Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended March 31, 2013

or

 

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

For the Transition Period From                      To                     

Commission File Number: 000-30421

 

 

HANMI FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   95-4788120

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3660 Wilshire Boulevard, Penthouse Suite A

Los Angeles, California

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

 

(213) 382-2200
(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

 

 

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

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

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

 

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

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

As of April 30, 2013, there were 31,588,767 outstanding shares of the Registrant’s Common Stock.

 

 

 


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

THREE MONTHS ENDED MARCH 31, 2013

TABLE OF CONTENTS

 

PART 1 - FINANCIAL INFORMATION   

ITEM 1.

  FINANCIAL STATEMENTS      3   
 

Consolidated Balance Sheets (Unaudited)

     3   
 

Consolidated Statements of Operations (Unaudited)

     4   
 

Consolidated Statements of Comprehensive Income (Unaudited)

     5   
 

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

     6   
 

Consolidated Statements of Cash Flows (Unaudited)

     7   
 

Notes to Consolidated Financial Statements (Unaudited)

     8   

ITEM 2.

  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      33   

ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      54   

ITEM 4.

  CONTROLS AND PROCEDURES      54   
PART II - OTHER INFORMATION   

ITEM 1.

  LEGAL PROCEEDINGS      55   

ITEM 1A.

  RISK FACTORS      55   

ITEM 2.

  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      55   

ITEM 3.

  DEFAULTS UPON SENIOR SECURITIES      56   

ITEM 4.

  MINE SAFETY DISCLOSURES      56   

ITEM 5.

  OTHER INFORMATION      56   

ITEM 6.

  EXHIBITS      56   

SIGNATURES

       57   

 

2


Table of Contents

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Thousands, Except Share Data)

 

     March 31,     December 31,  
     2013     2012  

ASSETS

    

Cash and Due From Banks

   $ 69,642      $ 92,350   

Interest-Bearing Deposits in Other Banks

     75,657        175,697   
  

 

 

   

 

 

 

Cash and Cash Equivalents

     145,299        268,047   

Restricted Cash

     —          5,350   

Securities Available-for-Sale, at Fair Value (Amortized Cost of $413,132 as of March 31, 2013 and $443,712 as of December 31, 2012)

     419,903        451,060   

Loans Held for Sale, at the Lower of Cost or Fair Value

     6,043        8,306   

Loans Receivable, Net of Allowance for Loan Losses of $61,191 as of March 31, 2013 and $63,305 as of December 31, 2012

     2,061,156        1,986,051   

Accrued Interest Receivable

     7,526        7,581   

Premises and Equipment, Net

     14,792        15,150   

Other Real Estate Owned, Net

     900        774   

Customers’ Liability on Acceptances

     2,170        1,336   

Servicing Assets

     6,004        5,542   

Other Intangible Assets, Net

     1,294        1,335   

Investment in Federal Home Loan Bank Stock, at Cost

     16,014        17,800   

Investment in Federal Reserve Bank Stock, at Cost

     12,222        12,222   

Income Tax Assets

     57,084        60,028   

Bank-Owned Life Insurance

     29,284        29,054   

Prepaid Expenses

     2,676        2,084   

Other Assets

     10,056        10,800   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,792,423      $ 2,882,520   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

LIABILITIES:

    

Deposits:

    

Noninterest-Bearing

   $ 709,650      $ 720,931   

Interest-Bearing

     1,623,362        1,675,032   
  

 

 

   

 

 

 

Total Deposits

     2,333,012        2,395,963   

Accrued Interest Payable

     3,192        11,775   

Bank’s Liability on Acceptances

     2,170        1,336   

Federal Home Loan Bank Advances

     2,840        2,935   

Junior Subordinated Debentures

     51,478        82,406   

Accrued Expenses and Other Liabilities

     10,626        9,741   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     2,403,318        2,504,156   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY:

    

Common Stock, $0.001 Par Value; Authorized 62,500,000 Shares; Issued 32,166,661 Shares (31,588,767 Shares Outstanding) and 32,074,434 shares (31,496,540 Shares Outstanding) as of March 31, 2013 and December 31, 2012

     257        257   

Additional Paid-In Capital

     551,064        550,123   

Unearned Compensation

     (44     (57

Accumulated Other Comprehensive Income-Unrealized Gain on Securities Available-for-Sale and Interest-Only Strip, Net of Income Taxes of $1,695 as of March 31, 2013 and $1,946 as of December 31, 2012

     5,095        5,418   

Accumulated Deficit

     (97,409     (107,519

Less Treasury Stock, at Cost; 577,894 Shares as of March 31, 2013 and December 31, 2012

     (69,858     (69,858
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     389,105        378,364   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,792,423      $ 2,882,520   
  

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands, Except Per Share Data)

 

     Three Months Ended  
     March 31,  
     2013     2012  

INTEREST AND DIVIDEND INCOME:

    

Interest and Fees on Loans

   $ 26,799      $ 27,542   

Taxable Interest on Investment Securities

     2,116        2,098   

Tax-Exempt Interest on Investment Securities

     95        102   

Interest on Term Federal Funds Sold

     —          325   

Interest on Federal Funds Sold

     6        128   

Interest on Interest-Bearing Deposits in Other Banks

     88        2   

Dividends on Federal Reserve Bank Stock

     183        68   

Dividends on Federal Home Loan Bank Stock

     108        29   
  

 

 

   

 

 

 

Total Interest and Dividend Income

     29,395        30,294   
  

 

 

   

 

 

 

INTEREST EXPENSE:

    

Interest on Deposits

     3,159        4,919   

Interest on Federal Home Loan Bank Advances

     38        43   

Interest on Junior Subordinated Debentures

     594        799   
  

 

 

   

 

 

 

Total Interest Expense

     3,791        5,761   
  

 

 

   

 

 

 

NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES

     25,604        24,533   

Provision for Credit Losses

     —          2,000   
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

     25,604        22,533   
  

 

 

   

 

 

 

NON-INTEREST INCOME:

    

Service Charges on Deposit Accounts

     3,048        3,168   

Insurance Commissions

     1,213        1,236   

Remittance Fees

     497        454   

Trade Finance Fees

     277        292   

Other Service Charges and Fees

     398        364   

Bank-Owned Life Insurance Income

     230        399   

Gain on Sales of SBA Loans Guaranteed Portion

     2,692        —     

Net Loss on Sales of Other Loans

     (97     (2,393

Net Gain on Sales of Investment Securities

     9        1   

Other Operating Income

     90        112   
  

 

 

   

 

 

 

Total Non-Interest Income

     8,357        3,633   
  

 

 

   

 

 

 

NON-INTEREST EXPENSE:

    

Salaries and Employee Benefits

     9,351        9,110   

Occupancy and Equipment

     2,556        2,595   

Deposit Insurance Premiums and Regulatory Assessments

     234        1,401   

Data Processing

     1,170        1,253   

Other Real Estate Owned Expense

     32        (44

Professional Fees

     2,156        749   

Directors and Officers Liability Insurance

     220        297   

Supplies and Communications

     495        558   

Advertising and Promotion

     672        601   

Loan-Related Expense

     146        200   

Amortization of Other Intangible Assets

     41        71   

Other Operating Expenses

     2,094        1,955   
  

 

 

   

 

 

 

Total Non-Interest Expense

     19,167        18,746   
  

 

 

   

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

     14,794        7,420   

Provision for Income Taxes

     4,684        79   
  

 

 

   

 

 

 

NET INCOME

   $ 10,110      $ 7,341   
  

 

 

   

 

 

 

EARNINGS PER SHARE:

    

Basic

   $ 0.32      $ 0.23   

Diluted

   $ 0.32      $ 0.23   

WEIGHTED-AVERAGE SHARES OUTSTANDING:

    

Basic

     31,538,980        31,470,520   

Diluted

     31,626,667        31,489,569   

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In Thousands)

 

     Three Months Ended  
     March 31,  
     2013     2012  

NET INCOME

   $ 10,110      $ 7,341   

OTHER COMPREHENSIVE INCOME, NET OF TAX

    

Unrealized (Loss) Gain on Securities

    

Unrealized Holding (Loss) Gain Arising During Period

     (568     674   

Less: Reclassification Adjustment for Gain Included in Net Income

     (9     —     

Unrealized Gain on Interest Rate Swap

     —          1   

Unrealized Gain on Interest-only Strip of Servicing Assets

     3        2   

Income Tax Benefit Related to Items of Other Comprehensive Income

     251        —     
  

 

 

   

 

 

 

Other Comprehensive (Loss) Income

     (323     677   
  

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 9,787      $ 8,018   
  

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(In Thousands, Except Number of Shares)

 

    Common Stock - Number of
Shares
    Stockholders’ Equity  
    Gross           Net                       Accumulated                    
    Shares           Shares           Additional           Other     Retained     Treasury     Total  
    Issued and     Treasury     Issued and     Common     Paid-in     Unearned     Comprehensive     Earnings     Stock,     Stockholders’  
    Outstanding     Shares     Outstanding     Stock     Capital     Compensation     Income (Loss)     (Deficit)     at Cost     Equity  

BALANCE AT JANUARY 1, 2012

    32,066,987        (577,786     31,489,201      $ 257      $ 549,744      $ (166   $ 3,524      $ (197,893   $ (69,858   $ 285,608   

Share-Based Compensation Expense

    —          —          —          —          67        25        —          —          —          92   

Comprehensive Income:

                   

Net Income

    —          —          —          —          —          —          —          7,341        —          7,341   

Change in Unrealized Gain on Securities

                   

Available-for-Sale and Interest-Only Strips, Net of Income Taxes

    —          —          —          —          —          —          677        —          —          677   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Comprehensive Income

                      8,018   
                   

 

 

 

BALANCE AT MARCH 31, 2012

    32,066,987        (577,786     31,489,201      $ 257      $ 549,811      $ (141   $ 4,201      $ (190,552   $ (69,858   $ 293,718   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JANUARY 1, 2013

    32,074,434        (577,894     31,496,540      $ 257      $ 550,123      $ (57   $ 5,418      $ (107,519   $ (69,858   $ 378,364   

Share-Based Compensation Expense

    —          —          —          —          84        13        —          —          —          97   

Exercises of Stock Options

    1,679        —          1,679        —          (298     —          —          —          —          (298

Exercises of Stock Warrants

    90,548        —          90,548        —          1,155        —          —          —          —          1,155   

Comprehensive Income:

                   

Net Income

    —          —          —          —          —          —          —          10,110        —          10,110   

Change in Unrealized Gain on Securities

                   

Available-for-Sale and Interest-Only Strips, Net of Income Taxes

    —          —          —          —          —          —          (323     —          —          (323
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Comprehensive Income

                      9,787   
                   

 

 

 

BALANCE AT MARCH 31, 2013

    32,166,661        (577,894     31,588,767      $ 257      $ 551,064      $ (44   $ 5,095      $ (97,409   $ (69,858   $ 389,105   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

 

     Three Months Ended  
     March 31,  
     2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net Income

   $ 10,110      $ 7,341   

Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:

    

Depreciation and Amortization of Premises and Equipment

     504        554   

Amortization of Premiums and Accretion of Discounts on Investment Securities, Net

     769        1,078   

Amortization of Other Intangible Assets

     41        71   

Amortization of Servicing Assets

     329        205   

Share-Based Compensation Expense

     97        92   

Provision for Credit Losses

     —          2,000   

Net Gain on Sales of Investment Securities

     (9     (1

Net (Gain) Loss on Sales of Loans

     (2,595     1,736   

Loss on Investment in Affordable Housing Partnership

     —          220   

Gain on Sales of Other Real Estate Owned

     (5     —     

Gain on Bank-Owned Life Insurance Settlement

     —          (163

Valuation Impairment on Other Real Estate Owned

     7        —     

Lower of Cost or Fair Value Adjustment for Loans Held for Sale

     —          657   

Origination of Loans Held for Sale

     (23,144     (25,866

Proceeds from Life Insurance

     —          344   

Proceeds from Sales of SBA Loans Guaranteed Portion

     30,745        —     

Changes in Fair Value of Stock Warrants

     91        170   

Decrease in Restricted Cash

     5,350        —     

Decrease (Increase) in Accrued Interest Receivable

     55        (140

Increase in Servicing Assets

     (791     —     

Decrease (Increase) in Income Tax Assets

     2,876        (2,428

Increase in Cash Surrender Value of Bank-Owned Life Insurance

     (230     (236

Increase in Prepaid Expenses

     (592     (1,606

Increase in Other Assets

     (87     (4,957

Decrease in Accrued Interest Payable

     (8,583     (430

Increase in Other Liabilities

     2,582        247   
  

 

 

   

 

 

 

Net Cash Provided (Used In) By Operating Activities

     17,520        (21,112
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from Redemption of Federal Home Loan Bank and Federal Reserve Bank Stock

     1,786        1,093   

Proceeds from Matured or Called Securities Available-for-Sale

     20,820        40,873   

Proceeds from Sales of Securities Available-for-sale

     9,000        3,000   

Proceeds from Matured or Called Securities Held to Maturity

     —          135   

Proceeds from Sales of Other Real Estate Owned

     281        —     

Proceeds from Sales of Loans Held for Sale

     1,454        26,961   

Net Increase in Loans Receivable

     (79,815     (20,353

Purchase of Loans Receivable

     —          (67,428

Purchases of Term Federal Fund

     —          (5,000

Purchases of Securities Available-for-Sale

     —          (18,113

Purchases of Premises and Equipment

     (146     (223
  

 

 

   

 

 

 

Net Cash Used In Investing Activities

     (46,620     (39,055
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

(Decrease) Increase in Deposits

     (62,951     18,816   

Proceeds from Exercise of Stock Options

     21        —     

Proceeds from Exercise of Stock Warrant

     305        —     

Repayment of Long-Term Federal Home Loan Bank Advances

     (95     (90

Redemption of Junior Subordinated Debenture

     (30,928     —     
  

 

 

   

 

 

 

Net Cash (Used In) Provided By Financing Activities

     (93,648     18,726   
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (122,748     (41,441

Cash and Cash Equivalents at Beginning of Year

     268,047        201,683   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 145,299      $ 160,242   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash Paid During the Period for:

    

Interest Paid

   $ 12,374      $ 5,331   

Income Taxes Paid

   $ 1,800      $ 2,507   

Non-Cash Activities:

    

Transfer of Loans Receivable to Other Real Estate Owned

   $ 513      $ 1,080   

Transfer of Loans Receivable to Loans Held for Sale

   $ 3,373      $ 37,481   

Conversion of Stock Warrant into Common Stock

   $ 850      $ —     

Income Tax Benefit Related to Items of Other Comprehensive Income

   $ 251      $ —     

Change in Unrealized Gain or Loss in Accumulated Other Comprehensive Income

   $ 568      $ —     

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2013 AND 2012

NOTE 1 — BASIS OF PRESENTATION

Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we” or “us”) is a Delaware corporation and is subject to the Bank Holding Company Act of 1956, as amended. Our primary subsidiary is Hanmi Bank (the “Bank”), a California state chartered bank. Our other subsidiaries are Chun-Ha Insurance Services, Inc., a California corporation (“Chun-Ha”), and All World Insurance Services, Inc., a California corporation (“All World”).

In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial Corporation and Subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended March 31, 2013, 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, 2012 (the “2012 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.

Descriptions of our significant accounting policies are included in “Note 2 Summary of Significant Accounting Policies” in our 2012 Annual Report on Form 10-K.

NOTE 2 — INVESTMENT SECURITIES

The following is a summary of investment securities available-for-sale:

 

            Gross      Gross      Estimated  
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gain      Loss      Value  
     (In Thousands)  

March 31, 2013:

           

Mortgage-Backed Securities (1)

   $ 146,889       $ 3,008       $ 503       $ 149,394   

Collateralized Mortgage Obligations (1)

     90,972         2,081         185         92,868   

U.S. Government Agency Securities

     80,991         116         177         80,930   

Municipal Bonds-Tax Exempt

     12,185         526         —           12,711   

Municipal Bonds-Taxable

     44,159         2,124         127         46,156   

Corporate Bonds

     20,473         200         301         20,372   

SBA Loan Pool Securities

     14,084         —           166         13,918   

Other Securities

     3,025         58         53         3,030   

Equity Securities

     354         170         —           524   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available-for-Sale

   $ 413,132       $ 8,283       $ 1,512       $ 419,903   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012:

           

Mortgage-Backed Securities (1)

   $ 157,185       $ 3,327       $ 186       $ 160,326   

Collateralized Mortgage Obligations (1)

     98,821         1,775         109         100,487   

U.S. Government Agency Securities

     92,990         222         94         93,118   

Municipal Bonds-Tax Exempt

     12,209         603         —           12,812   

Municipal Bonds-Taxable

     44,248         2,029         135         46,142   

Corporate Bonds

     20,470         176         246         20,400   

SBA Loan Pool Securities

     14,104         4         82         14,026   

Other Securities

     3,331         73         47         3,357   

Equity Securities

     354         78         40         392   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available-for-Sale

   $ 443,712       $ 8,287       $ 939       $ 451,060   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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The amortized cost and estimated fair value of investment securities at March 31, 2013, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2042, expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Available-for-Sale  
     Amortized      Estimated  
     Cost      Fair Value  
     (In Thousands)  

Within One Year

   $ —         $ —     

Over One Year Through Five Years

     28,245         28,281   

Over Five Years Through Ten Years

     101,508         102,738   

Over Ten Years

     45,164         46,098   

Mortgage-Backed Securities

     146,889         149,394   

Collateralized Mortgage Obligations

     90,972         92,868   

Equity Securities

     354         524   
  

 

 

    

 

 

 

Total

   $ 413,132       $ 419,903   
  

 

 

    

 

 

 

In accordance with FASB ASC 320, “Investments – Debt and Equity Securities,” which amended current other-than-temporary impairment (“OTTI”) guidance, we periodically evaluate our investments for OTTI. There was no OTTI charged during the first quarter of 2013.

Gross unrealized losses on investment securities available-for-sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of March 31, 2013 and December 31, 2012:

 

     Holding Period  
     Less Than 12 Months      12 Months or More      Total  

Investment Securities Available-for-Sale

   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)  

March 31, 2013:

                          

Mortgage-Backed Securities

   $ 503       $ 35,523         12       $ —         $ —           —         $ 503       $ 35,523         12   

Collateralized Mortgage Obligations

     185         18,076         7         —           —           —           185         18,076         7   

U.S. Government Agency Securities

     177         35,799         12         —           —           —           177         35,799         12   

Municipal Bonds-Taxable

     124         4,577         4         3         464         1         127         5,041         5   

Corporate Bonds

     116         4,871         1         185         10,801         3         301         15,672         4   

SBA Loan Pool Securities

     166         13,918         4         —           —           —           166         13,918         4   

Other Securities

     1         25         2         52         947         1         53         972         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,272       $ 112,789         42       $ 240       $ 12,212         5       $ 1,512       $ 125,001         47   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012:

                          

Mortgage-Backed Securities

   $ 186       $ 28,354         10       $ —         $ —           —         $ 186       $ 28,354         10   

Collateralized Mortgage Obligations

     109         14,344         5         —           —           —           109         14,344         5   

U.S. Government Agency Securities

     94         26,894         9         —           —           —           94         26,894         9   

Municipal Bonds-Taxable

     126         4,587         4         9         1,964         3         135         6,551         7   

Corporate Bonds

             —           —           246         10,738         3         246         10,738         3   

SBA Loan Pool Securities

     82         11,004         3         —           —           —           82         11,004         3   

Other Securities

     1         12         1         46         953         1         47         965         2   

Equity Securities

     40         96         1         —           —           —           40         96         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 638       $ 85,291         33       $ 301       $ 13,655         7       $ 939       $ 98,946         40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of March 31, 2013 and December 31, 2012 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status as of March 31, 2013. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

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

 

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Table of Contents

The Company does not intend to sell these securities and it is not more likely than not that we will be required to sell the investments before the recovery of its amortized cost bases. In addition, the unrealized losses on municipal and corporate bonds are not considered other-than-temporarily impaired as the bonds are rated investment grade and there are no credit quality concerns with the issuers. Interest payments have been made as scheduled, and management believes this will continue in the future and that the bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of March 31, 2013 and December 31, 2012 are not other-than-temporarily impaired, and therefore, no impairment charges as of March 31, 2013 and December 31, 2012 are warranted.

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

 

     Three Months Ended  
     March 31,  
     2013      2012  
     (In Thousands)  

Gross Realized Gains on Sales of Investment Securities

   $ 9       $ 1   

Gross Realized Losses on Sales of Investment Securities

             —     
  

 

 

    

 

 

 

Net Realized Gains on Sales of Investment Securities

   $ 9       $ 1   
  

 

 

    

 

 

 

Proceeds from Sales of Investment Securities

   $ 9,000       $ 3,000   

Tax Expense on Sales of Investment Securities

   $ 4       $ —     

For the three months ended March 31, 2013, $577,000 of net unrealized loss arose during the period and was included in comprehensive income, and there was a $9,000 gain in earnings resulting from the redemption of investment securities that had previously been recorded as net unrealized gains of $34,000 in comprehensive income. For the three months ended March 31, 2012, $674,000 of net unrealized gains arose during the period and was included in comprehensive income, and there was a $1,000 gain in earnings resulting from the redemption of investment securities that had previously been recorded as net unrealized gains of $4,000.

Investment securities available-for-sale with carrying values of $16.5 million and $18.2 million as of March 31, 2013 and December 31, 2012, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.

 

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Table of Contents

NOTE 3 — 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 non-performing loans, problem loans, and policy adjustments.

Real estate loans are subject to 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 SBA loans. Consumer loans consist of auto loans, credit cards, personal loans, and home equity lines of credit. We maintain management loan review and monitoring departments that review and monitor pass graded loans as well as problem loans to prevent further deterioration.

Concentrations of Credit: The majority of the Bank’s loan portfolio consists of commercial real estate loans 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. Most of the Bank’s lending activity occurs within Southern California.

Loans Receivable

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

 

     March 31,     December 31,  
     2013     2012  
     (In Thousands)  

Real Estate Loans:

    

Commercial Property

   $ 831,019      $ 787,094   

Residential Property

     94,735        101,778   
  

 

 

   

 

 

 

Total Real Estate Loans

     925,754        888,872   

Commercial and Industrial Loans:

    

Commercial Term (1)

     921,009        884,364   

Commercial Lines of Credit (2)

     49,608        56,121   

SBA Loans (3)

     158,687        148,306   

International Loans

     31,448        34,221   
  

 

 

   

 

 

 

Total Commercial and Industrial Loans

     1,160,752        1,123,012   

Consumer Loans

     35,180        36,676   
  

 

 

   

 

 

 

Total Gross Loans

     2,121,686        2,048,560   

Allowance for Loans Losses

     (61,191     (63,305

Deferred Loan Fees

     661        796   
  

 

 

   

 

 

 

Loans Receivable, Net

   $ 2,061,156      $ 1,986,051   
  

 

 

   

 

 

 

 

(1) Includes owner-occupied property loans of $882.5 million and $774.2 million as of March 31, 2013 and December 31, 2012, respectively.
(2) Includes owner-occupied property loans of $1.3 million and $1.4 million as of March 31, 2013 and December 31, 2012, respectively.
(3) Includes owner-occupied property loans of $141.9 million and $128.4 million as of March 31, 2013 and December 31, 2012, respectively.

Accrued interest on loans receivable was $5.5 million and $5.4 million at March 31, 2013 and December 31, 2012, respectively. At March 31, 2013 and December 31, 2012, loans receivable totaling $614.8 million and $524.0 million, respectively, were pledged to secure advances from the FHLB and the FRB’s federal discount window.

 

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The following table details the information on the sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the three months ended March 31, 2013 and 2012:

 

     Real
Estate
    Commercial
and Industrial
    Consumer      Total  
     (In Thousands)  

March 31, 2013

         

Balance at Beginning of Period

   $ —        $ 8,306      $ —         $ 8,306   

Origination of Loans Held For Sale

     —          23,144        —           23,144   

Reclassification from Loans Receivable to Loans Held for Sale

     —          3,373        —           3,373   

Sales of Loans Held for Sale

     —          (28,765     —           (28,765

Principal Payoffs and Amortization

     —          (15     —           (15
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at End of Period

   $ —        $ 6,043      $ —         $ 6,043   
  

 

 

   

 

 

   

 

 

    

 

 

 

March 31, 2012

         

Balance at Beginning of Period

   $ 11,068      $ 11,519      $ —         $ 22,587   

Origination of Loans Held For Sale

     —          25,866        —           25,866   

Reclassification from Loans Receivable to Loans Held for Sale

     17,076        20,405        —           37,481   

Reclassification from Loans Receivable to Other Real Estate Owned

     (360     —          —           (360

Sales of Loans Held for Sale

     (16,794     (11,903     —           (28,697

Principal Payoffs and Amortization

     (111     (116     —           (227

Valuation Adjustments

     —          (657     —           (657
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at End of Period

   $ 10,879      $ 45,114      $ —         $ 55,993   
  

 

 

   

 

 

   

 

 

    

 

 

 

For the three months ended March 31, 2013, a loan receivable of $3.4 million was reclassified as loans held for sale, and loans held for sale of $28.8 million were sold. For the three months ended March 31, 2012, loans receivable of $37.5 million were reclassified as loans held for sale, and loans held for sale of $28.7 million were sold.

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

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

 

     As of and for the  
     Three Months Ended  
     March 31,     December 31,     March 31,  
     2013     2012     2012  
     (In Thousands)  

Allowance for Loan Losses:

      

Balance at Beginning of Period

   $ 63,305      $ 66,107      $ 89,936   

Actual Charge-Offs

     (3,024     (3,966     (12,321

Recoveries on Loans Previously Charged Off

     714        757        1,037   
  

 

 

   

 

 

   

 

 

 

Net Loan Charge-Offs

     (2,310     (3,209     (11,284

Provision Charged to Operating Expense

     196        407        2,400   
  

 

 

   

 

 

   

 

 

 

Balance at End of Period

   $ 61,191      $ 63,305      $ 81,052   
  

 

 

   

 

 

   

 

 

 

Allowance for Off-Balance Sheet Items:

      

Balance at Beginning of Period

   $ 1,824      $ 2,231      $ 2,981   

Provision Charged to Operating Expense

     (196     (407     (400
  

 

 

   

 

 

   

 

 

 

Balance at End of Period

   $ 1,628      $ 1,824      $ 2,581   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table details the information on the allowance for loan losses by portfolio segment for the three months ended March 31, 2013 and 2012:

 

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

March 31, 2013

          

Allowance for Loan Losses:

          

Beginning Balance

   $ 18,180      $ 41,928      $ 2,280      $ 917      $ 63,305   

Charge-Offs

     (213     (2,647     (164     —          (3,024

Recoveries on Loans Previously Charged Off

     8        657        49        —          714   

Provision

     (143     (378     (370     1,087        196   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 17,832      $ 39,560      $ 1,795      $ 2,004      $ 61,191   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 95      $ 4,388      $ 401      $ —        $ 4,884   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 17,737      $ 35,172      $ 1,394      $
 
 
2,004
  
  
  $ 56,307   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans Receivable:

          

Ending Balance

   $ 925,754      $ 1,160,752      $ 35,180      $ —        $ 2,121,686   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 8,047      $ 39,965      $ 1,639      $ —        $ 49,651   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 917,707      $ 1,120,787      $ 33,541      $ —        $ 2,072,035   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2012

          

Allowance for Loan Losses:

          

Beginning Balance

   $ 19,637      $ 66,005      $ 2,243      $ 2,051      $ 89,936   

Charge-Offs

     (2,842     (9,115     (364     —          (12,321

Recoveries on Loans Previously Charged Off

     —          1,013        24        —          1,037   

Provision

     5,435        (3,265     341        (111     2,400   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 22,230      $ 54,638      $ 2,244      $ 1,940      $ 81,052   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 536      $ 16,686      $ —        $ —        $ 17,222   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 21,694      $ 37,952      $ 2,244      $
 
 
1,940
  
  
  $ 63,830   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans Receivable:

          

Ending Balance

   $ 834,056      $ 1,102,140      $ 40,782      $ —        $ 1,976,978   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 16,395      $ 50,960      $ 402      $ —        $ 67,757   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 817,661      $ 1,051,180      $ 40,380      $ —        $ 1,909,221   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credit Quality Indicators

As part of the on-going monitoring of the credit quality of our loan portfolio, we utilize an internal loan grading system to identify credit risk and assign an appropriate grade (from (0) to (8)) for each and every loan in our loan portfolio. All loans are reviewed by a third-party loan reviewer on a semi-annual basis. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:

Pass: Pass loans, grades (0) to (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 (5),” “Substandard (6)” or “Doubtful (7).” This category is the strongest level of the Bank’s loan grading system. It incorporates all performing loans with no credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans. Following are sub categories within the Pass category, or grades (0) to (4):

 

  Pass (0): Loans or commitments secured in full by cash or cash equivalents.

 

  Pass (1): Loans or commitments requiring a very strong, well-structured credit relationship with an established borrower. The relationship should be supported by audited financial statements indicating cash flow, well in excess of debt service requirement, excellent liquidity, and very strong capital.

 

  Pass (2): Loans or commitments requiring a well-structured credit that may not be as seasoned or as high quality as grade (1). Capital, liquidity, debt service capacity, and collateral coverage must all be well above average. This grade includes individuals with substantial net worth supported by liquid assets and strong income.

 

  Pass (3): Loans or commitments to borrowers exhibiting a fully acceptable credit risk. These borrowers should have sound balance sheets and significant cash flow coverage, although they may be somewhat more leveraged and exhibit greater fluctuations in earning and financing but generally would be considered very attractive to the Bank as a borrower. The borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans with this grade must have characteristics that place them well above the minimum underwriting requirements. Asset-based borrowers assigned this grade must exhibit extremely favorable leverage and cash flow characteristics and consistently demonstrate a high level of unused borrowing capacity.

 

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Table of Contents
  Pass (4): Loans or commitments to borrowers exhibiting either somewhat weaker balance sheets or positive, but inconsistent, cash flow coverage. These borrowers may exhibit somewhat greater credit risk, and as a result, the Bank may have secured its exposure to mitigate the risk. If so, the collateral taken should provide an unquestionable ability to repay the indebtedness in full through liquidation, if necessary. Cash flows should be adequate to cover debt service and fixed obligations, although there may be a question about the borrower’s ability to provide alternative sources of funds in emergencies. Better quality real estate and asset-based borrowers who fully comply with all underwriting standards and are performing according to projections would be assigned this grade.

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

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

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

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

 

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Table of Contents
     Pass
(Grade 0-4)
     Criticized
(Grade 5)
     Classified
(Grade 6-7)
     Total Loans  
     (In Thousands)  

March 31, 2013

           

Real Estate Loans:

           

Commercial Property

           

Retail

   $ 395,952       $ 3,946       $ 3,304       $ 403,202   

Land

     5,677         —           8,062         13,739   

Other

     401,291         12,070         717         414,078   

Residential Property

     92,735         —           2,000         94,735   

Commercial and Industrial Loans:

           

Commercial Term

           

Unsecured

     80,022         624         17,854         98,500   

Secured By Real Estate

     760,095         15,838         46,576         822,509   

Commercial Lines of Credit

     46,908         849         1,851         49,608   

SBA Loans

     146,389         1,115         11,183         158,687   

International Loans

     30,018         —           1,430         31,448   

Consumer Loans

     32,393         190         2,597         35,180   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Gross Loans

   $ 1,991,480       $ 34,632       $ 95,574       $ 2,121,686   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

           

Real Estate Loans:

           

Commercial Property

           

Retail

   $ 386,650       $ 3,971       $ 2,324       $ 392,945   

Land

     5,491         —           8,516         14,007   

Other

     366,518         12,132         1,492         380,142   

Residential Property

     99,250         —           2,528         101,778   

Commercial and Industrial Loans:

           

Commercial Term

           

Unsecured

     87,370         663         22,139         110,172   

Secured By Real Estate

     710,723         13,038         50,431         774,192   

Commercial Lines of Credit

     53,391         863         1,867         56,121   

SBA Loans

     136,058         1,119         11,129         148,306   

International Loans

     34,221         —           —           34,221   

Consumer Loans

     33,707         201         2,768         36,676   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Gross Loans

   $ 1,913,379       $ 31,987       $ 103,194       $ 2,048,560   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following is an aging analysis of past due loans, disaggregated by loan class, as of March 31, 2013 and December 31, 2012:

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or
More
Past Due
     Total Past Due      Current      Total Loans      Accruing 90
Days or More
Past Due
 
     (In Thousands)  

March 31, 2013

                    

Real Estate Loans:

                    

Commercial Property

                    

Retail

   $ 2,004       $ —         $ —         $ 2,004       $ 401,198       $ 403,202       $ —     

Land

     —           —           —           —           13,739         13,739         —     

Other

     —           —           —           —           414,078         414,078         —     

Construction

     —           —           —           —           —           —           —     

Residential Property

     222         —           819         1,041         93,694         94,735         —     

Commercial and Industrial Loans:

                    

Commercial Term

                    

Unsecured

     1,005         724         1,470         3,199         95,301         98,500         —     

Secured By Real Estate

     —           122         926         1,048         821,461         822,509         —     

Commercial Lines of Credit

     238         —           604         842         48,766         49,608         —     

SBA Loans

     4,158         1,205         4,006         9,369         149,318         158,687         —     

International Loans

     —           —           —           —           31,448         31,448         —     

Consumer Loans

     307         16         571         894         34,286         35,180         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Gross Loans

   $ 7,934       $ 2,067       $ 8,396       $ 18,397       $ 2,103,289       $ 2,121,686       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

                    

Real Estate Loans:

                    

Commercial Property

                    

Retail

   $ —         $ 111       $ —         $ 111       $ 392,834       $ 392,945       $ —     

Land

     —           —           335         335         13,672         14,007         —     

Other

     —           —           —           —           380,142         380,142         —     

Construction

     —           —           —           —           —           —           —     

Residential Property

     —           588         311         899         100,879         101,778         —     

Commercial and Industrial Loans:

                    

Commercial Term

                    

Unsecured

     918         1,103         1,279         3,300         106,872         110,172         —     

Secured By Real Estate

     1,949         —           926         2,875         771,317         774,192         —     

Commercial Lines of Credit

     —           188         416         604         55,517         56,121         —     

SBA Loans

     3,759         1,039         2,800         7,598         140,708         148,306         —     

International Loans

     —           —           —           —           34,221         34,221         —     

Consumer Loans

     61         146         538         745         35,931         36,676         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Gross Loans

   $ 6,687       $ 3,175       $ 6,605       $ 16,467       $ 2,032,093       $ 2,048,560       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired Loans

Loans are considered impaired when non-accrual and principal or interest payments have been contractually past due for 90 days or more, unless the loan is both well-collateralized and in the process of collection; or they are classified as Troubled Debt Restructuring (“TDR”) loans to offer terms not typically granted by the Bank; or when current information or events make it unlikely to collect in full according to the contractual terms of the loan agreements; or there is a deterioration in the borrower’s financial condition that raises uncertainty as to timely collection of either principal or interest; or full payment of both interest and principal is in doubt according to the original contractual terms.

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

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

 

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Table of Contents

The following table provides information on impaired loans, disaggregated by loan class, as of the dates indicated:

 

     Recorded
Investment
     Unpaid Principal
Balance
     With No
Related
Allowance
Recorded
     With an
Allowance
Recorded
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (In Thousands)  

March 31, 2013

                    

Real Estate Loans:

                    

Commercial Property

                    

Retail

   $ 2,785       $ 2,838       $ 1,835       $ 950       $ 42       $ 2,796       $ 26   

Land

     1,687         1,937         1,687         —           —           1,712         40   

Other

     526         526         —           526         53         527         4   

Construction

     —           —           —           —           —           —           —     

Residential Property

     3,049         3,104         3,049         —           —           3,059         27   

Commercial and Industrial Loans:

                    

Commercial Term

                    

Unsecured

     13,064         14,006         4,206         8,858         3,328         13,254         186   

Secured By Real Estate

     17,449         18,592         15,575         1,874         425         17,513         313   

Commercial Lines of Credit

     1,505         1,702         1,505         —           —           1,512         15   

SBA Loans

     6,517         10,101         4,766         1,750         578         6,473         273   

International Loans

     1,430         1,430         859         572         57         1,498         —     

Consumer Loans

     1,639         1,710         391         1,248         401         1,643         12   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Gross Loans

   $ 49,651       $ 55,946       $ 33,873       $ 15,778       $ 4,884       $ 49,987       $ 896   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

                    

Real Estate Loans:

                    

Commercial Property

                    

Retail

   $ 2,930       $ 3,024       $ 2,930       $ —         $ —         $ 2,357       $ 136   

Land

     2,097         2,307         2,097         —           —           2,140         179   

Other

     527         527         —           527         67         835         43   

Construction

     —           —           —           —           —           6,012         207   

Residential Property

     3,265         3,308         1,866         1,399         94         3,268         164   

Commercial and Industrial Loans:

                    

Commercial Term

                    

Unsecured

     14,532         15,515         6,826         7,706         2,144         14,160         821   

Secured By Real Estate

     22,050         23,221         9,520         12,530         2,319         21,894         1,723   

Commercial Lines of Credit

     1,521         1,704         848         673         230         1,688         64   

SBA Loans

     6,170         10,244         4,294         1,876         762         7,173         1,131   

International Loans

     —           —           —           —           —           —           —     

Consumer Loans

     1,652         1,711         449         1,203         615         1,205         73   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Gross Loans

   $ 54,744       $ 61,561       $ 28,830       $ 25,914       $ 6,231       $ 60,732       $ 4,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended,  
     March 31,     March 31,  
     2013     2012  
     (In Thousands)  

Interest Income That Would Have Been Recognized Had Impaired Loans

    

Performed in Accordance With Their Original Terms

   $ 1,068      $ 1,428   

Less: Interest Income Recognized on Impaired Loans

     (896     (1,106
  

 

 

   

 

 

 

Interest Foregone on Impaired Loans

   $ 172      $ 322   
  

 

 

   

 

 

 

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

Non-Accrual Loans

Loans are placed on non-accrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on non-accrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When a loan is placed on non-accrual 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. Non-accrual loans may be restored to accrual status when principal and interest payments become current and full repayment is expected.

 

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Table of Contents

The following table details non-accrual loans, disaggregated by loan class, for the periods indicated:

 

     March 31,      December 31,  
     2013      2012  
     (In Thousands)  

Real Estate Loans:

     

Commercial Property

     

Retail

   $ 950       $ 1,079   

Land

     1,687         2,097   

Other

     —           —     

Construction

     —           —     

Residential Property

     1,638         1,270   

Commercial and Industrial Loans:

     

Commercial Term

     

Unsecured

     7,253         8,311   

Secured By Real Estate

     6,353         8,679   

Commercial Lines of Credit

     1,505         1,521   

SBA Loans

     11,852         12,563   

International Loans

     —           —     

Consumer Loans

     1,655         1,759   
  

 

 

    

 

 

 

Total Non-Accrual Loans

   $ 32,893       $ 37,279   
  

 

 

    

 

 

 

The following table details non-performing assets as of the dates indicated:

 

     March 31,      December 31,  
     2013      2012  
     (In Thousands)  

Non-Accrual Loans

   $ 32,893       $ 37,279   

Loans 90 Days or More Past Due and Still Accruing

             —     
  

 

 

    

 

 

 

Total Non-Performing Loans

     32,893         37,279   

Other Real Estate Owned

     900         774   
  

 

 

    

 

 

 

Total Non-Performing Assets

   $ 33,793       $ 38,053   
  

 

 

    

 

 

 

Loans on non-accrual status, excluding loans held for sale, totaled $32.9 million as of March 31, 2013, compared to $37.3 million as of December 31, 2012, representing an 11.8 percent decrease. Delinquent loans (defined as 30 days or more past due), excluding loans held for sale, were $18.4 million as of March 31, 2013, compared to $16.5 million as of December 31, 2012, representing an 11.7 percent increase.

As of March 31, 2013, other real estate owned (“OREO”) consisted of two properties in Virginia and California. For the three months ended March 31, 2013, one property was transferred from loans receivable to other real estate owned at fair value less aggregate selling costs of $513,000, and a valuation adjustment of $126,000 was recorded. As of December 31, 2012, there were two properties located in Illinois and Virginia with a combined carrying value of $774,000 and no valuation adjustment.

Troubled Debt Restructuring

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

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

During the three months ended March 31, 2013, we restructured monthly payments on 4 loans, with a net carrying value of $1.6 million as of March 31, 2013, through temporary payment structure modifications or re-amortization. For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms are probable.

 

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Table of Contents

The following table details troubled debt restructurings, disaggregated by concession type and by loan type, as of March 31, 2013 and December 31, 2012:

 

     Non-Accrual TDRs      Accrual TDRs  
     Deferral
of
Principal
     Deferral
of
Principal
and
Interest
     Reduction
of
Principal
and
Interest
     Extension
of
Maturity
     Total      Deferral
of
Principal
     Deferral
of
Principal
and
Interest
     Reduction
of
Principal
and
Interest
     Extension
of
Maturity
     Total  
     (In Thousands)  

March 31, 2013

                             

Real Estate Loans:

                             

Commercial Property

                             

Retail

   $ —         $ —         $ —         $ 950       $ 950       $ 350       $ —         $ —         $ 175       $ 525   

Other

     —           —           —           —           —           526         —           —           —           526   

Residential Property

     819         —           —           —           819         —           —           —           —           —     

Commercial and Industrial Loans:

                             

Commercial Term

                             

Unsecured

     —           576         4,029         998         5,603         922         —           794         2,776         4,492   

Secured By Real Estate

     2,263         1,085         298         —           3,646         2,139         —           512         4,527         7,178   

Commercial Lines of Credit

     663         —           188         238         1,089         —           —           —           —           —     

SBA Loans

     2,865         1,237         781         —           4,883         453         —           80         —           533   

International Loans

     —           —           —           —           —           —           —           1,430         —           1,430   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,610       $ 2,898       $ 5,296       $ 2,186       $ 16,990       $ 4,390       $ —         $ 2,816       $ 7,478       $ 14,684   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

                             

Real Estate Loans:

                             

Commercial Property

                             

Retail

   $ —         $ —         $ —         $ 1,080       $ 1,080       $ 357       $ —         $ —         $ 175       $ 532   

Other

     —           —           —           —           —           527         —           —           —           527   

Residential Property

     827         —           —           —           827         —           572         —           —           572   

Commercial and Industrial Loans:

                             

Commercial Term

                             

Unsecured

     —           658         4,558         1,413         6,629         976         —           1,090         3,260         5,326   

Secured By Real Estate

     2,317         1,343         318         —           3,978         4,444         —           448         4,547         9,439   

Commercial Lines of Credit

     673         —           188         244         1,105         —              —           —           —     

SBA Loans

     2,831         1,287         1,032         —           5,150         484         —           100         —           584   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,648       $ 3,288       $ 6,096       $ 2,737       $ 18,769       $ 6,788       $ 572       $ 1,638       $ 7,982       $ 16,980   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

The following table details troubled debt restructuring, disaggregated by loan class, for the three months ended March 31, 2013 and 2012:

 

     March 31, 2013      March 31, 2012  
     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)  

Real Estate Loans:

                 

Commercial Property

                 

Retail (1)

     —         $ —         $ —           1       $ 102       $ 102   

Other (2)

     —           —           —           2         509         504   

Commercial and Industrial Loans:

                 

Commercial Term

                 

Unsecured (3)

     1         197         198         20         3,615         3,537   

Secured By Real Estate (4)

     —           —           —           2         1,813         1,801   

SBA Loans (5)

     1         8         7         6         472         455   

International Loans (6)

     2         1,584         1,430         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4       $ 1,789       $ 1,635         31       $ 6,511       $ 6,399   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes a modification of $102,000 through an extension of maturity for the three months ended March 31, 2012.
(2) Includes modifications of $504,000 through extensions of maturity for the three months ended March 31, 2012.
(3) Includes a modification of $198,000 through an extension of maturity for the three months ended March 31, 2013, and modifications of $1.6 million through reductions of principal or accrued interest and $1.9 million through extensions of maturity for the three months ended March 31, 2012.
(4) Includes modifications of $1.3 million through a reduction of principal or accrued interest and $501,000 through an extension of maturity for the three months ended March 31, 2012.
(5) Includes a modification of $7,000 through a payment deferral for the three months ended March 31, 2013, and modifications of 133,000 through payment deferrals and $322,000 through reductions of principal or accrued interest for the three months ended March 31, 2012.
(6) Includes modifications of $1.4 million through reductions of principal or accrued interest for the three months ended March 31, 2013.

As of March 31, 2013 and December 31, 2012, total TDRs, excluding loans held for sale, were $31.7 million and $35.7 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered to the borrower, for economic or legal reasons related to the borrower’s financial difficulties. Loans are considered to be TDRs if they were restructured through payment structure modifications such as reducing the amount of principal and interest due monthly and/or allowing for interest only monthly payments for six months or less. All TDRs are impaired and are individually evaluated for specific impairment using one of these three criteria: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent.

At March 31, 2013 and December 31, 2012, TDRs, excluding loans held for sale, were subjected to specific impairment analysis, and $3.7 million and $3.6 million, respectively, of reserves relating to these loans were included in the allowance for loan losses.

 

20


Table of Contents

The following table details troubled debt restructurings that defaulted subsequent to the modifications occurring within the previous twelve months, disaggregated by loan class, for the three months ended March 31, 2013 and 2012:

 

     Three Months Ended  
     March 31, 2013      March 31, 2012  
     Number
of
Loans
     Recorded
Investment
     Number
of
Loans
     Recorded
Investment
 
     (In Thousands)  

Real Estate Loans:

           

Commercial Property

           

Retail

     —         $ —           1       $ 102   

Other

     —           —           1         279   

Residential Property

     —           —           1         865   

Commercial and Industrial Loans:

           

Commercial Term

           

Unsecured

     7         730         10         3,401   

Secured By Real Estate

     1         1,306         —           —     

Commercial Lines of Credit

     1         188         —           —     

SBA Loans

     1         32         10         848   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     10       $ 2,256         23       $ 5,495   
  

 

 

    

 

 

    

 

 

    

 

 

 

Servicing Assets

The changes in servicing assets were as follows for the three months ended March 31, 2013 and 2012:

 

     March 31,     March 31,  
     2013     2012  
     (In Thousands)  

Balance at Beginning of Period

   $ 5,542      $ 3,720   

Additions

     791        —     

Amortization

     (329     (205
  

 

 

   

 

 

 

Balance at End of Period

   $ 6,004      $ 3,515   
  

 

 

   

 

 

 

At March 31, 2013 and 2012, we serviced loans sold to unaffiliated parties in the amounts of $316.2 million and $211.1 million, respectively. These represented loans that have been sold for which the Bank continues to provide servicing. These loans are maintained off balance sheet and are not included in the loans receivable balance. All of the loans being serviced were SBA loans.

NOTE 4 — INCOME TAXES

The Company’s effective tax rate was 31.66% and 1.07% with income tax expenses of $4.7 million and $79,000 for the three months ended March 31, 2013 and 2012, respectively. Income tax expense of $4.7 million for the first quarter of 2013 includes favorable discrete items of $779,000, related mainly to adjustments of stock options and state tax attributes. Due to a full valuation allowance against the Company’s entire net deferred tax asset, 1.07% of its effective tax rate for the three months ended March 31, 2012 resulted from 2012 state income taxes. Management concluded that deferred tax assets were more-likely-than-not to be realized, and therefore, maintaining a valuation allowance was no longer required as of March 31, 2013.

As of March 31, 2013, the Company was subject to examination by various federal and state tax authorities for the years ended December 31, 2004 through 2011. The Company was subjected to audits by the Internal Revenue Service for the 2009 tax year, by the California FTB for the 2008 and 2009 tax years, and by the Texas Comptroller of Public Accounts for the 2008 tax year. Management does not anticipate any material changes in our financial statements due to the results of those audits.

 

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NOTE 5 — STOCKHOLDERS’ EQUITY

Stock Warrants

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

Upon re-measuring the fair value of the stock warrants at March 31, 2013, the fair value decreased by $51,000, which we have included in other operating expenses for the three months ended March 31, 2013. We used a weighted average expected stock volatility of 36.99 percent and a remaining contractual life of 2.3 years based on the contract terms. We also used a dividend yield of zero as we have no present intention to pay cash dividends. The risk free rate of 0.47 percent used for the warrant is equal to the zero coupon rate in effect at the end of the measurement period.

NOTE 6 — REGULATORY MATTERS

Risk-Based Capital

Federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 4.0 percent.

In order for banks to be considered “well capitalized,” federal bank regulatory agencies require them to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 10.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require depository institutions to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 5.0 percent.

 

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The capital ratios of Hanmi Financial and the Bank were as follows as of March 31, 2013 and 2012:

 

                  Minimum     Minimum to Be  
                  Regulatory     Categorized as  
     Actual     Requirement     “Well Capitalized”  
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (In Thousands)  
March 31, 2013                

Total Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 439,587         19.45   $ 180,839         8.00     N/A         N/A   

Hanmi Bank

   $ 421,661         18.69   $ 180,515         8.00   $ 225,644         10.00

Tier 1 Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 410,825         18.17   $ 90,419         4.00     N/A         N/A   

Hanmi Bank

   $ 393,015         17.42   $ 90,257         4.00   $ 135,386         6.00

Tier 1 Capital (to Average Assets):

               

Hanmi Financial

   $ 410,825         14.68   $ 111,968         4.00     N/A         N/A   

Hanmi Bank

   $ 393,015         14.07   $ 111,758         4.00   $ 139,698         5.00
March 31, 2012                

Total Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 394,973         18.74   $ 168,569         8.00     N/A         N/A   

Hanmi Bank

   $ 373,171         17.74   $ 168,325         8.00   $ 210,406         10.00

Tier 1 Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 367,927         17.46   $ 84,284         4.00     N/A         N/A   

Hanmi Bank

   $ 346,154         16.45   $ 84,162         4.00   $ 126,243         6.00

Tier 1 Capital (to Average Assets):

               

Hanmi Financial

   $ 367,927         13.44   $ 109,456         4.00     N/A         N/A   

Hanmi Bank

   $ 346,154         12.67   $ 109,247         4.00   $ 136,559         5.00

Federal Reserve Notices of Proposed Rulemaking

On June 7, 2012, the Board of Governors of the Federal Reserve System approved for publication in the Federal Register three related notices of proposed rulemaking (collectively, the “Notices”) relating to the implementation of revised capital rules to reflect the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as well as the Basel III international capital standards. Among other things, if adopted as proposed, the Notices would establish a new capital standard consisting of common equity Tier 1 capital; increase the capital ratios required for certain existing capital categories and add a requirement for a capital conservation buffer (failure to meet these standards would result in limitations on capital distributions as well as executive bonuses); and add more conservative standards for including securities in regulatory capital, which would phase-out trust preferred securities as a component of Tier 1 capital. In addition, the Notices contemplate the deduction of certain assets from regulatory capital and revisions to the methodologies for determining risk weighted assets, including applying a more risk-sensitive treatment to residential mortgage exposures and to past due or non-accrual loans. The Notices provide for various phase-in periods over the next several years. Hanmi Financial and the Bank will be subject to many provisions in the Notices, but until final regulations are issued pursuant to the Notices, Hanmi Financial cannot predict the actual effect of the Notices.

NOTE 7 — 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.

 

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

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

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

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

As of March 31, 2013, we had a zero coupon tax credit municipal bond of $774,000 compared to $779,000 as of December 31, 2012. This bond was recorded at estimated fair value using a discounted cash flow method, and was measured on a recurring basis with Level 3 inputs. Key assumptions used in measuring the fair value of the tax credit bond as of March 31, 2013 were discount rate and cash flows. The discount rate was derived from the term structure of Bank Qualified (“BQ”) “A-” rated municipal bonds, as the tax credit bond’s guarantee had the similar credit strength. The contractual future cash flows were the tax credits to be received for a remaining life of two years. If the discount rate is adjusted down to the term structure of BQ “BBB-” rating municipal bonds, the tax credit bond’s value would decline by 1.6 percent. We do not anticipate a significant deterioration of the tax credit bond’s credit quality. Management reviews the discount rate on an ongoing basis based on current market rates.

SBA Loans Held for Sale – Small Business Administration (“SBA”) loans held for sale are carried at the lower of cost or fair value. As of March 31, 2013 and December 31, 2012, we had $3.7 million and $7.8 million of SBA loans held for sale, respectively. Management obtains quotes, bids or pricing indication sheets on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At March 31, 2013 and December 31, 2012, 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.

Non-Performing Loans Held for Sale – We reclassify certain non-performing loans as held for sale when we decide to sell those loans. The fair value of non-performing loans held for sale is generally based upon the quotes, bids or sales contract prices which approximate their fair value. Non-performing loans held for sale are recorded at estimated fair value less anticipated liquidation cost. As of March 31, 2013 and December 31, 2012, we had $2.3 million and $484,000 of non-performing loans held for sale, respectively, which are measured on a nonrecurring basis with Level 2 inputs.

Stock Warrants – The Company followed the guidance of FASB ASC Topic 815- 40, “Derivatives and Hedging—Contracts in Entity’s Own Stock” (“ASC 815- 40”), which establishes a framework for determining whether certain freestanding and embedded instruments are indexed to a company’s own stock for purposes of evaluation of the accounting for such instruments under existing accounting literature. Under GAAP, the issuer is required to measure the fair value of the equity instruments in the transaction as of earlier of (i) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty’s performance is complete. The fair value of the warrants was recorded as a liability and a cost of equity, which was determined by the Black-Scholes option pricing modeling and was measured on a recurring basis with Level 3 inputs.

 

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

There were no transfers of assets between Level 1 and Level 2 of the fair value hierarchy for the three months ended March 31, 2013. As of March 31, 2013 and December 31, 2012, 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)  

As of March 31, 2013

           

ASSETS:

           

Debt Securities Available-for-Sale:

           

Mortgage-Backed Securities

   $ —         $ 149,394       $  —         $ 149,394   

Collateralized Mortgage Obligations

     —           92,868         —           92,868   

U.S. government Agency Securities

     80,930         —