,722       $ 175      $ 16,897   

Provision for income taxes

     6,542         40        6,582   
  

 

 

    

 

 

   

 

 

 

Income from continuing operations

   $ 10,180       $ 135      $ 10,315   
  

 

 

    

 

 

   

 

 

 

Earnings per share from continuing operations

       

Basic

   $ 0.32       $ 0.01      $ 0.33   

Diluted

   $ 0.32       $ 0.01      $ 0.33   

 

     For the Nine Months Ended September 30, 2013  
     As Previously
Reported
     Effect of Change in
Accounting Principle
    As
Adjusted
 
     (In thousands, except per share data)  

Interest and dividend income

   $ 91,401       $ —        $ 91,401   

Interest expense

     10,169         —          10,169   
  

 

 

    

 

 

   

 

 

 

Net interest income

   $ 81,232       $ —        $ 81,232   

Noninterest income

     19,945         —          19,945   

Noninterest expense

     54,451         (553     53,898   
  

 

 

    

 

 

   

 

 

 

Income before provision for income taxes

   $ 46,726       $ 553      $ 47,279   

Provision for income taxes

     17,008         502        17,510   
  

 

 

    

 

 

   

 

 

 

Income from continuing operations

   $ 29,718       $ 51      $ 29,769   
  

 

 

    

 

 

   

 

 

 

Earnings per share from continuing operations

       

Basic

   $ 0.94       $ —        $ 0.94   

Diluted

   $ 0.94       $ —        $ 0.94   

Hanmi Financial Corporations and Subsidiaries

Consolidated Statement of Cash Flows (Unaudited)

 

     For the Nine Months Ended September 30, 2013  
     As Previously
Reported
    Effect of Change in
Accounting Principle
    As
Adjusted
 
     (In thousands)  

Cash flows from operating activities:

      

Net income

   $ 29,879      $ 51      $ 29,930   

Total adjustment in net income

     18,098        (51     18,047   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

   $ 47,977      $ —        $ 47,977   

Cash flows from investing activities:

      

Net cash used in investing activities

     (71,768     —          (71,768

Cash flows from financing activities:

      

Net cash used in financing activities

     (50,402     —          (50,402
  

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

   $ (74,193   $ —        $ (74,193

Cash and cash equivalents at beginning of period

     268,047        —          268,047   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 193,854      $ —        $ 193,854   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The Bank determined that there were no events or changes in circumstances indicating that it is more likely than not that the carrying amount of the investment will not be realized. Therefore, no impairment was recognized as of September 30, 2014 or December 31, 2013. The investment in low income housing was $21.8 million and $3.0 million as of September 30, 2014 and December 31, 2013, respectively. The Bank’s unfunded commitments related to low income housing investments was $12.6 million as of September 30, 2014 and there were none as of December 31, 2013. The Bank recognized $592,000 and $1.0 million as a component of income tax expense during the three and nine months ended September 30, 2014, respectively, and tax credits and other benefits received from the tax expenses were $821,000 and $1.4 million during the three and nine months ended September 30, 2014, respectively.

Note 4 — Sale of Insurance Subsidiaries and Discontinued Operations

In June 2014, Hanmi Financial sold its insurance subsidiaries, Chun-Ha and All World, and entered into a stock purchase agreement for their sale. The subsidiaries were classified as held for sale in April 2014 and accounted for as discontinued operations. The operations and cash flows of the businesses have been eliminated and in accordance with the provisions of ASC 205, Presentation of Financial Statements, the results are reported as discontinued operations for all periods presented.

Hanmi Financial completed the sale of its two insurance subsidiaries to Chunha Holding Corporation on June 30, 2014. The total sales price was $3.5 million, of which $2.0 million was paid upon signing. The $2.0 million was reduced by $1.6 million cash and cash equivalents included in net assets of Chun-Ha and All World, resulting in $398,000 net cash proceeds. The remaining $1.5 million will be payable in three equal installments on each anniversary of the closing date through June 30, 2017.

The sale resulted in a $51,000 gain and a $4,000 income tax benefit from operating loss, offset by a $470,000 capital gain tax and a $52,000 operating loss. Consequently, net loss from discontinued operations in the second quarter of 2014 was $467,000, or $0.01 per diluted share. The discontinued operations generated noninterest income, primarily in the line item for insurance commissions, of $2.7 million in the first six months of 2014 and $1.3 million in the first quarter of 2014. They also incurred noninterest expense of $2.7 million in various line items in the first six months of 2014 and $1.4 million in the first quarter of 2014.

Summarized financial information for our discontinued operations related to Chun-Ha and All World are as follows:

 

     June 30,
2014
     December 31,
2013
 
     (In thousands)  

Cash and cash equivalents

   $ 1,602       $ 1,396   

Premises and equipment, net

     90         79   

Other intangible assets, net

     1,089         1,171   

Other assets

     2,855         3,298   
  

 

 

    

 

 

 

Total assets

   $ 5,636       $ 5,944   
  

 

 

    

 

 

 

Income tax payable

   $ 415       $ 1,304   

Accrued expenses and other liabilities

     1,878         2,171   
  

 

 

    

 

 

 

Total liabilities

   $ 2,293       $ 3,475   
  

 

 

    

 

 

 

Net assets of discontinued operations

   $ 3,343       $ 2,469   
  

 

 

    

 

 

 

 

     Three Months
Ended
September 30,
     Nine Months Ended September 30,  
     2013      2014     2013  
            (In thousands)        

Noninterest income (loss)

   $ 112       $ (14   $ 242   

Gain on disposal

     —           51        —     
  

 

 

    

 

 

   

 

 

 

Income before taxes

   $ 112       $ 37      $ 242   

Provision for income taxes

     42         481        81   
  

 

 

    

 

 

   

 

 

 

Net income (loss) from discontinued operations

   $ 70       $ (444   $ 161   
  

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Note 5 — Investment Securities

The following is a summary of investment securities available for sale as of September 30, 2014 and December 31, 2013:

 

     Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Estimated
Fair

Value
 
     (In thousands)  

September 30, 2014

           

Mortgage-backed securities (1) (2)

   $ 588,638       $ 230       $ 4,711       $ 584,157   

Collateralized mortgage obligations (1)

     197,784         146         1,719         196,211   

U.S. government agency securities

     176,449         —           3,656         172,793   

SBA loan pool securities

     114,753         64         700         114,117   

Municipal bonds-tax exempt

     4,335         94         —           4,429   

Municipal bonds-taxable

     16,666         141         147         16,660   

Corporate bonds

     17,018         11         89         16,940   

U.S. treasury securities

     164         —           1         163   

Other securities

     22,916         —           212         22,704   

Equity security

     450         —           —           450   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 1,139,173       $ 686       $ 11,235       $ 1,128,624   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

           

Mortgage-backed securities (1)

   $ 222,768       $ 317       $ 6,026       $ 217,059   

Collateralized mortgage obligations (1)

     130,636         274         3,217         127,693   

U.S. government agency securities

     90,852         —           7,316         83,536   

Municipal bonds-tax exempt

     13,857         110         30         13,937   

Municipal bonds-taxable

     33,361         73         1,080         32,354   

Corporate bonds

     21,013         8         186         20,835   

U.S. treasury securities

     19,998         —           1         19,997   

SBA loan pool securities

     13,598         —           969         12,629   

Other securities

     3,030         —           144         2,886   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 549,113       $ 782       $ 18,969       $ 530,926   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities
(2)  A portion of the mortgage-backed securities is comprised of home mortgage-backed securities backed by home equity conversion mortgages

The amortized cost and estimated fair value of investment securities as of September 30, 2014, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2064, expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Available for Sale  
     Amortized
Cost
     Estimated
Fair Value
 
     (In thousands)  

Within one year

   $ 15,702       $ 15,721   

Over one year through five years

     73,633         73,247   

Over five years through ten years

     139,745         136,900   

Over ten years

     100,305         99,234   

Mortgage-backed securities

     588,638         584,157   

Collateralized mortgage obligations

     197,784         196,211   

Other securities

     22,916         22,704   

Equity security

     450         450   
  

 

 

    

 

 

 

Total

   $ 1,139,173       $ 1,128,624   
  

 

 

    

 

 

 

 

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Table of Contents

FASB ASC 320, Investments – Debt and Equity Securities, requires us to periodically evaluate our investments for other-than-temporary impairment (“OTTI”). There was no OTTI charge during the nine months ended September 30, 2014.

Gross unrealized losses on investment 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 September 30, 2014 and December 31, 2013:

 

    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)  

September 30, 2014

                 

Mortgage-backed securities

  $ 2,947      $ 422,318        73      $ 1,764      $ 60,057        22      $ 4,711      $ 482,375        95   

Collateralized mortgage obligations

    914        145,816        30        805        21,188        9        1,719        167,004        39   

U.S. government agency securities

    537        85,948        22        3,119        71,843        26        3,656        157,791        48   

SBA loan pool securities

    27        87,088        15        673        12,037        4        700        99,125        19   

Municipal bonds-taxable

    9        2,238        2        138        5,511        5        147        7,749        7   

Corporate bonds

    —          —          —          89        7,902        2        89        7,902        2   

U.S. treasury securities

    1        163        1        —          —          —          1        163        1   

Other securities

    111        19,775        1        101        2,924        5        212        22,699        6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,546      $ 763,346        144      $ 6,689      $ 181,462        73      $ 11,235      $ 944,808        217   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2013

                 

Mortgage-backed securities

  $ 3,437      $ 170,324        51      $ 2,589      $ 30,947        12      $ 6,026      $ 201,271        63   

Collateralized mortgage obligations

    2,353        87,026        27        864        14,657        7        3,217        101,683        34   

U.S. government agency securities

    3,942        50,932        19        3,374        32,606        12        7,316        83,538        31   

Municipal bonds-tax exempt

    30        8,562        5        —          —          —          30        8,562        5   

Municipal bonds-taxable

    787        22,817        16        293        3,813        4        1,080        26,630        20   

Corporate bonds

    9        5,024        1        177        11,803        3        186        16,827        4   

U.S. treasury bills

    1        19,996        2        —          —          —          1        19,996        2   

SBA loan pool securities

    —          —          —          969        12,629        4        969        12,629        4   

Other securities

    48        1,957        3        96        929        3        144        2,886        6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 10,607      $ 366,638        124      $ 8,362      $ 107,384        45      $ 18,969      $ 474,022        169   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of September 30, 2014 and December 31, 2013 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 September 30, 2014 and December 31, 2013. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

FASB ASC 320 requires other-than-temporarily impaired investment securities to be written down when fair value is below amortized cost in circumstances where: (1) an entity has the intent to sell a security; (2) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income.

The Company does not intend to sell these securities and it is more likely than not that we will not be required to sell the investments before the recovery of its 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 September 30, 2014 and December 31, 2013 were not other-than-temporarily impaired, and therefore, no impairment charges as of September 30, 2014 and December 31, 2013 were warranted.

 

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Table of Contents

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014      2013     2014     2013  
     (In thousands)  

Gross realized gains on sales of investment securities

   $ 67       $ 619      $ 1,853      $ 932   

Gross realized losses on sales of investment securities

     —           (8     (1     (9
  

 

 

    

 

 

   

 

 

   

 

 

 

Net realized gains on sales of investment securities

   $ 67       $ 611      $ 1,852      $ 923   
  

 

 

    

 

 

   

 

 

   

 

 

 

Proceeds from sales of investment securities

   $ 9,778       $ 26,661      $ 140,855      $ 51,425   

For the three months ended September 30, 2014, there was a $67,000 gain in earnings resulting from the sale of investment securities that had previously been recorded as net unrealized gains of $23,000 in comprehensive income. For the three months ended September 30, 2013, there was a $611,000 net gain in earnings resulting from the sale of investment securities that had previously been recorded as net unrealized gains of $899,000 in comprehensive income.

For the nine months ended September 30, 2014, there was a $1.9 million net gain in earnings resulting from the redemption and sale of investment securities that had previously been recorded as net unrealized losses of $498,000 in comprehensive income. For the nine months ended September 30, 2013, there was a $923,000 net gain in earnings resulting from the redemption and sale of investment securities that had previously been recorded as net unrealized gains of $2.4 million in comprehensive income.

Investment securities available for sale with par values of $79.9 million and $47.6 million as of September 30, 2014 and December 31, 2013, respectively, were pledged to secure Federal Home Loan Bank (“FHLB”) advances, public deposits and for other purposes as required or permitted by law.

 

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Table of Contents

Note 6 — Loans

The loan portfolio includes originated and purchased loans. Originated loans and purchased loans for which there was no evidence of credit deterioration at their acquisition date and it was probable that we would be able to collect all contractually required payments, are referred to collectively as non-purchased credit impaired loans, or “Non-PCI loans.” Purchased loans for which there was, at the acquisition date, evidence of credit deterioration since their origination and it was probable that we would be unable to collect all contractually required payments are referred to as purchased credit impaired loans, or “PCI loans”.

Non-PCI loans are carried at the principal amount outstanding, net of deferred fees and costs, and in the case of acquired loans, net of purchase discounts and premiums. Deferred fees and costs and purchase discounts and premiums on acquired non-impaired loans are recognized as an adjustment to interest income over the contractual life of the loans using the effective interest method or taken into income when the related loans are paid off or sold.

PCI loans are accounted for in accordance with ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” For PCI loans, at the time of acquisition, we (i) calculate the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”) and (ii) estimate 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 difference between the undiscounted cash flows expected to be collected and the estimated fair value of the acquired loans is the accretable yield. The accretable yield is recorded as interest income over the estimated life of the loans using the effective yield method if the timing and amount of the future cash flows is reasonably estimable. PCI loans may be placed on nonaccrual status, including use of the cost recovery method or cash basis method of income recognition, if information is not available to reasonably estimate cash flows expected to be collected to compute its yield. The nonaccretable difference represents an estimate of the loss exposure of principal and interest related to PCI loans; 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.

As part of the fair value process and the subsequent accounting, the Company aggregates PCI loans into pools having common credit risk characteristics such as type 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.

PCI loans that are contractually past due are still considered to be accruing and performing as long as there is an expectation that the estimated cash flows will be received. If the timing and amount of cash flows is not reasonably estimable, the loans may be classified as nonaccrual with interest income recognized on either a cash basis or as a reduction of the principal amount outstanding.

The Board of Directors and management review and approve the Bank’s loan policy and procedures on a regular basis to reflect issues such as regulatory and organizational structure changes, strategic planning revisions, concentrations of credit, loan delinquencies and nonperforming loans, problem loans, and policy adjustments.

Real estate loans are loans secured by liens or interest in real estate, to provide purchase, construction, and refinance on real estate properties. Commercial and industrial loans consist of commercial term loans, commercial lines of credit, and Small Business Administration (“SBA”) loans. Consumer loans consist of auto loans, credit cards, personal loans, and home equity lines of credit. We maintain management loan review and monitoring functions that review and monitor pass graded loans as well as problem loans to prevent further deterioration.

The majority of the Bank’s loan portfolio consists of commercial real estate and commercial and industrial loans. The Bank has been diversifying and monitoring commercial real estate loans based on property types, underwriting standards, and portfolio liquidity and management, and certain specified limits set forth in the Bank’s loan policy. To date, most of the Bank’s lending activity occurred within Southern California. With the acquisition of CBI, our lending activities in other areas of the country will increase.

 

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Table of Contents

Loans Receivable

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

 

     September 30, 2014     December 31,  
     Non-PCI Loans     PCI Loans      Total     2013  
     (In thousands)  

Real estate loans:

         

Commercial property (1)

         

Retail

   $ 635,861      $ 15,940       $ 651,801      $ 543,619   

Hotel/Motel

     452,405        14,206         466,611        322,927   

Gas station

     340,386        18,069         358,455        292,557   

Other

     805,696        15,715         821,411        731,617   

Construction

     4,146        —           4,146        —     

Residential property

     106,044        2,686         108,730        79,078   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total real estate loans

     2,344,538        66,616         2,411,154        1,969,798   

Commercial and industrial loans:

         

Commercial term

     119,175        350         119,525        124,391   

Commercial lines of credit

     75,246        —           75,246        71,042   

International loans

     41,127        —           41,127        36,353   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial and industrial loans

     235,548        350         235,898        231,786   

Consumer loans

     28,849        58         28,907        32,505   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total gross loans

     2,608,935        67,024         2,675,959        2,234,089   

Allowance for loans losses

     (51,179     —           (51,179     (57,555

Deferred loan costs

     3,311        —           3,311        964   
  

 

 

   

 

 

    

 

 

   

 

 

 

Loans receivable, net

   $ 2,561,067      $ 67,024       $ 2,628,091      $ 2,177,498   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Includes owner-occupied property loans of $1.10 billion and $957.3 million as of September 30, 2014 and December 31, 2013, respectively.

Accrued interest on loans receivable was $5.8 million and $5.4 million at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014 and December 31, 2013, loans receivable totaling $872.2 million and $568.7 million, respectively, were pledged to secure advances from the FHLB and the Federal Reserve Bank’s (“FRB”) federal discount window.

The following table details the information on the sales and reclassifications of loans receivable to loans held for sale (excluding PCI loans) by portfolio segment for the three months ended September 30, 2014 and 2013:

 

     Real Estate     Commercial
and Industrial
    Consumer      Total
Non-PCI
 
     (In thousands)  

September 30, 2014

         

Balance at beginning of period

   $ 2,568      $ 1,274      $ —         $ 3,842   

Origination of loans held for sale

     15,198        3,031        —           18,229   

Sales of loans held for sale

     (12,135     (2,133     —           (14,268

Principal payoffs and amortization

     (20     (26     —           (46
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 5,611      $ 2,146      $ —         $ 7,757   
  

 

 

   

 

 

   

 

 

    

 

 

 

September 30, 2013

         

Balance at beginning of period

   $ 2,137      $ 416      $ —         $ 2,553   

Origination of loans held for sale

     15,634        1,501        —           17,135   

Reclassification from loans held for sale to loans receivable

     (2,118     (416     —           (2,534

Sales of loans held for sale

     (10,725     (1,181     —           (11,906

Principal payoffs and amortization

     (20     —          —           (20
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 4,908      $ 320      $ —         $ 5,228   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

For the three months ended September 30, 2014, there was no reclassification of Non-PCI loans receivable as Non-PCI loans held for sale, and Non-PCI loans held for sale of $14.3 million were sold. In addition, there was no reclassification from Non-PCI loans held for sale to Non-PCI loans receivable. For the three months ended September 30, 2013, there was no reclassification of Non-PCI loans receivable as Non-PCI loans held for sale, and Non-PCI loans held for sale of $11.9 million were sold.

The following table details the information on the sales and reclassifications of loans receivable to loans held for sale (excluding PCI loans) by portfolio segment for the nine months ended September 30, 2014 and 2013:

 

     Real Estate     Commercial
and Industrial
    Consumer      Total
Non-PCI
 
     (In thousands)  

September 30, 2014

         

Balance at beginning of period

   $ —        $ —        $ —         $ —     

Origination of loans held for sale

     29,591        5,207        —           34,798   

Sales of loans held for sale

     (23,953     (3,033     —           (26,986

Principal payoffs and amortization

     (27     (28     —           (55
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 5,611      $ 2,146      $ —         $ 7,757   
  

 

 

   

 

 

   

 

 

    

 

 

 

September 30, 2013

         

Balance at beginning of period

   $ 7,977      $ 329      $ —         $ 8,306   

Origination of loans held for sale

     58,725        4,387        —           63,112   

Reclassification from loans receivable to loans held for sale

     7,593        416        —           8,009   

Reclassification from loans held for sale to loans receivable

     (2,118     (416     —           (2,534

Sales of loans held for sale

     (67,235     (4,391     —           (71,626

Principal payoffs and amortization

     (34     (5     —           (39
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 4,908      $ 320      $ —         $ 5,228   
  

 

 

   

 

 

   

 

 

    

 

 

 

For the nine months ended September 30, 2014, there was no reclassification of Non-PCI loans receivable as Non-PCI loans held for sale, and Non-PCI loans held for sale of $27.0 million were sold. In addition, there was no reclassification from Non-PCI loans held for sale to Non-PCI loans receivable. For the nine months ended September 30, 2013, Non-PCI loans receivable of $8.0 million were reclassified as Non-PCI loans held for sale, and Non-PCI loans held for sale of $71.6 million were sold.

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

Activity in the allowance for loan losses and allowance for off-balance sheet items was as follows for the periods indicated:

 

     As of and for the
Three Months Ended
    As of and for the
Nine Months Ended
 
     September 30,
2014
    September 30,
2013
    September 30,
2014
    September 30,
2013
 
     (In thousands)  

Allowance for loan losses:

        

Balance at beginning of period

   $ 51,886      $ 59,876      $ 57,555      $ 63,305   

Charge-offs

     (1,418     (4,610     (5,569     (11,124

Recoveries on loans previously charged off

     663        2,383        6,656        4,964   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loan (charge-offs) recoveries

     (755     (2,227     1,087        (6,160

Provision (negative provision) charged to operating expense

     48        (10     (7,463     494   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 51,179      $ 57,639      $ 51,179      $ 57,639   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for off-balance sheet items:

        

Balance at beginning of period

   $ 1,592      $ 1,320      $ 1,247      $ 1,824   

(Negative provision) provision charged to operating expense

     (48     10        297        (494
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 1,544      $ 1,330      $ 1,544      $ 1,330   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

There was no allowance for loan losses on our PCI loans as of September 30, 2014. The allowance for off-balance sheet items is maintained at a level believed to be sufficient to absorb estimated 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. As of September 30, 2014 and 2013, the allowance for off-balance sheet items amounted to $1.5 million and $1.3 million, respectively. Net adjustments to the allowance for off-balance sheet items are included in the provision for credit losses.

The following table details the information on the allowance for loan losses by portfolio segment for the three months ended September 30, 2014 and 2013:

 

     Real Estate     Commercial
and Industrial
    Consumer     Unallocated     Total  
     (In thousands)  

September 30, 2014

          

Allowance for loan losses:

          

Beginning balance

   $ 40,303      $ 9,738      $ 540      $ 1,305      $ 51,886   

Charge-offs

     (884     (499     (35     —          (1,418

Recoveries on loans previously charged off

     293        365        5        —          663   

(Negative provision) provision

     179        260        (186     (205     48   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 39,891      $ 9,864      $ 324      $ 1,100      $ 51,179   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 2,027      $ 3,757      $ —        $ —        $ 5,784   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 37,864      $ 6,107      $ 324      $ 1,100      $ 45,395   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable:

          

Ending balance

   $ 2,411,154      $ 235,898      $ 28,907      $ —        $ 2,675,959   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 35,654      $ 11,970      $ 1,758      $ —        $ 49,382   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 2,308,884      $ 223,578      $ 27,091      $ —        $ 2,559,553   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: acquired with deteriorated credit quality

   $ 66,616      $ 350      $ 58      $ —        $ 67,024   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Real Estate     Commercial
and Industrial
    Consumer     Unallocated      Total  
     (In thousands)  

September 30, 2013

           

Allowance for loan losses:

           

Beginning balance

   $ 46,396      $ 11,118      $ 1,884      $ 478       $ 59,876   

Charge-offs

     (1,017     (3,575     (18     —           (4,610

Recoveries on loans previously charged off

     1,641        737        5        —           2,383   

Provision (negative provision)

     (1,795     388        (232     1,629         (10
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 45,225      $ 8,668      $ 1,639      $ 2,107       $ 57,639   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 564      $ 1,475      $ 330      $ —         $ 2,369   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 44,661      $ 7,193      $ 1,309      $ 2,107       $ 55,270   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans receivable:

           

Ending balance

   $ 1,921,659      $ 203,547      $ 34,065      $ —         $ 2,159,271   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 29,424      $ 12,468      $ 1,574      $ —         $ 43,466   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 1,892,235      $ 191,079      $ 32,491      $ —         $ 2,115,805   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

The following table details the information on the allowance for loan losses by portfolio segment for the nine months ended September 30, 2014 and 2013:

 

     Real Estate     Commercial
and Industrial
    Consumer     Unallocated     Total  
     (In thousands)  

September 30, 2014

          

Allowance for loan losses:

          

Beginning balance

   $ 43,550      $ 11,287      $ 1,427      $ 1,291      $ 57,555   

Charge-offs

     (2,073     (3,394     (102     —          (5,569

Recoveries on loans previously charged off

     3,298        3,338        20        —          6,656   

(Negative provision) provision

     (4,884     (1,367     (1,021     (191     (7,463
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 39,891      $ 9,864      $ 324      $ 1,100      $ 51,179   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 2,027      $ 3,757      $ —        $ —        $ 5,784   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 37,864      $ 6,107      $ 324      $ 1,100      $ 45,395   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable:

          

Ending balance

   $ 2,411,154      $ 235,898      $ 28,907      $ —        $ 2,675,959   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 35,654      $ 11,970      $ 1,758      $ —        $ 49,382   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 2,308,884      $ 223,578      $ 27,091      $ —        $ 2,559,553   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: acquired with deteriorated credit quality

   $ 66,616      $ 350      $ 58      $ —        $ 67,024   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Real Estate     Commercial
and Industrial
    Consumer     Unallocated      Total  
     (In thousands)  

September 30, 2013

           

Allowance for loan losses:

           

Beginning balance

   $ 49,472      $ 10,636      $ 2,280      $ 917       $ 63,305   

Charge-offs

     (4,592     (6,314     (218     —           (11,124

Recoveries on loans previously charged off

     2,923        1,981        60        —           4,964   

Provision (negative provision)

     (2,578     2,365        (483     1,190         494   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 45,225      $ 8,668      $ 1,639      $ 2,107       $ 57,639   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 564      $ 1,475      $ 330      $ —         $ 2,369   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 44,661      $ 7,193      $ 1,309      $ 2,107       $ 55,270   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans receivable:

           

Ending balance

   $ 1,921,659      $ 203,547      $ 34,065      $ —         $ 2,159,271   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 29,424      $ 12,468      $ 1,574      $ —         $ 43,466   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 1,892,235      $ 191,079      $ 32,491      $ —         $ 2,115,805   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Credit 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 and every loan in our loan portfolio. A third party loan review is required on an annual basis. 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 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.

 

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Table of Contents

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 active bank assets 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 will be charged off in a timely manner.

As of September 30, 2014 and December 31, 2013, pass/pass-watch (grade 0-4), criticized (grade 5) and classified (grade 6-7) loans (excluding PCI loans), disaggregated by loan class, were as follows:

 

     As of September 30, 2014  
     Pass/Pass-Watch
(Grade 0-4)
     Criticized
(Grade 5)
     Classified
(Grade 6-7)
     Total  
     (In thousands)  

Real estate loans:

           

Commercial property

           

Retail

   $ 620,511       $ 12,821       $ 2,529       $ 635,861   

Hotel/Motel

     399,006         48,995         4,404         452,405   

Gas station

     320,501         10,054         9,831         340,386   

Other

     780,400         13,599         11,697         805,696   

Construction

     4,146         —           —           4,146   

Residential property

     103,812         122         2,110         106,044   

Commercial and industrial loans:

           

Commercial term

     108,908         1,315         8,952         119,175   

Commercial lines of credit

     74,286         —           960         75,246   

International loans

     38,676         —           2,451         41,127   

Consumer loans

     26,626         140         2,083         28,849   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

   $ 2,476,872       $ 87,046       $ 45,017       $ 2,608,935   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2013  
     Pass/Pass-Watch
(Grade 0-4)
     Criticized
(Grade 5)
     Classified
(Grade 6-7)
     Total  
     (In thousands)  

Real estate loans:

           

Commercial property

           

Retail

   $ 531,014       $ 5,309       $ 7,296       $ 543,619   

Hotel/Motel

     308,483         1,796         12,648         322,927   

Gas station

     279,636         3,104         9,817         292,557   

Other

     690,481         8,524         32,612         731,617   

Residential property

     77,422         —           1,656         79,078   

Commercial and industrial loans:

           

Commercial term

     107,712         2,007         14,672         124,391   

Commercial lines of credit

     69,823         —           1,219         71,042   

International loans

     35,777         576         —           36,353   

Consumer loans

     30,044         163         2,298         32,505   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

   $ 2,130,392       $ 21,479       $ 82,218       $ 2,234,089   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

     As of September 30, 2014  
     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or
More Past Due
     Total Past Due      Current      Total      Accruing 90
Days or More
Past Due
 
     (In thousands)  

Real estate loans:

                    

Commercial property

                    

Retail

   $ 1,927       $ 146       $ 182       $ 2,255       $ 633,606       $ 635,861       $ —     

Hotel/Motel

     52         733         1,203         1,988         450,417         452,405         —     

Gas station

     4,781         794         544         6,119         334,267         340,386         —     

Other

     1,867         67         380         2,314         803,382         805,696         15   

Construction

     —           —           —           —           4,146         4,146         —     

Residential property

     113         121         486         720         105,324         106,044         —     

Commercial and industrial loans:

                    

Commercial term

     1,410         587         2,873         4,870         114,305         119,175         —     

Commercial lines of credit

     274         197         —           471         74,775         75,246         —     

International loans

     251         —           —           251         40,876         41,127         —     

Consumer loans

     —           —           248         248         28,601         28,849         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

   $ 10,675       $ 2,645       $ 5,916       $ 19,236       $ 2,589,699       $ 2,608,935       $ 15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2013  
     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or
More Past Due
     Total Past Due      Current      Total      Accruing 90
Days or More
Past Due
 
     (In thousands)  

Real estate loans:

                    

Commercial property

                    

Retail

   $ 202       $ 426       $ 2,196       $ 2,824       $ 540,794       $ 543,618       $ —     

Hotel/Motel

     1,087         —           1,532         2,619         320,308         322,927         —     

Gas station

     141         410         153         704         291,853         292,557         —     

Other

     423         2,036         839         3,298         728,320         731,618         —     

Residential property

     —           122         279         401         78,677         79,078         —     

Commercial and industrial loans:

                    

Commercial term

     1,443         886         3,269         5,598         118,793         124,391         —     

Commercial lines of credit

     —           150         250         400         70,642         71,042         —     

International loans

     —           —           —           —           36,353         36,353         —     

Consumer loans

     311         42         77         430         32,075         32,505         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

   $   3,607       $ 4,072       $ 8,595       $ 16,274       $ 2,217,815       $ 2,234,089       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired Loans

Loans are considered impaired when nonaccrual and principal or interest payments have been contractually past due for 90 days or more, unless the loan is both well-collateralized and in the process of collection; or they are classified as Troubled Debt Restructuring (“TDR”) loans to offer terms not typically granted by the Bank; 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 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, 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.

 

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Table of Contents

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)  

September 30, 2014

              

Real estate loans:

              

Commercial property

              

Retail

   $ 4,443       $ 4,543       $ 1,940       $ 2,503       $ 256   

Hotel/Motel

     4,042         4,855         4,042         —           1,261   

Gas station

     14,152         14,681         13,692         460         166   

Other

     9,856         11,266         8,518         1,338         344   

Residential property

     3,161         3,292         3,161         —           —     

Commercial and industrial loans:

              

Commercial term

     7,958         8,408         1,914         6,044         3,469   

Commercial lines of credit

     2,874         2,976         2,692         182         183   

International loans

     1,138         1,138         460         678         105   

Consumer loans

     1,758         1,910         1,758         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

   $ 49,382       $ 53,069       $ 38,177       $ 11,205       $ 5,784   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

              

Real estate loans:

              

Commercial property

              

Retail

   $ 6,244       $ 6,332       $ 3,767       $ 2,477       $ 305   

Hotel/Motel

     6,200         6,940         4,668         1,532         1,183   

Gas station

     9,389         9,884         8,592         797         209   

Other

     11,451         12,882         9,555         1,896         351   

Residential property

     2,678         2,773         2,678         —           —     

Commercial and industrial loans:

              

Commercial term

     13,834         14,308         2,929         10,905         3,806   

Commercial lines of credit

     614         686         173         441         252   

International loans

     1,087         1,087         286         801         78   

Consumer loans

     1,569         1,671         644         925         284   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

   $ 53,066       $ 56,563       $ 33,292       $ 19,774       $ 6,468   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Average
Recorded
Investment for
the Three Months
Ended
     Interest Income
Recognized for
the Three
Months Ended
     Average
Recorded
Investment for
the Nine Months
Ended
     Interest Income
Recognized for
the Nine
Months Ended
 
     (In thousands)  

September 30, 2014

           

Real estate loans:

           

Commercial property

           

Retail

   $ 4,456       $ 36       $ 5,682       $ 215   

Hotel/Motel

     4,206         102         4,149         232   

Gas station

     14,181         218         12,023         587   

Other

     9,898         232         10,716         682   

Residential property

     3,173         30         2,853         87   

Commercial and industrial loans:

           

Commercial term

     8,118         126         10,007         443   

Commercial lines of credit

     2,884         36         1,447         61   

International loans

     1,146         —           1,136         —     

Consumer loans

     1,765         16         1,619         46   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

   $ 49,827       $ 796       $ 49,632       $ 2,353   
  

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2013

           

Real estate loans:

           

Commercial property

           

Retail

   $ 2,723       $ 27       $ 3,703       $ 105   

Hotel/Motel

     6,377         127         4,752         384   

Gas station

     8,777         229         8,775         569   

Other

     8,699         243         9,512         779   

Residential property

     2,992         33         3,026         92   

Commercial and industrial loans:

           

Commercial term

     10,581         191         12,751         692   

Commercial lines of credit

     840         23         1,137         47   

International loans

     1,197         —           1,342         —     

Consumer loans

     1,581         27         1,624         54   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

   $ 43,767       $ 900       $ 46,622       $ 2,722   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended     Nine Months Ended  
     September 30,
2014
    September 30,
2013
    September 30,
2014
    September 30,
2013
 
     (In thousands)  

Interest income that would have been recognized had impaired loans performed in accordance with their original terms

   $ 1,063      $ 1,058      $ 3,490      $ 3,183   

Less: Interest income recognized on impaired loans

     (796     (900     (2,353     (2,722
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest foregone on impaired loans

   $ 267      $ 158      $ 1,137      $ 461   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

Nonaccrual Loans

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.

 

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Table of Contents

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:

 

     September 30,
2014
     December 31,
2013
 
     (In thousands)  

Real estate loans:

     

Commercial property

     

Retail

   $ 2,062       $ 2,946   

Hotel/Motel

     3,051         5,200   

Gas station

     5,208         2,492   

Other

     3,674         4,808   

Residential property

     1,516         1,365   

Commercial and industrial loans:

     

Commercial term

     6,060         7,146   

Commercial lines of credit

     674         423   

Consumer loans

     1,758         1,497   
  

 

 

    

 

 

 

Total nonaccrual Non-PCI loans

   $ 24,003       $ 25,877   
  

 

 

    

 

 

 

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

 

     September 30,
2014
     December 31,
2013
 
     (In thousands)  

Nonaccrual Non-PCI loans

   $ 24,003       $ 25,877   

Loans 90 days or more past due and still accruing

     15         —     
  

 

 

    

 

 

 

Total nonperforming Non-PCI loans

     24,018         25,877   

Other real estate owned

     24,781         756   
  

 

 

    

 

 

 

Total nonperforming assets

   $ 48,799       $ 26,633   
  

 

 

    

 

 

 

Loans on nonaccrual status, excluding loans held for sale, totaled $24.0 million as of September 30, 2014, compared to $25.9 million as of December 31, 2013, representing a 7.2 percent decrease. Delinquent loans (defined as 30 days or more past due), excluding loans held for sale, were $19.2 million as of September 30, 2014, compared to $16.3 million as of December 31, 2013, representing a 18.2 percent increase.

As of September 30, 2014, other real estate owned (“OREO”) consisted of forty properties, of which $20.2 million and $4.6 million were commercial and residential properties, respectively, with a combined carrying value of $24.8 million and no valuation adjustment. Of $24.8 million, $22.3 million was OREOs assumed in the CBI acquisition. As of December 31, 2013, there were three OREOs with a combined carrying value of $756,000 and a valuation adjustment of $56,000.

Troubled Debt Restructuring

In April 2011, the FASB issued ASU 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, which clarifies the guidance for evaluating whether a restructuring constitutes a TDR. This guidance is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For the purposes of measuring impairment of loans that are newly considered impaired, the guidance should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011.

As a result of the amendments in ASU 2011-02, we reassessed all restructurings that occurred on or after the beginning of the annual period and identified certain receivables as TDRs. Upon identifying those receivables as TDRs, we considered them impaired and applied the impairment measurement guidance prospectively for those receivables newly identified as impaired.

 

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Table of Contents

The following table details troubled debt restructurings (excluding PCI loans), disaggregated by concession type and by loan type, as of September 30, 2014 and December 31, 2013:

 

    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)  

September 30, 2014

                   

Real estate loans:

                   

Commercial property

                   

Retail

  $ —        $ —        $ —        $ 1,856      $ 1,856      $ 307      $ —        $ —        $ —        $ 307   

Hotel/Motel

    1,158        727        —          —          1,885        991        —          —          —          991   

Gas station

    1,106        —          —          —          1,106        2,351        —          —          —          2,351   

Other

    —          1,532        465        59        2,056        3,310        —          792        1,378        5,480   

Residential property

    755        —          —          —          755        —          —          —          311        311   

Commercial and industrial loans:

                   

Commercial term

    118        2        1,007        1,567        2,694        61        227        2,118        1,176        3,582   

Commercial lines of credit

    230        —          316        128        674        2,200        —          —          —          2,200   

Consumer loans

    —          —          135        —          135        —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-PCI loans

  $ 3,367      $ 2,261      $ 1,923      $ 3,610      $ 11,161      $ 9,220      $ 227      $ 2,910      $ 2,865      $ 15,222   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2013

                   

Real estate loans:

                   

Commercial property

                   

Retail

  $ —        $ —        $ —        $ 750      $ 750      $ —        $ —        $ —        $ 474      $ 474   

Hotel/Motel

    1,272        758        —          —          2,030        1,000        —          —          —          1,000   

Gas station

    1,291        —          729        —          2,020        365        —          —          2,609        2,974   

Other

    403        1,279        555        —          2,237        2,956        —          1,253        2,027        6,236   

Residential property

    795        —          —          —          795        —          —          —          —          —     

Commercial and industrial loans:

                   

Commercial term

    25        206        1,449        851        2,531        1,203        —          2,286        3,817        7,306   

Commercial lines of credit

    —          —          —          173        173        —          —          191        —          191   

International loans

    —          —          —          —          —          —          —          1,087        —          1,087   

Consumer loans

    —          —          —          —          —          —          —          149        —          149   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-PCI loans

  $ 3,786      $ 2,243      $ 2,733      $ 1,774      $ 10,536      $ 5,524      $ —        $ 4,966      $ 8,927      $ 19,417   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2014 and December 31, 2013, total TDRs, excluding loans held for sale, were $26.4 million and $30.0 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 six months or less. 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 September 30, 2014 and December 31, 2013, TDRs, excluding loans held for sale, were subjected to specific impairment analysis, and $3.7 million and $2.8 million, respectively, of reserves relating to these loans were included in the allowance for loan losses.

The following table details troubled debt restructurings (excluding PCI loans), disaggregated by loan class, for the three months ended September 30, 2014 and 2013:

 

    September 30, 2014     September 30, 2013  
    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

           

Hotel/Motel (1)

    —        $ —        $ —          1      $ 1,000      $ 1,000   

Gas station (2)

    1        2,014        1,991        1        107        91   

Other (3)

    1        395        385        2        1,011        1,014   

Commercial and industrial loans:

           

Commercial term (4)

    —          —          —          8        1,015        1,002   

Commercial lines of credit (5)

    1        2,092        2,200        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-PCI loans

    3      $ 4,501      $ 4,576        12      $ 3,133      $ 3,107   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Includes a modification of $1.0 million through a payment deferral for the three months ended September 30, 2013.
(2)  Includes a modification of $2.0 million through a payment deferral for the three months ended September 30, 2014, and a modification of $91,000 through a payment deferral for the three months ended September 30, 2013.

 

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(3)  Includes a modification of $385,000 through a payment deferral for the three months ended September 30, 2014, and modifications of $365,000 through a payment deferral and reduction of principal or accrued interest and $649,000 through an extension of maturity for the three months ended September 30, 2013.
(4)  Includes modifications of $381,000 through payment deferrals and $621,000 through extensions of maturity for the three months ended September 30, 2013.
(5)  Includes a modification of $2.2 million through a payment deferral for the three months ended September 30, 2014.

During the three months ended September 30, 2014, we restructured monthly payments on three loans, with a net carrying value of $4.6 million as of September 30, 2014, through temporary payment structure modifications or re-amortization. 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 troubled debt restructurings (excluding PCI loans), disaggregated by loan class, for the nine months ended September 30, 2014 and 2013:

 

     September 30, 2014      September 30, 2013  
     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       $ 2,002       $ 1,856         —         $ —         $ —     

Hotel/Motel (2)

     —           —           —           1         1,000         1,000   

Gas station (3)

     1         2,040         1,991         1         113         91   

Other (4)

     3         1,422         1,386         3         1,176         1,144   

Residential property (5)

     1         317         311         —           —           —     

Commercial and industrial loans:

                 

Commercial term (6)

     5         327         263         15         1,787         1,625   

Commercial lines of credit (7)

     3         2,366         2,563         —           —           —     

International loans (8)

     —           —           —           2         1,584         1,180   

Consumer loans (9)

     —           —           —           1         149         149   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

     14       $ 8,474       $ 8,370         23       $ 5,809       $ 5,189   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Includes a modification of $1.9 million through an extension of maturity for the nine months ended September 30, 2014.
(2)  Includes a modification of $1.0 million through an extension of maturity for the nine months ended September 30, 2013.
(3)  Includes a modification of $2.0 million through a payment deferral for the nine months ended September 30, 2014, and a modification of $91,000 a payment deferral for the nine months ended September 30, 2013.
(4)  Includes modifications of $1.3 million through payment deferrals and $59,000 through an extension of maturity for the nine months ended September 30, 2014, and modifications of $356,000 through a payment deferral, $130,000 through a reduction of principal or accrued interests and $649,000 through an extension of maturity for the nine months ended September 30, 2013.
(5)  Includes a modification of $311,000 through an extension of maturity for the nine months ended September 30, 2014.
(6)  Includes modifications of $39,000 through a payment deferral, $51,000 through reductions of principal or accrued interest and $173,000 through an extension of maturity for the nine months ended September 30, 2014, and modifications of $388,000 through payment deferrals and $1.2 million through extensions of maturity for the nine months ended September 30, 2013.
(7)  Includes modifications of $2.4 million through payment deferrals and $134,000 through a reduction of principal or accrued interest for the nine months ended September 30, 2014.
(8)  Includes modifications of $1.2 million through reductions of principal or accrued interest for the nine months ended September 30, 2013.
(9)  Includes a modification of $149,000 through a reduction of principal or accrued interest for the nine months ended September 30, 2013.

During the nine months ended September 30, 2014, we restructured monthly payments on 14 loans, with a net carrying value of $8.4 million as of September 30, 2014, through temporary payment structure modifications or re-amortization. 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.

 

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The following table details troubled debt restructurings, excluding PCI loans, that defaulted subsequent to the modifications occurring within the previous twelve months, disaggregated by loan class, for the three and nine months ended September 30, 2014 and 2013, respectively:

 

     Three Months Ended      Nine Months Ended  
     September 30, 2014      September 30, 2013      September 30, 2014      September 30, 2013  
     Number of
Loans
     Recorded
Investment
     Number of
Loans
     Recorded
Investment
     Number of
Loans
     Recorded
Investment
     Number of
Loans
     Recorded
Investment
 
     (In thousands, except number of loans)  

Real estate loans:

                       

Commercial property

                       

Retail

     1       $ 1,856         —         $ —           1       $ 1,856         —         $ —     

Other

     —           —           1         130         —           —           1         130   

Commercial and industrial loans:

                       

Commercial term

     2         47         —           —           2         47         1         29   

Commercial lines of credit

     2         412         —           —           3         546         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

     5       $ 2,315         1       $ 130         6       $ 2,449         2       $ 159   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchased Credit Impaired Loans

As part of the CBI acquisition during the third quarter ended September 30, 2014, the Company purchased loans for which there was, at acquisition, evidence of deterioration of credit quality subsequent to origination and it was probable, at acquisition, that all contractually required payments would not be collected. The following table presents the outstanding balance and carrying amount of those PCI loans as of the dates indicated:

 

     Carrying
Amount
    Accretable
Yield
 
     (In thousands)  

Balance at January 1, 2014

   $ —        $ —     

Additions from CBI acquisition at August 31, 2014

     75,878        (22,858

Accretion

     491        491   

Payment received

     (5,892     —     

Disposals/transfers to OREO

     (3,453     212   
  

 

 

   

 

 

 

Balance at September 30, 2014

   $ 67,024      $ (22,155
  

 

 

   

 

 

 

 

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As of September 30, 2014, pass/pass-watch (grade 0-4), criticized (grade 5) and classified (grade 6-7) PCI loans, disaggregated by loan class, were as follows:

 

     As of September 30, 2014  
     Pass/Pass-Watch
(Grade 0-4)
     Criticized
(Grade 5)
     Classified
(Grade 6-7)
     Total  

Real estate loans:

           

Commercial property

           

Retail

   $ 2,939       $ 215       $ 12,786       $ 15,940   

Hotel/Motel

     248         —           13,958         14,206   

Gas station

     10,200         1,205         6,664         18,069   

Other

     2,154         —           13,561         15,715   

Residential property

     —           —           2,686         2,686   

Commercial and industrial loans:

           

Commercial term

     —           —           350         350   

Consumer loans

     —           —           58         58   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total PCI loans

   $ 15,541       $ 1,420       $ 50,063       $ 67,024   
  

 

 

    

 

 

    

 

 

    

 

 

 

Servicing Assets

The changes in servicing assets for the nine months ended September 30, 2014 and 2013 were as follows:

 

     Nine Months Ended September 30,  
     2014     2013  
     (In thousands)  

Balance at beginning of period

   $ 6,833      $ 5,542   

Additions from CBI acquisition

     1,458        —     

Addition related to sale of SBA loans

     871        1,996   

Amortization

     (1,318     (1,152
  

 

 

   

 

 

 

Balance at end of period

   $ 7,844      $ 6,386   
  

 

 

   

 

 

 

At September 30, 2014 and 2013, we serviced loans sold to unaffiliated parties in the amounts of $341.6 million and $330.4 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 being serviced were SBA loans.

FDIC Loss Sharing Asset

The FDIC loss sharing asset related to the assumption of Single Family and Commercial Shared-Loss Agreement (“SLAs”) between CBI and the FDIC arising from the CBI’s acquisition of Mutual Bank. The loss sharing asset was measured at its fair value as of August 31, 2014 in conjunction with the CBI acquisition. There is a three-year recovery period which begins at the expiration of the Commercial SLA. During this period, 80% of any recoveries of previously charged-off and reimbursed Commercial SLA loans need to be reimbursed to the FDIC. As of September 30, 2014, the FDIC loss sharing asset was related to $7.7 million net receivable from the FDIC. Single-family loans under the Single family SLA as of September 30, 2014 were $3.7 million.

Note 7 — Income Taxes

The Company’s income tax expenses for the continuing operations were $5.0 million for the three months ended September 30, 2014, compared to $6.6 million for the same period in 2013. The effective income tax rate was 27.25 percent for the three months ended September 30, 2014, compared to 38.95 percent for the same period in 2013. For the nine months ended September 30, 2014, income tax expense for the continuing operations were $19.7 million, compared to $17.5 million for the same period in 2013. The effective income tax rate was 35.48 percent, compared to 41.42 percent for the same period in 2013. The decrease in the effective tax rate for the three months ended September 30, 2014 was due mainly to tax rate reduction to the adjustment for the nontaxable bargain purchase gain, which is excluded from taxable income. The decrease in the effective tax rate for the nine months ended September 30, 2014, as compared to the same period in 2013, was due mainly to tax rate reduction to the adjustment for the bargain purchase gain,

 

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a $400,000 deferred tax benefit generated from the sale of the insurance businesses and tax benefits to be realized from investments in low income tax credit funds, offset by the expiration of the California EZ net interest deduction and EZ hiring credits. Management concluded that no valuation allowance is required for the deferred tax assets except for the portion related to certain state net operating losses as of September 30, 2014.

As of September 30, 2014, the Company was subject to examinations by various federal and state tax authorities for the tax years ended December 31, 2004 through 2013. As of September 30, 2014, the Company was subjected to audits or examinations by the Internal Revenue Service for the 2009 tax year and the California Franchise Tax Board for the 2008 and 2009 tax years. Management does not anticipate any material changes in our financial statements due to the results of the audits.

Note 8 — Subordinated Debentures and Rescinded Stock Obligation

Subordinated Debentures

During the third quarter of 2014 with the acquisition of CBI, the Company assumed CBI’s Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) with a notional balance of $26.8 million and an estimated fair value of $18.5 million. The $8.3 million discount will be amortized to interest expense over the remaining term. In December 2005, a trust was formed by CBI and issued $26.0 million 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 thereafter and invested the proceeds Subordinated Debentures. The Subordinated Debentures will mature on December 31, 2035, which date may be shortened to, at the Bank’s option if certain conditions are met. The TPS will be subject to mandatory redemption if the Subordinated Debentures are repaid by the Bank. Interest is payable quarterly, and the Bank has the option to defer interest payments on the Subordinated Debentures from time to time for a period not to exceed five consecutive years. Interest expense related to the amortization discount was 35,000 for the three months ended September 30, 2014.

Rescinded Stock Obligation

Hanmi Finanical assumed a rescinded stock obligation of $15.7 million and related accrued interest payable of $4.9 million at the closing date. The obligation resulted from the issuance of CBI common shares more than what was legally authorized in 2009 and 2010. Interest has been accrued on the obligation with interest rates varying state to state. Interest expense of $87,000 was recorded in September 2014, reflecting a weighted average rate of 6.79%. Accrued interest on the obligation as of September 30, 2014 was $5.1 million. Hanmi Financial has been in the process of paying off the obligation since the acquisition date.

Note 9 — Stockholders’ Equity

Stock Warrants

As part of the agreement dated as of July 27, 2010 with Cappello Capital Corp., the placement agent in connection with our best efforts offering and the financial advisor in connection with our completed rights offering, we issued warrants to purchase 250,000 shares of our common stock for services performed. The warrants have an exercise price of $9.60 per share. According to the agreement, the warrants vested on October 14, 2010 and are exercisable until their expiration on October 14, 2015. The Company followed the guidance of FASB ASC Topic 815-40, Derivatives and Hedging—Contracts in Entity’s Own Stock, which establishes a framework for determining whether certain freestanding and embedded instruments are indexed to a company’s own stock for purposes of evaluation of the accounting for such instruments under existing accounting literature. Under GAAP, the issuer is required to measure the fair value of the equity instruments in the transaction as of earlier of (i) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty’s performance is complete. The fair value of the warrants at the date of issuance totaling $2.0 million was recorded as a liability and a cost of equity, which was determined by the Black-Scholes option pricing model. The expected stock volatility was based on historical volatility of our common stock over the expected term of the warrants. We used a weighted average expected stock volatility of 111.46 percent. The expected life assumption was based on the contract term of five years. The dividend yield of zero was based on the fact that we had no intention to pay cash dividends for the term at the grant date. The risk free rate of 2.07 percent used for the warrants was equal to the zero coupon rate in effect at the time of the grant. During the third quarter of 2014, the remaining stock warrants were exercised and there were no outstanding stock warrants as of September 30, 2014.

 

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Table of Contents

Note 10 – Accumulated Other Comprehensive Income

Activity in accumulated other comprehensive income for the three months ended September 30, 2014 and 2013 was as follows:

 

    Unrealized Gains
and Losses on
Available-for-Sale
Securities
    Unrealized Gains
and Losses on
Interest-Only
Strip
    Tax Benefit     Total  
    (In thousands)  

For the three months ended September 30 2014:

       

Balance at beginning of period

  $ (5,534   $ 17      $ 3,367      $ (2,150

Other comprehensive (loss) income before reclassification

    (4,947     (3     2,102        (2,848

Reclassification from accumulated other comprehensive income

    (67     —          —          (67
 

 

 

   

 

 

   

 

 

   

 

 

 

Period change

    (5,014     (3     2,102        (2,915
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ (10,548   $ 14      $ 5,469      $ (5,065
 

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2013:

       

Balance at beginning of period

  $ 915      $ 17      $ 702      $ 1,634   

Other comprehensive (loss) income before reclassification

    (10,020     —          4,528        (5,492

Reclassification from accumulated other comprehensive income

    (611     —          —          (611
 

 

 

   

 

 

   

 

 

   

 

 

 

Period change

    (10,631     —          4,528        (6,103
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ (9,716   $ 17      $ 5,230      $ (4,469
 

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2014, there were a $2.8 million of net unrealized loss on available-for-sale securities and interest-only strip, and a $67,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $67,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under noninterest income. The securities were previously recorded as unrealized gains of $23,000 in accumulated other comprehensive income.

For the three months ended September 30, 2013, there were a $5.5 million of net unrealized loss on available-for-sale securities and interest-only strip, and a $611,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the redemption and sale of available-for-sale securities. The $611,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under noninterest income. The securities were previously recorded as unrealized gains of $899,000 in accumulated other comprehensive income.

 

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Table of Contents

Activity in accumulated other comprehensive income for the nine months ended September 30, 2014 and 2013 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)  

For the nine months ended September 30 2014:

       

Balance at beginning of period

  $ (18,187   $ 16      $ 8,791      $ (9,380

Other comprehensive income (loss) before reclassification

    9,491        (2     (3,322     6,167   

Reclassification from accumulated other comprehensive income

    (1,852     —          —          (1,852