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 March 31, 2015

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 April 30, 2015, there were 31,936,384 outstanding shares of the Registrant’s Common Stock.

 

 

 

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Hanmi Financial Corporation and Subsidiaries

Quarterly Report on Form 10-Q

Three months ended March 31, 2015

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			42
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			64
Item 4.		Controls and Procedures			64
Part II – Other Information
Item 1.		Legal Proceedings			65
Item 1A.		Risk Factors			65
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			65
Item 3.		Defaults Upon Senior Securities			65
Item 4.		Mine Safety Disclosures			65
Item 5.		Other Information			65
Item 6.		Exhibits			65
Signatures					66

 

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Part I — Financial Information

Item 1. Financial Statements

Hanmi Financial Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)

 

		March 31, 2015				December 31, 2014
Assets
Cash and cash equivalents		$	182,054			$	158,320
Securities available for sale, at fair value (amortized cost of $849,190 as of March 31, 2015 and $1,061,703 as of December 31, 2014)			858,064				1,060,717
Loans held for sale, at the lower of cost or fair value			8,677				5,451
Loans receivable, net of allowance for loan losses of $52,951 as of March 31, 2015 and $52,666 as of December 31, 2014			2,767,080				2,735,832
Accrued interest receivable			9,238				9,749
Premises and equipment, net			30,934				30,912
Other real estate owned (“OREO”), net			12,114				15,790
Customers’ liability on acceptances			2,598				1,847
Servicing assets			13,321				13,773
Other intangible assets, net			1,985				2,080
Investment in Federal Home Loan Bank stock (“FHLB”), at cost			17,581				17,580
Investment in Federal Reserve Bank (“FRB”) stock, at cost			12,273				12,273
Income tax asset			86,478				84,371
Bank-owned life insurance			47,795				48,866
Prepaid expenses			3,918				2,672
Other assets			29,905				32,210
Total assets		$	4,084,015			$	4,232,443
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing		$	1,064,695			$	1,022,972
Interest-bearing			2,487,981				2,533,774
Total deposits			3,552,676				3,556,746
Accrued interest payable			3,497				3,450
Bank’s liability on acceptances			2,598				1,847
FHLB advances			—				150,000
Servicing liabilities			5,529				5,971
FDIC loss sharing liability			543				2,074
Rescinded stock obligation			150				933
Subordinated debentures			18,582				18,544
Accrued expenses and other liabilities			32,970				39,491
Total liabilities			3,616,545				3,779,056
Stockholders’ equity:
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 32,511,528 shares (31,933,634 shares outstanding) as of March 31, 2015 and 32,488,097 shares (31,910,203 shares outstanding) as of December 31, 2014			257				257
Additional paid-in capital			555,710				554,904
Accumulated other comprehensive income, net of tax expense (benefit) of $2,691 as of March 31, 2015 and ($1,432) as of December 31, 2014			6,199				463
Accumulated deficit			(24,838	)			(32,379	)
Less: treasury stock, at cost; 577,894 shares as of March 31, 2015 and December 31, 2014			(69,858	)			(69,858	)
Total stockholders’ equity			467,470				453,387
Total liabilities and stockholders’ equity		$	4,084,015			$	4,232,443

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

(In thousands, except share and per share data)

 

		Three Months Ended March 31,
		2015				2014
Interest and Dividend Income:
Interest and fees on loans		$	37,250			$	27,329
Taxable interest on investment securities			3,854				2,537
Tax-exempt interest on investment securities			20				76
Interest on interest-bearing deposits in other banks			48				21
Dividends on FRB stock			184				168
Dividends on FHLB stock			298				236
Total interest and dividend income			41,654				30,367
Interest Expense:
Interest on deposits			3,780				3,221
Interest on FHLB advances			56				48
Interest on subordinated debentures			145				—
Total interest expense			3,981				3,269
Net interest income before provision for credit losses			37,673				27,098
Negative provision for credit losses			(1,985	)			(3,300	)
Net interest income after provision for credit losses			39,658				30,398
Noninterest Income:
Service charges on deposit accounts			3,211				2,474
Remittance fees			561				438
Trade finance fees			281				252
Other service charges and fees			425				331
Bank-owned life insurance income			253				223
Gain on sale of SBA loans			1,684				547
Net gain on sales of investment securities			2,184				1,421
Disposition gains on PCI loans			881				—
Other operating income			1,154				528
Total noninterest income			10,634				6,214
Noninterest Expense:
Salaries and employee benefits			16,384				10,259
Occupancy and equipment			4,303				2,396
Merger and integration costs			1,611				85
Deposit insurance premiums and regulatory assessments			893				437
Data processing			2,132				1,158
OREO expense			417				6
Professional fees			2,341				748
Directors and officers liability insurance			176				191
Supplies and communications			830				501
Advertising and promotion			523				581
Loan-related expense			669				83
Amortization of other intangible assets			95				—
Other operating expenses			1,330				1,354
Total noninterest expense			31,704				17,799
Income from continuing operations before provision for income taxes			18,588				18,813
Provision for income taxes			7,534				7,844
Income from continuing operations, net of taxes		$	11,054			$	10,969
Discontinued operations:
Income from operations of discontinued subsidiaries		$	—			$	37
Income tax expense			—				15
Income from discontinued operations			—				22
Net income		$	11,054			$	10,991
Basic earnings per share:
Income from continuing operations, net of taxes		$	0.35			$	0.35
Income from discontinued operations, net of taxes			—				—
Basic earnings per share		$	0.35			$	0.35
Diluted earnings per share:
Income from continuing operations, net of taxes		$	0.35			$	0.34
Income from discontinued operations, net of taxes			—				—
Diluted earnings per share		$	0.35			$	0.34
Weighted-average shares outstanding:
Basic			31,747,299				31,659,705
Diluted			32,026,723				31,934,163

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

		Three Months Ended March 31,
		2015				2014
Net Income		$	11,054			$	10,991
Other comprehensive income, net of tax
Unrealized gain on securities
Unrealized holding gain arising during period			12,043				8,098
Less: reclassification adjustment for net gain included in net income			(2,184	)			(1,421	)
Unrealized loss on interest-only strip of servicing assets			—				1
Income tax expense related to items of other comprehensive income			(4,123	)			(2,807	)
Other comprehensive income			5,736				3,871
Comprehensive Income		$	16,790			$	14,862

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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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, 2014			32,339,444				(577,894	)			31,761,550			$	257			$	552,270			$	(9,380	)		$	(73,212	)		$	(69,858	)		$	400,077
Exercises of stock options			15,195				—				15,195				—				190				—				—				—				190
Exercises of stock warrants			363				—				363				—				2				—				—				—				2
Restricted stock awards, net of shares forfeited			18,000				—				18,000				—				—				—				—				—				—
Share-based compensation expense			—				—				—				—				605				—				—				—				605
Cash dividends declared			—				—				—				—				—				—				(2,225	)			—				(2,225	)
Comprehensive income:
Net income			—				—				—				—				—				—				10,991				—				10,991
Change in unrealized gain on securities available for sale and interest-only strips, net of income taxes			—				—				—				—				—				3,871				—				—				3,871
Balance at March 31, 2014			32,373,002				(577,894	)			31,795,108			$	257			$	553,067			$	(5,509	)		$	(64,446	)		$	(69,858	)		$	413,511
Balance at January 1, 2015			32,488,097				(577,894	)			31,910,203			$	257			$	554,904			$	463			$	(32,379	)		$	(69,858	)		$	453,387
Exercises of stock options			19,581				—				19,581				—				278				—				—				—				278
Restricted stock awards, net of shares forfeited			3,850				—				3,850				—				—				—				—				—				—
Share-based compensation expense			—				—				—				—				528				—				—				—				528
Cash dividends declared			—				—				—				—								—				(3,513	)			—				(3,513	)
Comprehensive income:
Net income			—				—				—				—				—				—				11,054				—				11,054
Change in unrealized loss on securities available for sale and interest-only strips, net of income taxes			—				—				—				—				—				5,736				—				—				5,736
Balance at March 31, 2015			32,511,528				(577,894	)			31,933,634			$	257			$	555,710			$	6,199			$	(24,838	)		$	(69,858	)		$	467,470

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

		Three Months Ended March 31,
		2015				2014
Cash flows from operating activities:
Net income		$	11,054			$	10,991
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			5,441				1,556
Share-based compensation expense			528				605
Negative provision for credit losses			(1,985	)			(3,300	)
Gain on sales of investment securities			(2,184	)			(1,421	)
Gain on sales of loans			(1,684	)			(547	)
Disposition gains on PCI loans			(881	)			—
Loss on sales of other real estate owned			—				2
Valuation adjustment on OREO			(215	)			—
Origination of loans held for sale			(23,108	)			(6,354	)
Proceeds from sales of SBA loans guaranteed portion			21,996				6,626
Change in accrued interest receivable			511				(52	)
Change in FDIC loss sharing liability			(1,531	)			—
Change in bank-owned life insurance			(253	)			(223	)
Change in prepaid expenses			(1,246	)			(847	)
Change in other assets			989				7,388
Change in income tax assets			(6,230	)			7,534
Change in accrued interest payable			47				(47	)
Change in other liabilities			(6,256	)			1,354
Net cash (used in) provided by operating activities			(5,007	)			23,265
Cash flows from investing activities:
Proceeds from matured or called securities available for sale			34,613				13,049
Proceeds from sales of securities available for sale			176,848				85,234
Proceeds from sales of other real estate owned			4,038				734
Proceeds from liquidation on bank-owned life insurance			1,323				—
Change in loans receivable			13,611				(40,728	)
Purchases of securities available for sale			—				(55,751	)
Purchases of premises and equipment			(903	)			(120	)
Purchases of loans receivable			(43,979	)			—
Purchases of FRB stock			(1	)			—
Net cash provided by investing activities			185,550				2,418
Cash flows from financing activities:
Change in deposits			(4,070	)			(5,745	)
Change in short-term FHLB advances			(150,000	)			4,899
Redemption of rescinded stock obligation			(783	)			—
Proceeds from exercise of stock options			278				190
Cash dividends paid			(2,234	)			—
Net cash used in financing activities			(156,809	)			(656	)
Net increase in cash and cash equivalents			23,734				25,027
Cash and cash equivalents at beginning of year			158,320				179,357
Cash and cash equivalents at end of period		$	182,054			$	204,384
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	3,934			$	3,316
Income taxes		$	13,172			$	16
Non-cash activities:
Transfer of loans receivable to other real estate owned		$	627			$	—
Conversion of stock warrants into common stock		$	—			$	2
Income tax expense related to items of other comprehensive income		$	(4,123	)		$	(2,807	)
Change in unrealized gain in accumulated other comprehensive income		$	(12,043	)		$	(8,099	)
Cash dividends declared		$	(3,513	)		$	(2,225	)

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Hanmi Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three months ended March 31, 2015 and 2014

Note 1 — Basis of Presentation

Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we,” “us” or “our”) was formed as a holding company of Hanmi Bank (the “Bank”) and registered with the Securities and Exchange Commission under the Act on March 17, 2001. Our primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money through operation of the Bank.

On August 31, 2014, Hanmi Financial completed its acquisition of Central Bancorp, Inc., a Texas corporation (“CBI”). See “Note 2 — Acquisition” and “Note 6 — Loans” for accounting policies regarding purchased loans. During the second quarter of 2014, we sold 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.”

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 March 31, 2015, 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, 2014 (the “2014 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 the CBI acquisition as discussed in “Note 2 – Acquisition.” The acquired assets and assumed liabilities of CBI 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 2014 Annual Report on Form 10-K. During the second quarter of 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.”

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 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 net assets of $1.27 billion, $1.17 billion and $93.3 million, respectively. Total loans and deposits were $297.3 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. The 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 the 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

 

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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. Such changes to the preliminary estimates during the measurement period are recorded as retrospective adjustments to the consolidated financial statements. During the measurement period, the Company identified retrospective adjustments to certain of the provisional amounts recorded that had the net effect of increasing the bargain purchase gain, net of deferred taxes by $8.0 million.

The following table presents the purchase price allocation reported as of the acquisition date:

 

		(In thousands)
Consideration paid:
CBI stockholders		$	50,000
Redemption of preferred and cumulative unpaid dividends			28,675
			78,675
Assets acquired:
Cash and cash equivalents			197,209
Securities available for sale			663,497
Loans			297,272
Premises and equipment			17,925
Other real estate owned			25,952
Income tax assets, net			12,011
Core deposit intangible			2,213
FDIC loss sharing assets			11,413
Bank-owned life insurance			18,296
Servicing assets			7,497
Other assets			14,636
Total assets acquired			1,267,921
Liabilities assumed:
Deposits			1,098,997
Subordinated debentures			18,473
Rescinded stock obligation			15,485
FHLB advances			10,000
Servicing liabilities			6,039
Other liabilities			25,675
Total liabilities assumed			1,174,669
Total identifiable net assets		$	93,252
Bargain purchase gain, net of deferred taxes		$	14,577

The provisional application of the acquisition method of accounting resulted in a bargain purchase gain of $14.6 million. The operations of CBI are included in our operating results since the acquisition date. Acquisition-related costs of $6.6 million for the year ended December 31, 2014 were expensed as incurred as merger and integration costs. These expenses are comprised primarily of system conversion costs and professional fees. For the three months ended March 31, 2015, acquisition-related costs of $1.6 million were expensed as incurred as merger and integration costs. The $297.3 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.

 

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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		$	93,623
Nonaccretable discount			(17,421	)
Undiscounted cash flow to be collected			76,202
Estimated fair value of PCI loans			65,346
Accretable yield		$	10,856

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 three months ended March 31, 2015 was $95,000.

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 the 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 $7.4 million with $1.6 million amortized for the three months ended March 31, 2015.

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 three months ended March 31, 2015 was $38,000.

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, 2014. 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 2014. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions.

 

		Three Months Ended March 31,
		2015				2014
		(In thousands, except per share data)
Pro forma revenues (net interest income plus noninterest income)		$	53,531			$	56,245
Pro forma net income from continuing operations		$	12,611			$	16,280
Pro forma earnings per share from continuing operations:
Basic		$	0.40			$	0.51
Diluted		$	0.39			$	0.51

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.

 

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The cumulative effect of the retrospective application of this accounting principle as of January 1, 2012 was a negative $1.1 million. Net incomes for the three months ended March 31, 2014 decreased $44,000 due to the change in accounting principle.

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 March 31, 2014
		As Previously Reported				Effect of Change in Accounting Principle				As Adjusted
		(In thousands)
Assets
Cash and cash equivalents		$	204,384			$	—			$	204,384
Securities available for sale			520,990				—				520,990
Loans receivable			2,221,520				—				2,221,520
Income tax assets			53,227				273				53,500
Other assets			96,841				(1,477	)			95,364
Total assets		$	3,096,962			$	(1,204	)		$	3,095,758
Liabilities and stockholders’ equity
Liabilities		$	2,682,247			$	—			$	2,682,247
Stockholders’ equity			414,715				(1,204	)			413,511
Total liabilities and stockholders’ equity		$	3,096,962			$	(1,204	)		$	3,095,758

Hanmi Financial Corporations and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

		As Previously Reported				Effect of Change in Accounting Principle				As Adjusted
		(In thousands, except per share data)
For the Three Months Ended March 31, 2014
Interest and dividend income		$	30,367			$	—			$	30,367
Interest expense			3,269				—				3,269
Negative provision for credit losses			(3,300	)			—				(3,300	)
Net interest income			30,398				—				30,398
Noninterest income			6,214				—				6,214
Noninterest expense			17,961				(162	)			17,799
Income before provision for income taxes			18,651				162				18,813
Provision for income taxes			7,638				206				7,844
Income from continuing operations		$	11,013			$	(44	)		$	10,969
Earnings per share from continuing operations
Basic		$	0.35			$	—			$	0.35
Diluted		$	0.35			$	(0.01	)		$	0.34

 

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Hanmi Financial Corporations and Subsidiaries

Consolidated Statement of Cash Flows (Unaudited)

 

		As Previously Reported				Effect of Change in Accounting Principle				As Adjusted
		(In thousands)
For the Three Months Ended March 31, 2014
Cash flows from operating activities:
Net income		$	11,035			$	(44	)		$	10,991
Total adjustment in net income			12,230				44				12,274
Net cash provided by operating activities			23,265				—				23,265
Cash flows from investing activities:
Net cash provided by investing activities			2,418				—				2,418
Cash flows from financing activities:
Net cash used in financing activities			(656	)			—				(656	)
Net increase in cash and cash equivalents			25,027				—				25,027
Cash and cash equivalents at beginning of period			179,357				—				179,357
Cash and cash equivalents at end of period		$	204,384			$	—			$	204,384

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 March 31, 2015 or December 31, 2014. The investment in low income housing was $20.7 million and $21.3 million as of March 31, 2015 and December 31, 2014, respectively. The Bank’s unfunded commitments related to low income housing investments were $9.9 million and $11.9 million as of March 31, 2015 and December 31, 2014, respectively. The Bank recognized $584,000 and $171,000 as a component of income tax expense during the three months ended March 31, 2015 and 2014, respectively, and tax credits and other benefits received from the tax expenses were $829,000 and $255,000 during the three months ended March 31, 2015 and 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 when total assets and net assets of Chun-Ha and All World were $5.6 million and $3.3 million as of June 30, 2014, respectively. The total sales price was $3.5 million, of which $2.0 million was paid upon signing. 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, offset by a $470,000 capital gain tax, a $14,000 operating loss and an $11,000 income tax expense. Consequently, the net loss from discontinued operations for the second quarter of 2014 was $444,000, or $0.01 per diluted share. For the three months ended March 31, 2014, the discontinued operations generated noninterest income, primarily in the line item for insurance commissions, of $1.4 million and incurred noninterest expense of $1.4 million in various line items.

 

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

 

		March 31, 2014
		(In thousands)
Cash and cash equivalents		$	1,628
Premises and equipment, net			73
Other intangible assets, net			1,130
Other assets			2,764
Total assets		$	5,595
Income tax payable		$	1,319
Accrued expenses and other liabilities			1,785
Total liabilities		$	3,104
Net assets of discontinued operations		$	2,491
		Three Months Ended March 31, 2014
		(In thousands)
Noninterest income		$	37
Provision for income taxes			15
Net income from discontinued operations		$	22

 

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Note 5 — Investment Securities

The following is a summary of investment securities available for sale as of March 31, 2015 and December 31, 2014:

 

		Amortized Cost				Gross Unrealized Gain				Gross Unrealized Loss				Estimated Fair Value
		(In thousands)
March 31, 2015
Mortgage-backed securities (1) (2)		$	485,112			$	8,329			$	545			$	492,896
Collateralized mortgage obligations (1)			164,163				1,719				477				165,405
U.S. government agency securities			63,967				12				624				63,355
SBA loan pool securities			75,236				70				279				75,027
Municipal bonds-tax exempt			3,604				72				—				3,676
Municipal bonds-taxable			16,562				561				81				17,042
Corporate bonds			17,018				14				48				16,984
U.S. treasury securities			162				1				—				163
Other securities			22,916				260				76				23,100
Equity securities			450				—				34				416
Total securities available for sale		$	849,190			$	11,038			$	2,164			$	858,064
December 31, 2014
Mortgage-backed securities (1) (2)		$	571,678			$	2,811			$	1,203			$	573,286
Collateralized mortgage obligations (1)			188,704				417				1,074				188,047
U.S. government agency securities			129,857				172				1,822				128,207
SBA loan pool securities			109,983				52				588				109,447
Municipal bonds-tax exempt			4,319				71				—				4,390
Municipal bonds-taxable			16,615				398				91				16,922
Corporate bonds			17,018				2				72				16,948
U.S. treasury securities			163				—				—				163
Other securities			22,916				57				80				22,893
Equity securities			450				—				36				414
Total securities available for sale		$	1,061,703			$	3,980			$	4,966			$	1,060,717

 

(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 March 31, 2015, 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				Estimated
		Cost				Fair Value
		(In thousands)
Within one year		$	11,995			$	11,948
Over one year through five years			11,341				11,363
Over five years through ten years			88,960				89,001
Over ten years			64,253				63,935
Mortgage-backed securities			485,112				492,896
Collateralized mortgage obligations			164,163				165,405
Other securities			22,916				23,100
Equity securities			450				416
Total		$	849,190			$	858,064

 

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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 three months ended March 31, 2015.

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 March 31, 2015 and December 31, 2014:

 

		Holding Period
		Less Than 12 Months												12 Months or More												Total
		Gross				Estimated				Number				Gross				Estimated				Number				Gross				Estimated				Number
		Unrealized				Fair				of				Unrealized				Fair				of				Unrealized				Fair				of
		Loss				Value				Securities				Loss				Value				Securities				Loss				Value				Securities
		(In thousands, except number of securities)
March 31, 2015
Mortgage-backed securities		$	88			$	29,430				13			$	457			$	23,906				9			$	545			$	53,336				22
Collateralized mortgage obligations			51				34,752				9				426				30,146				12				477				64,898				21
U.S. government agency securities			127				23,864				9				497				30,480				10				624				54,344				19
SBA loan pool securities			12				14,781				3				267				11,837				4				279				26,618				7
Municipal bonds-taxable			2				1,517				2				79				802				1				81				2,319				3
Corporate bonds			—				—				—				48				7,947				2				48				7,947				2
Other securities			—				—				—				76				949				3				76				949				3
Equity Securities			34				216				1				—				—				—				34				216				1
Total		$	314			$	104,560				37			$	1,850			$	106,067				41			$	2,164			$	210,627				78
December 31, 2014
Mortgage-backed securities		$	288			$	102,704				21			$	915			$	50,625				19			$	1,203			$	153,329				40
Collateralized mortgage obligations			350				78,191				21				724				33,308				13				1,074				111,499				34
U.S. government agency securities			—				5,000				1				1,822				73,142				26				1,822				78,142				27
SBA loan pool securities			155				85,062				15				433				11,975				4				588				97,037				19
Municipal bonds-taxable			—				—				—				91				5,538				5				91				5,538				5
Corporate bonds			4				5,021				1				68				7,925				2				72				12,946				3
Other securities			—				—				—				80				1,945				4				80				1,945				4
Equity Securities			36				214				1				—				—				—				36				214				1
Total		$	833			$	276,192				60			$	4,133			$	184,458				73			$	4,966			$	460,650				133

All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of March 31, 2015 and December 31, 2014 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 March 31, 2015 and December 31, 2014. 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 March 31, 2015 and December 31, 2014 were not other-than-temporarily impaired, and therefore, no impairment charges as of March 31, 2015 and December 31, 2014 were warranted.

 

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

 

		Three Months Ended March 31,
		2015				2014
		(In thousands)
Gross realized gains on sales of investment securities		$	2,194			$	1,421
Gross realized losses on sales of investment securities			(10	)			—
Net realized gains on sales of investment securities		$	2,184			$	1,421
Proceeds from sales of investment securities		$	176,848			$	85,234

For the three months ended March 31, 2015, there was a $2.2 million gain in earnings resulting from the sale of investment securities that had previously been recorded as net unrealized gains of $535,000 in comprehensive income. For the three months ended March 31, 2014, there was a $1.4 million net gain in earnings resulting from the sale of investment securities that had previously been recorded as net unrealized gains of $59,000 in comprehensive income.

Investment securities available for sale with market values of $73.5 million and $76.2 million as of March 31, 2015 and December 31, 2014, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.

 

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Note 6 — Loans

The loan portfolio includes originated and purchased loans. Loans are originated by the Company with the intent to hold them for investment and are stated at the principal amount outstanding, net of unearned income. Unearned income includes deferred unamortized nonrefundable loan fees and direct loan origination costs. Net deferred fees or costs 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. The amortization of loan fees or costs is discontinued when a loan is placed on nonaccrual status. Interest income is recorded on an accrual basis in accordance with the terms of the respective loan and includes prepayment penalties.

Purchased loans, which are loans we have acquired through our acquisition of other banks, are stated at the principal amount outstanding, net of unearned discounts or unamortized premiums. All loans acquired in our acquisitions are initially measured and recorded at their fair value on the acquisition date. A component of the initial fair value measurement is an estimate of the credit losses over the life of the purchased loans. Purchased loans are also evaluated for impairment as of the acquisition date and are accounted for as “acquired non-impaired” or “purchased credit impaired” loans.

Acquired non-impaired loans are those 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. Acquired non-impaired loans, together with originated loans, are referred to as non-purchased credit impaired (“Non-PCI”) loans. Purchase discount or premium on acquired non-impaired loans is recognized as an adjustment to interest income over the contractual life of such loans using the effective interest method or taken into income when the related loans are paid off or sold.

Purchased credit impaired (“PCI”) loans are accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” A purchased loan is deemed to be credit impaired when there is evidence of credit deterioration since its origination and it is probable at the acquisition date that we would be unable to collect all contractually required payments. We apply PCI loan accounting when we acquire loans deemed to be impaired.

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

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

At acquisition, the Company may aggregate PCI loans into pools having common credit risk characteristics such as product type, geographic location and risk rating. Increases in expected cash flows over those previously estimated increase the accretable yield and are recognized as interest income prospectively. Decreases in the amount and changes in the timing of expected cash flows compared to those previously estimated decrease the accretable yield and usually result in a provision for loan losses and the establishment of an allowance for loan losses. As the accretable yield increases or decreases from changes in cash flow expectations, the offset is a decrease or increase to the nonaccretable difference. The accretable yield is measured at each financial reporting date based on information then currently available and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans.

The 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, personal loans, and home equity lines of credit. We maintain management loan review and monitoring departments that review and monitor pass graded loans as well as problem loans to prevent further deterioration.

 

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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, tightening underwriting standards and portfolio liquidity and management, and has not exceeded certain specified limits set forth in the Bank’s loan policy.

Loans Receivable

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

 

		March 31, 2015												December 31, 2014
		Non-PCI Loans				PCI Loans				Total				Non-PCI Loans				PCI Loans				Total
		(In thousands)
Real estate loans:
Commercial property (1)
Retail		$	679,938			$	10,565			$	690,503			$	675,072			$	8,535			$	683,607
Hotel/motel			481,960				11,720				493,680				454,499				7,682				462,181
Gas station			346,798				6,441				353,239				362,240				7,745				369,985
Other			820,707				10,174				830,881				842,126				5,796				847,922
Construction			15,123				—				15,123				9,517				—				9,517
Residential property			154,797				1,716				156,513				120,932				14,371				135,303
Total real estate loans			2,499,323				40,616				2,539,939				2,464,386				44,129				2,508,515
Commercial and industrial loans:
Commercial term			116,252				281				116,533				116,073				327				116,400
Commercial lines of credit			97,761				—				97,761				93,860				—				93,860
International loans			36,338				—				36,338				38,929				—				38,929
Total commercial and industrial loans			250,351				281				250,632				248,862				327				249,189
Consumer loans			25,942				44				25,986				27,512				45				27,557
Total gross loans			2,775,616				40,941				2,816,557				2,740,760				44,501				2,785,261
Allowance for loans losses			(51,515	)			(1,436	)			(52,951	)			(51,640	)			(1,026	)			(52,666	)
Deferred loan costs			3,474				—				3,474				3,237				—				3,237
Loans receivable, net		$	2,727,575			$	39,505			$	2,767,080			$	2,692,357			$	43,475			$	2,735,832

 

(1)	Includes owner-occupied property loans of $1.14 billion and $1.12 billion as of March 31, 2015 and December 31, 2014, respectively.

Accrued interest on loans receivable was $6.2 million and $6.4 million at March 31, 2015 and December 31, 2014, respectively. At March 31, 2015 and December 31, 2014, loans receivable totaling $802.0 million and $840.0 million, respectively, were pledged to secure advances from the FHLB and the FRB’s Federal Reserve 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 March 31, 2015 and 2014:

 

		Real Estate				Commercial and Industrial				Consumer				Total Non-PCI
		(In thousands)
March 31, 2015
Balance at beginning of period		$	3,323			$	2,128			$	—			$	5,451
Origination of loans held for sale			16,927				6,181				—				23,108
Sales of loans held for sale			(13,014	)			(6,840	)			—				(19,854	)
Principal payoffs and amortization			(10	)			(18	)			—				(28	)
Balance at end of period		$	7,226			$	1,451			$	—			$	8,677
March 31, 2014
Balance at beginning of period		$	—			$	—			$	—			$	—
Origination of loans held for sale			6,269				85				—				6,354
Sales of loans held for sale			(5,874	)			(84	)			—				(5,958	)
Principal payoffs and amortization			(5	)			(1	)			—				(6	)
Balance at end of period		$	390			$	—			$	—			$	390

 

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For the three months ended March 31, 2015, there was no reclassification of Non-PCI loans receivable as Non-PCI loans held for sale, and Non-PCI loans held for sale of $19.9 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 March 31, 2015. For the three months ended March 31, 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 $6.0 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 March 31, 2014.

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:

 

		March 31, 2015												March 31 2014
		Non-PCI Loans				PCI Loans				Total
		(In thousands)
Allowance for loan losses:
Balance at beginning of period		$	51,640			$	1,026			$	52,666			$	57,555
Charge-offs			(34	)			(52	)			(86	)			(1,604	)
Recoveries on loans previously charged off			1,692				352				2,044				4,251
Net loan recoveries (charge-offs)			1,658				300				1,958				2,647
(Negative provision) provision charged to operating expense			(1,783	)			110				(1,673	)			(3,609	)
Balance at end of period		$	51,515			$	1,436			$	52,951			$	56,593
Allowance for off-balance sheet items:
Balance at beginning of period		$	1,366			$	—			$	1,366			$	1,248
(Negative provision) provision charged to operating expense			(312	)			—				(312	)			309
Balance at end of period		$	1,054			$	—			$	1,054			$	1,557

The allowance for off-balance sheet items is maintained at a level believed to be sufficient to absorb probable losses related to these unfunded credit facilities. The determination of the allowance adequacy is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. As of March 31, 2015 and 2014, the allowance for off-balance sheet items amounted to $1.1 million and $1.6 million, respectively. Net adjustments to the allowance for off-balance sheet items are included in the provision for credit losses.

 

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The following table details the information on the allowance for loan losses by portfolio segment for the three months ended March 31, 2015 and 2014:

 

		Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		(In thousands)
March 31, 2015
Allowance for loan losses on Non-PCI loans:
Beginning balance		$	41,194			$	9,142			$	220			$	1,084			$	51,640
Charge-offs			—				(34	)			—				—				(34	)
Recoveries on loans previously charged off			32				1,660				—				—				1,692
(Negative provision) provision			1,324				(2,982	)			(35	)			(90	)			(1,783	)
Ending balance		$	42,550			$	7,786			$	185			$	994			$	51,515
Ending balance: individually evaluated for impairment		$	3,386			$	1,913			$	—			$	—			$	5,299
Ending balance: collectively evaluated for impairment		$	39,164			$	5,873			$	185			$	994			$	46,216
Non-PCI loans receivable:
Ending balance		$	2,499,323			$	250,351			$	25,942			$	—			$	2,775,616
Ending balance: individually evaluated for impairment		$	33,537			$	11,570			$	1,823			$	—			$	46,930
Ending balance: collectively evaluated for impairment		$	2,465,786			$	238,781			$	24,119			$	—			$	2,728,686
Allowance for loan losses on PCI loans:
Beginning balance		$	895			$	131			$	—			$	—			$	1,026
Charge-offs			(52	)			—				—				—				(52	)
Recoveries on loans previously charged off			—				352				—				—				352
Provision			475				(365	)			—				—				110
Ending balance: acquired with deteriorated credit quality		$	1,318			$	118			$	—			$	—			$	1,436
PCI loans receivable:
Ending balance: acquired with deteriorated credit quality		$	40,633			$	282			$	44			$	—			$	40,959
March 31, 2014
Allowance for loan losses on Non-PCI loans :
Beginning balance		$	43,550			$	11,287			$	1,427			$	1,291			$	57,555
Charge-offs			(1,128	)			(422	)			(54	)			—				(1,604	)
Recoveries on loans previously charged off			2,918				1,321				12				—				4,251
Provision (negative provision)			(1,110	)			(1,761	)			(752	)			14				(3,609	)
Ending balance		$	44,230			$	10,425			$	633			$	1,305			$	56,593
Ending balance: individually evaluated for impairment		$	1,029			$	3,973			$	117			$	—			$	5,119
Ending balance: collectively evaluated for impairment		$	43,201			$	6,452			$	516			$	1,305			$	51,474
Non-PCI loans receivable:
Ending balance		$	2,027,914			$	219,102			$	29,356			$	—			$	2,276,372
Ending balance: individually evaluated for impairment		$	34,294			$	14,503			$	1,553			$	—			$	50,350
Ending balance: collectively evaluated for impairment		$	1,993,620			$	204,599			$	27,803			$	—			$	2,226,022

 

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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.

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.

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

 

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As of March 31, 2015 and December 31, 2014, pass/pass-watch, special mention and classified loans (excluding PCI loans), disaggregated by loan class, were as follows:

 

		Pass/Pass-Watch				Special Mention				Classified				Total
						(In thousands)
March 31, 2015
Real estate loans:
Commercial property
Retail		$	658,292			$	12,141			$	9,505			$	679,938
Hotel/motel			425,710				42,938				13,312				481,960
Gas station			330,319				9,861				6,618				346,798
Other			800,758				9,087				10,862				820,707
Construction			15,123				—				—				15,123
Residential property			152,673				—				2,124				154,797
Commercial and industrial loans:
Commercial term			106,066				1,089				9,097				116,252
Commercial lines of credit			95,482				—				2,279				97,761
International loans			35,987				152				199				36,338
Consumer loans			23,674				121				2,147				25,942
Total Non-PCI loans		$	2,644,084			$	75,389			$	56,143			$	2,775,616
December 31, 2014
Real estate loans:
Commercial property
Retail		$	654,360			$	18,013			$	2,699			$	675,072
Hotel/motel			397,437				46,365				10,697				454,499
Gas station			345,775				8,899				7,566				362,240
Other			822,037				9,543				10,546				842,126
Construction			9,517				—				—				9,517
Residential property			118,688				66				2,178				120,932
Commercial and industrial loans:
Commercial term			106,326				1,225				8,522				116,073
Commercial lines of credit			92,312				993				555				93,860
International loans			36,121				252				2,556				38,929
Consumer loans			25,313				131				2,068				27,512
Total Non-PCI loans		$	2,607,886			$	85,487			$	47,387			$	2,740,760

 

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

 

		30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due				Total Past Due				Current				Total				Accruing 90 Days or More Past Due
														(In thousands)
March 31, 2015
Real estate loans:
Commercial property
Retail		$	1,943			$	6,031			$	2,950			$	10,924			$	669,014			$	679,938			$	—
Hotel/motel			2,659				—				3,421				6,080				475,880				481,960				—
Gas station			580				480				4,088				5,148				341,650				346,798				—
Other			1,770				278				3,544				5,592				815,115				820,707				—
Construction			—				—				—				—				15,123				15,123				—
Residential property			—				—				547				547				154,250				154,797				—
Commercial and industrial loans:
Commercial term			(30	)			87				3,062				3,119				113,133				116,252				—
Commercial lines of credit			1,407				—				819				2,226				95,535				97,761				—
International loans			131				—				—				131				36,207				36,338				—
Consumer loans			—				239				348				587				25,355				25,942				—
Total Non-PCI loans		$	8,460			$	7,115			$	18,779			$	34,354			$	2,741,262			$	2,775,616			$	—
December 31, 2014
Real estate loans:
Commercial property
Retail		$	1,554			$	281			$	1,920			$	3,755			$	671,317			$	675,072			$	—
Hotel/motel			1,531				2,340				433				4,304				450,195				454,499				—
Gas station			2,991				1,113				353				4,457				357,783				362,240				—
Other			1,674				2,156				1,142				4,972				837,154				842,126				—
Construction			—				—				—				—				9,517				9,517				—
Residential property			167				—				687				854				120,078				120,932				—
Commercial and industrial loans:
Commercial term			1,107				490				2,847				4,444				111,629				116,073				—
Commercial lines of credit			—				—				227				227				93,633				93,860				—
International loans			200				—				—				200				38,729				38,929				—
Consumer loans			489				349				248				1,086				26,426				27,512				—
Total Non-PCI loans		$	9,713			$	6,729			$	7,857			$	24,299			$	2,716,461			$	2,740,760			$	—

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 because, due to the financial difficulties of the borrowers, we have granted concessions to the borrowers we would not otherwise consider; or when current information or events make it unlikely to collect in full according to the contractual terms of the loan agreements; or there is a deterioration in the borrower’s financial condition that raises uncertainty as to timely collection of either principal or interest; or full payment of both interest and principal is in doubt according to the original contractual terms.

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

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

 

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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				Average Recorded Investment				Interest Income Recognized
										(In thousands)
March 31, 2015
Real estate loans:
Commercial property
Retail		$	5,963			$	6,133			$	3,496			$	2,467			$	189			$	5,990			$	72
Hotel/motel			6,228				6,910				4,974				1,254				2,767				6,272				182
Gas station			7,968				8,608				7,527				441				137				7,993				93
Other			10,291				11,896				9,120				1,171				293				10,254				208
Residential property			3,087				3,242				3,087				—				—				3,102				32
Commercial and industrial loans:
Commercial term			8,147				8,716				3,912				4,235				1,881				8,078				99
Commercial lines of credit			2,092				2,210				442				1,650				8				2,439				7
International loans			1,331				1,331				767				563				24				1,360				—
Consumer loans			1,823				2,005				1,823				—				—				1,830				17
Total Non-PCI loans		$	46,930			$	51,051			$	35,148			$	11,781			$	5,299			$	47,318			$	710
December 31, 2014
Real estate loans:
Commercial property
Retail		$	4,436			$	4,546			$	1,938			$	2,498			$	220			$	5,373			$	251
Hotel/motel			5,835				6,426				4,581				1,254				1,828				4,583				398
Gas station			8,974				9,594				8,526				448				150				11,281				787
Other			10,125				11,591				8,890				1,235				319				10,579				885
Residential property			3,127				3,268				3,127				—				—				2,924				115
Commercial and industrial loans:
Commercial term			7,614				8,133				2,999				4,615				2,443				9,458				566
Commercial lines of credit			466				575				466				—				—				1,205				66
International loans			3,546				3,546				2,628				918				286				1,736				33
Consumer loans			1,742				1,907				1,742				—				—				1,651				59
Total Non-PCI loans		$	45,865			$	49,586			$	34,897			$	10,968			$	5,246			$	48,790			$	3,160

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

 

		Three Months Ended
		March 31				March 31
		2015				2014
		(In thousands)
Interest income that would have been recognized had impaired loans performed in accordance with their original terms		$	740			$	1,213
Less: Interest income recognized on impaired loans			(710	)			(764	)
Interest foregone on impaired loans		$	30			$	449

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. 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.

 

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

 

		March 31				December 31
		2015				2014
		(In thousands)
Real estate loans:
Commercial property
Retail		$	3,988			$	2,160
Hotel/motel			4,431				3,835
Gas station			5,023				3,478
Other			5,548				4,961
Residential property			1,537				1,588
Commercial and industrial loans:
Commercial term			5,867				7,052
Commercial lines of credit			1,041				466
Consumer loans			1,823				1,742
Total nonaccrual Non-PCI loans		$	29,258			$	25,282

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

 

		March 31				December 31
		2015				2014
		(In thousands)
Nonaccrual Non-PCI loans		$	29,258			$	25,282
Loans 90 days or more past due and still accruing			—				—
Total nonperforming Non-PCI loans			29,258				25,282
Other real estate owned			12,114				15,790
Total nonperforming assets		$	41,372			$	41,072

As of March 31, 2015, OREOs consisted of nineteen properties with a combined carrying value of $12.1 million. Of the $12.1 million, $11.8 million were OREOs acquired in the CBI acquisition or were obtained as a result of PCI loan collateral foreclosures subsequent to the acquisition date. As of December 31, 2014, OREOs consisted of twenty-five properties with a combined carrying value of $15.8 million. Of the $15.8 million, $15.3 million were OREOs acquired in the CBI acquisition or were obtained as a result of PCI loan collateral foreclosures subsequent to the acquisition date.

 

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Troubled Debt Restructuring

The following table details TDRs (excluding PCI loans), disaggregated by concession type and by loan type, as of March 31, 2015 and December 31, 2014:

 

		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)
March 31, 2015
Real estate loans:
Commercial property
Retail		$	—			$	—			$	—			$	2,003			$	2,003			$	304			$	—			$	—			$	—			$	304
Hotel/motel			1,073				(64	)			—				—				1,009				1,802				—				—				—				1,802
Gas station			3,033				—				—				—				3,033				352				—				—				—				352
Other			932				1,766				407				20				3,125				2,318				—				771				1,373				4,462
Residential property			729				—				—				—				729				—				—				—				306				306
Commercial and industrial loans:
Commercial term			12				(3	)			2,507				1,632				4,148				53				223				481				1,533				2,290
Commercial lines of credit			220				—				124				98				442				1,650				—				—				—				1,650
International loans			—				—				—				—				—				—				—				199				—				199
Consumer loans			—				—				127				—				127				—				—				—				—				—
Total Non-PCI loans		$	5,999			$	1,699			$	3,165			$	3,753			$	14,616			$	6,479			$	223			$	1,451			$	3,212			$	11,365
December 31, 2014
Real estate loans:
Commercial property
Retail		$	—			$	—			$	—			$	2,032			$	2,032			$	306			$	—			$	—			$	—			$	306
Hotel/motel			1,115				(53	)			—				—				1,062				1,807				—				—				—				1,807
Gas station			1,075				—				—				—				1,075				2,335				—				—				—				2,335
Other			943				1,498				433				24				2,898				2,343				—				782				1,372				4,497
Residential property			742				—				—				—				742				—				—				—				308				308
Commercial and industrial loans:
Commercial term			14				(1	)			2,556				1,481				4,050				57				226				567				1,358				2,208
Commercial lines of credit			227				—				126				113				466				2,156				—				—				—				2,156
International loans			—				—				—				—				—				—				—				200				—				200
Consumer loans			—				—				131				—				131				—				—				—				—				—
Total Non-PCI loans		$	4,116			$	1,444			$	3,246			$	3,650			$	12,456			$	9,004			$	226			$	1,549			$	3,038			$	13,817

As of March 31, 2015 and December 31, 2014, total TDRs, excluding loans held for sale, were $26.0 million and $26.3 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered to the borrower, for economic or legal reasons related to the borrower’s financial difficulties. Loans are considered to be TDRs if they were restructured through payment structure modifications such as reducing the amount of principal and interest due monthly and/or allowing for interest only monthly payments for three months or more. All TDRs are impaired and are individually evaluated for specific impairment using one of these three criteria: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent.

At March 31, 2015 and December 31, 2014, TDRs, excluding loans held for sale, were subjected to specific impairment analysis, and $2.2 million and $2.9 million, respectively, of reserves relating to these loans were included in the allowance for loan losses.

The following table details TDRs (excluding PCI loans), disaggregated by loan class, for the three months ended March 31, 2015 and 2014:

 

		March 31, 2015												March 31, 2014
		Number of Loans				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment				Number of Loans				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
						(In thousands, except number of loans)
Real estate loans:
Commercial property
Other (1)			—			$	—			$	—				1			$	943			$	943
Commercial and industrial loans:
Commercial term (2)			4				543				508				5				829				788
Commercial lines of credit (3)			—				—				—				1				250				242
Total Non-PCI loans			4			$	543			$	508				7			$	2,022			$	1,973

 

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(1)	Includes a modification of $943,000 through a payment deferral for the three months ended March 31, 2014.

(2)

Includes modifications of $508,000 through extensions of maturity for the three months ended March 31, 2015, and modifications of $491,000 through a payment deferral, $107,000 through reductions of principal or accrued interest and $190,000 through an extension of maturity for the three months ended March 31, 2014

(3)	Includes a modification of $242,000 through a payment deferral for the three months ended March 31, 2014.

During the three months ended March 31, 2015, we restructured monthly payments on four loans, with a net carrying value of $508,000 as of March 31, 2015, through 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 TDRs (excluding PCI loans) that defaulted subsequent to the modifications occurring within the previous twelve months, disaggregated by loan class, for the three months ended March 31, 2015 and 2014, respectively:

 

		Three Months Ended
		March 31, 2015								March 31, 2014
		Number of Loans				Recorded Investment				Number of Loans				Recorded Investment
		(In thousands, except number of loans)
Real estate loans:
Commercial property
Retail			1			$	1,832				1			$	310
Hotel/motel			—				—				1				1,000
Gas station			1				1,990				1				87
Other			1				379				2				481
Commercial and industrial loans:
Commercial term			—				—				1				53
Commercial lines of credit			1				124				—				—
Consumer loans			—				—				1				149
Total Non-PCI loans			4			$	4,325				7			$	2,080

Purchased Credit Impaired Loans

As part of the acquisition of CBI, the Company purchased loans for which there was, at acquisition, evidence of deterioration of credit quality subsequent to origination and it was probable, at acquisition, that all contractually required payments would not be collected. The following table summarizes the changes in carrying value of PCI loans during the year ended March 31, 2015:

 

		Carrying				Accretable
		Amount				Yield
		(In thousands)
Balance at January 1, 2015		$	43,475			$	(11,025	)
Accretion			843				843
Payments received			(5,425	)			—
Disposal/transfer to OREO			722				—
Changes in expected cash flows, net			—				376
Provision for credit losses			(110	)			—
Balance at March 31, 2015		$	39,505			$	(9,806	)

 

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

 

		Pass/Pass-Watch				Special Mention				Classified				Total				Allowance				Total PCI Loans
										(In thousands)
March 31, 2015
Real estate loans:
Commercial property
Retail		$	1,201			$	168			$	9,196			$	10,565			$	404			$	10,161
Hotel/motel			252				—				11,468				11,720				146				11,574
Gas station			—				178				6,263				6,441				555				5,886
Other			—				—				10,174				10,174				167				10,007
Residential property			—				—				1,716				1,716				46				1,670
Commercial and industrial loans:
Commercial term			—				—				281				281				118				163
Consumer loans			—				—				44				44				—				44
Total PCI loans		$	1,453			$	346			$	39,142			$	40,941			$	1,436			$	39,505
December 31, 2014
Real estate loans:
Commercial property
Retail		$	1,207			$	219			$	7,109			$	8,535			$	401			$	8,134
Hotel/motel			—				—				7,682				7,682				99				7,583
Gas station			—				1,242				6,503				7,745				302				7,443
Other			—				—				5,796				5,796				65				5,731
Residential property			—				—				14,371				14,371				28				14,343
Commercial and industrial loans:
Commercial term			—				—				327				327				131				196
Consumer loans			—				—				45				45				—				45
Total PCI loans		$	1,207			$	1,461			$	41,833			$	44,501			$	1,026			$	43,475

Loans accounted for as PCI are generally considered accruing and performing loans as the accretable discount is accreted to interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, PCI loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans are classified as nonaccrual loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated. As of March 31, 2015 and December 31, 2014, we had no PCI loans on nonaccrual status and included in the delinquency table below.

 

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

 

		30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due				Total Past Due				Current				Total				Allowance Amount				Total PCI Loans
														(In thousands)
March 31, 2015
Real estate loans:
Commercial property
Retail		$	13			$	—			$	6,424			$	6,437			$	4,128			$	10,565			$	404			$	10,161
Hotel/motel			—				—				6,801				6,801				4,919				11,720				146				11,574
Gas station			831				—				3,868				4,699				1,742				6,441				555				5,886
Other			62				—				9,719				9,781				393				10,174				167				10,007
Residential property			—				—				1,056				1,056				660				1,716				46				1,670
Commercial and industrial loans:
Commercial term			—				6				110				116				165				281				118				163
Consumer loans			—				16				28				44				—				44				—				44
Total PCI loans		$	906			$	22			$	28,006			$	28,934			$	12,007			$	40,941			$	1,436			$	39,505
December 31, 2014
Real estate loans:
Commercial property
Retail		$	93			$	287			$	3,815			$	4,195			$	4,340			$	8,535			$	401			$	8,134
Hotel/motel			312				—				2,490				2,802				4,880				7,682				99				7,583
Gas station			1,139				1,053				3,178				5,370				2,375				7,745				302				7,443
Other			—				—				5,235				5,235				561				5,796				65				5,731
Residential property			—				—				13,594				13,594				777				14,371				28				14,343
Commercial and industrial loans:
Commercial term			30				—				135				165				162				327				131				196
Consumer loans			—				17				28				45				—				45				—				45
Total PCI loans		$	1,574			$	1,357			$	28,475			$	31,406			$	13,095			$	44,501			$	1,026			$	43,475

Servicing Assets and liabilities

The changes in servicing assets for the three months ended March 31, 2015 and 2014 were as follows:

 

		Three Months Ended March 31,
		2015				2014
		(In thousands)
Servicing assets:
Balance at beginning of period		$	13,773			$	6,833
Addition related to sale of SBA loans			617				200
Amortization			(1,069	)			(474	)
Balance at end of period		$	13,321			$	6,559
Servicing liabilities:
Balance at beginning of period		$	5,971			$	33
Amortization			(442	)			(3	)
Balance at end of period		$	5,529			$	30

At March 31, 2015 and 2014, we serviced loans sold to unaffiliated parties in the amounts of $486.1 million and $340.5 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 and Liability

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 acquisition of CBI. During the third quarter of 2014, the Bank submitted losses in excess of the stated reimbursement threshold of $611.0 million, increasing the reimbursable percentage to 95 from 80. The three-year recovery period on the Commercial Share-Loss Portfolio commenced on October 1, 2014. During this period, 95 percent of any recoveries of previously charged-off and reimbursed Commercial SLA loans need to be reimbursed to the FDIC, less any reasonable recovery costs incurred until cumulative submitted losses fall below the stated reimbursement threshold. As of March 31, 2015, the

 

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FDIC loss sharing liability was related to $543,000 net payables to the FDIC, consisting of $935,000 of FDIC recoveries partially offset by $392,000 of reimbursable expense owed to the Bank. Of the $543,000 net payable to the FDIC, all activity is related to the non Single Family SLA Portfolio.

Note 7 — Income Taxes

The Company’s income tax expense for continuing operations was $7.5 million for the three months ended March 31, 2015, compared to $7.8 million for the same period in 2014. The effective income tax rate was 40.53 percent for the three months ended March 31, 2015, compared to 41.69 percent for the same period in 2014. The decrease in the effective tax rate for the three months ended March 31, 2015 was due mainly to an increased benefit from low income housing investment compared to the three months ended March 31, 2014. Management concluded that no valuation allowance is required for the deferred tax assets as of March 31, 2015.

As of March 31, 2015, 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 March 31, 2015, 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, the Company assumed CBI’s Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) with an unpaid principal 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 in Subordinated Debentures. The Subordinated Debentures will mature on December 31, 2035, however, the Bank may redeem the Subordinated Debentures at an earlier date if certain conditions are met. The TPS will be subject to mandatory redemption if the Subordinated Debentures are repaid by the Company. Interest is payable quarterly, and the Company has the option to defer interest payments on the Subordinated Debentures from time to time for a period not to exceed five consecutive years. The discount amortization was $38,000 for the three months ended March 31, 2015.

Rescinded Stock Obligation

Hanmi Finanical assumed a rescinded stock obligation of $15.5 million and related accrued interest payable of $4.5 million at the closing date of the CBI acquisition. The obligation resulted from the issuance of CBI common shares that CBI was not legally authorized to issue in 2010 and 2009. Interest has been accrued on the obligation at statutory interest rates that vary from state to state. The rescinded stock obligation and accrued interest as of March 31, 2015 were $150,000 and $65,000, respectively, and were $933,000 and $288,000, respectively, as of December 31, 2014.

Note 9 — Stockholders’ Equity

Stock Warrants

As part of an 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 had an exercise price of $9.60 per share. According to the agreement, the warrants vested on October 14, 2010 and were 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 established 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 the 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 years of 2012, 2013 and 2014, all the stock warrants were exercised and there were no outstanding stock warrants as of December 31, 2014.

 

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Note 10 – Accumulated Other Comprehensive Income

Activity in accumulated other comprehensive income for the three months ended March 31, 2015 and 2014 was as follows:

 

		Unrealized Gains and Losses on Available-for-Sale				Unrealized Gains and Losses on Interest-Only
										Tax Benefit
		Securities				Strip				(Expense)				Total
						(In thousands)
For the three months ended March 31, 2015
Balance at beginning of period		$	(985	)		$	16			$	1,432			$	463
Other comprehensive income (loss) before reclassification			12,043				—				(4,123	)			7,920
Reclassification from accumulated other comprehensive income			(2,184	)			—				—				(2,184	)
Period change			9,859				—				(4,123	)			5,736
Balance at end of period		$	8,874			$	16			$	(2,691	)		$	6,199
For the three months ended March 31, 2014
Balance at beginning of period		$	(18,187	)		$	16			$	8,791			$	(9,380	)
Other comprehensive income (loss) before reclassification			8,098				1				(2,807	)			5,292
Reclassification from accumulated other comprehensive income			(1,421	)			—				—				(1,421	)
Period change			6,677				1				(2,807	)			3,871
Balance at end of period		$	(11,510	)		$	17			$	5,984			$	(5,509	)

For the three months ended March 31, 2015, there was a $2.2 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $2.2 million reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under noninterest income. The securities sold had a recorded unrealized gain of $535,000 in accumulated other comprehensive income as of December 31, 2014.

For the three months ended March 31, 2014, there was a $1.4 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $1.4 million reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under noninterest income. The securities sold had a recorded unrealized gain of $59,000 in accumulated other comprehensive income as of December 31, 2013.

Note 11 — Regulatory Matters

Risk-Based Capital

In July 2013, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation approved the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The rules also revise the regulatory capital elements, add a new common equity Tier I capital ratio, and increase the minimum Tier I capital ratio requirement. The revisions permit banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. Additionally, a new rule on the capital conservation buffer will be implemented beginning January 1, 2016. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if certain capital levels fall below newly required amounts. The rules became effective January 1, 2015 for smaller, non-complex banking organizations with full implementation of certain deductions and adjustments to regulatory capital through January 1, 2019.

 

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The capital ratios of Hanmi Financial and the Bank as of March 31, 2015 and December 31, 2014 were as follows:

 

										Minimum								Minimum to Be
										Regulatory								Categorized as
		Actual								Requirement								“Well Capitalized”
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(In thousands)
March 31, 2015
Total capital (to risk-weighted assets):
Hanmi Financial		$	493,598				15.40	%		$	252,777				8.00	%			N/A				N/A
Hanmi Bank		$	482,965				15.33	%		$	252,348				8.00	%		$	315,435				10.00	%
Tier 1 capital (to risk-weighted assets):
Hanmi Financial		$	454,582				14.15	%		$	189,583				6.00	%			N/A				N/A
Hanmi Bank		$	443,946				14.08	%		$	189,261				6.00	%		$	252,348				8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Hanmi Financial		$	454,582				14.15	%		$	142,187				4.50	%			N/A				N/A
Hanmi Bank		$	443,946				14.08	%		$	141,946				4.50	%		$	205,033				6.50	%
Tier 1 capital (to average assets):
Hanmi Financial		$	454,582				10.78	%		$	165,895				4.00	%			N/A				N/A
Hanmi Bank		$	443,946				10.72	%		$	165,710				4.00	%		$	207,137				5.00	%
December 31, 2014
Total capital (to risk-weighted assets):
Hanmi Financial		$	493,598				15.89	%		$	248,501				8.00	%			N/A				N/A
Hanmi Bank		$	470,934				15.18	%		$	248,157				8.00	%		$	310,196				10.00	%
Tier 1 capital (to risk-weighted assets):
Hanmi Financial		$	454,582				14.63	%		$	124,250				4.00	%			N/A				N/A
Hanmi Bank		$	431,971				13.93	%		$	124,078				4.00	%		$	186,118				6.00	%
Tier 1 capital (to average assets):
Hanmi Financial		$	454,582				10.91	%		$	166,600				4.00	%			N/A				N/A
Hanmi Bank		$	431,971				10.39	%		$	166,332				4.00	%		$	207,915				5.00	%

Note 12 — Fair Value Measurements

Fair Value Measurements

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

 

•

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

 

•

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

 

•

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

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

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

 

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

Investment securities available for sale – The fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve, prepayment speeds, and default rates. Level 1 investment securities include U.S. government and agency debentures and equity securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 investment securities primarily include mortgage-backed securities, municipal bonds, collateralized mortgage obligations, SBA loan pool securities, and equity securities in markets that are not active. In determining the fair value of the securities categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security held as of each reporting date. The broker-dealers use prices obtained from nationally recognized pricing services to value our fixed income securities. The fair value of the municipal bonds is determined based on a proprietary model maintained by the broker-dealers. We review the prices obtained for reasonableness based on our understanding of the marketplace, and also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. Level 3 investment securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available, which necessitates the use of significant unobservable inputs.

SBA loans held for sale – SBA loans held for sale are carried at the lower of cost or fair value. As of March 31, 2015 and December 31, 2014, we had $8.7 million and $5.5 million SBA loans held for sale, respectively. Management obtains quotes, bids or pricing indication sheets on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At March 31, 2015, the entire balance of SBA loans held for sale was recorded at its cost. We record SBA loans held for sale on a nonrecurring basis with Level 2 inputs.

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

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

Nonperforming loans held for sale – We reclassify certain nonperforming loans as held for sale when we decide to sell those loans. The fair value of nonperforming loans held for sale is generally based upon the quotes, bids or sales contract prices which approximate their fair value. Nonperforming loans held for sale are recorded at estimated fair value less anticipated liquidation cost. As of March 31, 2015 and December 31, 2014, we did not have nonperforming loans held for sale, which are measured on a nonrecurring basis with Level 2 inputs.

 

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

There were no transfers of assets between Level 1 and Level 2 of the fair value hierarchy for the three months ended March 31, 2015. As of March 31, 2015 and December 31, 2014, assets and liabilities measured at fair value on a recurring basis are as follows:

 

		Level 1				Level 2				Level 3
		Quoted Prices in Active Markets for Identical Assets				Significant Observable Inputs with No Active Market with Identical Characteristics				Significant Unobservable Inputs				Balance
		(In thousands)
March 31, 2015
Assets:
Securities available for sale:
Mortgage-backed securities		$	—			$	492,896			$	—			$	492,896
Collateralized mortgage obligations			—				165,405				—				165,405
U.S. government agency securities			63,355				—				—				63,355
SBA loan pools securities			—				75,027				—				75,027
Municipal bonds-tax exempt			—				3,676				—				3,676
Municipal bonds-taxable			—				17,042				—				17,042
Corporate bonds			—				16,984				—				16,984
U.S. treasury securities			163				—				—				163
Other securities			—				23,100				—				23,100
Equity securities			—				—				416				416
Total securities available for sale		$	63,518			$	794,130			$	416			$	858,064
December 31, 2014
Assets:
Securities available for sale:
Mortgage-backed securities		$	—			$	573,286			$	—			$	573,286
Collateralized mortgage obligations			—				188,047				—				188,047
U.S. government agency securities			128,207				—				—				128,207
SBA loan pools securities			—				109,447				—				109,447
Municipal bonds-tax exempt			—				3,681				709				4,390
Municipal bonds-taxable			—				16,922				—				16,922
Corporate bonds			—				16,948				—				16,948
U.S. treasury securities			163				—				—				163
Other securities			—				22,893				—				22,893
Equity securities			—				—				414				414
Total securities available for sale		$	128,370			$	931,224			$	1,123			$	1,060,717

 

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The table below presents a reconciliation and income statement classification of gains and losses for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2015:

 

		Beginning Balance as of January 1, 2015				Purchases, Issuances and Settlement				Realized Gains or Losses in Earnings				Unrealized Gains or Losses in Other Comprehensive Income				Ending Balance as of March 31, 2015
						(In thousands)
Assets:
Municipal bonds-tax exempt (1)		$	709			$	(709	)		$	—			$	—			$	—
Equity securities (2)			414				—				—				2				416

 

(1)	A zero coupon tax credit municipal bond matured during the first quarter of 2015.

(2)

Reflects two equity securities that are not actively traded. The fair value of one equity security with a fair value of $216,000 was computed using valuation multiples (price to book and price to earnings) derived from market transactions for comparable companies. The other equity security with a fair value of $200,000 was computed using valuation multiples (price to book and price to earnings) derived from 1) market transactions for comparable companies, and 2) publicly-traded comparable companies.

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

As of March 31, 2015 and December 31, 2014, assets and liabilities measured at fair value on a non-recurring basis are as follows:

 

		Level 1				Level 2				Level 3
		Quoted Prices in Active Markets for Identical Assets				Significant Observable Inputs With No Active Market With  Identical Characteristics				Significant Unobservable Inputs				Loss During the Three Months Ended March 31, 2015
						(In thousands)
March 31, 2015
Assets:
Impaired loans (excluding PCI loans) (1)		$	—			$	32,116			$	956			$	1,200
Other real estate owned (2)			—				12,114				—				—
		Level 1				Level 2				Level 3
		Quoted Prices in Active Markets for Identical Assets				Significant Observable Inputs With No Active Market With Identical Characteristics				Significant Unobservable Inputs				Loss During the Twelve Months Ended December 31, 2014
						(In thousands)
December 31, 2014
Assets:
Impaired loans (3)		$	—			$	32,171			$	781			$	2,774
Other real estate owned (4)			—				15,790				—				—

 

(1)	Include real estate loans of $30.1 million, commercial and industrial loans of $1.1 million, and consumer loans of $1.8 million.

(2)	Includes properties from the foreclosure of commercial property loans of $12.0 million and residential property loans of $163,000.

(3)	Include real estate loans of $30.0 million, commercial and industrial loans of $1.2 million, and consumer loans of $1.7 million.

(4)	Includes properties from the foreclosure of commercial property loans of $13.2 million and residential property loans of 2.6 million.

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

 

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

The estimated fair values of financial instruments were as follows:

 

		March 31, 2015
		Carrying				Fair Value
		Amount				Level 1				Level 2				Level 3
						(In thousands)
Financial assets:
Cash and cash equivalents		$	182,054			$	182,054			$	—			$	—
Securities available for sale			858,064				63,518				794,130				416
Loans receivable, net of allowance for loan losses			2,767,080				—				—				2,772,612
Loans held for sale			8,677				—				8,677				—
Accrued interest receivable			9,238				9,238				—				—
Servicing assets			13,321				—				—				13,321
Investment in FHLB stock			17,581				17,581				—				—
Investment in FRB stock			12,273				12,273				—				—
Financial liabilities:
Noninterest-bearing deposits			1,064,695				—				1,064,695				—
Interest-bearing deposits			2,487,981				—				—				2,500,027
Servicing liabilities			5,529				—				—				5,529
Borrowings			18,582				—				—				18,582
Accrued interest payable			3,497				3,497				—				—
Off-balance sheet items:
Commitments to extend credit			297,912				—				—				297,912
Standby letters of credit			6,299				—				—				6,299
		December 31, 2014
		Carrying				Fair Value
		Amount				Level 1				Level 2				Level 3
						(In thousands)
Financial assets:
Cash and cash equivalents		$	158,320			$	158,320			$	—			$	—
Securities available for sale			1,060,717				128,370				931,224				1,123
Loans receivable, net of allowance for loan losses			2,735,932				—				—				2,738,401
Loans held for sale			5,451				—				5,451				—
Accrued interest receivable			9,749				9,749				—				—
Servicing assets			13,773				—				—				13,773
Investment in FHLB stock			17,580				17,580				—				—
Investment in FRB stock			12,273				12,273				—				—
Financial liabilities:
Noninterest-bearing deposits			1,022,972				—				1,022,972				—
Interest-bearing deposits			2,533,774				—				—				2,528,304
Servicing liabilities			5,971				—				—				5,971
Borrowings			168,544				—				—				168,544
Accrued interest payable			3,450				3,450				—				—
Off-balance sheet items:
Commitments to extend credit			309,584				—				—				309,584
Standby letters of credit			8,982				—				—				8,982

 

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

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

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

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

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

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

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

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

Servicing assets or servicing liabilities – Servicing assets or servicing liabilities are carried at implied fair value. The fair values of the servicing assets or servicing liabilities are estimated by discounting future cash flows using market-based discount rates and prepayments speeds. The discount rate is based on the current U.S. Treasury yield curve, as published by the Department of the Treasury, plus a spread for the marketplace risk associated with these assets. (Level 3)

Investment in FHLB and FRB stock – The carrying amounts of investment in FHLB and FRB stock approximate fair value as such stock may be resold to the issuer at carrying value (Level 1).

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

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

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

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

 

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

Note 13 — Share-Based Compensation

Share-Based Compensation Expense

For the three months ended March 31, 2015 and 2014, share-based compensation expenses were $528,000 and $605,000, respectively. Net tax benefits recognized from stock option exercises and restricted stock awards vesting were $30,000 and $112,000 for the three months ended March 31, 2015 and 2014, respectively.

Unrecognized Share-Based Compensation Expense

As of March 31, 2015, unrecognized share-based compensation expense was as follows:

 

						Average Expected
		Unrecognized				Recognition
		Expense				Period
		(In thousands)
Stock option awards		$	1,137				1.6 years
Restricted stock awards			2,360				2.0 years
Total unrecognized share-based compensation expense		$	3,497				1.8 years

The table below provides stock option information for the three months ended March 31, 2015:

 

						Weighted-				Weighted-				Aggregate
						Average				Average				Intrinsic
						Exercise				Remaining				Value of
		Number of				Price Per				Contractual				In-the-Money
		Shares				Share				Life				Options
		(In thousands, except share and per share data)
Options outstanding at beginning of period			603,872			$	23.78				8.3 years			$	2,853	(1)
Options exercised			(19,581	)		$	14.20				8.0 years
Options forfeited			(501	)		$	12.54				7.7 years
Options expired			(125	)		$	144.00				1.1 years
Options outstanding at end of period			583,665			$	24.09				8.0 years			$	2,383	(2)
Options exercisable at end of period			205,058			$	35.12				6.8 years			$	1,158	(2)

 

(1)	Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $21.81 as of December 31, 2014, over the exercise price, multiplied by the number of options.

(2)	Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $21.15 as of March 31, 2015, over the exercise price, multiplied by the number of options.

There were 19,581 stock options exercised during the three months ended March 31, 2015, compared to 15,195 stock options exercised during the same period in 2014.

Restricted Stock Awards

Restricted stock awards under the Company’s 2007 and 2013 Equity Compensation Plans typically vest over three to five years, and are subject to forfeiture if employment terminates prior to the lapse of restrictions. Hanmi Financial becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued. Forfeitures of restricted stock are treated as cancelled shares.

 

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The table below provides information for restricted stock awards for the three months ended March 31, 2015:

 

		Number of Shares				Weighted- Average Grant Date Fair Value Per Share
Restricted stock at beginning of period			173,222			$	19.58
Restricted stock granted			3,850			$	20.33
Restricted stock vested			(2,000	)		$	24.45
Restricted stock at end of period			175,072			$	19.55

Note 14 — Earnings Per Share

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

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

 

		Three Months Ended March 31,
		2015												2014
						Weighted-												Weighted-
		Net				Average				Per				Net				Average				Per
		Income				Shares				Share				Income				Shares				Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
		(In thousands, except share and per share data)
Basic EPS
Income from continuing operations, net of taxes		$	11,054				31,747,299			$	0.35			$	10,969				31,659,705			$	0.35
Income from discontinued operations, net of taxes			—				31,747,299				—				22				31,659,705				—
Basic EPS		$	11,054				31,747,299			$	0.35			$	10,991				31,659,705			$	0.35
Effect of dilutive securities - options and unvested restricted stock			—				279,424				—				—				274,458				—
Diluted EPS
Income from continuing operations, net of taxes		$	11,054				32,026,723			$	0.35			$	10,969				31,934,163			$	0.34
Income from discontinued operations, net of taxes			—				32,026,723				—				22				31,934,163				—
Diluted EPS		$	11,054				32,026,723			$	0.35			$	10,991				31,934,163			$	0.34

For the three months ended March 31, 2015 and 2014, stock options totaling 138,725 and 34,250 respectively, were not included in the computation of diluted EPS because their effect would be anti-dilutive.

Note 15 — Off-Balance Sheet Commitments

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

The Bank’s exposure to credit losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, was based on management’s credit evaluation of the counterparty.

 

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Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-producing or borrower-occupied properties. The following table shows the distribution of undisbursed loan commitments as of the dates indicated:

 

		March 31,				December 31,
		2015				2014
		(In thousands)
Commitments to extend credit		$	297,912			$	309,584
Standby letters of credit			6,299				8,982
Commercial letters of credit			4,590				7,046
Total undisbursed loan commitments		$	308,801			$	325,612

Note 16 — Liquidity

Hanmi Financial

Management believes that Hanmi Financial, on a stand-alone basis, has adequate liquid assets to meet its operating cash needs through March 31, 2016.

Hanmi Bank

The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash flow requirements of our customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances and brokered deposits. As of March 31, 2015, the Bank had $99,000 of brokered deposits assumed from the CBI acquisition.

We monitor the sources and uses of funds on a regular basis to maintain an acceptable liquidity position. The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 30 percent of its assets. As of March 31, 2015, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $649.6 million and $649.6 million, respectively, compared to $649.5 million and $499.5 million, respectively, as of December 31, 2014. The Bank’s FHLB borrowings as of March 31, 2015 and December 31, 2014 totaled zero and $150.0 million, respectively, which represented zero percent and 3.54 percent of assets as of March 31, 2015 and December 31, 2014, respectively.

The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged by the Bank, and the advance rates for qualifying collateral may be adjusted upwards or downwards by the FHLB from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans and investment securities and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.

As a means of augmenting its liquidity, the Bank had an available borrowing source of $55.9 million from the Federal Reserve Discount Window, to which the Bank pledged loans with a carrying value of $77.4 million, and had no borrowings as of December 31, 2015. The Bank has a line of credit with Raymond James & Associates, Inc. for repurchase agreements up to $100.0 million. The Bank has an unsecured federal funds lines of credit totaling $95.0 million from three financial institutions to support short-term liquidity.

The Bank has Contingency Funding Plans (“CFPs”) designed to ensure that liquidity sources are sufficient to meet its ongoing obligations and commitments, particularly in the event of a liquidity contraction. The CFPs are designed to examine and quantify its liquidity under various “stress” scenarios. Furthermore, the CFPs provide a framework for management and other critical personnel to follow in the event of a liquidity contraction or in anticipation of such an event. The CFPs address authority for activation and decision making, liquidity options and the responsibilities of key departments in the event of a liquidity contraction.

Note 17 — Segment Reporting

Through our branch network and lending units, we provide a broad range of financial services to individuals and companies. These services include demand, time and savings deposits, and real estate, commercial, industrial and consumer lending. While our chief decision makers monitor the revenue streams of our various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, we consider all of our operations to be aggregated in one reportable operating segment.

 

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Note 18 — Subsequent Events

Management has evaluated subsequent events through the date of issuance of the financial data included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015, or would be required to be recognized in the Consolidated Financial Statements (Unaudited) as of March 31, 2015.

 

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

The following is management’s discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three and three months ended March 31, 2015. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Annual Report on Form 10-K”) and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 (this “Report”).

Forward-Looking Statements

Some of the statements under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this Report other than statements of historical fact are “forward –looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial position and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs and availability, developments regarding our capital plans, plans and objectives of management for future operations, strategic alternatives for a possible business combination, merger or sale transactions, and other similar forecasts and statements of expectation and statements of assumption underlying any of the foregoing. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statement. These factors include the following: failure to maintain adequate levels of capital and liquidity to support our operations; the effect of potential future supervisory action against us or Hanmi Bank; general economic and business conditions internationally, nationally and in those areas in which we operate, including, but not limited to, California, Illinois and Texas; volatility and deterioration in the credit and equity markets; changes in consumer spending, borrowing and savings habits; availability of capital from private and government sources; demographic changes; competition for loans and deposits and failure to attract or retain loans and deposits; fluctuations in interest rates and a decline in the level of our interest rate spread; risks of natural disasters related to our real estate portfolio; risks associated with Small Business Administration loans; failure to attract or retain key employees; changes in governmental regulation; enforcement actions against us and litigation we may become a party to; ability of Hanmi Bank to make distributions to Hanmi Financial, which is restricted by certain factors, including Hanmi Bank’s retained earnings, net income, prior distributions made, and certain other financial tests; ability to successfully and efficiently integrate the operations of banks and other institutions we acquire; adequacy of our allowance for loan losses; credit quality and the effect of credit quality on our provision for credit losses and allowance for loan losses; changes in the financial performance and/or condition of our borrowers and the ability of our borrowers to perform under the terms of their loans and other terms of credit agreements; our ability to control expenses; and changes in securities markets. In addition, for a discussion of some of the other factors that might cause such a difference, see the discussion contained in this Report under the heading “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Also see “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Interest Rate Risk Management” and “Capital Resources and Liquidity” in our 2014 Annual Report on Form 10-K, as well as other factors we identify from time to time in our periodic reports, including our Quarterly Reports on Form 10-Q, filed pursuant to the Exchange Act. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date, on which such statements were made, except as required by law.

Critical Accounting Policies

We have established various accounting policies that govern the application of GAAP in the preparation of our financial statements. In addition to our significant accounting policies described in the “Notes to Consolidated Financial Statements” in our 2014 Annual Report on Form 10-K, during the third quarter of 2014, we adopted ASC 805, “Business Combinations,” and ASC 310 - 30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” due to the acquisition of CBI. See “Note 2 —Acquisition” and “Note 6 — Loans” for accounting policies regarding purchased loans.

Certain accounting policies require us to make significant estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities, and we consider these critical accounting policies. For a description of these critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our 2014 Annual Report on Form 10-K. We use estimates and assumptions based on historical experience and other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates

 

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

 

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Selected Financial Data

The following tables set forth certain selected financial data for the periods indicated:

 

		As of and for the Three Months Ended
		March 31, 2015				March 31, 2014
		(In thousands, except share and per share data)
Summary Balance Sheets:
Cash and cash equivalents		$	182,054			$	204,384
Investment securities			858,064				520,990
Loans receivable (1)			2,767,080				2,221,520
Assets			4,084,015				3,095,758
Deposits			3,552,676				2,506,580
Liabilities			3,616,545				2,682,247
Stockholders’ equity			467,470				413,511
Tangible equity			465,485				412,381
Average gross loans, net of deferred loan costs			2,821,616				2,257,162
Average investment securities			1,001,707				535,356
Average interest-earning assets			3,901,818				2,825,669
Average assets			4,181,524				2,977,939
Average deposits			3,526,663				2,500,300
Average borrowings			146,773				56,886
Average interest-bearing liabilities			2,642,501				1,757,159
Average stockholders’ equity			459,784				405,120
Average tangible equity			457,738				403,963
Per Share Data:
Earnings (loss) per share – basic (2)		$	0.35			$	0.35
Earnings (loss) per share – diluted (2)		$	0.35			$	0.34
Book value per share (3)		$	14.64			$	13.01
Tangible book value per share (4)		$	14.58			$	12.97
Cash dividends per share		$	0.11			$	0.07
Common shares outstanding			31,933,634				31,795,108
Performance Ratios:
Return on average assets (5) (6)			1.07	%			1.49	%
Return on average stockholders’ equity (5) (7)			9.75	%			10.98	%
Return on average tangible equity (5) (8)			9.79	%			11.01	%
Net interest spread (9)			3.72	%			3.61	%
Net interest margin (10)			3.92	%			3.90	%
Net interest margin (excluding purchase accounting) (10)			3.30	%			3.90	%
Efficiency ratio (11)			65.63	%			53.43	%
Efficiency ratio (excluding merger and integration costs) (11)			62.30	%			53.18	%
Dividend payout ratio (12)			31.59	%			20.20	%
Average stockholders’ equity to average assets			11.00	%			13.60	%
Capital Ratios:
Total risk-based capital:
Hanmi Financial			15.40	%			17.96	%
Hanmi Bank			15.33	%			17.23	%
Tier 1 risk-based capital:
Hanmi Financial			14.15	%			16.70	%
Hanmi Bank			14.08	%			15.96	%
Common equity tier 1 capital
Hanmi Financial			14.15	%			—
Hanmi Bank			14.08	%			—
Tier 1 leverage:
Hanmi Financial			10.78	%			13.77	%
Hanmi Bank			10.72	%			13.18	%
Asset Quality Ratios:
Non-performing Non-PCI loans to gross loans (13)			1.04	%			1.10	%
Non-performing assets to assets (14)			1.01	%			0.81	%
Net loan recoveries to average gross loans			-0.28	%			-0.47	%
Allowance for loan losses to gross loans			1.88	%			2.49	%
Allowance for loan losses to non-performing Non-PCI loans			180.98	%			226.06	%

 

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(1)	Loans receivable, net of allowance for loan losses, deferred loan fees, deferred loan costs and discounts.

(2)	Calculation based on net income from continuing operations

(3)	Stockholders’ equity divided by common shares outstanding

(4)	Tangible equity divided by common shares outstanding

(5)	Calculation based on annualized net income

(6)	Net income divided by average assets

(7)	Net income divided by average stockholders’ equity

(8)	Net income divided by average tangible equity

(9)	Average yield earned on interest-earning assets less average rate paid on interest-bearing liabilities. Computed on a tax-equivalent basis using an effective marginal rate of 35 percent

(10)	Net interest income before provision for credit losses divided by average interest-earning assets. Computed on a tax-equivalent basis using an effective marginal rate of 35 percent

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

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

(13)	Nonperforming loans (excluding PCI loans) consist of nonaccrual loans and loans past due 90 days or more and still accruing interest

(14)	Nonperforming assets consist of nonperforming loans (excluding PCI loans) and other real estate owned

Non-GAAP Financial Measures

Tangible Stockholders’ Equity to Tangible Assets Ratio

Tangible common equity to tangible assets ratio is supplemental financial information determined by a method other than in accordance with U.S. generally accepted accounting principles (“GAAP”). This non-GAAP measure is used by management in analyzing Hanmi Financial’s capital strength. Tangible equity is calculated by subtracting goodwill and other intangible assets from stockholders’ equity. Subject to certain limitations, banking and financial institution regulators also exclude goodwill and other intangible assets from stockholders’ equity when assessing the capital adequacy of a financial institution. Management believes the presentation of this financial measure excluding the impact of these items provides useful supplemental information that is essential to a proper understanding of the capital strength of Hanmi Financial. This disclosure should not be viewed as a substitution for results determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

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

 

		Three Months Ended
		March 31, 2015				March 31, 2014
		(In thousands, except per share data)
Assets		$	4,084,015			$	3,095,758
Less other intangible assets			(1,985	)			(1,130	)
Tangible Assets		$	4,082,030			$	3,094,628
Stockholders’ equity		$	467,470			$	413,511
Less other intangible assets			(1,985	)			(1,130	)
Tangible equity		$	465,485			$	412,381
Book value per share		$	14.64			$	13.01
Effect of other intangible assets			(0.06	)			(0.04	)
Tangible book value per share		$	14.58			$	12.97

 

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Executive Overview

For the first quarter ended March 31, 2015, we recognized net income of $11.1 million, or $0.35 per diluted share, compared to net income of $5.9 million, or $0.19 per diluted share, for the fourth quarter ended December 31, 2014, and net income of $11.0 million, or $0.34 per diluted share, for the same period ended 2014. Financial highlights include:

 

•

Net interest margin for the first quarter of 2015 improved to 3.92 percent, an increase of 12 basis points, from 3.80 percent for the fourth quarter of 2014, and an increase of 2 basis points, from 3.90 percent for the same period of 2014.

 

•

Noninterest expense totaled $31.7 million in the first quarter of 2015, compared to $37.1 million in the fourth quarter of 2014 and $17.8 million in the same quarter of 2014.

 

•

The efficiency ratio improved to 65.63 percent in the first quarter of 2015 from 80.03 percent in the fourth quarter of 2014; the efficiency ratio excluding merger and integration costs in the first quarter of 2015 was 62.30 percent, compared to 73.39 percent in the fourth quarter of 2014.

 

•

Gross loans for the first quarter of 2015 totaled $2.82 billion, up $31.3 million from the fourth quarter of 2014.

 

•

Noninterest-bearing deposits, representing 30.0 percent of total deposits, at March 31, 2015 increased 4.1 percent to $1.06 billion from $1.02 billion at December 31, 2014.

 

•

A cash dividend of $0.11 per share for the first quarter of 2014 was paid on April 14, 2015, an increase of 57.1 percent from the fourth quarter of 2014.

Results of Operations

Acquisition’s Impact on Earnings Performance

The comparability of financial information is affected by our acquisition of CBI on August 31, 2014 ($1.27 billion in assets). The transaction has been accounted for using the acquisition method of accounting and accordingly, the related operating results have been included in the consolidated financial statements from the respective acquisition date. See “Note 2 — Acquisition.”

Net Interest Income

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

 

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

 

		Three Months Ended
		March 31, 2015												March 31, 2014
						Interest				Average								Interest				Average
		Average				Income /				Yield /				Average				Income /				Yield /
		Balance				Expense				Rate				Balance				Expense				Rate
		(In thousands)
Assets
Interest-earning assets:
Gross loans, net of deferred loan fees (1)		$	2,821,616			$	37,250				5.35	%		$	2,257,162			$	27,329				4.91	%
Municipal securities-taxable			16,906				163				3.86	%			31,220				328				4.20	%
Municipal securities-tax exempt (2)			4,339				31				2.84	%			13,202				117				3.54	%
Obligations of other U.S. government agencies			85,703				404				1.89	%			83,565				405				1.94	%
Other debt securities			864,492				3,287				1.52	%			382,113				1,804				1.89	%
Equity securities			30,267				482				6.37	%			25,256				404				6.40	%
Federal funds sold			—				—				0.00	%			11				—				0.00	%
Interest-bearing deposits in other banks			78,495				48				0.25	%			33,140				21				0.26	%
Total interest-earning assets			3,901,818				41,665				4.33	%			2,825,669				30,408				4.36	%
Noninterest-earning assets:
Cash and cash equivalents			86,313												77,397
Allowance for loan losses			(53,319	)											(58,655	)
Other assets			246,712												133,528
Total noninterest-earning assets			279,706												152,270
Total assets		$	4,181,524											$	2,977,939
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
Savings		$	120,254			$	114				0.38	%		$	116,471			$	403				1.40	%
Money market checking and NOW accounts			782,432				885				0.46	%			591,593				767				0.53	%
Time deposits of $100,000 or more			900,144				1,608				0.72	%			500,095				887				0.72	%
Other time deposits			692,898				1,173				0.69	%			492,114				1,164				0.96	%
FHLB advances			127,778				56				0.18	%			56,886				48				0.34	%
Rescinded stock obligation			438				—				0.00	%			—				—				0.00	%
Subordinated debentures			18,557				145				3.17	%			—				—				0.00	%
Total interest-bearing liabilities			2,642,501				3,981				0.61	%			1,757,159				3,269				0.75	%
Noninterest-bearing liabilities:
Demand deposits			1,030,935												800,027
Other liabilities			48,304												15,633
Total noninterest-bearing liabilities			1,079,239												815,660
Total liabilities			3,721,740												2,572,819
Stockholders’ equity			459,784												405,120
Total liabilities and stockholders’ equity		$	4,181,524											$	2,977,939
Net interest income						$	37,684											$	27,139
Cost of deposits											0.43	%											0.52	%
Net interest spread (3)											3.72	%											3.61	%
Net interest margin (4)											3.92	%											3.90	%

 

(1)

Loans are net of discounts, deferred fees and related direct costs, excluding loans held for sale and the allowance for loan losses. Nonaccrual loans are included in the average loan balance. Loan fees have been included in the calculation of interest income. Loan fees were $322,000 and $377,000 for the three months ended March 31, 2015 and 2014, respectively.

 

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(2)	Computed on a tax-equivalent basis using an effective marginal rate of 35 percent.

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

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

Excluding the effects of acquisition accounting adjustments, the net interest margin was 3.30 percent for the three months ended March 31, 2015. The impact of acquisition accounting adjustments on core loan yield and net interest margin are summarized in the following table:

 

		Three Months Ended
		March 31, 2015
		Amount				Impact
		(In thousands)
Core loan yield		$	32,896				4.74	%
Accretion of discount on purchased loans			4,354				0.61	%
As reported		$	37,250				5.35	%
Net interest margin excluding purchase accounting		$	31,762				3.30	%
Accretion of discount on Non-PCI loans			3,511				0.36	%
Accretion of discount on PCI loans			843				0.09	%
Accretion of time deposits premium			1,606				0.17	%
Amortization of subordinated debentures discount			(38	)			—
Net impact			5,922				0.62	%
As reported		$	37,684				3.92	%

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

 

		Three Months Ended
		March 31, 2015 vs. March 31, 2014
		Increases (Decreases) Due to Change In
		Volume				Rate				Total
		(In thousands)
Interest and dividend income:
Gross loans, net of deferred loan fees		$	7,304			$	2,617			$	9,921
Municipal securities-taxable			(140	)			(25	)			(165	)
Municipal securities-tax exempt			(67	)			(19	)			(86	)
Obligations of other U.S. government agencies			10				(11	)			(1	)
Other debt securities			1,888				(405	)			1,483
Equity securities			80				(2	)			78
Interest-bearing deposits in other banks			28				(1	)			27
Total interest and dividend income		$	9,103			$	2,154			$	11,257
Interest expense:
Savings		$	13			$	(302	)		$	(289	)
Money market checking and NOW accounts			229				(111	)			118
Time deposits of $100,000 or more			721				—				721
Other time deposits			393				(384	)			9
FHLB advances			38				(30	)			8
Subordinated debentures			145				—				145
Total interest expense		$	1,539			$	(827	)		$	712
Change in net interest income		$	7,564			$	2,981			$	10,545

Interest income on a tax-equivalent basis increased $11.3 million, or 37.0 percent, to $41.7 million for the three months ended March 31, 2015 from $30.4 million for the same period in 2014. Interest expense increased $712,000, or 21.8 percent, to $4.0

 

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million for the three months ended March 31, 2015 from $3.3 million for the same period in 2014. For the three months ended March 31, 2015 and 2014, net interest income before provision for credit losses on a tax-equivalent basis was $37.7 million and $27.1 million, respectively. The increase in net interest income before provision for credit losses was primarily attributable to growth in average loan balances and investment securities acquired and lower deposit costs. The net interest spread and net interest margin for the three months ended March 31, 2015 were 3.72 percent and 3.92 percent, respectively, compared to 3.61 percent and 3.90 percent, respectively, for the same period in 2014.

Average gross loans increased $564.5 million, or 25.0 percent, to $2.82 billion for the three months ended March 31, 2015 from $2.26 billion for the same period in 2014. Average investment securities increased $466.4 million, or 87.1 percent, to $1.00 billion for the three months ended March 31, 2015 from $535.4 million for the same period in 2014. Average interest-earning assets increased $1.08 billion, or 38.1 percent, to $3.90 billion for the three months ended March 31, 2015 from $2.83 billion for the same period in 2014. The increase in average interest-earning assets was due mainly to loans and investment securities acquired in the CBI acquisition. Average interest-bearing liabilities increased $885.3 million to $2.64 billion for the three months ended March 31, 2015, compared to $1.76 billion for the same period in 2014. The increase in average interest-bearing liabilities resulted primarily from deposits assumed in the CBI acquisition and increases in FHLB advances.

The average yield on loans increased to 5.35 percent for the three months ended March 31, 2015 from 4.91 percent for the same period in 2014, primarily due to a 61 basis point increase in discount accretion on purchased loans. The average yield on investment securities decreased to 1.74 percent for the three months ended March 31, 2015 from 2.28 percent for the same period in 2014, attributable primarily to increases in lower yielding investment securities acquired in the CBI acquisition. The average yield on interest-earning assets decreased 3 basis points to 4.33 percent for the three months ended March 31, 2015 from 4.36 percent for the same period in 2014, due mainly to increases in lower yielding investment securities acquired in the CBI acquisition partially offset by the increased yield related to discount accretion on loans acquired and interest-bearing liabilities assumed in the CBI acquisition. The average cost on interest-bearing liabilities decreased 14 basis points to 0.61 percent for the three months ended March 31, 2015 from 0.75 percent for the same period in 2014. The decrease was due primarily to $1.6 million amortization of time deposit premiums acquired in the CBI acquisition.

Provision for Credit Losses

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

Net recoveries were $1.7 million and $2.6 million for the three months ended March 31, 2015 and 2014, respectively. Classified loans (excluding PCI loans) totaled $56.1 million for the three months ended March 31, 2015, compared to $52.8 million for the three months ended March 31, 2014. All other credit metrics also experienced improvements as the quality of the loan portfolio improved. Therefore, negative provisions for credit losses of $2.0 million and $3.3 million were recorded for the three months ended March 31, 2015 and 2014, respectively. See “Nonperforming Assets” and “Allowance for Loan Losses and Allowance for Off-Balance Sheet Items” for further details.

 

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Noninterest Income

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

 

		Three Months Ended March 31,								Increase (Decrease)
		2015				2014				Amount				Percentage
		(In thousands)
Service charges on deposit accounts		$	3,211			$	2,474			$	737				29.8	%
Remittance fees			561				438				123				28.1	%
Trade finance fees			281				252				29				11.5	%
Other service charges and fees			425				331				94				28.4	%
Bank-owned life insurance income			253				223				30				13.5	%
Gain on sale of SBA loans			1,684				547				1,137				207.9	%
Net gain on sales of investment securities			2,184				1,421				763				53.7	%
Disposition gains on PCI loans			881				—				881				—
Other operating income			1,154				528				626				118.6	%
Total noninterest income		$	10,634			$	6,214			$	4,420				71.1	%

For the three months ended March 31, 2015, noninterest income was $10.6 million, an increase of $4.4 million, or 71.1 percent, compared to $6.2 million for the same period in 2014. The increase was primarily attributable to increases in gain on sales of SBA loans, disposition gains on PCI loans, net gain on sales of investment securities, service charges on deposit account and other operating income. Service charges on deposit accounts, which represent 30.2 percent of total noninterest income for the three months ended March 31, 2015, increased $737,000, or 29.8 percent, to $3.2 million, compared to $2.5 million for the same period in 2014, mainly due to the CBI acquisition. Gain on sale of SBA loans increased $1.1 million to $1.7 million for the three months ended March 31, 2015, compared to $547,000 for the same period of 2014, due mainly to a $13.9 million increase in the sale of SBA loans. Disposition gains on PCI loans totaled $881,000 for the three months ended March 31, 2015, compared to none for the same period in 2014. Net gain on sales of investment securities increased $763,000 to $2.2 million for the three months ended March 31, 2015, compared to $1.4 million for the same period in 2014.

Noninterest Expense

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

 

		Three Months Ended March 31,								Increase (Decrease)
		2015				2014				Amount				Percentage
		(In thousands)
Salaries and employee benefits		$	16,384			$	10,259			$	6,125				59.7	%
Occupancy and equipment			4,303				2,396				1,907				79.6	%
Merger and integration costs			1,611				85				1,526				1795.3	%
Deposit insurance premiums and regulatory assessments			893				437				456				104.3	%
Data processing			2,132				1,158				974				84.1	%
OREO expense			417				6				411				6850.0	%
Professional fees			2,341				748				1,593				213.0	%
Directors and officers liability insurance			176				191				(15	)			-7.9	%
Supplies and communications			830				501				329				65.7	%
Advertising and promotion			523				581				(58	)			-10.0	%
Loan-related expense			669				83				586				706.0	%
Amortization of other intangible assets			95				—				95				—
Other operating expenses			1,330				1,354				(24	)			-1.8	%
Total noninterest expense		$	31,704			$	17,799			$	13,905				78.1	%

For the three months ended March 31, 2015, noninterest expense was $31.7 million, an increase of $13.9 million or 78.1 percent, compared to $17.8 million for the same period in 2014. The increase was due primarily to the increases in salaries and employee benefits, occupancy and equipment, merger and integration costs and professional fees. The largest component of noninterest expense for the three months ended March 31, 2015 was salaries and employee benefits, which represented 51.7 percent of total noninterest expense for the three months ended March 31, 2015. Salaries and employee benefits increased $6.1 million, or 59.7

 

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percent, to $16.4 million, compared to $10.3 million for the same period in 2014, due mainly to an increase in the average number of employees added from the CBI acquisition and additional share-based compensation reflecting stock options and restricted stock awards granted. Occupancy and equipment costs for the three months ended March 31, 2015 increased $1.9 million, or 79.6 percent, to $4.3 million, compared to $2.4 million for the same period in 2014 as a result of the CBI acquisition. Merger and integration costs relating to CBI acquisition for the three months ended March 31, 2015 increased $1.5 million, or 1,795.3 percent, to $1.6 million, compared to $85,000 for the same period in 2014. For the three months ended March 31, 2015, professional fees increased $1.6 million, or 213.0 percent, to $2.3 million, compared to $748,000 for the same period in 2014, mainly due to costs incurred to strengthen infrastructure to meet heightened control standards.

Provision for Income Taxes

The Company’s income tax expenses for the continuing operations were $7.5 million for the three months ended March 31, 2015, compared to $7.8 million for the same period in 2014. The effective income tax rate was 40.53 percent for the three months ended March 31, 2015, compared to 41.69 percent for the same period in 2014. The decrease in the effective tax rate for the three months ended March 31, 2015 was due mainly to an increased benefit from low income housing investments compared to the three months ended March 31, 2014.

Financial Condition

Investment Portfolio

Investment securities are classified as held to maturity, available for sale, or trading in accordance with GAAP. Those securities that we have the ability and the intent to hold to maturity are classified as “held to maturity.” All other securities are classified either as “available for sale” or “trading.” There were no held to maturity or trading securities as of March 31, 2015 and December 31, 2014. Securities classified as held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts, and available for sale and trading securities are stated at fair value. The composition of our investment portfolio reflects our investment strategy of providing a relatively stable source of interest income while maintaining an appropriate level of liquidity. Our investment portfolio also provides a source of liquidity by pledging as collateral or through repurchase agreement and collateral for certain public funds deposits.

As of March 31, 2015, our investment portfolio was composed primarily of mortgage-backed securities, collateralized mortgage obligations and U.S. government agency securities. Investment securities available for sale were 100 percent of the investment portfolio as of March 31, 2015 and December 31, 2014. Most of the investment securities carried fixed interest rates. Other than holdings of U.S. government agency securities, there were no investments in securities of any one issuer exceeding 10 percent of stockholders’ equity as of March 31, 2015 and December 31, 2014.

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

 

		March 31, 2015												December 31, 2014
		Amortized Cost				Estimated Fair Value				Unrealized Gain (Loss)				Amortized Cost				Estimated Fair Value				Unrealized Gain (Loss)
		(In thousands)
Securities available for sale:
Mortgage-backed securities (1) (2)		$	485,112			$	492,896			$	7,784			$	571,678			$	573,286			$	1,608
Collateralized mortgage obligations (1)			164,163				165,405				1,242				188,704				188,047				(657	)
U.S. government agency securities			63,967				63,355				(612	)			129,857				128,207				(1,650	)
SBA loan pool securities			75,236				75,027				(209	)			109,983				109,447				(536	)
Municipal bonds-tax exempt			3,604				3,676				72				4,319				4,390				71
Municipal bonds-taxable			16,562				17,042				480				16,615				16,922				307
Corporate bonds			17,018				16,984				(34	)			17,018				16,948				(70	)
U.S. treasury securities			162				163				1				163				163				—
Other securities			22,916				23,100				184				22,916				22,893				(23	)
Equity security			450				416				(34	)			450				414				(36	)
Total securities available for sale:		$	849,190			$	858,064			$	8,874			$	1,061,703			$	1,060,717			$	(986	)

 

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(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

As of March 31, 2015, securities available for sale decreased 19.1 percent to $849.2 million, compared to $1.1 billion as of December 31, 2014, due mainly to a $176.8 million investment securities sold during the first quarter of 2015. As of March 31, 2015, securities available for sale had a net unrealized gain of $8.9 million, comprised of $11.0 million of unrealized gains and $2.2 million of unrealized losses. As of December 31, 2014, securities available for sale had a net unrealized loss of $986,000, comprised of $4.0 million of unrealized gains and $5.0 million of unrealized losses.

The following table summarizes the contractual maturity schedule for investment securities, at amortized cost, and their weighted-average yield as of March 31, 2015:

 

		Within One Year								After One Year But Within Five Years								After Five Years But Within Ten Years								After Ten Years								Total
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
		(In thousands)
Securities available for sale:
Mortgage-backed securities		$	9				2.76	%		$	2,490				0.51	%		$	190,740				2.02	%		$	291,873				2.02	%		$	485,112				2.01	%
Collateralized mortgage obligations			634				1.71	%			16,587				1.14	%			77,325				2.00	%			69,617				1.94	%			164,163				1.93	%
U.S. government agency securities			—				0.00	%			3,000				1.20	%			51,978				1.99	%			8,989				2.04	%			63,967				1.96	%
SBA loan pool securities			—				—				—				—				22,305				1.23	%			52,931				1.08	%			75,236				1.13	%
Municipal bonds-tax exempt (1)			—				—				722				1.84	%			2,882				2.27	%			—				—				3,604				2.18	%
Municipal bonds-taxable			—				—				2,434				3.23	%			11,795				4.01	%			2,333				4.17	%			16,562				3.92	%
Corporate bonds			11,995				1.16	%			5,023				0.73	%			—				—				—				—				17,018				1.03	%
U.S. treasury securities			—				—				162				1.17	%			—				—				—				—				162				1.17	%
Other securities			—				—				—				—				—				—				22,916				2.24	%			22,916				2.24	%
Equity security			—				—				—				—				—				—				450				—				450				—
Total securities available for sale:		$	12,638				1.16	%		$	30,418				1.31	%		$	357,025				2.03	%		$	449,109				1.92	%		$	849,190				1.94	%

 

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

 

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Loan Portfolio

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

 

		Legacy Loans				Acquired CBI Non-PCI Loans				Acquired CBI PCI Loans				Acquired Loan Total				Total
		(In thousands)
March 31, 2015
Real estate loans:
Commercial property
Retail		$	646,897			$	33,041			$	10,565			$	43,606			$	690,503
Hotel/motel			392,148				89,812				11,720				101,532				493,680
Gas station			288,480				58,318				6,441				64,759				353,239
Other			803,127				17,580				10,174				27,754				830,881
Construction			14,576				547				—				547				15,123
Residential property			154,510				287				1,716				2,003				156,513
Total real estate loans			2,299,738				199,585				40,616				240,201				2,539,939
Commercial and industrial loans:
Commercial term			112,120				4,132				281				4,413				116,533
Commercial lines of credit			96,020				1,741				—				1,741				97,761
International loans			36,338				—				—				—				36,338
Total commercial and industrial loans			244,478				5,873				281				6,154				250,632
Consumer loans (1)			24,940				1,002				44				1,046				25,986
Total gross loans			2,569,156				206,460				40,941				247,401				2,816,557
Allowance for loans losses			(51,515	)			—				(1,436	)			(1,436	)			(52,951	)
Deferred loan costs			3,474				—				—				—				3,474
Loans receivable, net		$	2,521,115			$	206,460			$	39,505			$	245,965			$	2,767,080
December 31, 2014
Real estate loans:
Commercial property
Retail		$	641,272			$	33,800			$	8,535			$	42,335			$	683,607
Hotel/motel			363,578				90,921				7,682				98,603				462,181
Gas station			293,827				68,413				7,745				76,158				369,985
Other			826,944				15,182				5,796				20,978				847,922
Construction			8,968				549				—				549				9,517
Residential property			118,592				2,340				14,371				16,711				135,303
Total real estate loans			2,253,181				211,205				44,129				255,334				2,508,515
Commercial and industrial loans:
Commercial term			111,658				4,415				327				4,742				116,400
Commercial lines of credit			91,808				2,052				—				2,052				93,860
International loans			38,929				—				—				—				38,929
Total commercial and industrial loans			242,395				6,467				327				6,794				249,189
Consumer loans (1)			26,458				1,054				45				1,099				27,557
Total gross loans			2,522,034				218,726				44,501				263,227				2,785,261
Allowance for loans losses			(51,640	)			—				(1,026	)			—				(52,666	)
Deferred loan costs			3,237				—				—				—				3,237
Loans receivable, net		$	2,473,631			$	218,726			$	43,475			$	263,227			$	2,735,832

 

(1)	Consumer loans include home equity lines of credit.

As of March 31, 2015 and December 31, 2014, loans receivable, net of deferred loan costs and allowance for loan losses, totaled $2.77 billion and $2.74 billion, respectively, representing an increase of $31.2 million, or 1.1 percent. Gross loans increased $31.3 million, or 1.1 percent, to $2.82 billion as of March 31, 2015, from $2.79 billion as of December 31, 2014. The increase was mainly attributable to increases in residential property loans by $21.2 million, construction loans by $5.6 million, commercial real estate loans by $4.6 million and commercial lines of credits by $3.9 million, mainly offset by decreases in international loans by $2.6 million.

 

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During the three months ended March 31, 2015, total loan disbursements were comprised of $89.4 million in commercial real estate loans, $11.8 million in commercial and industrial loans, $32.8 million in SBA loans and $39.0 million in purchased residential property loans. The increase was offset by $99.6 million of payoffs and paydowns, $29.3 million of other net amortization and $19.9 million of transfers to loans held for sale.

As of March 31, 2015, our loan portfolio included the following concentrations of loans to one type of industry that were greater than 10 percent of gross loans outstanding:

 

Industry		Balance as of March 31, 2015				Percentage of Gross Loans Outstanding
		(In thousands)
Less or of nonresidential buildings		$	761,467				26.9	%
Hospitality		$	517,314				18.3	%
Gas station		$	371,770				13.1	%

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

Nonperforming Assets

Nonperforming loans (excluding PCI loans) consist of loans on nonaccrual status and loans 90 days or more past due and still accruing interest. Nonperforming assets consist of nonperforming loans and other real estate owned (“OREO”). Non-purchased credit impaired (“Non-PCI”) loans are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless 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 an asset is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Nonaccrual assets may be restored to accrual status when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans not meeting the criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means that management intends to offer for sale.

Except for nonperforming loans set forth below and PCI loans, management is not aware of any loans as of March 31, 2015 and December 31, 2014 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan repayment terms, or any known events that would result in the loan being designated as nonperforming at some future date. Management cannot, however, predict the extent to which a deterioration in general economic conditions, real estate values, increases in general rates of interest, or changes in the financial condition or business of borrower may adversely affect a borrower’s ability to pay.

 

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

 

		March 31, 2015				December 31, 2014				Increase (Decrease)
										Amount				Percentage
		(In thousands)
Nonperforming Non-PCI loans:
Real estate loans:
Commercial property
Retail		$	3,988			$	2,160			$	1,828				84.6	%
Hotel/motel			4,431				3,835				596				15.5	%
Gas station			5,023				3,478				1,545				44.4	%
Other			5,548				4,961				587				11.8	%
Residential property			1,537				1,588				(51	)			-3.2	%
Commercial and industrial loans:
Commercial term			5,867				7,052				(1,185	)			-16.8	%
Commercial lines of credit			1,041				466				575				123.4	%
Consumer loans			1,823				1,742				81				4.6	%
Total nonperforming Non-PCI loans			29,258				25,282				3,976				15.7	%
Loans 90 days or more past due and still accruing			—				—				—				0.0	%
Total nonperforming Non-PCI loans (1)			29,258				25,282				3,976				15.7	%
Other real estate owned			12,114				15,790				(3,676	)			-23.3	%
Total nonperforming assets		$	41,372			$	41,072			$	300				0.7	%
Nonperforming Non-PCI loans as a percentage of gross loans			1.04	%			0.91	%
Nonperforming assets as a percentage of assets			1.01	%			0.97	%
Total debt restructured performing loans		$	11,365			$	13,817

 

(1)	Includes nonperforming troubled debt restructured loans of $14.6 million and $12.5 million as of March 31, 2015 and December 31, 2014, respectively.

Nonaccrual Non-PCI loans totaled $29.3 million as of March 31, 2015, compared to $25.3 million as of December 31, 2014, representing an increase of $4.0 million, or 15.7 percent. There were no PCI loans on nonaccrual as of March 31, 2015 and December 31, 2014. Delinquent loans (defined as 30 days or more past due) were $34.4 million as of March 31, 2015, compared to $24.3 million as of December 31, 2014, representing a 41.4 percent increase. Delinquent loans of $18.8 million and $7.9 million were included in nonperforming Non-PCI loans as of March 31, 2015 and December 31, 2014. During the three months ended March 31, 2015, loans totaling $6.6 million were placed on nonaccrual status. The additions to nonaccrual loans were offset by the receipt of a $1.5 million in SBA guaranty received, $752,000 in principal payoffs and paydowns and $344,000 in charge-offs.

The ratio of nonperforming loans to gross loans increased to 1.04 percent at March 31, 2015 from 0.91 percent at December 31, 2014. Of the $29.3 million nonperforming Non-PCI loans, approximately $26.7 million were impaired based on the definition contained in FASB ASC 310, Receivables, which resulted in aggregate impairment reserve of $4.7 million as of March 31, 2015. The allowance for collateral-dependent loans is calculated as the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals less estimated costs to sell. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as nonperforming. We continue to monitor the collateral coverage, based on recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.

As of March 31, 2015, OREOs consisted of nineteen properties with a combined carrying value of $12.1 million. Of the $12.1 million, $11.8 million were OREOs acquired in the CBI acquisition or were obtained as a result of PCI loan collateral foreclosures subsequent to the acquisition date. As of December 31, 2014, OREOs consisted of twenty-five properties with a combined carrying value of $15.8 million. Of the $15.8 million, $15.3 million were OREOs acquired in the CBI acquisition or were obtained as a result of PCI loan collateral foreclosures subsequent to the acquisition date.

Impaired Loans

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

 

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

 

		March 31, 2015								December 31, 2014
		Recorded Investment				Percentage				Recorded Investment				Percentage
		(In thousands)
Real estate loans:
Commercial property
Retail		$	5,963				12.7	%		$	4,436				9.7	%
Hotel/motel			6,228				13.3	%			5,835				12.7	%
Gas station			7,968				17.0	%			8,974				19.6	%
Other			10,291				21.8	%			10,125				22.1	%
Residential property			3,087				6.6	%			3,127				6.7	%
Commercial and industrial loans:
Commercial term			8,147				17.4	%			7,614				16.6	%
Commercial lines of credit			2,092				4.5	%			466				1.0	%
International loans			1,331				2.8	%			3,546				7.7	%
Consumer loans			1,823				3.9	%			1,742				3.8	%
Total Non-PCI loans		$	46,930				100.0	%		$	45,865				99.9	%

Total impaired loans increased $1.1 million, or 2.3 percent, to $46.9 million as of March 31, 2015, as compared to $45.9 million at December 31, 2014. Specific reserve allocations associated with impaired loans were $5.3 million and $5.2 million as of March 31, 2015 and December 31, 2014, respectively.

During the three months ended March 31, 2015 and 2014, interest income that would have been recognized had impaired loans performed in accordance with their original terms totaled $740,000 and $1.2 million, respectively. Of these amounts, actual interest recognized on impaired loans was $710,000 and $764,000 for the three months ended March 31, 2015 and 2014, respectively.

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

 

		March 31, 2015												December 31, 2014
		Nonaccrual TDRs				Accrual TDRs				Total				Nonaccrual TDRs				Accrual TDRs				Total
		(In thousands)
Real estate loans:
Commercial property
Retail		$	2,003			$	304			$	2,307			$	2,032			$	306			$	2,338
Hotel/motel			1,009				1,802				2,811				1,062				1,807				2,869
Gas station			3,033				352				3,385				1,075				2,335				3,410
Other			3,125				4,462				7,587				2,898				4,497				7,395
Residential property			729				306				1,035				742				308				1,050
Commercial and industrial loans:																			—
Commercial term			4,148				2,290				6,438				4,050				2,208				6,258
Commercial lines of credit			442				1,650				2,092				466				2,156				2,622
International loans			—				199				199				—				200				200
Consumer loans			127				—				127				131				—				131
Total Non-PCI loans		$	14,616			$	11,365			$	25,981			$	12,456			$	13,817			$	26,273

For the three months ended March 31, 2015, we restructured monthly payments for four loans, with a net carrying value of $508,000 at the time of modification, which we subsequently classified as TDRs. Temporary payment structure modifications included, but were not limited to, extending the maturity date, reducing the amount of principal and/or interest due monthly, and/or allowing for interest only monthly payments for six months or less.

As of March 31, 2015, TDRs on accrual status totaled $11.4 million, all of which were temporary interest rate and payment reductions or extensions of maturity and a $449,000 reserve relating to these loans was included in the allowance for loan losses. For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan

 

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restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms is probable. As of March 31, 2015, TDRs on nonaccrual status totaled $14.6 million, and a $1.7 million reserve relating to these loans was included in the allowance for loan losses.

As of December 31, 2014, TDRs on accrual status totaled $13.8 million, all of which were temporary interest rate and payment reductions or extensions of maturity, and an $844,000 reserve relating to these loans was included in the allowance for loan losses. 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 is probable. As of December 31, 2014, restructured loans on nonaccrual status totaled $12.5 million and a $2.0 million reserve relating to these loans was included in the allowance for loan losses.

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

Provisions to allowance for loan losses are made quarterly to recognize probable loan losses. The quarterly provision is based on the allowance need, which is determined through analysis involving quantitative calculations based on historic loss rates for general reserves and individual impairment calculations for specific allocations to impaired loans as well as qualitative adjustments.

In the first quarter of 2014, management evaluated the twelve quarter look-back period that was being used and extended the look-back period to sixteen quartrs in order to capture periods of higer losses that would have been dropped off and to reflect potential losses in our current credit portfolio. Risk factor calculations are weighted at 46.0 percent for the first four quarters, 31.0 percent for the second four quarters, 15.0 percent for the third four quarters and 8.0 percent for the last four quarters.

To determine general reserve requirements, existing loans are divided into 11 general loan pools of risk-rated loans, as well as three homogenous loan pools. For risk-rated loans, migration analysis allocates historical losses by loan pool and risk grade to determine risk factors for potential loss inherent in the current outstanding loan portfolio. As 3 homogeneous loan pools are bulk graded, the risk grade is not factored into the historical loss analysis. In addition, specific reserves are allocated for loans deemed “impaired.”

When determining the appropriate level for allowance for loan losses, management considers qualitative adjustments for any factors that are likely to cause estimated credit losses associated with the Bank’s current portfolio to differ from historical loss experience, including, but not limited to, national and local economic and business conditions, volume and geographic concentrations, and problem loan trends.

To systematically quantify the credit risk impact of trends and changes within the loan portfolio, a credit risk matrix is utilized. The qualitative factors are considered on a loan pool by loan pool basis subsequent to, and in conjunction with, a loss migration analysis. The credit risk matrix provides various scenarios with positive or negative impact on the portfolio along with corresponding basis points for qualitative adjustments.

 

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

 

		March 31, 2015												December 31, 2014												March 31, 2014
		Allowance								Non-PCI				Allowance								Non-PCI				Allowance								Non-PCI
		Amount				Percentage				Loans				Amount				Percentage				Loans				Amount				Percentage				Loans
		(In thousands)
Real estate loans:
Commercial property
Retail		$	10,274				19.9	%		$	679,938			$	9,798				19.0	%		$	675,072			$	10,329				18.3	%		$	547,472
Hotel/motel			10,945				21.2	%			481,960				9,524				18.4	%			454,499				8,530				15.1	%			331,971
Gas station			5,255				10.2	%			346,798				5,433				10.5	%			362,240				7,129				12.6	%			286,919
Other			13,981				27.3	%			820,707				14,668				28.4	%			842,126				17,581				31.1	%			751,122
Construction			990				1.9	%			15,123				1,143				2.2	%			9,517				18				0.0	%			125
Residential property			1,105				2.1	%			154,797				628				1.3	%			120,932				643				1.1	%			110,305
Total real estate loans			42,550				82.6	%			2,499,323				41,194				79.8	%			2,464,386				44,230				78.2	%			2,027,914
Commercial and industrial loans:																															0.0	%
Commercial term			5,295				10.3	%			116,252				6,232				12.1	%			116,073				8,263				14.6	%			116,903
Commercial lines of credit			2,056				4.0	%			97,761				2,228				4.3	%			93,860				1,751				3.1	%			67,079
International loans			435				0.8	%			36,338				683				1.3	%			38,929				411				0.7	%			35,120
Total commercial and industrial loans			7,786				15.1	%			250,351				9,143				17.7	%			248,862				10,425				18.4	%			219,102
Consumer loans			185				0.4	%			25,942				220				0.4	%			27,512				633				1.1	%			29,356
Unallocated			994				1.9	%			—				1,083				2.1	%			—				1,305				2.3	%			—
Total		$	51,515				100.0	%		$	2,775,616			$	51,640				100.0	%		$	2,740,760			$	56,593				100.0	%		$	2,276,372
		March 31, 2015												December 31, 2014
		Allowance Amount				Percentage				PCI Loans				Allowance Amount				Percentage				PCI Loans
		(In thousands)
Real estate loans:
Commercial property
Retail		$	404				28.1	%		$	10,565			$	401				39.1	%		$	8,535
Hotel/motel			146				10.2	%			11,720				99				9.6	%			7,682
Gas station			555				38.6	%			6,441				302				29.4	%			7,745
Other			167				11.6	%			10,174				65				6.3	%			5,796
Residential property			46				3.4	%			1,716				28				2.7	%			14,371
Total real estate loans			1,318				91.9	%			40,616				895				87.1	%			44,129
Commercial and industrial loans:
Commercial term			118				8.1	%			281				131				12.9	%			327
Total commercial and industrial loans			118				8.1	%			281				131				12.9	%			327
Consumer loans			—				0.0	%			44				—				0.0	%			45
Total		$	1,436				100.0	%		$	40,941			$	1,026				100.0	%		$	44,501

 

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

 

		As of and for the Three Months Ended,
		March 31, 2015												December 31, 2014												March 31, 2014
		Non-PCI Loans				PCI Loans				Total				Non-PCI Loans				PCI Loans				Total
		(In thousands)
Allowance for loan losses:
Balance at beginning of period		$	51,640			$	1,026			$	52,666			$	51,179			$	—			$	51,179			$	57,555
Actual charge-offs			(34	)			(52	)			(86	)			(1,423	)			—				(1,423	)			(1,604	)
Recoveries on loans previously charged off			1,692				352				2,044				1,705				—				1,705				4,251
Net loan recoveries			1,658				300				1,958				282				—				282				2,647
(Negative provision) provision charged to operating expense			(1,783	)			110				(1,673	)			179				1,026				1,205				(3,609	)
Balance at end of period		$	51,515			$	1,436			$	52,951			$	51,640			$	1,026			$	52,666			$	56,593
Allowance for off-balance sheet items:
Balance at beginning of period		$	1,366			$	—			$	1,366			$	1,544			$	—			$	1,544			$	1,248
(Negative provision) provision charged to operating expense			(312	)			—				(312	)			(178	)			—				(178	)			309
Balance at end of period		$	1,054			$	—			$	1,054			$	1,366			$	—			$	1,366			$	1,557
Ratios:
Net loan recoveries to average gross loans (1)			-0.24	%			-2.81	%			-0.28	%			-0.04	%			0.00	%			-0.04	%			-0.47	%
Net loan recoveries to gross loans (1)			-0.24	%			-2.93	%			-0.28	%			-0.04	%			0.00	%			-0.04	%			-0.47	%
Allowance for loan losses to average gross loans			1.87	%			3.36	%			1.88	%			1.93	%			1.84	%			1.94	%			2.51	%
Allowance for loan losses to gross loans			1.86	%			3.51	%			1.88	%			1.88	%			2.31	%			1.89	%			2.49	%
Net loan recoveries to allowance for loan losses (1)			-12.87	%			-83.57	%			-14.79	%			-2.18	%			0.00	%			-2.14	%			-18.71	%
Allowance for loan losses to nonperforming loans			176.07	%			0.00	%			180.98	%			204.26	%			0.00	%			208.31	%			226.06	%
Balance:
Average gross loans during period		$	2,758,188			$	42,721			$	2,821,616			$	2,674,848			$	55,763			$	2,719,692			$	2,257,162
Gross loans at end of period		$	2,775,616			$	40,941			$	2,816,557			$	2,740,760			$	44,501			$	2,785,261			$	2,276,372
Nonperforming loans at end of period		$	29,258			$	—			$	29,258			$	25,282			$	—			$	25,282			$	25,034

 

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

Allowance for loan losses increased $285,000, or 0.5 percent, to $53.0 million as of March 31, 2015, compared to $52.7 million as of December 31, 2014, but decreased $3.6 million, or 6.4 percent, as of March 31, 2015, compared to $56.6 million as of March 31, 2014. The increase in allowance for loan losses as of March 31, 2015 compared to December 31, 2014 was mainly due to recoveries on PCI loans, and the decrease in allowance for loan losses as of March 31, 2015 compared to March 31, 2014 was due primarily to improvements in historical loss rates. Due to the improvements in historical loss rates, general reserve decreased $6.2 million, or 42.2 percent, to $8.4 million as of March 31, 2015, compared to $14.6 million as of March 31, 2014.

Allowance for loan losses as a percentage of gross loans decreased 1 basis point to 1.88 percent as of March 31, 2015, compared to 1.89 percent as of December 31, 2014, and decreased 61 basis points as of March 31, 2015, compared to 2.49 percent as of March 31, 2014, due primarily to growth in loans. For the three months ended March 31, 2015, a $2.0 million negative provision for credit losses was recorded, compared to a $1.0 million provision for credit losses for the three months ended December 31, 2014 and a $3.3 million negative provision for credit losses for the three months ended March 31, 2014.

An allowance for off-balance sheet exposure, primarily unfunded loan commitments, totaled $1.1 million, $1.4 million and $1.6 million as of March 31, 2015, December 31, 2014 and March 31, 2014, respectively. The Bank closely monitors the borrower’s repayment capabilities, while funding existing commitments to ensure losses are minimized. Based on management’s evaluation and analysis of portfolio credit quality and prevailing economic conditions, we believe these reserves are adequate for losses inherent in the loan portfolio and off-balance sheet exposure as of March 31, 2015.

 

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

 

		March 31, 2015												March 31, 2014
		Charge-offs				Recoveries				Net Recoveries (Charge-offs)				Charge-offs				Recoveries				Net Recoveries (Charge-offs)
		(In thousands)
Real estate loans:
Commercial property
Retail		$	—			$	8			$	8			$	—			$	8			$	8
Hotel/motel			—				—				—				(1,028	)			25				(1,003	)
Other			—				24				24				(100	)			2,885				2,785
Commercial and industrial loans:
Commercial term			(34	)			1,614				1,580				(422	)			241				(181	)
Commercial lines of credit			—				31				31				—				268				268
International loans			—				15				15				—				812				812
Consumer loans			—				—				—				(54	)			12				(42	)
Total Non-PCI loans		$	(34	)		$	1,692			$	1,658			$	(1,604	)		$	4,251			$	2,647

For the three months ended March 31, 2015, total charge-offs were $34,000, a decrease of $1.6 million, or 97.9 percent, from $1.6 million for the same period in 2014, and total recoveries were $1.7 million, a decrease of $2.6 million, or 60.2 percent, from $4.3 million for the same period in 2014. For the three months ended March 31, 2015, net recoveries were $1.7 million, compared to $2.6 million for the same period in 2014.

Deposits

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

 

		March 31, 2015								December 31, 2014
		Balance				Percent				Balance				Percent
		(In thousands)
Demand – noninterest-bearing		$	1,064,695				30.0	%		$	1,022,972				28.8	%
Interest-bearing:
Savings			118,328				3.3	%			120,659				3.4	%
Money market checking and NOW accounts			807,965				22.7	%			796,490				22.4	%
Time deposits of $100,000 or more			890,362				25.1	%			910,340				25.5	%
Other time deposits			671,326				18.9	%			706,285				19.9	%
Total deposits		$	3,552,676				100.0	%		$	3,556,746				100.0	%

Deposits decreased $4.1 million, or 0.1 percent, to $3.55 billion as of March 31, 2015 from $3.56 billion as of December 31, 2014. The decrease in deposits was attributable mainly to $20.0 million decreases in time deposits of $100,000 or more and $35.0 million decreases in other time deposits, offset mainly by $41.7 million increases in noninterest-bearing demand deposits.

Core deposits (defined as demand, savings, money market checking, NOW accounts and other time deposits) increased $15.9 million, or 0.6 percent, to $2.66 billion at March 31, 2015 from $2.65 billion at December 31, 2014. Noninterest-bearing demand deposits as a percentage of deposits increased to 30.0 percent at March 31, 2015 from 28.8 percent at December 31, 2014. We had brokered deposits of $99,000 assumed in the CBI acquisition as of March 31, 2015 and December 31, 2014.

FHLB Advances and Other Borrowings

FHLB advances and other borrowings mostly take the form of advances from the FHLB of San Francisco and overnight federal funds. At March 31, 2015, there was no advance from the FHLB, a decrease of $150.0 million from $150.0 million at December 31, 2014. See “Note 8 — Subordinated Debentures and Rescinded Stock Obligation” for other liabilities assumed from the CBI acquisition.

 

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Interest Rate Risk Management

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

The following table shows the status of our gap position as of March 31, 2015:

 

		Less Than Three Months				More Than Three Months But Less Than One Year				More Than One Year But Less Than Five Years				More Than Five Years				Non- Interest- Sensitive				Total
		(In thousands)
Assets
Cash and due from banks		$	—			$	—			$	—			$	—			$	81,790			$	81,790
Interest-bearing deposits in other banks			100,264				—				—				—				—				100,264
Investment securities:
Fixed rate			35,982				66,925				266,348				316,351				—				685,606
Floating rate			138,228				10,050				15,456				—				—				163,734
Fair value adjustments			—				—				—				—				8,724				8,724
Loans:
Fixed rate			76,594				73,880				357,920				22,116				—				530,510
Floating rate			1,058,567				188,240				976,968				15,488				—				2,239,263
Nonaccrual			—				—				—				—				29,258				29,258
Deferred loan costs, discount, and allowance for loan losses			—				—				—				—				(23,274	)			(23,274	)
Federal home loan bank and federal reserve bank stock			—				—				—				29,854				—				29,854
Other assets			—				119,855				—				20,690				97,741				238,286
Total assets		$	1,409,635			$	458,950			$	1,616,692			$	404,499			$	194,239			$	4,084,015
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Demand – noninterest-bearing		$	—			$	—			$	—			$	—			$	1,064,695			$	1,064,695
Savings			14,128				30,634				48,475				25,091				—				118,328
Money market checking and NOW accounts			54,520				116,334				340,728				296,383				—				807,965
Time deposits			288,472				798,565				467,180				7,471				—				1,561,688
Other liabilities			—				—				—				—				63,869				63,869
Stockholders’ equity			—				—				—				—				467,470				467,470
Total liabilities and stockholders’ equity		$	357,120			$	945,533			$	856,383			$	328,945			$	1,596,034			$	4,084,015
Repricing gap			1,052,515				(486,584	)			760,309				75,554				(1,401,795	)
Cumulative repricing gap			1,052,515				565,932				1,326,241				1,401,795				—
Cumulative repricing gap as a percentage of assets			25.77	%			13.86	%			32.47	%			34.32	%			0.00	%
Cumulative repricing gap as a percentage of interest-earning assets			27.98	%			15.05	%			35.26	%			37.27	%			0.00	%
Interest-earning assets																						$	3,761,429

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

As of March 31, 2015, the cumulative repricing gap for the three-month period was at an asset-sensitive position and was 27.98 percent of interest-earning assets, which increased from 18.29 percent as of December 31, 2014. This increase was due mainly to a $221.9 million increase in floating rate loans, a $35.7 million increase in interest-bearing deposits in other banks and a $150.0 million decrease in federal home loan bank advances, mainly offset by a $36.7 million decrease in floating rate investment securities and a $35.8 million decrease in fixed rate loans.

 

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As of March 31, 2015, the cumulative repricing gap for the twelve-month period was at an asset-sensitive position and was 15.05 percent of interest-earning assets, which increased from 9.42 percent of an asset-sensitive position as of December 31, 2014. This increase was due mainly to a $73.2 million increase in floating rate loans, a $71.0 million increase in other assets and a $150.0 million decrease in federal home loan bank advances, mainly offset by a $79.2 million decrease in floating rate investment securities and a $45.3 million decrease in fixed rate loans.

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

 

		Less Than Three Months								Less Than Twelve Months
		March 31, 2015				December 31, 2014				March 31, 2015				December 31, 2014
		(In thousands)
Cumulative repricing gap		$	1,052,515			$	725,810			$	565,932			$	374,005
Percentage of assets			25.77	%			17.15	%			13.86	%			8.84	%
Percentage of interest-earning assets			27.98	%			18.29	%			15.05	%			9.42	%

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

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

 

				Percentage Changes								Change in Amount
		Change in Interest Rate		Net Interest Income				Economic Value of Equity				Net Interest Income				Economic Value of Equity
		(In thousands)
		300%			12.98	%			-3.06	%		$	19,255			$	(14,533	)
		200%			8.51	%			-2.53	%		$	12,621			$	(12,009	)
		100%			4.18	%			-1.18	%		$	6,197			$	(5,588	)
		-100%			(1	)			(1	)			(1	)			(1	)

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

Capital Resources

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

At March 31, 2015, the Bank’s total risk-based capital ratio of 15.33 percent, Tier 1 risk-based capital ratio of 14.08 percent, common equity Tier 1 capital ratio of 14.08 percent and Tier 1 leverage capital ratio of 10.72 percent, placed the Bank in the “well

 

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capitalized” category pursuant to the new capital rules, which is defined as institutions with total risk-based capital ratio equal to or greater than 10.00 percent, Tier 1 risk-based capital ratio equal to or greater than 8.00 percent, common equity Tier 1 capital ratios equal to or greater than 6.5 percent and Tier 1 leverage capital ratio equal to or greater than 5.00 percent.

For a discussion of recently implemented changes to the capital adequacy framework prompted by Basel III and the Dodd-Frank Wall Street Reform and Consumer Protection Act, see “Note 11 — Regulatory Matters” of Notes to Consolidated Financial Statements (Unaudited) in this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

For a discussion of off-balance sheet arrangements, see “Note 15 — Off-Balance Sheet Commitments” of Notes to Consolidated Financial Statements (Unaudited) in this Quarterly Report on Form 10-Q and “Item 1. Business — Off-Balance Sheet Commitments” in our 2014 Annual Report on Form 10-K.

Contractual Obligations

There have been no material changes to the contractual obligations described in our 2014 Annual Report on Form 10-K.

Recently Issued Accounting Standards

FASB ASU 2014-17, Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force), which allows an acquired entity to elect to apply pushdown accounting in its separate financial statements on a change-in-control event. The acquired entity elects whether to apply pushdown accounting individually for each change-in-control event, and may apply pushdown accounting during the reporting period in which the change-in-control event occurs. Effective November 18, 2014, an acquired entity may apply ASU 2014-17 to future change-in-control events. The Company did not make an election to apply FASB ASU 2014-17 for the acquisition of CBI, which has no impact on our financial condition or result of operations.

FASB ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, was issued to change the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations. ASU 2014-08 requires that an entity report as a discontinued operation only a disposal that represents a strategic shift in operations that has a major effect on its operations and financial results. ASU 2014-08 is effective prospectively for new disposals (or classifications as held-for-sale) that occur within annual periods beginning on or after December 15, 2014, and interim periods within those annual periods, for public business entities and not-for-profit entities that have issued (or are a conduit obligor for) securities that are traded, listed, or quoted on an exchange or an over-the-counter market. For other entities, the ASU is effective for disposals (or classifications as held-for-sale) that occur within annual periods beginning on or after December 15, 2014, and interim periods thereafter. The adoption of the ASU is not expected to have a significant impact on our financial condition or result of operations.

FASB ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (Topic 310-40), was issued to define the term in substance a repossession or foreclosure and physical possession in accounting literature and when a creditor should derecognize the loan receivable and recognize the real estate property. The amendments in this update are intended to reduce diversity in practice by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendment is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of FASB ASU 2014-04 is not expected to have a significant impact on our financial condition or result of operations.

FASB ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the Emerging Issues Task Force), was issued to permit a reporting entity to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The amendments are expected to enable more entities to record the amortization of the investment in income tax expense together with the tax credits and other tax benefits generated from the partnership. The ASU is effective retrospectively for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. For all entities other than public business entities, the amendments are effective retrospectively for annual periods beginning after December 15, 2014, and interim periods within annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company adopted the ASU effective April 1, 2014. See “Note 3 — Accounting for Investment in Qualified Affordable Housing Projects.” for further details.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of March 31, 2015, Hanmi Financial carried out an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, under the supervision and with the participation of our senior management, including our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial and accounting officer). The purpose of the disclosure controls and procedures is to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that Hanmi Financial’s disclosure controls and procedures were effective as of March 31, 2015.

Internal Controls

During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

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Part II — Other Information

Item 1. Legal Proceedings

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

Item  1A. Risk Factors

There are no material changes in the risk factors previously disclosed under Part I, Item 1A Risk Factors of our 2014 Annual Report on Form 10-K.

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

None.

Item  3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item  5. Other Information

None.

Item 6. Exhibits

 

Exhibit Number		Document
10.1		Amended and Restated 2013 Equity Compensation Plan, effective as of August 23, 2013 (incorporated by referene to Annex A to the Company’s Revised Proxy Satatement filed on July 25, 2013
31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document *
101.SCH		XBRL Taxonomy Extension Schema Document *
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document *
101.LAB		XBRL Taxonomy Extension Label Linkbase Document *
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document *
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document *

 

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

 

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Signatures

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

 

						Hanmi Financial Corporation
Date: May 11, 2015				By:		/s/ C. G. Kum
						C. G. Kum
						President and Chief Executive Officer
				By:		/s/ Michael W. McCall
						Michael W. McCall
						Executive Vice President and Chief Financial Officer

 

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