UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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 July 31, 2015, there were 31,977,091 outstanding shares of the Registrant’s Common Stock.



Hanmi Financial Corporation and Subsidiaries
Quarterly Report on Form 10-Q
Three and Six Months Ended June 30, 2015
Table of Contents
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 


2


Part I — Financial Information
Item 1. Financial Statements
Hanmi Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
 
(Unaudited)
June 30, 2015
 
December 31, 2014
Assets
 
 
 
Cash and cash equivalents
$
153,231

 
$
158,320

Securities available for sale, at fair value (amortized cost of $729,763 as of June 30, 2015 and $1,061,703 as of December 31, 2014)
728,683

 
1,060,717

Loans held for sale, at the lower of cost or fair value
4,158

 
5,451

Loans receivable, net of allowance for loan losses of $50,820 as of June 30, 2015 and $52,666 as of December 31, 2014
2,826,086

 
2,735,832

Accrued interest receivable
8,133

 
9,749

Premises and equipment, net
30,656

 
30,912

Other real estate owned ("OREO"), net
11,857

 
15,790

Customers’ liability on acceptances
1,638

 
1,847

Servicing assets
13,125

 
13,773

Other intangible assets, net
1,890

 
2,080

Investment in Federal Home Loan Bank ("FHLB") stock, at cost
16,385

 
17,580

Investment in Federal Reserve Bank ("FRB") stock, at cost
13,517

 
12,273

Income tax assets
82,819

 
84,371

Bank-owned life insurance
48,041

 
48,866

Prepaid expenses and other assets
30,551

 
34,882

Total assets
$
3,970,770

 
$
4,232,443

Liabilities and stockholders’ equity
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
1,061,823

 
$
1,022,972

Interest-bearing
2,377,958

 
2,533,774

Total deposits
3,439,781

 
3,556,746

Accrued interest payable
3,443

 
3,450

Bank’s liability on acceptances
1,638

 
1,847

FHLB advances
—

 
150,000

Servicing liabilities
5,368

 
5,971

Federal Deposit Insurance Corporation ("FDIC") loss sharing liability
116

 
2,074

Rescinded stock obligation
150

 
933

Subordinated debentures
18,623

 
18,544

Accrued expenses and other liabilities
28,911

 
39,491

Total liabilities
3,498,030

 
3,779,056

Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 32,552,736 shares (31,974,842 shares outstanding) as of June 30, 2015 and 32,488,097 shares (31,910,203 shares outstanding) as of December 31, 2014
257

 
257

Additional paid-in capital
556,289

 
554,904

Accumulated other comprehensive income, net of tax benefit of $1,486 as of June 30, 2015 and $1,432 as of December 31, 2014
423

 
463

Accumulated deficit
(14,371
)
 
(32,379
)
Less: treasury stock, at cost; 577,894 shares as of June 30, 2015 and December 31, 2014
(69,858
)
 
(69,858
)
Total stockholders’ equity
472,740

 
453,387

Total liabilities and stockholders’ equity
$
3,970,770

 
$
4,232,443


See Accompanying Notes to Consolidated Financial Statements (Unaudited)

3


Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
(in thousands, except share and per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Interest and dividend income:
 
 
 
 
 
 
 
Interest and fees on loans
$
36,915

 
$
27,522

 
$
73,949

 
$
54,851

Taxable interest on securities
2,959

 
2,375

 
6,813

 
4,912

Tax-exempt interest on securities
20

 
20

 
40

 
96

Interest on interest-bearing deposits in other banks
40

 
18

 
88

 
38

Dividends on FRB stock
201

 
172

 
385

 
340

Dividends on FHLB stock
915

 
236

 
1,213

 
472

Total interest and dividend income
41,050

 
30,343

 
82,488

 
60,709

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
3,802

 
3,153

 
7,582

 
6,375

Interest on FHLB advances
4

 
30

 
60

 
78

Interest on subordinated debentures
151

 
—

 
296

 
—

Total interest expense
3,957

 
3,183

 
7,938

 
6,453

Net interest income before provision for loan losses
37,093

 
27,160

 
74,550

 
54,256

Negative provision for loan losses
(2,495
)
 
(3,866
)
 
(4,480
)
 
(7,166
)
Net interest income after provision for loan losses
39,588

 
31,026

 
79,030

 
61,422

Noninterest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
3,169

 
2,568

 
6,380

 
5,041

Trade finance and other service charges and fees
1,109

 
1,166

 
2,376

 
2,188

Gain on sales of Small Business Administration ("SBA") loans
1,573

 
498

 
3,257

 
1,045

Net gain on sales of securities
1,912

 
364

 
4,096

 
1,785

Disposition gains on Purchased Credit Impaired ("PCI") loans
2,470

 
—

 
3,693

 
—

Other operating income
900

 
892

 
2,181

 
1,643

Total noninterest income
11,133

 
5,488

 
21,983

 
11,702

Noninterest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
15,542

 
10,280

 
31,926

 
20,539

Occupancy and equipment
4,224

 
2,469

 
8,527

 
4,866

Merger and integration costs
136

 
72

 
1,747

 
157

Data processing
1,335

 
1,112

 
3,467

 
2,270

OREO expense
(13
)
 
—

 
404

 
5

Professional fees
1,701

 
652

 
4,042

 
1,400

Supplies and communications
928

 
595

 
1,758

 
1,097

Advertising and promotion
1,046

 
753

 
1,569

 
1,333

Other operating expenses
2,219

 
2,206

 
5,382

 
4,270

Total noninterest expense
27,118

 
18,139

 
58,822

 
35,937

Income from continuing operations before provision for income taxes
23,603

 
18,375

 
42,191

 
37,187

Provision for income taxes
9,619

 
6,866

 
17,153

 
14,710

Income from continuing operations, net of taxes
13,984

 
11,509

 
25,038

 
22,477

Discontinued operations:
 
 
 
 
 
 
 
(Loss) income from operations of discontinued subsidiaries
—

 
(1
)
 
—

 
37

Income tax expense
—

 
466

 
—

 
481

Loss from discontinued operations, net of taxes
—

 
(467
)
 
—

 
(444
)
Net income
$
13,984

 
$
11,042

 
$
25,038

 
$
22,033

Basic earnings per share:
 
 
 
 
 
 
 
Income from continuing operations, net of taxes
$
0.44

 
$
0.36

 
$
0.79

 
$
0.71

Loss from discontinued operations, net of taxes
—

 
(0.01
)
 
—

 
(0.01
)
Basic earnings per share
$
0.44

 
$
0.35

 
$
0.79

 
$
0.70

Diluted earnings per share:
 
 
 
 
 
 
 
Income from continuing operations, net of taxes
$
0.44

 
$
0.36

 
$
0.79

 
$
0.70

Loss from discontinued operations, net of taxes
—

 
(0.01
)
 
—

 
(0.01
)
Diluted earnings per share
$
0.44

 
$
0.35

 
$
0.79

 
$
0.69

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
31,774,692

 
31,681,033

 
31,761,067

 
31,670,436

Diluted
31,908,719

 
31,974,253

 
31,874,484

 
31,950,313


See Accompanying Notes to Consolidated Financial Statements (Unaudited)


4


Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
 
Three Months Ended June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
13,984

 
$
11,042

 
$
25,038

 
$
22,033

Other comprehensive income, net of tax
 
 
 
 
 
 
 
Unrealized gain on securities
 
 
 
 
 
 
 
Unrealized holding (loss) gain arising during period
(8,041
)
 
6,340

 
4,002

 
14,438

Less: reclassification adjustment for net gain included in net income
(1,912
)
 
(364
)
 
(4,096
)
 
(1,785
)
Unrealized gain on interest-only strip of servicing assets
—

 
—

 
—

 
1

Income tax benefit (expense) related to items of other comprehensive income
4,177

 
(2,617
)
 
54

 
(5,424
)
Other comprehensive (loss) income
(5,776
)
 
3,359

 
(40
)
 
7,230

Comprehensive income
$
8,208

 
$
14,401

 
$
24,998

 
$
29,263


See Accompanying Notes to Consolidated Financial Statements (Unaudited)


5


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 (Loss) Income
 
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
33,695

 
—

 
33,695

 
—

 
418

 
—

 
—

 
—

 
418

Exercises of stock warrants
363

 
—

 
363

 
—

 
2

 
—

 
—

 
—

 
2

Restricted stock awards, net of shares forfeited
65,348

 
—

 
65,348

 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation expense
—

 
—

 
—

 
—

 
1,051

 
—

 
—

 
—

 
1,051

Cash dividends declared
—

 
—

 
—

 
—

 
—

 
—

 
(4,463
)
 
—

 
(4,463
)
Comprehensive income:
 
 
 
 


 
 
 
 
 
 
 
 
 
 
 


Net income
—

 
—

 
—

 
—

 
—

 
—

 
22,033

 
—

 
22,033

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

 
—

 
—

 
—

 
—

 
7,230

 
—

 
—

 
7,230

Balance at June 30, 2014
32,438,850

 
(577,894
)
 
31,860,956

 
$
257

 
$
553,741

 
$
(2,150
)
 
$
(55,642
)
 
$
(69,858
)
 
$
426,348

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
26,455

 
—

 
26,455

 
—

 
363

 
—

 
—

 
—

 
363

Restricted stock awards, net of shares forfeited
38,184

 
—

 
38,184

 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation expense
—

 
—

 
—

 
—

 
1,022

 
—

 
—

 
—

 
1,022

Cash dividends declared
—

 
—

 
—

 
—

 
—

 
—

 
(7,030
)
 
—

 
(7,030
)
Comprehensive income:
 
 
 
 


 
 
 
 
 
 
 
 
 
 
 


Net income
—

 
—

 
—

 
—

 
—

 
—

 
25,038

 
—

 
25,038

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

 
—

 
—

 
—

 
—

 
(40
)
 
—

 
—

 
(40
)
Balance at June 30, 2015
32,552,736

 
(577,894
)
 
31,974,842

 
$
257

 
$
556,289

 
$
423

 
$
(14,371
)
 
$
(69,858
)
 
$
472,740

See Accompanying Notes to Consolidated Financial Statements (Unaudited)


6


Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands) 
 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
25,038

 
$
22,033

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
9,573

 
3,283

Share-based compensation expense
1,022

 
1,051

Negative provision for loan losses
(4,480
)
 
(7,166
)
Gain on sales of securities
(4,096
)
 
(1,785
)
Gain on sales of loans
(3,257
)
 
(1,045
)
Disposition gains on PCI loans
(3,693
)
 
—

Loss on sale of OREO
—

 
2

Loss on sales of subsidiaries
—

 
419

Valuation adjustment on OREO
(228
)
 
—

Origination of loans held for sale
(37,942
)
 
(16,569
)
Proceeds from sales of SBA loans
43,443

 
14,009

Change in accrued interest receivable
1,616

 
700

Change in FDIC loss sharing liability
(1,958
)
 
—

Change in bank-owned life insurance
(498
)
 
(447
)
Change in prepaid expenses and other assets
4,225

 
(4,777
)
Change in income tax assets
1,606

 
5,202

Change in accrued interest payable
(7
)
 
57

Change in accrued expenses and other liabilities
(14,405
)
 
11,416

Net cash provided by operating activities
15,959

 
26,383

Cash flows from investing activities:
 
 
 
Proceeds from redemption of FHLB stock
1,195

 
—

Proceeds from matured or called securities
62,863

 
36,553

Proceeds from sales of securities
307,442

 
126,056

Proceeds from sales of OREO
6,096

 
734

Proceeds from sales of loans held for sale
360

 
—

Proceeds from bank-owned life insurance
1,323

 
—

Net proceeds from sales of subsidiaries
—

 
398

Change in loans receivable, net of purchases
(23,135
)
 
(118,166
)
Purchases of securities
(40,484
)
 
(124,442
)
Purchases of premises and equipment
(1,292
)
 
(611
)
Purchases of loans receivable
(64,553
)
 
—

Purchases of FRB stock
(1,244
)
 
(2,643
)
Net cash provided by (used in) investing activities
248,571

 
(82,121
)
Cash flows from financing activities:
 
 
 
Change in deposits
(116,965
)
 
32,524

Change in FHLB advances
(150,000
)
 
(30,546
)
Redemption of rescinded stock obligation
(783
)
 
—

Proceeds from exercise of stock options
363

 
418

Cash dividends paid
(2,234
)
 
(2,233
)
Net cash (used in) provided by financing activities
(269,619
)
 
163

Net decrease in cash and cash equivalents
(5,089
)
 
(55,575
)
Cash and cash equivalents at beginning of year
158,320

 
179,357

Cash and cash equivalents at end of period
$
153,231

 
$
123,782

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
7,945

 
$
6,396

Income taxes
$
14,338

 
$
8,916

Non-cash activities:
 
 
 
Transfer of loans receivable to OREO
$
2,711

 
$
1,714

Transfer of loans receivable to loans held for sale
$
360

 
$
—

Note receivable from sale of insurance subsidiaries
$
—

 
$
1,394

Conversion of stock warrants into common stock
$
—

 
$
2

Income tax benefit (expense) related to items of other comprehensive income
$
54

 
$
(5,424
)
Change in unrealized gain in accumulated other comprehensive income
$
(4,002
)
 
$
(14,438
)
Cash dividends declared
$
(7,030
)
 
$
(2,230
)
See Accompanying Notes to Consolidated Financial Statements (Unaudited)


7


Hanmi Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Three and Six months ended June 30, 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 Securities Exchange Act of 1934 in 2000. 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 June 30, 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. Certain prior period amounts have been reclassified to conform to current period presentation.

Descriptions of our significant accounting policies are included in Note 1 - Summary of Significant Accounting Policies in our 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 $50.0 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 $1.10 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. 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.

8


Such fair values are preliminary estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. The fair values are based on provisional valuation estimates of the fair values of the acquired assets and assumed liabilities. The valuation of acquired income tax assets and liabilities were based on a preliminary estimates 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 stock 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

OREO
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 and six months ended June 30, 2015, acquisition costs of $136,000 and $1.7 million, respectively, 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.


9


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 of the CDI for the three and six months ended June 30, 2015 was $95,000 and $190,000, respectively.

The fair value of savings and transactional deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Expected cash flows were utilized for fair value calculation of the certificates of deposit based on the contractual terms of the certificates of deposit and the cash flows were discounted based on a current market rate for certificates of deposit with corresponding maturities. The premium of $11.3 million was recognized for certificates of deposit acquired from CBI. The amortization of premium for the three and six months ended June 30, 2015 were $1.5 million and $3.1 million, respectively.

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 of discount for the three and six months ended June 30, 2015 were $41,000 and $79,000, respectively.

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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except per share data)
Pro forma revenues (net interest income plus noninterest income)
$
53,491

 
$
49,343

 
$
107,022

 
$
105,589

Pro forma net income from continuing operations
$
15,276

 
$
8,521

 
$
27,887

 
$
24,801

Pro forma earnings per share from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.48

 
$
0.27

 
$
0.88

 
$
0.78

Diluted
$
0.48

 
$
0.27

 
$
0.87

 
$
0.78


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

10


retrospective transition. This accounting change in the amortization methodology resulted in changes to account for amortization recognized in prior periods, which impacted the balance of tax credit investments and related tax accounts. The investment amortization expense is presented as a component of the income tax provision.

The cumulative effect of the retrospective application of this accounting principle was a $1.1 million charge to stockholders' equity as of January 1, 2012. Net income in the three months ended March 31, 2014 decreased by $44,000 due to the change in accounting principle.
    
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 June 30, 2015 or December 31, 2014. The investment in low income housing was $20.1 million and $21.3 million as of June 30, 2015 and December 31, 2014, respectively. The Bank’s unfunded commitments related to low income housing investments were $8.5 million and $11.9 million as of June 30, 2015 and December 31, 2014, respectively. As a component of income tax expense, the Bank recognized amortizations of $586,000 and $1.2 million during the three and six months ended June 30, 2015, respectively and $276,000 and $447,000 during the three and six months ended June 30, 2014, respectively. Tax credits and other benefits received from the tax expenses were $832,000 and $1.6 million during the three and six months ended June 30, 2015 and $423,000 and $665,000 during the three and six months ended June 30, 2014, respectively.

Note 4 — Sale of Insurance Subsidiaries and Discontinued Operations

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

Hanmi Financial completed the sale of its two insurance subsidiaries to Chunha Holding Corporation on June 30, 2014 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 and six months ended June 30, 2014, the discontinued operations generated noninterest income, primarily in the line item for insurance commissions, of $1.3 million and $2.7 million, respectively. They also incurred noninterest expense in various line items of $1.4 million and $2.7 million for the three and six months ended June 30, 2014.

Summarized financial information for our discontinued operations related to Chun-Ha and All World are as follows:
 
June 30, 2014
 
(in thousands)
Cash and cash equivalents
$
1,602

Premises and equipment, net
90

Other intangible assets, net
1,089

Other assets
2,855

Total assets
$
5,636

Income tax payable
$
415

Accrued expenses and other liabilities
1,878

Total liabilities
$
2,293

Net assets of discontinued operations
$
3,343


11


 
June 30, 2014
 
Three Months Ended
 
Six Months Ended
 
(in thousands)
Noninterest loss
$
(52
)
 
$
(14
)
Gain on disposal
51

 
51

(Loss) income before taxes
(1
)
 
37

Provision for income taxes
466

 
481

Net loss from discontinued operations
$
(467
)
 
$
(444
)

Note 5 — Securities

The following is a summary of securities available for sale as of June 30, 2015 and December 31, 2014: 
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
Mortgage-backed securities (1) (2)
$
379,574

 
$
1,374

 
$
1,380

 
$
379,568

Collateralized mortgage obligations (1)
154,968

 
1,061

 
660

 
155,369

U.S. government agency securities
63,969

 
4

 
1,312

 
62,661

SBA loan pool securities
71,960

 
83

 
357

 
71,686

Municipal bonds-tax exempt
3,589

 
37

 
—

 
3,626

Municipal bonds-taxable
15,607

 
271

 
46

 
15,832

Corporate bonds
17,019

 
1

 
44

 
16,976

U.S. treasury securities
161

 
1

 
—

 
162

Other securities
22,916

 
—

 
113

 
22,803

Total securities available for sale
$
729,763

 
$
2,832

 
$
3,912

 
$
728,683

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


12


The amortized cost and estimated fair value of securities as of June 30, 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 Cost
 
Estimated Fair Value
 
(in thousands)
Within one year
$
11,998

 
$
11,973

Over one year through five years
17,329

 
17,208

Over five years through ten years
98,196

 
97,498

Over ten years
44,782

 
44,264

Mortgage-backed securities
379,574

 
379,568

Collateralized mortgage obligations
154,968

 
155,369

Other securities
22,916

 
22,803

Total
$
729,763

 
$
728,683

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 six months ended June 30, 2015 and 2014.
    
Gross unrealized losses on securities available for sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of June 30, 2015 and December 31, 2014
 
Holding Period
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Number of Securities
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Number of Securities
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Number of Securities
 
(in thousands, except number of securities)
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
595

 
$
94,908

 
32

 
$
785

 
$
22,781

 
9

 
$
1,380

 
$
117,689

 
41

Collateralized mortgage obligations
114

 
28,201

 
8

 
546

 
28,654

 
12

 
660

 
56,855

 
20

U.S. government agency securities
394

 
29,596

 
11

 
918

 
30,061

 
10

 
1,312

 
59,657

 
21

SBA loan pool securities
19

 
13,971

 
3

 
338

 
11,362

 
4

 
357

 
25,333

 
7

Municipal bonds-taxable
46

 
6,086

 
5

 
—

 
—

 
—

 
46

 
6,086

 
5

Corporate bonds
17

 
5,004

 
1

 
27

 
7,971

 
2

 
44

 
12,975

 
3

Other securities
25

 
21,861

 
3

 
88

 
937

 
3

 
113

 
22,798

 
6

Total
$
1,210

 
$
199,627

 
63

 
$
2,702

 
$
101,766

 
40

 
$
3,912

 
$
301,393

 
103

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 June 30, 2015 and December 31, 2014 had investment grade ratings upon purchase. The issuers of these securities have not established

13


any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status as of June 30, 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 OTTI 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 June 30, 2015 and December 31, 2014 were not other-than-temporarily impaired, and therefore, no impairment charges as of June 30, 2015 and December 31, 2014 were warranted.

Realized gains and losses on sales of securities and proceeds from sales of securities were as follows for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Gross realized gains on sales of securities
$
2,067

 
$
365

 
$
4,262

 
$
1,786

Gross realized losses on sales of securities
(155
)
 
(1
)
 
(166
)
 
(1
)
Net realized gains on sales of securities
$
1,912

 
$
364

 
$
4,096

 
$
1,785

Proceeds from sales of securities
$
130,594

 
$
40,822

 
$
307,442

 
$
126,056


For the three months ended June 30, 2015, there was a $1.9 million net gain in earnings resulting from the sale of securities that had previously been recorded as net unrealized gains of $4.1 million in comprehensive income. For the three months ended June 30, 2014, there was a $364,000 net gain in earnings resulting from the sale of securities that had previously been recorded as net unrealized gains of $100,000 in comprehensive income.

For the six months ended June 30, 2015, there was a $4.1 million net gain in earnings resulting from the sale of securities that had previously been recorded as net unrealized gains of $1.2 million in comprehensive income. For the three months ended June 30, 2014, there was a $1.8 million net gain in earnings resulting from the sale of securities that had previously been recorded as net unrealized losses of $177,000 in comprehensive income.

Securities available for sale with market values of $71.1 million and $76.2 million as of June 30, 2015 and December 31, 2014, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.

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.


14


Purchased loans, which are loans we have acquired through our acquisition of other banks or purchased from other institutions, are stated at the principal amount outstanding, net of unearned discounts or unamortized premiums. All loans acquired in 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.

Purchased 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. Purchased non-impaired loans, together with originated loans, are referred to as non-purchased credit impaired ("Non-PCI") loans. Purchase discounts or premiums on Non-PCI 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.

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.


15


Loans receivable consisted of the following as of the dates indicated:
 
June 30, 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
$
690,097

 
$
9,358

 
$
699,455

 
$
675,072

 
$
10,343

 
$
685,415

Hospitality
492,289

 
10,345

 
502,634

 
454,499

 
12,862

 
467,361

Gas station
337,566

 
5,955

 
343,521

 
362,240

 
7,745

 
369,985

Other
840,735

 
5,885

 
846,620

 
842,126

 
10,680

 
852,806

Construction
21,310

 
—

 
21,310

 
9,517

 
—

 
9,517

Residential property
171,071

 
2,055

 
173,126

 
120,932

 
2,499

 
123,431

Total real estate loans
2,553,068

 
33,598

 
2,586,666

 
2,464,386

 
44,129

 
2,508,515

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial term
111,676

 
267

 
111,943

 
116,073

 
327

 
116,400

Commercial lines of credit
115,382

 
—

 
115,382

 
93,860

 
—

 
93,860

International loans
33,864

 
—

 
33,864

 
38,929

 
—

 
38,929

Total commercial and industrial loans
260,922

 
267

 
261,189

 
248,862

 
327

 
249,189

Consumer loans
26,274

 
43

 
26,317

 
27,512

 
45

 
27,557

Total gross loans
2,840,264

 
33,908

 
2,874,172

 
2,740,760

 
44,501

 
2,785,261

Allowance for loans losses
(49,468
)
 
(1,352
)
 
(50,820
)
 
(51,640
)
 
(1,026
)
 
(52,666
)
Deferred loan costs
2,734

 
—

 
2,734

 
3,237

 
—

 
3,237

Loans receivable, net
$
2,793,530

 
$
32,556

 
$
2,826,086

 
$
2,692,357

 
$
43,475

 
$
2,735,832

 
(1) 
Includes owner-occupied property loans of $1.16 billion and $1.12 billion as of June 30, 2015 and December 31, 2014, respectively.

Accrued interest on loans receivable was $6.1 million and $6.4 million at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015 and December 31, 2014, loans receivable totaling $735.2 million and $840.0 million respectively, were pledged to secure advances from the FHLB and the FBR discount window.


16


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 June 30, 2015 and 2014:
 
Real Estate
 
Commercial and Industrial
 
Consumer
 
Total Non-PCI
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
Balance at beginning of period
$
7,226

 
$
1,451

 
$
—

 
$
8,677

Origination of loans held for sale
6,807

 
8,027

 
—

 
14,834

Reclassification from loans receivable to loans held for sale
360

 
—

 
—

 
360

Sales of loans held for sale
(12,321
)
 
(7,368
)
 
—

 
(19,689
)
Principal payoffs and amortization
(5
)
 
(19
)
 
—

 
(24
)
Balance at end of period
$
2,067

 
$
2,091

 
$
—

 
$
4,158

June 30, 2014
 
 
 
 
 
 
 
Balance at beginning of period
$
390

 
$
—

 
$
—

 
$
390

Origination of loans held for sale
8,124

 
2,091

 
—

 
10,215

Sales of loans held for sale
(5,944
)
 
(815
)
 
—

 
(6,759
)
Principal payoffs and amortization
(2
)
 
(2
)
 
—

 
(4
)
Balance at end of period
$
2,568

 
$
1,274

 
$
—

 
$
3,842


For the three months ended June 30, 2015, a Non-PCI loan receivable of $360,000 was reclassified as loans held for sale and Non-PCI loans held for sale of $19.7 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 June 30, 2015. For the three months ended June 30, 2014, there was no reclassification of Non-PCI loans receivable as Non-PCI loans held for sale and Non-PCI loans held for sale of $6.8 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 June 30, 2014.

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 six months ended June 30, 2015 and 2014:
 
Real Estate
 
Commercial and Industrial
 
Consumer
 
Total Non-PCI
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
Balance at beginning of period
$
3,323

 
$
2,128

 
$
—

 
$
5,451

Origination of loans held for sale
23,734

 
14,208

 
—

 
37,942

Reclassification from loans receivable to loans held for sale
360

 
—

 
—

 
360

Sales of loans held for sale
(25,335
)
 
(14,208
)
 
—

 
(39,543
)
Principal payoffs and amortization
(15
)
 
(37
)
 
—

 
(52
)
Balance at end of period
$
2,067

 
$
2,091

 
$
—

 
$
4,158

June 30, 2014
 
 
 
 
 
 
 
Balance at beginning of period
$
—

 
$
—

 
$
—

 
$
—

Origination of loans held for sale
14,393

 
2,176

 
—

 
16,569

Sales of loans held for sale
(11,818
)
 
(899
)
 
—

 
(12,717
)
Principal payoffs and amortization
(7
)
 
(3
)
 
—

 
(10
)
Balance at end of period
$
2,568

 
$
1,274

 
$
—

 
$
3,842


For the six months ended June 30, 2015, a Non-PCI loan receivable of $360,000 was reclassified as loans held for sale and Non-PCI loans held for sale of $39.5 million were sold. In addition, there was no reclassification from Non-PCI loans held for sale to Non-PCI loans receivable for the six months ended June 30, 2015. For the six months ended June 30, 2014, there was no reclassification of Non-PCI loans receivable as Non-PCI loans held for sale, and Non-PCI loans held for sale of $12.7

17


million were sold. In addition, there was no reclassification from Non-PCI loans held for sale to Non-PCI loans receivable for the six months ended June 30, 2014.

Activity in the allowance for loan losses and allowance for off-balance sheet items was as follows for the periods indicated:
 
As of and for the
Three Months Ended
 
As of and for the
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
Non-PCI Loans
 
PCI Loans
 
Total
 
 
Non-PCI Loans
 
PCI Loans
 
Total
 
 
(in thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
51,515

 
$
1,436

 
$
52,951

 
$
56,593

 
$
51,640

 
$
1,026

 
$
52,666

 
$
57,555

Charge-offs
(1,221
)
 
52

 
(1,169
)
 
(2,547
)
 
(1,255
)
 
—

 
(1,255
)
 
(4,151
)
Recoveries on loans previously charged off
1,793

 
(352
)
 
1,441

 
1,741

 
3,485

 
—

 
3,485

 
5,992

Net loan recoveries (charge-offs)
572

 
(300
)
 
272

 
(806
)
 
2,230

 
—

 
2,230

 
1,841

(Negative provision) provision charged to operating expense
(2,619
)
 
216

 
(2,403
)
 
(3,901
)
 
(4,402
)
 
$
326

 
(4,076
)
 
(7,510
)
Balance at end of period
$
49,468

 
$
1,352

 
$
50,820

 
$
51,886

 
$
49,468

 
$
1,352

 
$
50,820

 
$
51,886

Allowance for off-balance sheet items:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
1,054

 
$
—

 
$
1,054

 
$
1,557

 
$
1,366

 
$
—

 
$
1,366

 
$
1,248

(Negative provision) provision charged to operating expense
(92
)
 
—

 
(92
)
 
35

 
(404
)
 
$
—

 
(404
)
 
344

Balance at end of period
$
962

 
$
—

 
$
962

 
$
1,592

 
$
962

 
$
—

 
$
962

 
$
1,592


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 June 30, 2015 and 2014, the allowance for off-balance sheet items amounted to $1.0 million and $1.6 million, respectively. Net adjustments to the allowance for off-balance sheet items are included in the provision for loan losses.


18


The following table details the information on the allowance for loan losses by portfolio segment for the three months ended June 30, 2015 and 2014:
 
Real Estate
 
Commercial and Industrial
 
Consumer
 
Unallocated
 
Total
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance
$
42,550

 
$
7,786

 
$
185

 
$
994

 
$
51,515

Charge-offs
(101
)
 
(1,120
)
 
—

 
—

 
(1,221
)
Recoveries on loans previously charged off
1,263

 
530

 
—

 
—

 
1,793

(Negative provision) provision
(3,814
)
 
1,049

 
(13
)
 
159

 
(2,619
)
Ending balance
$
39,898

 
$
8,245

 
$
172

 
$
1,153

 
$
49,468

Ending balance: individually evaluated for impairment
$
3,798

 
$
1,503

 
$
—

 
$
—

 
$
5,301

Ending balance: collectively evaluated for impairment
$
36,100

 
$
6,742

 
$
172

 
$
1,153

 
$
44,167

Loans receivable:
 
 
 
 
 
 
 
 
 
Ending balance
$
2,553,068

 
$
260,922

 
$
26,274

 
$
—

 
$
2,840,264

Ending balance: individually evaluated for impairment
$
32,795

 
$
10,401

 
$
1,807

 
$
—

 
$
45,003

Ending balance: collectively evaluated for impairment
$
2,520,273

 
$
250,521

 
$
24,467

 
$
—

 
$
2,795,261

Allowance for loan losses on PCI loans:
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,318

 
$
118

 
$
—

 
$
—

 
$
1,436

Charge-offs
52

 
—

 
—

 
—

 
52

Recoveries on loans previously charged off
$
—

 
(352
)
 
—

 
—

 
(352
)
Provision
(81
)
 
297

 
—

 
—

 
216

Ending balance: acquired with deteriorated credit quality
$
1,289

 
$
63

 
$
—

 
$
—

 
$
1,352

PCI loans receivable:
 
 
 
 
 
 
 
 
 
Ending balance: acquired with deteriorated credit quality
$
33,598

 
$
267

 
$
43

 
$
—

 
$
33,908

June 30, 2014
 
 
 
 
 
 
 
 
 
Allowance for loan losses on Non-PCI loans:
 
 
 
 
 
 
 
 
 
Beginning balance
$
44,230

 
$
10,425

 
$
633

 
$
1,305

 
$
56,593

Charge-offs
(60
)
 
(2,474
)
 
(13
)
 
—

 
(2,547
)
Recoveries on loans previously charged off
87

 
1,652

 
2

 
—

 
1,741

(Negative provision) provision
(3,954
)
 
135

 
(82
)
 
—

 
(3,901
)
Ending balance
$
40,303

 
$
9,738

 
$
540

 
$
1,305

 
$
51,886

Ending balance: individually evaluated for impairment
$
2,448

 
$
2,605

 
$
113

 
$
—

 
$
5,166

Ending balance: collectively evaluated for impairment
$
37,855

 
$
7,133

 
$
427

 
$
1,305

 
$
46,720

Non-PCI loans receivable:
 
 
 
 
 
 
 
 
 
Ending balance
$
2,090,083

 
$
230,309

 
$
28,843

 
$
—

 
$
2,349,235

Ending balance: individually evaluated for impairment
$
35,616

 
$
10,741

 
$
1,529

 
$
—

 
$
47,886

Ending balance: collectively evaluated for impairment
$
2,054,467

 
$
219,568

 
$
27,314

 
$
—

 
$
2,301,349



19


The following table details the information on the allowance for loan losses by portfolio segment for the six months ended June 30, 2015 and 2014:
 
Real Estate
 
Commercial and Industrial
 
Consumer
 
Unallocated
 
Total
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance
$
41,194

 
$
9,142

 
$
220

 
$
1,084

 
$
51,640

Charge-offs
(101
)
 
(1,154
)
 
—

 
—

 
(1,255
)
Recoveries on loans previously charged off
1,295

 
2,190

 
—

 
—

 
3,485

(Negative provision) provision
(2,490
)
 
(1,933
)
 
(48
)
 
69

 
(4,402
)
Ending balance
$
39,898

 
$
8,245

 
$
172

 
$
1,153

 
$
49,468

Ending balance: individually evaluated for impairment
$
3,798

 
$
1,503

 
$
—

 
$
—

 
$
5,301

Ending balance: collectively evaluated for impairment
$
36,100

 
$
6,742

 
$
172

 
$
1,153

 
$
44,167

Loans receivable:
 
 
 
 
 
 
 
 
 
Ending balance
$
2,553,068

 
$
260,922

 
$
26,274

 
$
—

 
$
2,840,264

Ending balance: individually evaluated for impairment
$
32,795

 
$
10,401

 
$
1,807

 
$
—

 
$
45,003

Ending balance: collectively evaluated for impairment
$
2,520,273

 
$
250,521

 
$
24,467

 
$
—

 
$
2,795,261

Allowance for loan losses on PCI loans:
 
 
 
 
 
 
 
 
 
Beginning balance
$
895

 
$
131

 
$
—

 
$
—

 
$
1,026

Provision
394

 
(68
)
 
—

 
—

 
326

Ending balance: acquired with deteriorated credit quality
$
1,289

 
$
63

 
$
—

 
$
—

 
$
1,352

PCI loans receivable:
 
 
 
 
 
 
 
 
 
Ending balance: acquired with deteriorated credit quality
$
33,598

 
$
267

 
$
43

 
$
—

 
$
33,908

June 30, 2014
 
 
 
 
 
 
 
 
 
Allowance for loan losses on Non-PCI loans:
 
 
 
 
 
 
 
 
 
Beginning balance
$
43,550

 
$
11,287

 
$
1,427

 
$
1,291

 
$
57,555

Charge-offs
(1,188
)
 
(2,896
)
 
(67
)
 
—

 
(4,151
)
Recoveries on loans previously charged off
3,005

 
2,973

 
14

 
—

 
5,992

(Negative provision) provision
(5,064
)
 
(1,626
)
 
(834
)
 
14

 
(7,510
)
Ending balance
$
40,303

 
$
9,738

 
$
540

 
$
1,305

 
$
51,886

Ending balance: individually evaluated for impairment
$
2,448

 
$
2,605

 
$
113

 
$
—

 
$
5,166

Ending balance: collectively evaluated for impairment
$
37,855

 
$
7,133

 
$
427

 
$
1,305

 
$
46,720

Non-PCI loans receivable:
 
 
 
 
 
 
 
 
 
Ending balance
$
2,090,083

 
$
230,309

 
$
28,843

 
$
—

 
$
2,349,235

Ending balance: individually evaluated for impairment
$
35,616

 
$
10,741

 
$
1,529

 
$
—

 
$
47,886

Ending balance: collectively evaluated for impairment
$
2,054,467

 
$
219,568

 
$
27,314

 
$
—

 
$
2,301,349


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 loan in our loan portfolio. A third party loan review is performed 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

20


all performing loans with no credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans.
Special Mention: A special mention credit, grade 5, has potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses may result in deterioration of the repayment prospects of the debt and result in a Substandard classification. Loans that have significant actual, not potential, weaknesses are considered more severely classified.
Substandard: A substandard credit, grade 6, has a well-defined weakness that jeopardizes the liquidation of the debt. A credit graded Substandard is not protected by the sound worth and paying capacity of the borrower, or of the value and type of collateral pledged. With a Substandard loan, there is a distinct possibility that the Bank will sustain some loss if the weaknesses or deficiencies are not corrected.
Doubtful: A doubtful credit, grade 7, is one that has critical weaknesses that would make the collection or liquidation of the full amount due improbable. However, there may be pending events which may work to strengthen the credit, and therefore the amount or timing of a possible loss cannot be determined at the current time.
Loss: A loan classified as loss, grade 8, is considered uncollectible and of such little value that their continuance as an active bank asset is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans classified as loss are charged off in a timely manner.

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


21


     As of June 30, 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)
June 30, 2015
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
676,646

 
$
11,599

 
$
1,852

 
$
690,097

Hospitality
440,360

 
41,436

 
10,493

 
492,289

Gas station
321,327

 
9,515

 
6,724

 
337,566

Other
823,627

 
6,222

 
10,886

 
840,735

Construction
21,310

 
—

 
—

 
21,310

Residential property
169,287

 
62

 
1,722

 
171,071

Commercial and industrial loans:
 
 
 
 
 
 

Commercial term
101,985

 
1,373

 
8,318

 
111,676

Commercial lines of credit
112,553

 
195

 
2,634

 
115,382

International loans
33,864

 
—

 
—

 
33,864

Consumer loans
24,034

 
111

 
2,129

 
26,274

Total Non-PCI loans
$
2,724,993

 
$
70,513

 
$
44,758

 
$
2,840,264

December 31, 2014
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
654,360

 
$
18,013

 
$
2,699

 
$
675,072

Hospitality
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

 

22


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)
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
$
543

 
$
177

 
$
1,166

 
$
1,886

 
$
688,211

 
$
690,097

 
$
—

Hospitality
3,837

 
—

 
4,356

 
8,193

 
484,096

 
492,289

 
—

Gas station
1,085

 
1,687

 
842

 
3,614

 
333,952

 
337,566

 
—

Other
1,209

 
447

 
3,477

 
5,133

 
835,602

 
840,735

 
—

Construction
—

 
—

 
—

 
—

 
21,310

 
21,310

 
—

Residential property
—

 
—

 
108

 
108

 
170,963

 
171,071

 
—

Commercial and industrial loans:
 
 
 
 
 
 


 
 
 


 
 
Commercial term
390

 
337

 
1,991

 
2,718

 
108,958

 
111,676

 
—

Commercial lines of credit
500

 
570

 
220

 
1,290

 
114,092

 
115,382

 
—

International loans
—

 
—

 
—

 
—

 
33,864

 
33,864

 
—

Consumer loans
250

 
—

 
338

 
588

 
25,686

 
26,274

 
—

Total Non-PCI loans
$
7,814

 
$
3,218

 
$
12,498

 
$
23,530

 
$
2,816,734

 
$
2,840,264

 
$
—

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
$
1,554

 
$
281

 
$
1,920

 
$
3,755

 
$
671,317

 
$
675,072

 
$
—

Hospitality
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 the Bank will be unable to collect all interest and principal payments per contractual terms of the loan agreement, unless the loan is both well-collateralized and in the process of collection; or they are classified as Troubled Debt Restructurings (“TDRs”) because, due to the financial difficulties of the borrowers, we have granted concessions to the borrowers we would not otherwise consider; or when current information or events make it unlikely to collect in full according to the contractual terms of the loan agreements; or there is a deterioration in the borrower’s financial condition that raises uncertainty as to timely collection of either principal or interest; or full payment of both interest and principal is in doubt according to the original contractual terms.
We evaluate loan impairment in accordance with applicable GAAP. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, less estimated costs to sell. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency is either charged off against the allowance for loan losses or we establish a specific allocation in the allowance for loan losses. Additionally, loans that are considered impaired are specifically excluded from the quarterly migration analysis when determining the amount of the allowance for loan losses required for the period.

23


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

The following tables provide information on impaired loans (excluding PCI loans), disaggregated by loan class, as of the dates indicated:
 
Recorded
Investment
 
Unpaid 
Principal
Balance
 
With No
Related
Allowance
Recorded
 
With an
Allowance
Recorded
 
Related
Allowance
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
Retail
$
3,223

 
$
3,485

 
$
3,046

 
$
177

 
$
42

Hospitality
7,109

 
7,796

 
5,329

 
1,780

 
3,276

Gas station
8,538

 
9,299

 
8,104

 
434

 
127

Other
11,247

 
12,893

 
9,783

 
1,464

 
353

Residential property
2,678

 
2,843

 
2,678

 
—

 
—

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
Commercial term
7,055

 
7,492

 
3,640

 
3,415

 
1,481

Commercial lines of credit
2,064

 
2,186

 
417

 
1,647

 
5

International loans
1,282

 
1,282

 
597

 
685

 
17

Consumer loans
1,807

 
2,004

 
1,807

 
—

 
—

Total Non-PCI loans
$
45,003

 
$
49,280

 
$
35,401

 
$
9,602

 
$
5,301

December 31, 2014
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
Retail
$
4,436

 
$
4,546

 
$
1,938

 
$
2,498

 
$
220

Hospitality
5,835

 
6,426

 
4,581

 
1,254

 
1,828

Gas station
8,974

 
9,594

 
8,526

 
448

 
150

Other
10,125

 
11,591

 
8,890

 
1,235

 
319

Residential property
3,127

 
3,268

 
3,127

 
—

 
—

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
Commercial term
7,614

 
8,133

 
2,999

 
4,615

 
2,443

Commercial lines of credit
466

 
575

 
466

 
—

 
—

International loans
3,546

 
3,546

 
2,628

 
918

 
286

Consumer loans
1,742

 
1,907

 
1,742

 
—

 
—

Total Non-PCI loans
$
45,865

 
$
49,586

 
$
34,897

 
$
10,968

 
$
5,246


24


 
Average Recorded Investment
for the Three Months Ended
 
Interest Income Recognized 
for the Three Months Ended
 
Average Recorded Investment 
for the Six Months Ended
 
Interest Income Recognized
for the Six Months Ended
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
4,278

 
$
126

 
$
5,134

 
$
198

Hospitality
7,128

 
118

 
6,700

 
300

Gas station
8,712

 
189

 
8,352

 
282

Other
11,294

 
196

 
10,774

 
404

Residential property
2,689

 
28

 
2,896

 
60

Commercial and industrial loans:
 
 
 
 
 
 
 
Commercial term
7,190

 
97

 
7,634

 
196

Commercial lines of credit
2,071

 
29

 
2,255

 
36

International loans
1,182

 
—

 
1,271

 
—

Consumer loans
1,812

 
17

 
1,821

 
34

Total Non-PCI loans
$
46,356

 
$
800

 
$
46,837

 
$
1,510

June 30, 2014
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
5,286

 
$
108

 
$
6,295

 
$
179

Hospitality
4,712

 
80

 
4,121

 
129

Gas station
12,432

 
181

 
10,944

 
369

Other
10,624

 
228

 
11,124

 
451

Residential property
2,833

 
30

 
2,692

 
57

Commercial and industrial loans:
 
 
 
 
 
 
 
Commercial term
9,085

 
140

 
10,952

 
317

Commercial lines of credit
713

 
11

 
729

 
25

International loans
1,131

 
—

 
1,130

 
—

Consumer loans
1,535

 
16

 
1,547

 
30

Total Non-PCI loans
$
48,351

 
$
794

 
$
49,534

 
$
1,557


The following is a summary of interest foregone on impaired loans (excluding PCI loans) for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
(in thousands)
Interest income that would have been recognized had impaired loans performed in accordance with their original terms
$
1,177

 
$
1,215

 
$
1,917

 
$
2,427

Less: Interest income recognized on impaired loans
(800
)
 
(794
)
 
(1,510
)
 
(1,557
)
Interest foregone on impaired loans
$
377

 
$
421

 
$
407

 
$
870

    
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

25


days past due, unless management believes the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on nonaccrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Nonaccrual loans may be restored to accrual status when principal and interest payments become current and full repayment is expected.
    
The following table details nonaccrual loans (excluding PCI loans), disaggregated by loan class, as of the dates indicated:
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
Real estate loans:
 
 
 
Commercial property
 
 
 
Retail
$
1,599

 
$
2,160

Hospitality
6,133

 
3,835

Gas station
5,664

 
3,478

Other
6,404

 
4,961

Residential property
1,141

 
1,588

Commercial and industrial loans:
 
 
 
Commercial term
5,108

 
7,052

Commercial lines of credit
417

 
466

Consumer loans
1,557

 
1,742

Total nonaccrual Non-PCI loans
$
28,023

 
$
25,282


The following table details nonperforming assets (excluding PCI loans) as of the dates indicated:
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
Nonaccrual Non-PCI loans
$
28,023

 
$
25,282

Loans 90 days or more past due and still accruing
—

 
—

Total nonperforming Non-PCI loans
28,023

 
25,282

OREO
11,857

 
15,790

Total nonperforming assets
$
39,880

 
$
41,072


As of June 30, 2015, OREO consisted of 19 properties with a combined carrying value of $11.9 million. Of the $11.9 million, $10.6 million were OREO 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, OREO consisted of 25 properties with a combined carrying value of $15.8 million. Of the $15.8 million, $15.3 million were OREO acquired in the CBI acquisition or were obtained as a result of PCI loan collateral foreclosures subsequent to the acquisition date.


26


Troubled Debt Restructurings
    
The following table details TDRs (excluding PCI loans), disaggregated by concession type and by loan type, as of June 30, 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)
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
$
—

 
$
—

 
$
—

 
$
371

 
$
371

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Hospitality
1,852

 
(74
)
 
—

 
—

 
1,778

 
—

 
—

 
—

 
—

 
—

Gas station
2,868

 
—

 
—

 
—

 
2,868

 
349

 
—

 
—

 
—

 
349

Other
920

 
1,749

 
384

 
16

 
3,069

 
2,249

 
—

 
760

 
1,370

 
4,379

Residential property
716

 
—

 
—

 
—

 
716

 
—

 
—

 
—

 
304

 
304

Commercial and industrial loans:
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 


Commercial term
10

 
5

 
2,396

 
1,557

 
3,968

 
49

 
220

 
307

 
1,085

 
1,661

Commercial lines of credit
220

 
—

 
114

 
83

 
417

 
1,647

 
—

 
—

 
—

 
1,647

Consumer loans
—

 
—

 
123

 
—

 
123

 
250

 
—

 
—

 
—

 
250

Total Non-PCI loans
$
6,586

 
$
1,680

 
$
3,017

 
$
2,027

 
$
13,310

 
$
4,544

 
$
220

 
$
1,067

 
$
2,759

 
$
8,590

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
$
—

 
$
—

 
$
—

 
$
2,032

 
$
2,032

 
$
306

 
$
—

 
$
—

 
$
—

 
$
306

Hospitality
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 June 30, 2015 and December 31, 2014, total TDRs, excluding loans held for sale, were $21.9 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 June 30, 2015 and December 31, 2014, TDRs, excluding loans held for sale, were subjected to specific impairment analysis, and $2.0 million and $2.9 million, respectively, of reserves relating to these loans were included in the allowance for loan losses.


27


The following table details TDRs (excluding PCI loans), disaggregated by loan class, for the three months ended June 30, 2015 and 2014:
 
June 30, 2015
 
June 30, 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
 
 
 
 
 
 
 
 
 
 
 
Retail (1)
—

 
$
—

 
$
—

 
1

 
$
2,002

 
$
1,882

Other (2)
1

 
313

 
313

 
1

 
65

 
62

Residential property (3)
—

 
—

 
—

 
1

 
316

 
313

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial term (4)
1

 
9

 
9

 
2

 
59

 
53

Commercial lines of credit (5)
—

 
—

 
—

 
1

 
146

 
140

Consumer loans (6)
1

 
250

 
250

 
—

 
—

 
—

Total Non-PCI loans
3

 
$
572

 
$
572

 
6

 
$
2,588

 
$
2,450

                               
(1) 
Includes a modification of $1.9 million through an extension of maturity for the three months ended June 30, 2014.
(2) 
Includes a modification of $313,000 through a payment deferral for the three months ended June 30, 2015 and a modification of $62,000 through an extension of maturity for the three months ended June 30, 2014.
(3) 
Includes a modification of $313,000 through an extension of maturity for the three months ended June 30, 2014.
(4) 
Includes a modification of $9,000 through a reduction of principal or accrued interest for the three months ended June 30, 2015 and modifications of $41,000 through a payment deferral and $12,000 through a reduction of principal or accrued interest for the three months ended June 30, 2014.
(5) 
Includes a modification of $140,000 through a reduction of principal or accrued interest for the three months ended June 30, 2014.
(6) 
Includes a modification of $250,000 through a payment deferral for the three months ended June 30, 2015.

During the three months ended June 30, 2015, we restructured monthly payments on three loans, with a net carrying value of $572,000 as of June 30, 2015, through temporary payment structure modifications. 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.


28


The following table details TDRs (excluding PCI loans), disaggregated by loan class, for the six months ended June 30, 2015 and 2014:
 
June 30, 2015
 
June 30, 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
 
 
 
 
 
 
 
 
 
 
 
Retail (1)
—

 
$
—

 
$
—

 
1

 
$
2,002

 
$
1,882

Other (2)
1

 
313

 
313

 
2

 
1,011

 
1,005

Residential property (3)
—

 
—

 
—

 
1

 
317

 
313

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial term (4)
5

 
553

 
486

 
5

 
327

 
287

Commercial lines of credit (5)
—

 
—

 
—

 
2

 
400

 
378

Consumer loans (6)
1

 
250

 
250

 
—

 
—

 
—

Total Non-PCI loans
7

 
$
1,116

 
$
1,049

 
11

 
$
4,057

 
$
3,865

                              
(1) 
Includes a modification of $1.9 million through an extension of maturity for the six months ended June 30, 2014.
(2) 
Includes a modification of $313,000 through a payment deferral for the six months ended June 30, 2015 and modifications of $62,000 through an extension of maturity and $943,000 through a payment deferral for the six months ended June 30, 2014.
(3) 
Includes a modification of $313,000 through an extension of maturity for the six months ended June 30, 2014.
(4) 
Includes modifications of $476,000 through extensions of maturity and a modification of $9,000 through a reduction of principal or accrued interest for the six months ended June 30, 2015, and modifications of $140,000 through a reduction of principal or accrued interest and $238,000 through a payment deferral for the six months ended June 30, 2014.
(5) 
Includes modifications of $140,000 through a reduction of principal or accrued interest and $238,000 through a payment deferral for the six months ended June 30, 2014.
(6) 
Includes a modification of $250,000 through a payment deferral for the three months ended June 30, 2015.

The following table details TDRs (excluding PCI loans) that defaulted subsequent to the modifications occurring within the previous twelve months, disaggregated by loan class, for the three and six months ended June 30, 2015 and 2014, respectively:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
(in thousands, except number of loans)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
—

 
$
—

 
—
 
$
—

 
—

 
$
—

 
1

 
$
309

Hospitality
1

 
821

 
—
 
—

 
1

 
821

 
1

 
996

Gas station
1

 
1,856

 
—
 
—

 
1

 
1,856

 
—

 
—

Other
1

 
379

 
—
 
—

 
1

 
379

 
1

 
364

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial term
—

 
—

 
2
 
212

 
—

 
—

 
2

 
212

Commercial lines of credit
—

 
—

 
1
 
140

 
—

 
—

 
1

 
140

Total Non-PCI loans
3

 
$
3,056

 
3

 
$
352

 
3

 
$
3,056

 
6

 
$
2,021



29


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. Outstanding balance of PCI loans, the undiscounted sum of all amounts including amounts deemed principal, interest, fees and penalties, were $49.0 million and $64.3 million, respectively as of June 30, 2015 and December 31, 2014. The following table summarizes the changes in carrying value of PCI loans during the six months ended June 30, 2015:
 
Carrying Amount
 
Accretable Yield
 
(in thousands)
Balance at January 1, 2015
$
43,475

 
$
(11,025
)
Accretion
1,758

 
1,758

Payments received
(13,792
)
 
—

Disposal/transfer to OREO
1,441

 
—

Change in expected cash flows, net
—

 
92

Provision for credit losses
(326
)
 
—

Balance at June 30, 2015
$
32,556

 
$
(9,175
)

As of June 30, 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)
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
1,199

 
$
177

 
$
7,982

 
$
9,358

 
$
257

 
$
9,101

Hospitality
191

 
—

 
10,154

 
10,345

 
317

 
10,028

Gas station
—

 
188

 
5,767

 
5,955

 
503

 
5,452

Other
51

 
—

 
5,834

 
5,885

 
16

 
5,869

Residential property
—

 
—

 
2,055

 
2,055

 
196

 
1,859

Commercial and industrial loans:
 
 
 
 
 
 


 
 
 


Commercial term
—

 
—

 
267

 
267

 
63

 
204

Consumer loans
—

 
—

 
43

 
43

 
—

 
43

Total PCI loans
$
1,441

 
$
365


$
32,102

 
$
33,908

 
$
1,352

 
$
32,556

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
1,207

 
$
219

 
$
8,917

 
$
10,343

 
$
401

 
$
9,942

Hospitality
—

 
—

 
12,862

 
12,862

 
99

 
12,763

Gas station
—

 
1,242

 
6,503

 
7,745

 
302

 
7,443

Other
—

 
—

 
10,680

 
10,680

 
65

 
10,615

Residential property
—

 
—

 
2,499

 
2,499

 
28

 
2,471

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

30


loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans are classified as nonaccrual loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated. As of June 30, 2015 and December 31, 2014, we had no PCI loans on nonaccrual status and included in the delinquency table below.

The following table presents a summary of the borrowers' underlying payment status of PCI loans as of the dates indicated:
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due
 
Total Past Due
 
Current
 
Total
 
Allowance Amount
 
Total
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
$
1,759

 
$
—

 
$
4,851

 
$
6,610

 
$
2,748

 
$
9,358

 
$
257

 
$
9,101

Hospitality
36

 
—

 
5,614

 
5,650

 
4,695

 
10,345

 
317

 
10,028

Gas station
63

 
—

 
1,874

 
1,937

 
4,018

 
5,955

 
503

 
5,452

Other
8

 
—

 
5,330

 
5,338

 
547

 
5,885

 
16

 
5,869

Residential property
—

 
—

 
1,406

 
1,406

 
649

 
2,055

 
196

 
1,859

Commercial and industrial loans:
 
 
 
 
 
 

 
 
 

 
 
 

Commercial term
—

 
—

 
70

 
70

 
197

 
267

 
63

 
204

Consumer loans
—

 
—

 
43

 
43

 
—

 
43

 
—

 
43

Total PCI loans
$
1,866

 
$
—

 
$
19,188

 
$
21,054

 
$
12,854

 
$
33,908

 
$
1,352

 
$
32,556

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
$
93

 
$
287

 
$
5,623

 
$
6,003

 
$
4,340

 
$
10,343

 
$
401

 
$
9,942

Hospitality
312

 
—

 
7,670

 
7,982

 
4,880

 
12,862

 
99

 
12,763

Gas station
1,139

 
1,053

 
3,178

 
5,370

 
2,375

 
7,745

 
302

 
7,443

Other
—

 
—

 
10,119

 
10,119

 
561

 
10,680

 
65

 
10,615

Residential property
—

 
—

 
1,722

 
1,722

 
777

 
2,499

 
28

 
2,471

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 six months ended June 30, 2015 and 2014 were as follows:
 
2015
 
2014
 
(in thousands)
Servicing assets:
 
 
 
Balance at beginning of period
$
13,773

 
$
6,833

Addition related to sale of SBA loans
1,181

 
413

Amortization
(1,829
)
 
(891
)
Balance at end of period
$
13,125

 
$
6,355

Servicing liabilities:
 
 
 
Balance at beginning of period
$
5,971

 
$
106

Amortization
(603
)
 
(3
)
Balance at end of period
$
5,368

 
$
103



31


At June 30, 2015 and 2014, we serviced loans sold to unaffiliated parties in the amounts of $486.1 million and $333.0 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 percent from 80 percent. 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 June 30, 2015, the FDIC loss sharing liability was a net payable to the FDIC of $116,000, which consisted of $806,000 of FDIC recoveries partially offset by $690,000 of reimbursable expenses owed to the Bank. Of the $116,000 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 expenses for the continuing operations were $9.6 million and $17.2 million for the three and six months ended June 30, 2015, respectively, compared to $6.9 million and $14.7 million for the same periods in 2014. The effective income tax rates were 40.75 percent and 40.66 percent, respectively, for the three and six months ended June 30, 2015, compared to 37.37 percent and 39.56 percent for the same periods in 2014. Management concluded that no valuation allowance is required for the deferred tax assets as of June 30, 2015.

As of June 30, 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 June 30, 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 of Trust Preferred Securities (“TPS”) at 6.26 percent fixed rate for the first five years and a variable rate at the 3 month LIBOR plus 140 basis 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 amortization was $41,000 and $79,000 for the three and six months ended June 30, 2015.

Rescinded Stock Obligation

Hanmi Financial 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 June 30, 2015 were $150,000 and $65,000, respectively and were $933,000 and $288,000, respectively, as of December 31, 2014.


32


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.

Note 10 – Accumulated Other Comprehensive Income

Activity in accumulated other comprehensive income for the three months ended June 30, 2015 and 2014 was as follows:
 
Unrealized Gains
and Losses on
Available for Sale
Securities
 
Unrealized Gains
and Losses on
Interest-Only
Strip
 
Tax Benefit (Expense)
 
Total
 
(in thousands)
For the three months ended June 30, 2015
 
 
 
 
 
 
 
Balance at beginning of period
$
8,874

 
$
16

 
$
(2,691
)
 
$
6,199

Other comprehensive income before reclassification
(8,041
)
 
—

 
4,177

 
(3,864
)
Reclassification from accumulated other comprehensive income
(1,912
)
 
—

 
—

 
(1,912
)
Period change
(9,953
)
 
—

 
4,177

 
(5,776
)
Balance at end of period
$
(1,079
)
 
$
16

 
$
1,486

 
$
423

For the three months ended June 30, 2014
 
 
 
 
 
 
 
Balance at beginning of period
$
(11,510
)
 
$
17

 
$
5,984

 
$
(5,509
)
Other comprehensive income before reclassification
6,340

 
—

 
(2,617
)
 
3,723

Reclassification from accumulated other comprehensive income
(364
)
 
—

 
—

 
(364
)
Period change
5,976

 
—

 
(2,617
)
 
3,359

Balance at end of period
$
(5,534
)
 
$
17

 
$
3,367

 
$
(2,150
)

For the three months ended June 30, 2015, there was a $1.9 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $1.9 million reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities under noninterest income. The securities sold had a recorded unrealized gain of $4.1 million in accumulated other comprehensive income as of March 31, 2015.

For the three months ended June 30, 2014, there was a $364,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $364,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities under noninterest

33


income. The securities sold had a recorded unrealized gain of $100,000 in accumulated other comprehensive income as of March 31, 2014.

Activity in accumulated other comprehensive income for the six months ended June 30, 2015 and 2014 was as follows:
 
Unrealized Gains
and Losses  on
Available for Sale
Securities
 
Unrealized Gains
and Losses on
Interest-Only
Strip
 
Tax Benefit
(Expense)
 
Total
 
(in thousands)
For the six months ended June 30, 2015
 
 
 
 
 
 
 
Balance at beginning of period
$
(985
)
 
$
16

 
$
1,432

 
$
463

Other comprehensive income before reclassification
4,002

 
—

 
54

 
4,056

Reclassification from accumulated other comprehensive income
(4,096
)
 
—

 
—

 
(4,096
)
Period change
(94
)
 
—

 
54

 
(40
)
Balance at end of period
$
(1,079
)
 
$
16

 
$
1,486

 
$
423

For the six months ended June 30, 2014
 
 
 
 
 
 
 
Balance at beginning of period
$
(18,187
)
 
$
16

 
$
8,791

 
$
(9,380
)
Other comprehensive income before reclassification
14,438

 
1

 
(5,424
)
 
9,015

Reclassification from accumulated other comprehensive income
(1,785
)
 
—

 
—

 
(1,785
)
Period change
12,653

 
1

 
(5,424
)
 
7,230

Balance at end of period
$
(5,534
)
 
$
17

 
$
3,367

 
$
(2,150
)

For the six months ended June 30, 2015, there was a $4.1 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $4.1 million reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities under noninterest income. The securities sold had a recorded unrealized gain of $1.2 million in accumulated other comprehensive income as of December 31, 2014.

For the six months ended June 30, 2014, there was a $1.8 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $1.8 million reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities under noninterest income. The securities sold had a recorded unrealized loss of $177,000 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. All prior period data is based on Basel I rules.


34


The capital ratios of Hanmi Financial and the Bank as of June 30, 2015 and December 31, 2014 were as follows:
 
Actual
 
Minimum
Regulatory
Requirement
 
Minimum to Be
Categorized as
“Well Capitalized”
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
476,897

 
15.27
%
 
$
249,810

 
8.00
%
 
 N/A

 
N/A

Hanmi Bank
$
474,037

 
15.20
%
 
$
249,492

 
8.00
%
 
$
311,866

 
10.00
%
Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
437,453

 
14.01
%
 
$
187,357

 
6.00
%
 
 N/A

 
N/A

Hanmi Bank
$
434,642

 
13.94
%
 
$
187,119

 
6.00
%
 
$
249,492

 
8.00
%
Common equity Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
437,453

 
14.01
%
 
$
140,518

 
4.50
%
 
 N/A

 
N/A

Hanmi Bank
$
434,642

 
13.94
%
 
$
140,340

 
4.50
%
 
$
202,713

 
6.5
%
Tier 1 capital (to average assets):
 
 
 
 
 
 
 
 
 
 
 
Hanmi Financial
$
437,453

 
11.05
%
 
$
158,364

 
4.00
%
 
 N/A

 
N/A

Hanmi Bank
$
434,642

 
10.99
%
 
$
158,157

 
4.00
%
 
$
197,696

 
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.


35


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

We record securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, impaired loans, OREO, and 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.

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

Securities available for sale - The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve, prepayment speeds, and default rates. Level 1 securities include U.S. treasury securities and mutual funds that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 securities primarily include mortgage-backed securities, collateralized mortgage obligations, U.S. government agency securities, SBA loan pool securities, municipal bonds and corporate bonds in markets that are 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 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 June 30, 2015 and December 31, 2014, we had $4.2 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 June 30, 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.

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

Nonperforming loans held for sale - We reclassify certain nonperforming loans as held for sale when we decide to sell those loans. The fair value of nonperforming loans held for sale is generally based upon the quotes, bids or sales contract prices which approximate their fair value. Nonperforming loans held for sale are recorded at estimated fair value less anticipated liquidation cost. As of June 30, 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.


36


Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of June 30, 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)
June 30, 2015
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Mortgage-backed securities
$
—

 
$
379,568

 
$
—

 
$
379,568

Collateralized mortgage obligations
—

 
155,369

 
—

 
155,369

U.S. government agency securities
—

 
62,661

 
—

 
62,661

SBA loan pools securities
—

 
71,686

 
—

 
71,686

Municipal bonds-tax exempt
—

 
3,626

 
—

 
3,626

Municipal bonds-taxable
—

 
15,832

 
—

 
15,832

Corporate bonds
—

 
16,976

 
—

 
16,976

U.S. treasury securities
162

 
—

 
—

 
162

Other securities
22,803

 
—

 
—

 
22,803

Total securities available for sale
$
22,965

 
$
705,718

 
$
—

 
$
728,683

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 (1)
—

 
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 (2)
22,893

 
—

 
—

 
22,893

Equity securities
—

 
—

 
414

 
414

Total securities available for sale
$
23,056

 
$
1,036,538

 
$
1,123

 
$
1,060,717

 
(1) 
U.S. government agency securities of $128.2 million were reclassified as level 2 rather than level 1 as originally classified due to significant other observable inputs other than quoted prices for identical assets in active markets.
(2) 
Other securities of $22.9 million were reclassified as level 1 rather than level 2 as originally classified due to the availability of quoted prices in active markets of the holdings.


37


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 six months ended June 30, 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 June 30, 2015
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
Municipal bonds-tax exempt (1)
$
709

 
$
(709
)
 
$
—

 
$
—

 
$
—

Equity securities (2)
$
414

 
$
(339
)
 
$
(75
)
 
$
—

 
$
—

 
(1) 
A zero coupon tax credit municipal bond matured during the first quarter of 2015.
(2) 
Reflects two equity securities that were not actively traded. During the second quarter of 2015, one equity security with a book value of $200,000 with a fair value of $200,000 as of December 31, 2014 was sold at $75,000 loss and the other equity security with a book value of $250,000 with a fair value of $214,000 as of December 31, 2014 was reclassified to other assets.

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

As of June 30, 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 six Months Ended June 30, 2015
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans (excluding PCI loans) (1)
$
—

 
$
28,607

 
$
3,217

 
$
1,579

OREO (2)
$
—

 
$
11,857

 
$
—

 
$
632

 
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 (excluding PCI loans) (3)
$
—

 
$
32,171

 
$
781

 
$
2,774

OREO (4)
$
—

 
$
15,790

 
$
—

 
$
—

 
(1) 
Consists of real estate loans of $29.0 million, commercial and industrial loans of $1.0 million, and consumer loans of $1.8 million.
(2) 
Consists of properties obtained from the foreclosure of commercial property loans of $11.7 million and residential property loans of $163,000.
(3) 
Consists of real estate loans of $30.0 million, commercial and industrial loans of $1.2 million and consumer loans of $1.7 million.
(4) 
Consists of properties obtained 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

38


basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured on a recurring basis or non-recurring basis are discussed above.

The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
    
The estimated fair values of financial instruments were as follows:
 
June 30, 2015
 
Carrying
 
Fair Value
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
153,231

 
$
153,231

 
$
—

 
$
—

Securities available for sale
728,683

 
22,965

 
705,718

 
—

Loans receivable, net of allowance for loan losses
2,826,086

 
—

 
—

 
2,829,963

Loans held for sale
4,158

 
—

 
4,158

 
—

Accrued interest receivable
8,133

 
8,133

 
—

 
—

Servicing assets
13,125

 
—

 
—

 
13,125

Investment in FHLB stock
16,385

 
—

 
16,385

 
—

Investment in FRB stock
13,517

 
—

 
13,517

 
—

Financial liabilities:


 
 
 
 
 
 
Noninterest-bearing deposits
1,061,823

 
—

 
1,061,823

 
—

Interest-bearing deposits
2,377,958

 
—

 
—

 
2,361,096

Servicing liabilities
5,368

 
—

 
—

 
5,368

Borrowings
18,623

 
—

 
—

 
18,623

Accrued interest payable
3,443

 
3,443

 
—

 
—

Off-balance sheet items:


 
 
 
 
 
 
Commitments to extend credit
244,766

 
—

 
—

 
244,766

Standby letters of credit
5,426

 
—

 
—

 
5,426

 

39


 
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)
1,060,717

 
23,056

 
1,036,538

 
1,123

Loans receivable, net of allowance for loan losses
2,735,832

 
—

 
—

 
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

 
(1) 
Level 1 and Level 2 previously reported as $128.4 million and $931.2 million, respectively. U.S. government agency securities of $128.2 million were reclassified as level 2 rather than level 1 as originally classified due to significant other observable inputs other than quoted prices for identical assets in active markets. Other securities of $22.9 million were reclassified as level 1 rather than level 2 as originally classified due to the availability of quoted prices in active markets of the holdings.

The methods and assumptions used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value are explained below:
Cash and cash equivalents - The carrying amounts of cash and cash equivalents approximate fair value due to the short-term nature of these instruments (Level 1).
Securities - The fair value of securities, consisting of securities available for sale, is generally obtained from market bids for similar or identical securities, from independent securities brokers or dealers, or from other model-based valuation techniques described above (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).

40


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 investments in FHLB and FRB stock approximate fair value as such stock may be resold to the issuer at carrying value (Level 2). Subsequent to the issuance of the Company's consolidated financial statements, the Company determined that investments in FHLB and FRB stock of $17.6 million and $12.3 million, respectively, should be classified as Level 2 rather than Level 1 as originally classified as ownership of these investments is restricted to member banks, the securities are non-marketable equity investments and purchases and sales of these securities are at par with the issuer. Accordingly, the Company has revised the classification of these investments from Level 1 to Level 2 in the table of fair value measurements as of December 31, 2014.
Noninterest-bearing deposits - The fair value of noninterest-bearing deposits is the amount payable on demand at the reporting date (Level 2).
Interest-bearing deposits - The fair value of interest-bearing deposits, such as savings accounts, money market checking, and certificates of deposit, is estimated based on discounted cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).
Borrowings - Borrowings consist of FHLB advances, subordinated debentures and other borrowings. Discounted cash flows based on current market rates for borrowings with similar remaining maturities are used to estimate the fair value of borrowings (Level 3).
Accrued interest payable - The carrying amount of accrued interest payable approximates its fair value (Level 1).

Commitments to extend credit 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 June 30, 2015 and 2014, share-based compensation expenses were $494,000 and $447,000, respectively, and net tax benefits recognized from stock option exercises and restricted stock awards were $161,000 and $149,000, respectively. For the six months ended June 30, 2015 and 2014, share-based compensation expenses were $1.0 million and $1.1 million, respectively, and net tax benefits recognized from stock option exercises and restricted stock awards were $337,000 and $368,000, respectively.

41



Unrecognized Share-Based Compensation Expense

As of June 30, 2015, unrecognized share-based compensation expense was as follows:
 
Unrecognized
Expense
 
Average Expected
Recognition
Period
 
(in thousands)
Stock option awards
$
1,002

 
1.5 years
Restricted stock awards
2,877

 
2.1 years
Total unrecognized share-based compensation expense
$
3,879

 
2.0 years

The table below provides stock option information for the three months ended June 30, 2015:
 
Number of
Shares
 
Weighted-
Average
Exercise
Price Per
Share
 
Weighted-
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value of
In-the-
Money
Options
 
 
(in thousands, except share and per share data)
 
Options outstanding at beginning of period
583,665

 
$
24.09

 
8.0 years
 
$
2,383

(1) 
Options granted
28,000

 
$
23.47

 
9.9 years
 
—

 
Options exercised
(6,874
)
 
$
12.54

 
7.5 years
 
—

 
Options forfeited
(51,126
)
 
$
21.20

 
8.9 years
 
—

 
Options expired
(225
)
 
$
144.00

 
0.8 years
 
—

 
Options outstanding at end of period
553,440

 
$
24.42

 
7.8 years
 
$
4,116

(2) 
Options exercisable at end of period
216,289

 
$
34.63

 
6.7 years
 
$
1,764

(2) 
                              
(1) 
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.
(2) 
Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $24.84 as of June 30, 2015, over the exercise price, multiplied by the number of options.

The table below provides stock option information for the six months ended June 30, 2015:
 
Number of
Shares
 
Weighted-
Average
Exercise
Price Per
Share
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value of
In-the-
Money
Options
 
 
(in thousands, except share and per share data)
 
Options outstanding at beginning of period
603,872

 
$
23.78

 
8
 
$
2,853

(1) 
Options granted
28,000

 
$
23.47

 
9.9 years
 
 
 
Options exercised
(26,455
)
 
$
13.77

 
7.7 years
 
 
 
Options forfeited
(51,627
)
 
$
21.12

 
8.9 years
 
 
 
Options expired
(350
)
 
$
144.00

 
0.8 years
 
 
 
Options outstanding at end of period
553,440

 
$
24.42

 
7.8 years
 
$
4,116

(2) 
Options exercisable at end of period
216,289

 
$
34.63

 
6.7 years
 
$
1,764

(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 $24.84 as of June 30, 2015, over the exercise price, multiplied by the number of options.


42


There were 6,874 and 18,500 stock options exercised during the three months ended June 30, 2015 and 2014, respectively and 26,455 and 33,695 stock options exercised during the six months ended June 30, 2015 and 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 canceled shares.

The table below provides information for restricted stock awards for the three and six months ended June 30, 2015:
 
Three Months Ended
 
Six Months Ended
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
Per Share
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
Per Share
Restricted stock at beginning of period
175,072

 
$
19.55

 
173,222

 
$
19.58

Restricted stock granted
49,334

 
$
22.59

 
53,184

 
$
22.43

Restricted stock vested
(16,151
)
 
$
22.26

 
(18,151
)
 
$
22.50

Restricted stock forfeited
(15,000
)
 
$
21.83

 
(15,000
)
 
$
21.83

Restricted stock at end of period
193,255

 
$
19.92

 
193,255

 
$
19.92


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.


43


The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
 
2015
 
2014
 
Net Income (Numerator)
 
Weighted-Average Shares (Denominator)
 
Per Share Amount
 
Net Income (Numerator)
 
Weighted-Average Shares (Denominator)
 
Per Share Amount
 
(in thousands, except share and per share data)
Three months ended June 30
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations, net of tax
$
13,984

 
31,774,692

 
$
0.44

 
$
11,509

 
31,681,033

 
$
0.36

Income from discontinued operations, net of tax
—

 
31,774,692

 
—

 
(467
)
 
31,681,033

 
(0.01
)
Basic EPS
$
13,984

 
31,774,692

 
$
0.44

 
$
11,042

 
31,681,033

 
$
0.35

Effect of dilutive securities - options and unvested restricted stock


 
134,027

 


 


 
293,220

 


Diluted EPS
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations, net of tax
$
13,984

 
31,908,719

 
$
0.44

 
$
11,509

 
31,974,253

 
$
0.36

Income from discontinued operations, net of tax
—

 
31,908,719

 
—

 
(467
)
 
31,974,253

 
(0.01
)
Diluted EPS
$
13,984

 
31,908,719

 
$
0.44

 
$
11,042

 
31,974,253

 
$
0.35

Six months ended June 30


 
 
 


 


 
 
 


Basic EPS


 
 
 


 


 
 
 


Income from continuing operations, net of tax
$
25,038

 
31,761,067

 
$
0.79

 
$
22,477

 
31,670,436

 
$
0.71

Income from discontinued operations, net of tax
—

 
31,761,067

 
—

 
(444
)
 
31,670,436

 
(0.01
)
Basic EPS
$
25,038

 
31,761,067

 
$
0.79

 
$
22,033

 
31,670,436

 
$
0.70

Effect of dilutive securities - options and unvested restricted stock
 
 
113,417

 
 
 
 
 
279,877

 
 
Diluted EPS
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations, net of tax
$
25,038

 
31,874,484

 
$
0.79

 
$
22,477

 
31,950,313

 
$
0.70

Income from discontinued operations, net of tax
—

 
31,874,484

 
—

 
(444
)
 
31,950,313

 
(0.01
)
Diluted EPS
$
25,038

 
31,874,484

 
$
0.79

 
$
22,033

 
31,950,313

 
$
0.69


For the three months ended June 30, 2015 and 2014, stock options totaling 83,500 and 88,975, respectively, were not included in the computation of diluted EPS. For the six months ended June 30, 2015 and 2014, stock options totaling 113,500 and 58,975, respectively, were not included in the computation of diluted EPS.

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


44


Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-producing or borrower-occupied properties. The following table shows the distribution of undisbursed loan commitments as of the dates indicated:
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
Commitments to extend credit
$
270,702

 
$
309,584

Standby letters of credit
5,426

 
8,982

Commercial letters of credit
4,645

 
7,046

Total undisbursed loan commitments
$
280,773

 
$
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 June 30, 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 June 30, 2015, the Bank had $99,000 of brokered deposits assumed in 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 June 30, 2015, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $604.8 million and $604.8 million, respectively, compared to $649.5 million and $499.5 million, respectively, as of December 31, 2014. The Bank’s FHLB borrowings as of June 30, 2015 and December 31, 2014 totaled zero and $150.0 million, respectively, which represented zero percent and 3.54 percent of assets as of June 30, 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 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 $42.9 million from the Federal Reserve Discount Window, to which the Bank pledged loans with a carrying value of $60.3 million, and had no borrowings as of June 30, 2015. The Bank has a line of credit with Raymond James & Associates, Inc. for repurchase agreements up to $100.0 million. The Bank established 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.


45


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 and 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.

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 June 30, 2015, or would be required to be recognized in the Consolidated Financial Statements (Unaudited) as of June 30, 2015.

46


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

The following is management’s discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three and six months ended June 30, 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 June 30, 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 loan losses and allowance for loan losses; changes in the financial performance and/or condition of our borrowers and the ability of our borrowers to perform under the terms of their loans and other terms of credit agreements; our ability to control expenses; and changes in securities markets. In addition, for a discussion of some of the other factors that might cause such a difference, see the discussion contained in this Report under the heading “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Also see “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Interest Rate Risk Management” and “Capital Resources and Liquidity” in our 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 applied 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

47


on historical experience and other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of Hanmi Financial’s Board of Directors.

Selected Financial Data

The following table set forth certain selected financial data for the periods indicated:
 
As of or For the
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except share and per share data)
Summary balance sheets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
153,231

 
$
123,782

 
$
153,231

 
$
123,782

Securities
728,683

 
505,977

 
728,683

 
505,977

Loans receivable (1)
2,826,086

 
2,300,810

 
2,826,086

 
2,300,810

Assets
3,970,770

 
3,094,775

 
3,970,770

 
3,094,775

Deposits
3,439,781

 
2,544,849

 
3,439,781

 
2,544,849

Liabilities
3,498,030

 
2,668,427

 
3,498,030

 
2,668,427

Stockholders’ equity
472,740

 
426,348

 
472,740

 
426,348

Tangible equity
470,850

 
426,348

 
470,850

 
426,348

Average gross loans, net of deferred loan costs
2,839,601

 
2,298,996

 
2,829,813

 
2,278,193

Average securities
844,064

 
526,474

 
922,245

 
530,890

Average interest-earning assets
3,749,011

 
2,854,031

 
3,823,942

 
2,839,927

Average assets
4,023,750

 
3,001,050

 
4,101,420

 
2,989,551

Average deposits
3,484,267

 
2,522,269

 
3,505,379

 
2,511,345

Average borrowings
26,233

 
39,146

 
85,953

 
47,967

Average interest-bearing liabilities
2,467,440

 
1,718,887

 
2,554,301

 
1,737,917

Average stockholders’ equity
474,134

 
417,874

 
467,019

 
411,526

Average tangible equity
472,183

 
417,874

 
465,020

 
410,951

Per share data:
 
 
 
 
 
 
 
Earnings per share – basic (2)
$
0.44

 
$
0.36

 
$
0.79

 
$
0.71

Earnings per share – diluted (2)
$
0.44

 
$
0.36

 
$
0.79

 
$
0.70

Book value per share (3)
$
14.78

 
$
13.38

 
$
14.78

 
$
13.38

Tangible book value per share (4)
$
14.73

 
$
13.38

 
$
14.73

 
$
13.38

Cash dividends per share
$
0.11

 
$
0.07

 
$
0.22

 
$
0.14

Common shares outstanding
31,974,842

 
31,860,956

 
31,974,842

 
31,860,956

Performance ratios:
 
 
 
 
 
 
 
Return on average assets (5) (6)
1.39
 %
 
1.54
%
 
1.23
 %
 
1.52
 %
Return on average stockholders’ equity (5) (7)
11.83
 %
 
11.05
%
 
10.81
 %
 
11.01
 %
Return on average tangible equity (5) (8)
11.88
 %
 
11.05
%
 
10.86
 %
 
11.03
 %
Net interest spread (9)
3.75
 %
 
3.53
%
 
3.72
 %
 
3.56
 %
Net interest spread (excluding purchase accounting) (9)
3.18
 %
 
3.53
%
 
3.09
 %
 
3.56
 %
Net interest margin (10)
3.97
 %
 
3.82
%
 
3.93
 %
 
3.86
 %
Net interest margin (excluding purchase accounting) (10)
3.48
 %
 
3.82
%
 
3.38
 %
 
3.86
 %
Efficiency ratio (11)
56.23
 %
 
55.56
%
 
60.93
 %
 
54.48
 %
Efficiency ratio (excluding merger and integration costs) (11)
55.95
 %
 
55.34
%
 
59.12
 %
 
54.25
 %
Dividend payout ratio (12)
25.14
 %
 
20.19
%
 
28.06
 %
 
20.07
 %
Average stockholders’ equity to average assets
11.78
 %
 
13.92
%
 
11.39
 %
 
13.77
 %

48


Capital ratios (15):
 
 
 
 
 
 
 
Total risk-based capital:
 
 
 
 
 
 
 
Hanmi Financial
15.64
 %
 
17.90
%
 
15.64
 %
 
17.90
 %
Hanmi Bank
15.57
 %
 
17.17
%
 
15.57
 %
 
17.17
 %
Tier 1 risk-based capital:
 
 
 
 
 
 
 
Hanmi Financial
14.39
 %
 
16.64
%
 
14.39
 %
 
16.64
 %
Hanmi Bank
14.32
 %
 
15.91
%
 
14.32
 %
 
15.91
 %
Common equity Tier 1 capital:
 
 
 
 
 
 
 
Hanmi Financial
14.39
 %
 
—

 
14.39
 %
 
—

Hanmi Bank
14.32
 %
 
—

 
14.32
 %
 
—

Tier 1 leverage:
 
 
 
 
 
 
 
Hanmi Financial
11.52
 %
 
14.09
%
 
11.52
 %
 
14.09
 %
Hanmi Bank
11.47
 %
 
13.49
%
 
11.47
 %
 
13.49
 %
Asset quality ratios:
 
 
 
 
 
 
 
Nonperforming Non-PCI loans to gross loans (13)
0.97
 %
 
0.88
%
 
0.97
 %
 
0.88
 %
Nonperforming assets to assets (14)
1.00
 %
 
1.08
%
 
1.00
 %
 
1.08
 %
Nonperforming Non-PCI loans to allowance for loan losses
55.14
 %
 
48.92
%
 
55.14
 %
 
48.92
 %
Net loan (recoveries) charge-offs to average gross loans
(0.04
)%
 
0.14
%
 
(0.08
)%
 
(0.08
)%
Allowance for loan losses to gross loans
1.77
 %
 
2.21
%
 
1.77
 %
 
2.21
 %
Allowance for loan losses to non-performing Non-PCI loans
181.35
 %
 
204.43
%
 
181.35
 %
 
204.43
 %
 
(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 loan 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 loan 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 (see footnote (13) above) and OREO.
(15) 
Basel III rules became effective January 1, 2015, with transitional provisions, and all prior period data is based on Basel I rules.
Non-GAAP Financial Measures
Tangible Stockholders’ Equity to Tangible Assets Ratio

Tangible stockholders' 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. 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.


49


The following table reconciles this non-GAAP performance measure to the GAAP performance measure as of the dates indicated:
 
 Six Months Ended June 30,
 
2015
 
2014
 
(in thousands, except share and per share data)
Assets
$
3,970,770

 
$
3,094,775

Less other intangible assets
(1,890
)
 
—

Tangible assets
$
3,968,880

 
$
3,094,775

Stockholders’ equity
$
473,365

 
$
426,348

Less other intangible assets
(1,890
)
 
—

Tangible stockholders' equity
$
471,475

 
$
426,348

Book value per share
$
14.78

 
$
13.38

Effect of other intangible assets
(0.05
)
 
—

Tangible book value per share
$
14.73

 
$
13.38


Executive Overview

For the three months ended June 30, 2015, we recognized net income of $14.0 million, or $0.44 per diluted share, compared to net income of $11.0 million, or $0.35 per diluted share, for the same period of 2014. For the six months ended June 30, 2015, we recognized net income of $25.0 million, or $0.79 per diluted share, compared to net income of $22.0 million, or $0.69 per diluted share, for the same period of 2014. Financial highlights include:

•
Net interest margin for the second quarter of 2015 improved to 3.97 percent, an increase of 15 basis points, from 3.82 percent for the same period of 2014.
•
Interest and dividend income totaled $41.0 million and $82.5 million for the three and six months ended June 30, 2015, respectively, compared to $30.3 million and $60.7 million for the three and six months ended June 30, 2014, respectively.
•
Noninterest income totaled $11.1 million and $22.0 million for the three and six months ended June 30, 2015, respectively, compared to $5.5 million and $11.7 million for the three and six months ended June 30, 2014, respectively.
•
Asset quality in the second quarter of 2015 improved with classified loans (excluding PCI loans) of $44.8 million, compared to $46.2 million in the same period of 2014. Negative provision for loan losses of $2.5 million and $4.5 million were recorded for the three months and six months ended June 30, 2015, respectively.
•
New loan production, excluding loan purchases of $20.6 million, totaled $208.1 million, up 80.6 percent, compared to $115.2 million in the same quarter of 2014.
•
A cash dividend of $0.11 per share for the second quarter of 2015 was paid on July 15, 2015.

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.


50


The following table shows the average balances of assets, liabilities and stockholders’ equity; the amount of interest income, on a tax-equivalent basis, and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. All average balances are daily average balances.
 
Three Months Ended
 
June 30, 2015
 
June 30, 2014
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield /
Rate
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield /
Rate
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Gross loans, net of deferred loan fees (1)
$
2,839,601

 
$
36,915

 
5.21
%
 
$
2,298,996

 
$
27,522

 
4.80
%
Municipal securities-taxable
16,272

 
155

 
3.81
%
 
19,151

 
191

 
3.99
%
Municipal securities-tax exempt (2)
3,670

 
31

 
3.35
%
 
4,428

 
31

 
2.78
%
Obligations of other U.S. government agencies
63,512

 
315

 
1.98
%
 
85,160

 
401

 
1.88
%
Other debt securities
730,672

 
2,489

 
1.36
%
 
390,435

 
1,783

 
1.83
%
Equity securities
29,938

 
1,116

 
14.91
%
 
27,300

 
408

 
5.98
%
Interest-bearing deposits in other banks
65,346

 
40

 
0.25
%
 
28,561

 
18

 
0.25
%
Total interest-earning assets
3,749,011

 
41,061

 
4.39
%
 
2,854,031

 
30,354

 
4.27
%
Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
89,313

 
 
 
 
 
70,660

 
 
 
 
Allowance for loan losses
(53,159
)
 
 
 
 
 
(57,127
)
 
 
 
 
Other assets
238,585

 
 
 
 
 
133,486

 
 
 
 
Total noninterest-earning assets
274,739

 
 
 
 
 
147,019

 
 
 
 
Total assets
$
4,023,750

 
 
 
 
 
$
3,001,050

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings
$
119,520

 
$
106

 
0.36
%
 
$
115,667

 
$
372

 
1.29
%
Money market checking and NOW accounts
796,664

 
928

 
0.47
%
 
572,949

 
759

 
0.53
%
Time deposits
1,525,023

 
2,768

 
0.73
%
 
991,125

 
2,022

 
0.82
%
FHLB advances
7,637

 
4

 
0.21
%
 
39,146

 
30

 
0.31
%
Subordinated debentures
18,596

 
151

 
3.26
%
 
—

 
—

 
—

Total interest-bearing liabilities
2,467,440

 
3,957

 
0.64
%
 
1,718,887

 
3,183

 
0.74
%
Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
1,043,060

 
 
 
 
 
842,528

 
 
 
 
Other liabilities
39,116

 
 
 
 
 
21,761

 
 
 
 
Total noninterest-bearing liabilities
1,082,176

 
 
 
 
 
864,289

 
 
 
 
Total liabilities
3,549,616

 
 
 
 
 
2,583,176

 
 
 
 
Stockholders’ equity
474,134

 
 
 
 
 
417,874

 
 
 
 
Total liabilities and stockholders’ equity
$
4,023,750

 
 
 
 
 
$
3,001,050

 
 
 
 
Net interest income
 
 
$
37,104

 
 
 
 
 
$
27,171

 
 
Cost of deposits
 
 
 
 
0.44
%
 
 
 
 
 
0.50
%
Net interest spread (3)
 
 
 
 
3.75
%
 
 
 
 
 
3.53
%
Net interest margin (4)
 
 
 
 
3.97
%
 
 
 
 
 
3.82
%
 
(1) 
Loans are net of discounts, deferred fees and related direct costs and include LHFS and exclude 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 $755,000 and $404,000 for the three months ended June 30, 2015 and 2014, respectively.
(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.

51


Excluding the effects of acquisition accounting adjustments, the net interest margin was 3.48 percent for the three months ended June 30, 2015. The impact of acquisition accounting adjustments on core loan yield and net interest margin are summarized in the following table:
 
Three Months Ended
 
June 30, 2015
 
Amount
 
Impact
 
(in thousands)
Core loan interest income and yield
$
33,842

 
4.78
%
Accretion of discount on purchased loans
3,073

 
0.43
%
As reported
$
36,915

 
5.21
%
 
 
 
 
Core net interest income and margin excluding purchase accounting
$
32,568

 
3.48
%
Accretion of discount on Non-PCI loans
2,606

 
0.28
%
Accretion of discount on PCI loans
467

 
0.05
%
Accretion of time deposits premium
1,504

 
0.16
%
Amortization of subordinated debentures discount
(41
)
 
—

Net impact
4,536

 
0.49
%
As reported
$
37,104

 
3.97
%

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
 
June 30, 2015 vs. June 30, 2014
 
Increases (Decreases) Due to Change In
 
Volume
 
Rate
 
Total
 
(in thousands)
Interest and dividend income:
 
 
 
 
 
Gross loans, net of deferred loan fees
$
6,890

 
$
2,503

 
$
9,393

Municipal securities-taxable
(28
)
 
(8
)
 
(36
)
Municipal securities-tax exempt
(6
)
 
6

 
—

Obligations of other U.S. government agencies
(106
)
 
20

 
(86
)
Other debt securities
1,252

 
(546
)
 
706

Equity securities
43

 
665

 
708

Interest-bearing deposits in other banks
22

 
—

 
22

Total interest and dividend income
$
8,067

 
$
2,640

 
$
10,707

Interest expense:
 
 
 
 
 
Savings
$
12

 
$
(278
)
 
$
(266
)
Money market checking and NOW accounts
264

 
(95
)
 
169

Time deposits
989

 
(243
)
 
746

FHLB advances
(18
)
 
(8
)
 
(26
)
Subordinated debentures
151

 
—

 
151

Total interest expense
$
1,398

 
$
(624
)
 
$
774

Change in net interest income
$
6,669

 
$
3,264

 
$
9,933


Interest income on a tax-equivalent basis increased $10.7 million, or 35.3 percent, to $41.1 million for the three months ended June 30, 2015 from $30.4 million for the same period in 2014. Interest expense increased $774,000, or 24.3 percent, to $4.0 million for the three months ended June 30, 2015 from $3.2 million for the same period in 2014. For the three months ended June 30, 2015 and 2014, net interest income before provision for loan losses on a tax-equivalent basis was $37.1

52


million and $27.2 million, respectively. The increase in net interest income before provision for loan losses was primarily attributable to growth in average loan balances and securities acquired in the CBI acquisition, primarily offset by increase in time deposits assumed in the CBI acquisition. The net interest spread and net interest margin for the three months ended June 30, 2015 were 3.75 percent and 3.97 percent, respectively, compared to 3.53 percent and 3.82 percent, respectively, for the same period in 2014.

Average gross loans increased $540.6 million, or 23.5 percent, to $2.84 billion for the three months ended June 30, 2015 from $2.30 billion for the same period in 2014. Average securities increased $317.6 million, or 60.3 percent, to $844.1 million for the three months ended June 30, 2015 from $526.5 million for the same period in 2014. Average interest-earning assets increased $895.0 million, or 31.4 percent, to $3.75 billion for the three months ended June 30, 2015 from $2.85 billion for the same period in 2014. The increase in average interest-earning assets was due mainly to loans and securities acquired in the CBI acquisition. Average interest-bearing liabilities increased $748.6 million to $2.47 billion for the three months ended June 30, 2015, compared to $1.72 billion for the same period in 2014. The increase in average interest-bearing liabilities resulted primarily from deposits assumed in the CBI acquisition, partially offset by reduction of high-cost time deposits.

The average yield on loans increased to 5.21 percent for the three months ended June 30, 2015 from 4.80 percent for the same period in 2014, primarily due to a 43 basis point increase in discount accretion on purchased loans. The average yield on securities decreased to 1.95 percent for the three months ended June 30, 2015 from 2.14 percent for the same period in 2014, attributable primarily to increases in lower yielding securities acquired in the CBI acquisition. The average yield on interest-earning assets increased 12 basis points to 4.39 percent for the three months ended June 30, 2015 from 4.27 percent for the same period in 2014, due mainly to the increased yield related to discount accretion on loans acquired in the CBI acquisition. The average cost on interest-bearing liabilities decreased 10 basis points to 0.64 percent for the three months ended June 30, 2015 from 0.74 percent for the same period in 2014, due mainly to $1.5 million amortization of time deposit premiums acquired in the CBI acquisition.


53


The following table shows the average balances of assets, liabilities and stockholders’ equity; the amount of interest income, on a tax-equivalent basis, and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. All average balances are daily average balances.
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield /
Rate
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield /
Rate
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Gross loans, net of deferred loan fees (1)
$
2,829,813

 
$
73,949

 
5.27
%
 
$
2,278,193

 
$
54,851

 
4.86
%
Municipal securities-taxable
16,587

 
318

 
3.83
%
 
25,152

 
520

 
4.13
%
Municipal securities-tax exempt (2)
4,003

 
62

 
3.07
%
 
8,790

 
148

 
3.36
%
Obligations of other U.S. government agencies
74,546

 
719

 
1.93
%
 
84,367

 
806

 
1.91
%
Other debt securities
797,213

 
5,776

 
1.45
%
 
386,297

 
3,586

 
1.86
%
Equity securities
29,896

 
1,598

 
10.69
%
 
26,284

 
812

 
6.18
%
Federal funds sold
—

 
—

 
—

 
6

 
—

 
—

Interest-bearing deposits in other banks
71,884

 
88

 
0.25
%
 
30,838

 
38

 
0.25
%
Total interest-earning assets
3,823,942

 
82,510

 
4.35
%
 
2,839,927

 
60,761

 
4.31
%
Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
87,842

 
 
 
 
 
74,010

 
 
 
 
Allowance for loan losses
(53,238
)
 
 
 
 
 
(57,887
)
 
 
 
 
Other assets
242,874

 
 
 
 
 
133,501

 
 
 
 
Total noninterest-earning assets
277,478

 
 
 
 
 
149,624

 
 
 
 
Total assets
$
4,101,420

 
 
 
 
 
$
2,989,551

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings
$
119,884

 
$
220

 
0.37
%
 
$
116,067

 
$
776

 
1.35
%
Money market checking and NOW accounts
789,587

 
1,813

 
0.46
%
 
582,219

 
1,526

 
0.53
%
Time deposits
1,558,877

 
5,549

 
0.72
%
 
991,664

 
4,073

 
0.83
%
FHLB advances
67,376

 
60

 
0.18
%
 
47,967

 
78

 
0.33
%
Subordinated debentures
18,577

 
296

 
3.21
%
 
—

 
—

 
—

Total interest-bearing liabilities
2,554,301

 
7,938

 
0.63
%
 
1,737,917

 
6,453

 
0.75
%
Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
1,037,031

 
 
 
 
 
821,395

 
 
 
 
Other liabilities
43,069

 
 
 
 
 
18,713

 
 
 
 
Total noninterest-bearing liabilities
1,080,100

 
 
 
 
 
840,108

 
 
 
 
Total liabilities
3,634,401

 
 
 
 
 
2,578,025

 
 
 
 
Stockholders’ equity
467,019

 
 
 
 
 
411,526

 
 
 
 
Total liabilities and stockholders’ equity
$
4,101,420

 
 
 
 
 
$
2,989,551

 
 
 
 
Net interest income
 
 
$
74,572

 
 
 
 
 
$
54,308

 
 
Cost of deposits
 
 
 
 
0.44
%
 
 
 
 
 
0.51
%
Net interest spread (3)
 
 
 
 
3.72
%
 
 
 
 
 
3.56
%
Net interest margin (4)
 
 
 
 
3.93
%
 
 
 
 
 
3.86
%
 
(1) 
Loans are net of discounts, deferred fees and related direct costs and include LHFS and exclude 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 $1.1 million and $781,000 for the six months ended June 30, 2015 and 2014, respectively.
(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.

54


Excluding the effects of acquisition accounting adjustments, the net interest margin was 3.38 percent for the six months ended June 30, 2015. The impact of acquisition accounting adjustments on core loan yield and net interest margin are summarized in the following table:
 
Six Months Ended
 
June 30, 2015
 
Amount
 
Impact
 
(in thousands)
Core loan interest income and yield
$
66,522

 
4.74
%
Accretion of discount on purchased loans
7,427

 
0.53
%
As reported
$
73,949

 
5.27
%
 
 
 
 
Core net interest income and margin excluding purchase accounting
$
64,114

 
3.38
%
Accretion of discount on Non-PCI loans
6,117

 
0.32
%
Accretion of discount on PCI loans
1,310

 
0.07
%
Accretion of time deposits premium
3,110

 
0.16
%
Amortization of subordinated debentures discount
(79
)
 
—

Net impact
10,458

 
0.55
%
As reported
$
74,572

 
3.93
%

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.
 
 Six Months Ended
 
June 30, 2015 vs. June 30, 2014
 
Increases (Decreases) Due to Change In
 
Volume
 
Rate
 
Total
 
(in thousands)
Interest and dividend income:
 
 
 
 
 
Gross loans, net of deferred loan fees
$
14,163

 
$
4,935

 
$
19,098

Municipal securities-taxable
(166
)
 
(36
)
 
(202
)
Municipal securities-tax exempt
(75
)
 
(11
)
 
(86
)
Obligations of other U.S. government agencies
(95
)
 
8

 
(87
)
Other debt securities
3,115

 
(925
)
 
2,190

Equity securities
125

 
661

 
786

Interest-bearing deposits in other banks
50

 
—

 
50

Total interest and dividend income
$
17,117

 
$
4,632

 
$
21,749

Interest expense:
 
 
 
 
 
Savings
$
—

 
$
(556
)
 
$
(556
)
Money market checking and NOW accounts
358

 
(71
)
 
287

Time deposits
1,640

 
(164
)
 
1,476

FHLB advances
8

 
(26
)
 
(18
)
Subordinated debentures
296

 
—

 
296

Total interest expense
$
2,302

 
$
(817
)
 
$
1,485

Change in net interest income
$
14,815

 
$
5,449

 
$
20,264


Interest income on a tax-equivalent basis increased $21.7 million, or 35.8 percent, to $82.5 million for the six months ended June 30, 2015 from $60.8 million for the same period in 2014. Interest expense increased $1.5 million, or 23.0 percent, to $7.9 million for the six months ended June 30, 2015 from $6.5 million for the same period in 2014. For the six months ended June 30, 2015 and 2014, net interest income before provision for loan losses on a tax-equivalent basis was $74.6 million and

55


$54.3 million, respectively. The increase in net interest income before provision for loan losses was primarily attributable to growth in average loan balances and securities acquired in the CBI acquisition, primarily offset by increase in time deposits assumed in the CBI acquisition. The net interest spread and net interest margin for the six months ended June 30, 2015 were 3.72 percent and 3.93 percent, respectively, compared to 3.56 percent and 3.86 percent, respectively, for the same period in 2014.

Average gross loans increased $551.6 million, or 24.2 percent, to $2.83 billion for the six months ended June 30, 2015 from $2.28 billion for the same period in 2014. Average securities increased $391.4 million, or 73.7 percent, to $922.2 million for the six months ended June 30, 2015 from $530.9 million for the same period in 2014. Average interest-earning assets increased $984.0 million, or 34.6 percent, to $3.82 billion for the six months ended June 30, 2015 from $2.84 billion for the same period in 2014. The increase in average interest-earning assets was due mainly to loans and securities acquired in the CBI acquisition. Average interest-bearing liabilities increased $816.4 million to $2.55 billion for the six months ended June 30, 2015, compared to $1.74 billion for the same period in 2014. The increase in average interest-bearing liabilities resulted primarily from deposits assumed in the CBI acquisition, partially offset by reduction of high-cost time deposits.

The average yield on loans increased to 5.27 percent for the six months ended June 30, 2015 from 4.86 percent for the same period in 2014, primarily due to a 53 basis point increase in discount accretion on purchased loans. The average yield on securities decreased to 1.84 percent for the six months ended June 30, 2015 from 2.21 percent for the same period in 2014, attributable primarily to increases in lower yielding securities acquired in the CBI acquisition. The average yield on interest-earning assets increased 4 basis points to 4.35 percent for the six months ended June 30, 2015 from 4.31 percent for the same period in 2014, due mainly to the increased yield related to discount accretion on loans acquired in the CBI acquisition. The average cost on interest-bearing liabilities decreased 12 basis points to 0.63 percent for the six months ended June 30, 2015 from 0.75 percent for the same period in 2014, due primarily to $3.1 million amortization of time deposit premiums acquired in the CBI acquisition.

Provision for Loan 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 $272,000 and $2.3 million for the three and six months ended June 30, 2015, respectively, compared to $806,000 of net charge-offs and $1.8 million of net recoveries for the same periods in 2014. Classified loans (excluding PCI loans) totaled $44.8 million as of June 30, 2015, compared to $46.2 million as of June 30, 2014. Other credit metrics also experienced improvements as the quality of the loan portfolio improved. Therefore, negative provisions for loan losses of $2.5 million and $4.5 million were recorded for the three and six months ended June 30, 2015, respectively, compared to negative provision for loan losses of $3.9 million and $7.2 million for the same periods in 2014. See “Nonperforming Assets” and “Allowance for Loan Losses and Allowance for Off-Balance Sheet Items” for further details.

Noninterest Income

The following table sets forth the various components of noninterest income for the periods indicated:
 
Three Months Ended June 30,
 
Increase (Decrease)
 
2015
 
2014
 
Amount
 
Percentage
 
(in thousands)
Service charges on deposit accounts
$
3,169

 
$
2,568

 
$
601

 
23.4
 %
Trade finance and other service charges and fees
1,109

 
1,166

 
(57
)
 
(4.9
)%
Gain on sale of SBA loans
1,573

 
498

 
1,075

 
215.9
 %
Net gain on sales of securities
1,912

 
364

 
1,548

 
425.3
 %
Disposition gains on PCI loans
2,470

 
—

 
2,470

 
—

Other operating income
900

 
892

 
8

 
0.9
 %
Total noninterest income
$
11,133

 
$
5,488

 
$
5,645

 
102.9
 %


56


For the three months ended June 30, 2015, noninterest income was $11.1 million, an increase of $5.6 million, or 102.9 percent, compared to $5.5 million for the same period in 2014. The increase was primarily attributable to increases in disposition gains on PCI loans, net gain on sales of securities, gain on sales of SBA loans and service charges on deposit account. Service charges on deposit accounts, which represent 28.5 percent of total noninterest income for the three months ended June 30, 2015, increased $601,000, or 23.4 percent, to $3.2 million, compared to $2.6 million for the same period in 2014, mainly due to the CBI acquisition. Due to a $12.6 million increase in the sale of SBA loans, gain on sale of SBA loans increased $1.1 million to $1.6 million for the three months ended June 30, 2015, compared to $498,000 for the same period of 2014. Due to a $90.6 million increase in the sale of securities, net gain on sales of securities increased $1.5 million to $1.9 million for the three months ended June 30, 2015, compared to $364,000 for the same period in 2014. Disposition gains on PCI loans totaled $2.5 million for the three months ended June 30, 2015, compared to none for the same period in 2014.

The following table sets forth the various components of noninterest income for the periods indicated:
 
Six Months Ended June 30,
 
Increase (Decrease)
 
2015
 
2014
 
Amount
 
Percentage
 
(in thousands)
Service charges on deposit accounts
$
6,380

 
$
5,041

 
$
1,339

 
26.6
%
Trade finance and other service charges and fees
2,376

 
2,188

 
188

 
8.6
%
Gain on sale of SBA loans
3,257

 
1,045

 
2,212

 
211.7
%
Net gain on sales of securities
4,096

 
1,785

 
2,311

 
129.5
%
Disposition gains on PCI loans
3,693

 
—

 
3,693

 
—

Other operating income
2,181

 
1,643

 
538

 
32.7
%
Total noninterest income
$
21,983

 
$
11,702

 
$
10,281

 
87.9
%

For the six months ended June 30, 2015, noninterest income was $22.0 million, an increase of $10.3 million, or 87.9 percent, compared to $11.7 million for the same period in 2014. The increase was primarily attributable to increases in disposition gains on PCI loans, net gain on sales of securities, gain on sales of SBA loans and service charges on deposit account. Service charges on deposit accounts, which represent 29.0 percent of total noninterest income for the six months ended June 30, 2015, increased $1.3 million, or 26.6 percent, to $6.4 million, compared to $5.0 million for the same period in 2014, mainly due to the CBI acquisition. Due to a $25.5 million increase in the sale of SBA loans, gain on sale of SBA loans increased $2.2 million to $3.3 million for the six months ended June 30, 2015, compared to $1.0 million for the same period of 2014. Due to a $203.6 million increase in the sale of securities, net gain on sales of securities increased $2.3 million to $4.1 million for the six months ended June 30, 2015, compared to $1.8 million for the same period in 2014. Disposition gains on PCI loans totaled $3.7 million for the six months ended June 30, 2015, compared to none 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 June 30,
 
Increase (Decrease)
 
2015
 
2014
 
Amount
 
Percentage
 
(in thousands)
Salaries and employee benefits
$
15,542

 
$
10,280

 
$
5,262

 
51.2
%
Occupancy and equipment
4,224

 
2,469

 
1,755

 
71.1
%
Merger and integration costs
136

 
72

 
64

 
88.9
%
Data processing
1,335

 
1,112

 
223

 
20.1
%
OREO expense
(13
)
 
—

 
(13
)
 
—

Professional fees
1,701

 
652

 
1,049

 
160.9
%
Supplies and communications
928

 
595

 
333

 
56.0
%
Advertising and promotion
1,046

 
753

 
293

 
38.9
%
Other operating expenses
2,219

 
2,206

 
13

 
0.6
%
Total noninterest expense
$
27,118

 
$
18,139

 
$
8,979

 
49.5
%

For the three months ended June 30, 2015, noninterest expense was $27.1 million, an increase of $9.0 million or 49.5 percent, compared to $18.1 million for the same period in 2014. The increase was due primarily to the increases in salaries and

57


employee benefits, occupancy and equipment and professional fees. The largest component of noninterest expense for the three months ended June 30, 2015 was salaries and employee benefits, which represented 57.3 percent of total noninterest expense for the three months ended June 30, 2015. Salaries and employee benefits increased $5.3 million, or 51.2 percent, to $15.5 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 June 30, 2015 increased $1.8 million, or 71.1 percent, to $4.2 million, compared to $2.5 million for the same period in 2014 as a result of the CBI acquisition. For the three months ended June 30, 2015, professional fees increased $1.0 million, or 160.9 percent, to $1.7 million, compared to $652,000 for the same period in 2014, mainly due to costs incurred to strengthen infrastructure to meet heightened control standards.

The following table sets forth the breakdown of noninterest expense for the periods indicated:
 
Six Months Ended June 30,
 
Increase (Decrease)
 
2015
 
2014
 
Amount
 
Percentage
 
(in thousands)
Salaries and employee benefits
$
31,926

 
$
20,539

 
$
11,387

 
55.4
%
Occupancy and equipment
8,527

 
4,866

 
3,661

 
75.2
%
Merger and integration costs
1,747

 
157

 
1,590

 
1,012.7
%
Data processing
3,467

 
2,270

 
1,197

 
52.7
%
OREO expense
404

 
5

 
399

 
7,980.0
%
Professional fees
4,042

 
1,400

 
2,642

 
188.7
%
Supplies and communications
1,758

 
1,097

 
661

 
60.3
%
Advertising and promotion
1,569

 
1,333

 
236

 
17.7
%
Other operating expenses
5,382

 
4,270

 
1,112

 
26.0
%
Total noninterest expense
$
58,822

 
$
35,937

 
$
22,885

 
63.7
%

For the six months ended June 30, 2015, noninterest expense was $58.8 million, an increase of $23.0 million or 63.7 percent, compared to $35.9 million for the same period in 2014. The increase was due primarily to the increases in salaries and employee benefits, occupancy and equipment, data processing and professional fees. The largest component of noninterest expense for the six months ended June 30, 2015 was salaries and employee benefits, which represented 54.2 percent of total noninterest expense for the six months ended June 30, 2015. Salaries and employee benefits increased $11.4 million, or 55.4 percent, to $31.9 million, compared to $20.5 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 six months ended June 30, 2015 increased $3.7 million, or 75.2 percent, to $8.5million, compared to $4.9 million for the same period in 2014 as a result of the CBI acquisition. Data processing costs for the six months ended June 30, 2015 increased $1.2 million, or 52.7 percent, to $3.5million, compared to $2.3 million for the same period in 2014 as a result of the CBI acquisition. For the six months ended June 30, 2015, professional fees increased $2.6 million, or 188.7 percent, to $4.0 million, compared to $1.4 million for the same period in 2014, mainly due to costs incurred to strengthen infrastructure to meet heightened control standards.

Provision for Income Taxes

Provision for income taxes from continuing operations totaled $9.6 million for the three months ended June 30, 2015, compared to $6.9 million for the same period in 2014. The effective income tax rate was 40.75 percent for the three months ended June 30, 2015, compared to 37.37 percent for the same period in 2014. Provision for income taxes from continuing operations totaled $17.2 million for the six months ended June 30, 2015, compared to $14.7 million for the same period in 2014. The effective income tax rate was 40.66 percent for the six months ended June 30, 2015, compared to 39.56 percent for the same period in 2014.

58


Financial Condition

Securities

Securities are classified as held to maturity, available for sale, or trading in accordance with GAAP. There were no held to maturity or trading securities as of June 30, 2015 and December 31, 2014. Securities classified as available for sale are stated at fair value. The composition of our securities portfolio reflects our securities strategy of providing a relatively stable source of interest income while maintaining an appropriate level of liquidity. Our securities portfolio also provides a source of liquidity by pledging as collateral or through repurchase agreement and collateral for certain public funds deposits.

As of June 30, 2015, our securities portfolio was composed primarily of mortgage-backed securities, collateralized mortgage obligations and U.S. government agency securities. Most of the securities carried fixed interest rates. Other than holdings of U.S. government agency securities, there were no securities of any one issuer exceeding 10 percent of stockholders’ equity as of June 30, 2015 and December 31, 2014.

The following table summarizes the amortized cost, estimated fair value and unrealized gain (loss) on securities as of the dates indicated:
 
June 30, 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)
$
379,574

 
$
379,568

 
$
(6
)
 
$
571,678

 
$
573,286

 
$
1,608

Collateralized mortgage obligations (1)
154,968

 
155,369

 
401

 
188,704

 
188,047

 
(657
)
U.S. government agency securities
63,969

 
62,661

 
(1,308
)
 
129,857

 
128,207

 
(1,650
)
SBA loan pool securities
71,960

 
71,686

 
(274
)
 
109,983

 
109,447

 
(536
)
Municipal bonds-tax exempt
3,589

 
3,626

 
37

 
4,319

 
4,390

 
71

Municipal bonds-taxable
15,607

 
15,832

 
225

 
16,615

 
16,922

 
307

Corporate bonds
17,019

 
16,976

 
(43
)
 
17,018

 
16,948

 
(70
)
U.S. treasury securities
161

 
162

 
1

 
163

 
163

 
—

Other securities
22,916

 
22,803

 
(113
)
 
22,916

 
22,893

 
(23
)
Equity securities (3)
—

 
—

 
—

 
450

 
414

 
(36
)
Total securities available for sale
$
729,763

 
$
728,683

 
$
(1,080
)
 
$
1,061,703

 
$
1,060,717

 
$
(986
)
 
(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.
(3) 
During the second quarter of 2015, of the two equity securities, one was sold and the other was reclassified to other asset.

As of June 30, 2015, securities available for sale decreased 31.3 percent to $728.7 million, compared to $1.06 billion as of December 31, 2014, due mainly to a $307.4 million securities sold during the six months ended June 30, 2015. As of June 30, 2015, securities available for sale had a net unrealized loss of $1.1 million, comprised of $2.8 million of unrealized gains and $3.9 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.


59

The following table summarizes the contractual maturity schedule for securities, at amortized cost, and their weighted-average yield as of June 30, 2015:
 
 
 
 
 
After One Year But
 
After Five Years But
 
 
 
 
 
 
 
 
 
Within One Year
 
Within Five Years
 
Within Ten Years
 
After Ten Years
 
Total
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
—

 
—

 
$
35,092

 
1.39
%
 
$
196,232

 
2.01
%
 
$
148,250

 
1.39
%
 
$
379,574

 
1.71
%
Collateralized mortgage obligations
445

 
1.24
%
 
10,805

 
0.65
%
 
76,712

 
1.85
%
 
67,006

 
2.07
%
 
154,968

 
1.86
%
U.S. government agency securities
—

 
—

 
9,000

 
1.57
%
 
48,979

 
2.00
%
 
5,990

 
2.32
%
 
63,969

 
1.97
%
SBA loan pool securities
—

 
—

 
—

 
—

 
34,616

 
1.07
%
 
37,344

 
1.10
%
 
71,960

 
1.09
%
Municipal bonds-tax exempt (1)
—

 
—

 
722

 
2.82
%
 
2,867

 
3.49
%
 
—

 
—

 
3,589

 
3.36
%
Municipal bonds-taxable
—

 
—

 
2,425

 
3.23
%
 
11,734

 
4.01
%
 
1,448

 
4.13
%
 
15,607

 
3.90
%
Corporate bonds
11,998

 
1.17
%
 
5,021

 
0.75
%
 
—

 
—

 
—

 
—

 
17,019

 
1.04
%
U.S. treasury securities
—

 
—

 
161

 
1.17
%
 
—

 
—

 
—

 
—

 
161

 
1.17
%
Other securities
—

 
—

 
—

 
—

 
—

 
—

 
22,916

 
2.19
%
 
22,916

 
2.19
%
Total securities available for sale
$
12,443

 
1.17
%
 
$
63,226

 
1.32
%
 
$
371,140

 
1.96
%
 
$
282,954

 
1.61
%
 
$
729,763

 
1.76
%
 
(1) 
The yield on municipal bonds has been computed on a federal tax-equivalent basis of 35 percent.

60

Loans
The following table shows the loan composition by type as of the dates indicated:
 
 
 
Acquired CBI
 
Acquired CBI
 
Acquired
 
 
 
Legacy Loans
 
Non-PCI Loans
 
PCI Loans
 
Loans Total
 
Total
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
Retail
$
658,776

 
$
31,321

 
$
9,358

 
$
40,679

 
$
699,455

Hospitality
416,014

 
76,275

 
10,345

 
86,620

 
502,634

Gas station
281,665

 
55,901

 
5,955

 
61,856

 
343,521

Other
824,726

 
16,009

 
5,885

 
21,894

 
846,620

Construction
20,876

 
434

 
—

 
434

 
21,310

Residential property
168,830

 
2,241

 
2,055

 
4,296

 
173,126

Total real estate loans
2,370,887

 
182,181

 
33,598

 
215,779

 
2,586,666

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
Commercial term
107,818

 
3,858

 
267

 
4,125

 
111,943

Commercial lines of credit
113,696

 
1,686

 
—

 
1,686

 
115,382

International loans
33,864

 
—

 
—

 
—

 
33,864

Total commercial and industrial loans
255,378

 
5,544

 
267

 
5,811

 
261,189

Consumer loans (1)
25,312

 
962

 
43

 
1,005

 
26,317

Gross loans
2,651,577

 
188,687

 
33,908

 
222,595

 
2,874,172

Allowance for loans losses
(49,468
)
 
—

 
(1,352
)
 
(1,352
)
 
(50,820
)
Deferred loan costs
2,734

 
—

 
—

 
—

 
2,734

Loans receivable, net
$
2,604,843

 
$
188,687

 
$
32,556

 
$
221,243

 
$
2,826,086

December 31, 2014
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
Retail
$
641,272

 
$
33,800

 
$
10,343

 
$
44,143

 
$
685,415

Hospitality
363,578

 
90,921

 
12,862

 
103,783

 
467,361

Gas station
293,827

 
68,413

 
7,745

 
76,158

 
369,985

Other
826,944

 
15,182

 
10,680

 
25,862

 
852,806

Construction
8,968

 
549

 
—

 
549

 
9,517

Residential property
118,592

 
2,340

 
2,499

 
4,839

 
123,431

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

Gross loans
2,522,034

 
218,726

 
44,501

 
263,227

 
2,785,261

Allowance for loans losses
(51,640
)
 
—

 
(1,026
)
 
(1,026
)
 
(52,666
)
Deferred loan costs
3,237

 
—

 
—

 
—

 
3,237

Loans receivable, net
$
2,473,631

 
$
218,726

 
$
43,475

 
$
262,201

 
$
2,735,832

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


61

As of June 30, 2015 and December 31, 2014, loans receivable, net of deferred loan costs and allowance for loan losses, totaled $2.83 billion and $2.74 billion, respectively, representing an increase of $90.3 million, or 3.3 percent. Gross loans increased $88.9 million, or 3.2 percent, to $2.87 billion as of June 30, 2015, from $2.79 billion as of December 31, 2014. The increase was attributable to increases in commercial real estate loans by $28.5 million, construction loans by $11.8 million, residential property loans by $37.9 million and commercial lines of credits by $21.5 million, offset by decreases in commercial term loans by $4.5 million, international loans by $5.1 million and consumer loans by $1.2 million.
 
During the six months ended June 30, 2015, total loan disbursements comprised of $245.3 million in commercial real estate loans, $47.0 million in commercial and industrial loans, $52.7 million in SBA loans and $59.6 million in purchased residential property loans. The increase was offset by $201.6 million of payoffs and paydowns, $75.7 million of other net amortization and $39.2 million of transfers to loans held for sale.

Our loan portfolio included the following concentrations of loans to one type of industry that were greater than 10 percent of gross loans outstanding:
 
Balance as of
June 30, 2015
 
Percentage of
Gross Loans
Outstanding
Industry
 
 
(in thousands)
Lessor of nonresidential buildings
$
725,296

 
25.2
%
Hospitality
$
506,095

 
17.6
%
Gas station
$
360,877

 
12.5
%

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

Except for nonperforming loans set forth below and PCI loans, we are not aware of any loans as of June 30, 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. We cannot, however, predict the extent to which a deterioration in general economic conditions, real estate values, increases in general rates of interest, or changes in the financial condition or business of borrower may adversely affect a borrower’s ability to pay.


62

The following table provides information with respect to the components of nonperforming assets (excluding PCI loans) as of the dates indicated:
 
June 30, 2015
 
December 31, 2014
 
Increase (Decrease)
 
 
 
Amount
 
Percentage
 
 
 
(in thousands)
 
 
Nonperforming Non-PCI loans:
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
1,599

 
$
2,160

 
$
(561
)
 
-26.0
 %
Hospitality
6,133

 
3,835

 
2,298

 
59.9
 %
Gas station
5,664

 
3,478

 
2,186

 
62.9
 %
Other
6,404

 
4,961

 
1,443

 
29.1
 %
Residential property
1,141

 
1,588

 
(447
)
 
-28.1
 %
Commercial and industrial loans:
 
 
 
 

 

Commercial term
5,108

 
7,052

 
(1,944
)
 
-27.6
 %
Commercial lines of credit
417

 
466

 
(49
)
 
-10.5
 %
Consumer loans
1,557

 
1,742

 
(185
)
 
-10.6
 %
Total nonperforming Non-PCI loans
28,023

 
25,282

 
2,741

 
10.8
 %
Loans 90 days or more past due and still accruing
—

 
—

 
—

 
—

Total nonperforming Non-PCI loans (1)
28,023

 
25,282

 
2,741

 
10.8
 %
OREO
11,857

 
15,790

 
(3,933
)
 
-24.9
 %
Total nonperforming assets
$
39,880

 
$
41,072

 
$
(1,192
)
 
-2.9
 %
Nonperforming Non-PCI loans as a percentage of gross loans
0.97
%
 
0.91
%
 
 
 
 
Nonperforming assets as a percentage of assets
1.00
%
 
0.97
%
 
 
 
 
Total debt restructured performing Non-PCI loans
$
8,590

 
$
13,817

 
 
 
 
                              
(1) 
Includes nonperforming TDRs of $13.3 million and $12.5 million as of June 30, 2015 and December 31, 2014, respectively.

Nonaccrual Non-PCI loans totaled $28.0 million as of June 30, 2015, compared to $25.3 million as of December 31, 2014, representing an increase of $2.7 million, or 10.8 percent. There were no PCI loans on nonaccrual as of June 30, 2015 and December 31, 2014. Delinquent loans (defined as 30 days or more past due) were $23.5 million as of June 30, 2015, compared to $24.3 million as of December 31, 2014, representing a 3.3 percent decrease. Delinquent loans of $12.5 million and $7.9 million were included in nonperforming Non-PCI loans as of June 30, 2015 and December 31, 2014. During the six months ended June 30, 2015, loans totaling $12.7 million were placed on nonaccrual status. The additions to nonaccrual loans were mainly offset by the receipt of a $1.5 million in SBA guaranty received, $6.3 million in principal payoffs and paydowns and $1.3 million in charge-offs.

The ratio of nonperforming Non-PCI loans to gross loans increased to 0.97 percent at June 30, 2015 from 0.91 percent at December 31, 2014. Of the $28.0 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 $5.0 million as of June 30, 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 June 30, 2015, OREO consisted of 19 properties with a combined carrying value of $11.9 million. Of the $11.9 million, $10.6 million were OREO as loans acquired in the CBI acquisition that were foreclosed subsequent to the acquisition date. As of December 31, 2014, OREO consisted of 25 properties with a combined carrying value of $15.8 million. Of the $15.8 million, $15.3 million were OREO as loans acquired in the CBI acquisition that were foreclosed subsequent to the acquisition date.


63

Impaired Loans

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

The following table provides information on impaired loans (excluding PCI loans) as of the dates indicated:
 
June 30, 2015
 
December 31, 2014
 
Recorded
Investment
 
Percentage
 
Recorded
Investment
 
Percentage
 
(in thousands)
Real estate loans:
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
Retail
$
3,223

 
7.2
%
 
$
4,436

 
9.7
%
Hospitality
7,109

 
15.8
%
 
5,835

 
12.7
%
Gas station
8,538

 
19.0
%
 
8,974

 
19.6
%
Other
11,247

 
24.9
%
 
10,125

 
22.2
%
Residential property
2,678

 
6.0
%
 
3,127

 
6.7
%
Commercial and industrial loans:
 
 
 
 
 
 
 
Commercial term
7,055

 
15.7
%
 
7,614

 
16.6
%
Commercial lines of credit
2,064

 
4.6
%
 
466

 
1.0
%
International loans
1,282

 
2.8
%
 
3,546

 
7.7
%
Consumer loans
1,807

 
4.0
%
 
1,742

 
3.8
%
Total Non-PCI loans
$
45,003

 
100.0
%
 
$
45,865

 
100.0
%

Total impaired loans decreased $862,000, or 1.9 percent, to $45.0 million as of June 30, 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 June 30, 2015 and December 31, 2014, respectively.

During the three months ended June 30, 2015 and 2014, interest income that would have been recognized had impaired loans performed in accordance with their original terms totaled $1.2 million and $1.2 million, respectively. Of these amounts, actual interest recognized on impaired loans was $800,000 and $794,000 for the three months ended June 30, 2015 and 2014, respectively. During the six months ended June 30, 2015 and 2014, interest income that would have been recognized had impaired loans performed in accordance with their original terms totaled $1.9 million and $2.4 million, respectively. Of these amounts, actual interest recognized on impaired loans was $1.5 million and $1.6 million for the six months ended June 30, 2015 and 2014, respectively.


64

The following table provides information on TDRs (excluding PCI loans) as of dates indicated:
 
June 30, 2015
 
December 31, 2014
 
Nonaccrual TDRs
 
Accrual TDRs
 
Total
 
Nonaccrual TDRs
 
Accrual TDRs
 
Total
 
(in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
371

 
$
—

 
$
371

 
$
2,032

 
$
306

 
$
2,338

Hospitality
1,778

 
—

 
1,778

 
1,062

 
1,807

 
2,869

Gas station
2,868

 
349

 
3,217

 
1,075

 
2,335

 
3,410

Other
3,069

 
4,379

 
7,448

 
2,898

 
4,497

 
7,395

Residential property
716

 
304

 
1,020

 
742

 
308

 
1,050

Commercial and industrial loans:
 
 
 
 

 
 
 
 
 

Commercial term
3,968

 
1,661

 
5,629

 
4,050

 
2,208

 
6,258

Commercial lines of credit
417

 
1,647

 
2,064

 
466

 
2,156

 
2,622

International loans
—

 
—

 
—

 
—

 
200

 
200

Consumer loans
123

 
250

 
373

 
131

 
—

 
131

Total Non-PCI loans
$
13,310

 
$
8,590

 
$
21,900

 
$
12,456

 
$
13,817

 
$
26,273


For the three and months ended June 30, 2015, we restructured monthly payments for three and seven loans, respectively, with a net carrying value of $572,000 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 June 30, 2015, TDRs on accrual status totaled $8.6 million, all of which were temporary interest rate and payment reductions or extensions of maturity, and a $308,000 reserve relating to these loans was included in the allowance for loan losses. For the TDRs on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms is probable. As of June 30, 2015, TDRs on nonaccrual status totaled $13.3 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 TDRs on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms is probable. As of December 31, 2014, TDRs 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.

Prior to the first quarter of 2014, risk factor calculations were weighted at 50.0 percent for the most recent four quarters, 33.0 percent for the next four quarters, and 17.0 percent for the oldest four quarters. In the first quarter of 2014, management evaluated the look-back period and extended the periods to sixteen quarters to continue capturing a period of higher losses that would have been dropped off and to reflect probable 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. The change in methodology maintained the Bank’s allowance at a level consistent with the prior quarter.

To determine general reserve requirements, existing loans are divided into 11 general loan pools of risk-rated loans, as well as three homogeneous loan pools. For risk-rated loans, migration analysis allocates historical losses by loan pool and risk

65

grade to determine risk factors for potential loss inherent in the current outstanding loan portfolio. As 3 homogeneous loans are bulk graded, the risk grade is not factored into the historical loss analysis. In addition, specific reserves are allocated for loans deemed “impaired.”
 
When determining the appropriate level for allowance for loan losses, management considers qualitative adjustments for any factors that are likely to cause estimated loan losses associated with the Bank’s current portfolio to differ from historical loss experience, including, but not limited to, national and local economic and business conditions, volume and geographic concentrations, and problem loan trends.
 
To systematically quantify the credit risk impact of trends and changes within the loan portfolio, a credit risk matrix is utilized. The qualitative factors are considered on a loan pool by loan pool basis subsequent to, and in conjunction with, a loss migration analysis. The credit risk matrix provides various scenarios with positive or negative impact on the portfolio along with corresponding basis points for qualitative adjustments.

The following tables reflect our allocation of allowance for loan losses by loan category as well as the loans receivable for each loan type:
 
June 30, 2015
 
December 31, 2014
 
Allowance
Amount
 
Percentage
 
Non- PCI Loans
 
Allowance
Amount
 
Percentage
 
Non- PCI Loans
 
(in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
9,289

 
18.8
%
 
$
690,097

 
$
9,798

 
19.0
%
 
$
675,072

Hospitality
10,616

 
21.5
%
 
492,289

 
9,524

 
18.4
%
 
454,499

Gas station
4,798

 
9.7
%
 
337,566

 
5,433

 
10.5
%
 
362,240

Other
13,306

 
26.9
%
 
840,735

 
14,668

 
28.4
%
 
842,126

Construction
714

 
1.4
%
 
21,310

 
1,143

 
2.2
%
 
9,517

Residential property
1,175

 
2.4
%
 
171,071

 
628

 
1.3
%
 
120,932

Total real estate loans
39,898

 
80.7
%
 
2,553,068

 
41,194

 
79.8
%
 
2,464,386

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial term
5,537

 
11.2
%
 
111,676

 
6,232

 
12.1
%
 
116,073

Commercial lines of credit
2,278

 
4.6
%
 
115,382

 
2,228

 
4.3
%
 
93,860

International loans
430

 
0.9
%
 
33,864

 
683

 
1.3
%
 
38,929

Total commercial and industrial loans
8,245

 
16.7
%
 
260,922

 
9,143

 
17.7
%
 
248,862

Consumer loans
172

 
0.3
%
 
26,274

 
220

 
0.4
%
 
27,512

Unallocated
1,153

 
2.3
%
 
—

 
1,083

 
2.1
%
 
—

Total
$
49,468

 
100.0
%
 
$
2,840,264

 
$
51,640

 
100.0
%
 
$
2,740,760


66

 
June 30, 2015
 
December 31, 2014
 
Allowance
Amount
 
Percentage
 
PCI Loans
 
Allowance
Amount
 
Percentage
 
PCI Loans
 
(in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
257

 
19.0
%
 
$
9,358

 
$
401

 
39.1
%
 
$
8,535

Hospitality
317

 
23.4
%
 
10,345

 
99

 
9.6
%
 
7,682

Gas station
503

 
37.2
%
 
5,955

 
302

 
29.4
%
 
7,745

Other
16

 
1.2
%
 
5,885

 
65

 
6.3
%
 
5,796

Residential property
196

 
14.6
%
 
2,055

 
28

 
2.7
%
 
14,371

Total real estate loans
1,289

 
95.4
%
 
33,598

 
895

 
87.1
%
 
44,129

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial term
63

 
4.6
%
 
267

 
131

 
12.9
%
 
327

Total commercial and industrial loans
63

 
4.6
%
 
267

 
131

 
12.9
%
 
327

Consumer loans
—

 
—

 
43

 
—

 
—

 
45

Total
$
1,352

 
100.0
%
 
$
33,908

 
$
1,026

 
100.0
%
 
$
44,501



67

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,
 
As of and for the Six Months Ended,
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
Non-PCI Loans
 
PCI Loans
 
Total
 
 
Non-PCI Loans
 
PCI Loans
 
Total
 
 
(in thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
51,515

 
$
1,436

 
$
52,951

 
$
56,593

 
$
51,640

 
$
1,026

 
$
52,666

 
$
57,555

Actual charge-offs
(1,221
)
 
52

 
(1,169
)
 
(2,547
)
 
(1,255
)
 
—

 
(1,255
)
 
(4,151
)
Recoveries on loans previously charged off
1,793

 
(352
)
 
1,441

 
1,741

 
3,485

 
—

 
3,485

 
5,992

Net loan recoveries
572

 
(300
)
 
272

 
(806
)
 
2,230

 
—

 
2,230

 
1,841

(Negative provision) provision charged to operating expense
(2,619
)
 
216

 
(2,403
)
 
(3,901
)
 
(4,402
)
 
326

 
(4,076
)
 
(7,510
)
Balance at end of period
$
49,468

 
$
1,352

 
$
50,820

 
$
51,886

 
$
49,468

 
$
1,352

 
$
50,820

 
$
51,886

Allowance for off-balance sheet items:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
1,054

 
$
—

 
$
1,054

 
$
1,557

 
$
1,366

 
$
—

 
$
1,366

 
$
1,248

(Negative provision) provision charged to operating expense
(92
)
 
—

 
(92
)
 
35

 
(404
)
 
—

 
(404
)
 
344

Balance at end of period
$
962

 
$
—

 
$
962

 
$
1,592

 
$
962

 
$
—

 
$
962

 
$
1,592

Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loan (recoveries) charge-offs to average gross loans (1)
-0.08
 %
 
3.21
%
 
-0.04
 %
 
0.14
%
 
-0.32
 %
 
—

 
-0.16
 %
 
-0.16
 %
Net loan (recoveries) charge-offs to gross loans (1)
-0.08
 %
 
3.54
%
 
-0.04
 %
 
0.14
%
 
-0.31
 %
 
—

 
-0.16
 %
 
-0.31
 %
Allowance for loan losses to average gross loans
1.76
 %
 
3.61
%
 
1.79
 %
 
2.26
%
 
1.78
 %
 
3.40
%
 
1.80
 %
 
2.28
 %
Allowance for loan losses to gross loans
1.74
 %
 
3.99
%
 
1.77
 %
 
2.21
%
 
1.74
 %
 
3.99
%
 
1.77
 %
 
2.21
 %
Net loan recoveries to allowance for loan losses (1)
-4.63
 %
 
88.76
%
 
-2.14
 %
 
6.21
%
 
-9.02
 %
 
—

 
-8.78
 %
 
-7.10
 %
Allowance for loan losses to nonperforming loans
176.53
 %
 
—

 
181.35
 %
 
207.26
%
 
176.53
 %
 
—

 
181.35
 %
 
207.26
 %
Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average gross loans during period
$
2,807,940

 
$
37,425

 
$
2,845,365

 
$
2,298,996

 
$
2,785,547

 
$
39,783

 
$
2,825,330

 
$
2,278,193

Gross loans at end of period
$
2,840,264

 
$
33,908

 
$
2,874,172

 
$
2,349,235

 
$
2,840,264

 
$
33,908

 
$
2,874,172

 
$
2,349,235

Nonperforming loans at end of period
$
28,023

 
$
—

 
$
28,023

 
$
25,381

 
$
28,023

 
$
—

 
$
28,023

 
$
25,034

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

Allowance for loan losses decreased $1.1 million, or 2.1 percent, to $50.8 million as of June 30, 2015, compared to $51.9 million as of June 30, 2014. The decrease in allowance for loan losses as of June 30, 2015 compared to June 30, 2014 was due primarily to improvements in historical loss rates. Due to the improvements in historical loss rates, general reserve decreased $5.7 million, or 44.7 percent, to $7.1 million as of June 30, 2015, compared to $12.8 million as of June 30, 2014.

Allowance for loan losses as a percentage of gross loans decreased 44 basis point to 1.77 percent as of June 30, 2015, compared to 2.21 percent as of June 30, 2014. For the three months ended June 30, 2015, a $2.5 million negative provision for loan losses was recorded, compared to a $3.9 million negative provision for loan losses for the three months ended June 30, 2014. For the six months ended June 30, 2015, a $4.5 million negative provision for loan losses was recorded, compared to a $7.2 million negative provision for loan losses for the six months ended June 30, 2014.

An allowance for off-balance sheet exposure, primarily unfunded loan commitments, totaled $962,000 and $1.6 million as of June 30, 2015 and June 30, 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

68

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 June 30, 2015.
The following table presents a summary of net recoveries (charge-offs) by the loan portfolio:
 
As of and for the Three Months Ended
 
As of and for the Six Months Ended
 
Charge-offs
 
Recoveries
 
Net Recoveries (Charge-offs)
 
Charge-offs
 
Recoveries
 
Net Recoveries (Charge-offs)
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
(22
)
 
$
8

 
$
(14
)
 
$
(22
)
 
$
16

 
$
(6
)
Hospitality
(79
)
 
1,074

 
995

 
(79
)
 
1,073

 
994

Other
—

 
181

 
181

 
—

 
206

 
206

Commercial and industrial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial term
(921
)
 
506

 
(415
)
 
(955
)
 
2,120

 
1,165

Commercial lines of credit
—

 
24

 
24

 
 
 
55

 
55

International loans
(199
)
 
—

 
(199
)
 
(199
)
 
15

 
(184
)
Total Non-PCI loans
$
(1,221
)
 
$
1,793

 
$
572

 
$
(1,255
)
 
$
3,485

 
$
2,230

June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial property
 
 
 
 
 
 
 
 
 
 
 
Retail
$
—

 
$
8

 
$
8

 
$
—

 
$
16

 
$
16

Hospitality
(57
)
 
—

 
(57
)
 
(1,085
)
 
25

 
(1,060
)
Gas station
(3
)
 
36

 
33

 
(3
)
 
36

 
33

Other
—

 
43

 
43

 
(100
)
 
2,928

 
2,828

Commercial and industrial loans:
 
 
 
 


 
 
 
 
 


Commercial term
(2,174
)
 
1,379

 
(795
)
 
(2,596
)
 
1,619

 
(977
)
Commercial lines of credit
(300
)
 
184

 
(116
)
 
(300
)
 
452

 
152

International loans
—

 
89

 
89

 
—

 
901

 
901

Consumer loans
(13
)
 
2

 
(11
)
 
(67
)
 
15

 
(52
)
Total Non-PCI loans
$
(2,547
)
 
$
1,741

 
$
(806
)
 
$
(4,151
)
 
$
5,992

 
$
1,841


For the three months ended June 30, 2015, total charge-offs were $1.2 million, a decrease of $1.3 million, or 52.1 percent, from $2.5 million for the same period in 2014, and total recoveries were $1.8 million, an increase of $52,000, or 2.9 percent, from $1.7 million for the same period in 2014. For the three months ended June 30, 2015, net recoveries were $572,000, compared to net charge-offs of $806,000 for the same period in 2014.

For the six months ended June 30, 2015, total charge-offs were $1.3 million, a decrease of $2.9 million, or 69.8 percent, from $4.2 million for the same period in 2014, and total recoveries were $3.5 million, a decrease of $2.5 million, or 41.8 percent, from $6.0 million for the same period in 2014. For the six months ended June 30, 2015, net recoveries were $2.2 million, compared to $1.8 million for the same period in 2014.

69


Deposits

The following table shows the composition of deposits by type as of the dates indicated:
 
June 30, 2015
 
December 31, 2014
 
Balance
 
Percent
 
Balance
 
Percent
 
(in thousands)
Demand – noninterest-bearing
$
1,061,823

 
30.9
%
 
$
1,022,972

 
28.7
%
Interest-bearing:
 
 
 
 
 
 
 
Savings
119,474

 
3.5
%
 
120,659

 
3.4
%
Money market checking and NOW accounts
779,684

 
22.7
%
 
796,490

 
22.4
%
Time deposits of $100,000 or more (1)
861,434

 
25.0
%
 
910,340

 
25.6
%
Other time deposits
617,366

 
17.9
%
 
706,285

 
19.9
%
Total deposits
$
3,439,781

 
100.0
%
 
$
3,556,746

 
100.0
%
                              
(1) 
Includes $361.3 million of time deposits of $250,000 or more.

Deposits decreased $117.0 million, or 3.3 percent, to $3.44 billion as of June 30, 2015 from $3.56 billion as of December 31, 2014. The decrease in deposits resulting was attributable mainly to $88.9 million decreases in other time deposits and $48.9 million decreases in time deposits of $100,000 or more, offset mainly by $38.9 million increases in noninterest-bearing demand deposits.

Core deposits (defined as demand, savings, money market checking, NOW accounts and other time deposits) decreased $68.1 million, or 2.6 percent, to $2.58 billion at June 30, 2015 from $2.65 billion at December 31, 2014. Noninterest-bearing demand deposits as a percentage of deposits increased to 30.9 percent at June 30, 2015 from 28.7 percent at December 31, 2014. We had brokered deposits of $99,000 assumed in the CBI acquisition as of June 30, 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 June 30, 2015, there were no advances 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 in the CBI acquisition.

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.


70

The following table shows the status of our gap position as of June 30, 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
 
Noninterest-
Sensitive
 
Total
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
—

 
$
—

 
$
—

 
$
—

 
$
85,742

 
$
85,742

Interest-bearing deposits in other banks
67,489

 
—

 
—

 
—

 
—

 
67,489

Securities:
 
 
 
 
 
 
 
 
 
 


Fixed rate
24,191

 
52,772

 
284,513

 
210,745

 
—

 
572,221

Floating rate
133,181

 
3,804

 
20,443

 
—

 
—

 
157,428

Fair value adjustments
—

 
—

 
—

 
—

 
(966
)
 
(966
)
Loans:
 
 
 
 
 
 
 
 
 
 


Fixed rate
65,960

 
76,502

 
375,297

 
44,435

 
—

 
562,194

Floating rate
1,081,598

 
167,272

 
1,022,395

 
15,080

 
—

 
2,286,345

Nonaccrual
—

 
—

 
—

 
—

 
69,548

 
69,548

Deferred loan costs, discount, and allowance for loan losses
—

 
—

 
—

 
—

 
(87,843
)
 
(87,843
)
FHLB and FRB stock
—

 
—

 
—

 
29,902

 
—

 
29,902

Other assets
—

 
48,041

 
—

 
20,104

 
160,565

 
228,710

Total assets
$
1,372,419

 
$
348,391

 
$
1,702,648

 
$
320,266

 
$
227,046

 
$
3,970,770

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand – noninterest-bearing
$
—

 
$
—

 
$
—

 
$
—

 
$
1,061,823

 
$
1,061,823

Savings
9,393

 
36,592

 
48,447

 
25,042

 
—

 
119,474

Money market checking and NOW accounts
52,273

 
112,281

 
329,720

 
285,409

 
—

 
779,683

Time deposits
327,548

 
729,812

 
415,482

 
5,959

 
—

 
1,478,801

FHLB advances
—

 
—

 
—

 
—

 
—

 
—

Subordinated debentures
18,623

 
—

 
—

 
—

 
—

 
18,623

Other liabilities
—

 
—

 
—

 
—

 
39,626

 
39,626

Stockholders’ equity
—

 
—

 
—

 
—

 
472,740

 
472,740

Total liabilities and stockholders’ equity
$
407,837

 
$
878,685

 
$
793,649

 
$
316,410

 
$
1,574,189

 
$
3,970,770

Repricing gap
964,582

 
(530,294
)
 
908,999

 
3,856

 
(1,347,143
)
 
 
Cumulative repricing gap
964,582

 
434,288

 
1,343,287

 
1,347,143

 
—

 
 
Cumulative repricing gap as a percentage of assets
24.29
%
 
10.94
%
 
33.83
%
 
33.93
%
 
—

 
 
Cumulative repricing gap as a percentage of interest-earning assets
26.23
%
 
11.81
%
 
36.53
%
 
36.63
%
 
—

 
 
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
$
3,677,347


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

As of June 30, 2015, the cumulative repricing gap for the three-month period was at an asset-sensitive position and was 26.23 percent of interest-earning assets, which increased from 17.82 percent as of December 31, 2014. This increase was due mainly to a $244.9 million increase in floating rate loans and a $150.0 million decrease in FHLB advances, mainly offset by a $52.4 million increase in time deposits, a $46.4 million decrease in fixed rate loans and a $41.8 million decrease in floating rate securities.

71


As of June 30, 2015, the cumulative repricing gap for the twelve-month period was at an asset-sensitive position and was 11.81 percent of interest-earning assets, which increased from 8.96 percent of an asset-sensitive position as of December 31, 2014. This increase was due mainly to a $75.3 million increase in floating rate loans and a $150.0 million decrease in FHLB advances, mainly offset by a $87.2 million decrease in fixed rate loans and $56.6 million decrease in floating rate securities and a $16.9 million decrease in fixed rate securities.
    
The following table summarizes the status of the cumulative gap position as of the dates indicated:
 
Less Than Three Months
 
Less Than Twelve Months
 
June 30, 2015
 
December 31, 2014
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
Cumulative repricing gap
$
964,582

 
$
707,266

 
$
434,288

 
$
355,461

Percentage of assets
24.29
%
 
16.71
%
 
10.94
%
 
8.40
%
Percentage of interest-earning assets
26.23
%
 
17.82
%
 
11.81
%
 
8.96
%

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%
12.72%
 
(1.14)%
 
$
12,605

 
$
(5,752
)
200%
8.30%
 
(0.80)%
 
$
12,170

 
$
(4,060
)
100%
4.11%
 
0.41%
 
$
2,059

 
$
2,065

-100%
(1) 
 
(1) 
 
(1) 
 
(1) 
 
(1) 
Results are not meaningful in a low interest rate environment

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

Capital Resources

Historically, our primary source of capital has been the retention of operating earnings. In order to ensure adequate levels of capital, the Board continually assesses projected sources and uses of capital in conjunction with projected increases in assets and levels of risk. Management considers, among other things, earnings generated from operations, and access to capital from financial markets through the issuance of additional securities, including common stock or notes, to meet our capital needs.
 
At June 30, 2015, the Bank’s total risk-based capital ratio of 15.20 percent, Tier 1 risk-based capital ratio of 13.94 percent, common equity Tier 1 capital ratio of 13.94 percent and Tier 1 leverage capital ratio of 10.99 percent, placed the Bank

72

in the “well capitalized” category pursuant to new capital rule, which is defined as institutions with total risk-based capital ratio equal to or greater than 10.00 percent, Tier 1 risk-based capital ratio equal to or greater than 8.00 percent, common equity Tier 1 capital ratios equal to or greater than 6.50 percent and Tier 1 leverage capital ratio equal to or greater than 5.00 percent.

For a discussion of 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 2015-07, Disclosures for Investment in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which will eliminate the requirement to categorize investments in the fair value hierarchy if their fair value is measured at net asset value per share (or its equivalent) using the practical expedient in the FASB's fair value measurement guidance. Investments eligible for the practical expedient, but for which it has not been applied, will continue to be included in the fair value hierarchy. The effective date for public business entities is fiscal years beginning after December 31, 2015 and early adoption is permitted. Reporting entities are required to adopt the ASU retrospectively. The adoption of FASB ASU 2015-07 is not expected to have a significant impact on our financial condition or result of operations.

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 FASB ASU 2014-08 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.


73


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 FASB ASU 2014-01 effective April 1, 2014. See Note 3 - Accounting for Investment in Qualified Affordable Housing Projects for further details.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of June 30, 2015, Hanmi Financial carried out an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, under the supervision and with the participation of our senior management, including our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial and accounting officer). The purpose of the disclosure controls and procedures is to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

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

74



Part II — Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes in the risk factors previously disclosed under Part I, Item 1A Risk Factors of our 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.

75


Item 6. Exhibits
Exhibit
Number
Document
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document *
101.SCH
XBRL Taxonomy Extension Schema Document *
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document *
101.LAB
XBRL Taxonomy Extension Label Linkbase Document *
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document *
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document *

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


76


Signatures

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

 
 
 
 
Hanmi Financial Corporation
 
 
 
 
Date:
August 10, 2015
 
By:
/s/ C. G. Kum
 
 
 
 
C. G. Kum
 
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
 
By:
/s/ Michael W. McCall
 
 
 
 
Michael McCall
 
 
 
 
Executive Vice President and Chief Financial Officer


77