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 June 30, 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 July 31, 2013, there were 31,607,087 outstanding shares of the Registrant’s Common Stock.

 

 

 


Table of Contents

Hanmi Financial Corporation and Subsidiaries

Quarterly Report on Form 10-Q

Three and Six Months Ended June 30, 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)      9   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      37   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      63   

Item 4.

  Controls and Procedures      63   
  Part II – Other Information   

Item 1.

  Legal Proceedings      64   

Item 1A.

  Risk Factors      64   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      64   

Item 3.

  Defaults Upon Senior Securities      64   

Item 4.

  Mine Safety Disclosures      64   

Item 5.

  Other Information      64   

Item 6.

  Exhibits      64   

Signatures

     66   

 

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)

 

     June 30,     December 31,  
     2013     2012  

Assets

    

Cash and due from banks

   $ 72,429      $ 92,350   

Interest-bearing deposits in other banks

     5,431        175,697   
  

 

 

   

 

 

 

Cash and cash equivalents

     77,860        268,047   

Restricted cash

     —          5,350   

Securities available-for-sale, at fair value (amortized cost of $399,900 as of June 30, 2013 and $443,712 as of December 31, 2012)

     400,815        451,060   

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

     2,553        8,306   

Loans receivable, net of allowance for loan losses of $59,876 as of June 30, 2013 and $63,305 as of December 31, 2012

     2,128,208        1,986,051   

Accrued interest receivable

     7,441        7,581   

Premises and equipment, net

     14,463        15,150   

Other real estate owned, net

     900        774   

Customers’ liability on acceptances

     1,372        1,336   

Servicing assets

     6,383        5,542   

Other intangible assets, net

     1,253        1,335   

Investment in federal home loan bank stock, at cost

     14,197        17,800   

Investment in federal reserve bank stock, at cost

     13,200        12,222   

Income tax assets

     63,783        60,028   

Bank-owned life insurance

     29,517        29,054   

Prepaid expenses

     2,572        2,084   

Other assets

     8,897        10,800   
  

 

 

   

 

 

 

Total assets

   $ 2,773,414      $ 2,882,520   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing

   $ 736,470      $ 720,931   

Interest-bearing

     1,625,443        1,675,032   
  

 

 

   

 

 

 

Total deposits

     2,361,913        2,395,963   

Accrued interest payable

     2,570        11,775   

Bank’s liability on acceptances

     1,372        1,336   

Federal home loan bank advances

     2,743        2,935   

Junior subordinated debentures

     —          82,406   

Accrued expenses and other liabilities

     9,420        9,741   
  

 

 

   

 

 

 

Total liabilities

     2,378,018        2,504,156   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock, $0.001 par value; authorized 62,500,000 shares; issued 32,182,731 shares (31,604,837 shares outstanding) and 32,074,434 shares (31,496,540 shares outstanding) as of June 30, 2013 and December 31, 2012

     257        257   

Additional paid-in capital

     551,286        550,123   

Unearned compensation

     (33     (57

Accumulated other comprehensive income, net of tax (benefit) expense of ($702) as of June 30, 2013 and $1,946 as of December 31, 2012

     1,634        5,418   

Accumulated deficit

     (87,890     (107,519

Less: treasury stock, at cost; 577,894 shares as of June 30, 2013 and December 31, 2012

     (69,858     (69,858
  

 

 

   

 

 

 

Total stockholders’ equity

     395,396        378,364   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,773,414      $ 2,882,520   
  

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Table of Contents

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(In thousands, except share and per share data)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  

Interest and Dividend Income:

        

Interest and fees on loans

   $ 27,839      $ 27,241      $ 54,638      $ 54,783   

Taxable interest on investment securities

     2,100        2,190        4,216        4,288   

Tax-exempt interest on investment securities

     73        99        168        201   

Interest on term federal funds sold

     —          168        —          493   

Interest on federal funds sold

     —          31        6        33   

Interest on interest-bearing deposits in other banks

     24        59        112        127   

Dividends on federal reserve bank stock

     196        148        379        276   

Dividends on federal home loan bank stock

     147        29        255        58   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     30,379        29,965        59,774        60,259   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense:

        

Interest on deposits

     3,100        3,953        6,259        8,872   

Interest on federal home loan bank advances

     41        43        79        86   

Interest on junior subordinated debentures

     84        797        678        1,596   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     3,225        4,793        7,016        10,554   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income before provision for credit losses

     27,154        25,172        52,758        49,705   

Provision for credit losses

     —          4,000        —          6,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     27,154        21,172        52,758        43,705   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-Interest Income:

        

Service charges on deposit accounts

     2,884        2,936        5,932        6,104   

Insurance commissions

     1,418        1,294        2,631        2,530   

Remittance fees

     541        487        1,038        941   

Trade finance fees

     276        292        553        584   

Other service charges and fees

     335        380        733        744   

Bank-owned life insurance income

     233        238        463        637   

Gain on sales of SBA loans guaranteed portion

     2,378        5,473        5,070        5,473   

Net loss on sales of other loans

     (460     (5,326     (557     (7,719

Net gain on sales of investment securities

     303        1,381        312        1,382   

Other-than-temporary impairment loss on investment securities

     —          (116     —          (116

Other operating income

     242        150        332        262   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     8,150        7,189        16,507        10,822   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-Interest Expense:

        

Salaries and employee benefits

     9,415        9,449        18,766        18,559   

Occupancy and equipment

     2,555        2,621        5,111        5,216   

Deposit insurance premiums and regulatory assessments

     517        1,498        751        2,899   

Data processing

     1,142        1,298        2,312        2,551   

Other real estate owned expense

     (20     69        12        25   

Professional fees

     2,365        1,089        4,521        1,838   

Directors and officers liability insurance

     219        295        439        592   

Supplies and communications

     630        576        1,125        1,134   

Advertising and promotion

     1,005        1,009        1,677        1,610   

Loan-related expense

     91        88        237        288   

Amortization of other intangible assets

     41        45        82        116   

Other operating expenses

     2,004        1,726        4,098        3,681   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     19,964        19,763        39,131        38,509   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision (benefit) for income taxes

     15,340        8,598        30,134        16,018   

Provision (benefit) for income taxes

     5,821        (47,177     10,505        (47,098
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 9,519      $ 55,775      $ 19,629      $ 63,116   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 0.30      $ 1.77      $ 0.62      $ 2.01   

Diluted

   $ 0.30      $ 1.77      $ 0.62      $ 2.00   

Weighted-average shares outstanding:

        

Basic

     31,590,760        31,475,610        31,565,013        31,473,065   

Diluted

     31,655,988        31,499,803        31,633,535        31,489,943   

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Table of Contents

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  

Net Income

   $ 9,519      $ 55,775      $ 19,629      $ 63,116   

Other comprehensive income (loss), net of tax

        

Unrealized (loss) gain on securities

        

Unrealized holding (loss) gain arising during period

     (5,553     214        (6,121     888   

Less: reclassification adjustment for gain included in net income

     (303     (1,266     (312     (1,266

Unrealized gain on interest rate swap

     —          8        —          9   

Unrealized gain on interest-only strip of servicing assets

     (2     (3     1        (1

Income tax benefit related to items of other comprehensive income

     2,397        —          2,648        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (3,461     (1,047     (3,784     (370
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 6,058      $ 54,728      $ 15,845      $ 62,746   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Table of Contents

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except share data)

 

    Common Stock - Number of Shares     Stockholders’ Equity  
    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

    —          —          —          —          77        25        —          —          —          102   

Restricted stock awards

    —          —          —          —          (25     25        —          —          —          —     

Comprehensive income:

                   

Net income

    —          —          —          —          —          —          —          63,116        —          63,116   

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

    —          —          —          —          —          —          (370     —          —          (370
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

                      62,746   
                   

 

 

 

Balance at June 30, 2012

    32,066,987        (577,786     31,489,201      $ 257      $ 549,796      $ (116   $ 3,154      $ (134,777   $ (69,858   $ 348,456   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    —          —          —          —          165        24        —          —          —          189   

Exercises of stock options

    2,241        —          2,241        —          (291     —          —          —          —          (291

Exercises of stock warrants

    106,056        —          106,056        —          1,289        —          —          —          —          1,289   

Comprehensive income:

                   

Net income

    —          —          —          —          —          —          —          19,629        —          19,629   

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

    —          —          —          —          —          —          (3,784     —          —          (3,784
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

                      15,845   
                   

 

 

 

Balance at June 30, 2013

    32,182,731        (577,894     31,604,837      $ 257      $ 551,286      $ (33   $ 1,634      $ (87,890   $ (69,858   $ 395,396   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Six Months Ended  
     June 30,  
     2013     2012  

Cash flows from operating activities:

    

Net income

   $ 19,629      $ 63,116   

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

    

Depreciation and amortization of premises and equipment

     997        1,087   

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

     1,443        2,005   

Amortization of other intangible assets

     82        116   

Amortization of servicing assets

     739        419   

Share-based compensation expense

     189        102   

Provision for credit losses

     —          6,000   

Other-than-temporary loss on investment securities

     —          116   

FRB and FHLB stock dividends

     —          334   

Net gain on sales of investment securities

     (312     (1,382

Net (gain) loss on sales of loans

     (4,513     465   

Loss on investment in affordable housing partnership

     378        440   

Gain on bank-owned life insurance settlement

     —          (163

Valuation adjustment on other real estate owned

     7        57   

Valuation adjustment for loans held for sale

     —          1,781   

Origination of loans held for sale

     (45,978     (60,589

Proceeds from sales of SBA loans guaranteed portion

     60,562        72,223   

Change in restricted cash

     5,350        (2,001

Change in accrued interest receivable

     140        661   

Change in cash surrender value of bank-owned life insurance

     (463     (473

Change in prepaid expenses

     (488     (1,128

Change in other assets

     1,489        (7,909

Change in income tax assets

     (1,425     (52,063

Change in accrued interest payable

     (9,205     (1,150

Change in stock warrants payable

     82        137   

Change in other liabilities

     1,239        882   
  

 

 

   

 

 

 

Net cash provided by operating activities

     29,942        23,083   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from matured term federal funds

     —          160,000   

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

     3,603        2,109   

Proceeds from matured or called securities available-for-sale

     40,247        71,339   

Proceeds from sales of securities available-for-sale

     24,764        88,538   

Proceeds from matured or called securities held to maturity

     —          6,338   

Proceeds from sales of other real estate owned

     548        —     

Proceeds from sales of loans held for sale

     5,380        65,470   

Proceeds from insurance settlement on bank-owned life insurance

     —          344   

Purchases of term federal fund

     —          (155,000

Change in loans receivable

     (154,739     (16,160

Purchases of securities available-for-sale

     (22,329     (98,311

Purchases of premises and equipment

     (310     (396

Purchases of loans receivable

     —          (82,669

Purchases of federal reserve bank stock

     (978     (1,979
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (103,814     39,623   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Change in deposits

     (34,050     40,197   

Repayment of long-term federal home loan bank advances

     (192     (181

Redemption of junior subordinated debentures

     (82,406     —     

Proceeds from exercise of stock options

     28        —     

Proceeds from exercise of stock warrants

     305        —     
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (116,315     40,016   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (190,187     102,722   

Cash and cash equivalents at beginning of year

     268,047        201,683   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 77,860      $ 304,405   
  

 

 

   

 

 

 

 

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Supplemental disclosures of cash flow information:

     

Cash paid during the period for:

     

Interest paid

   $ 12,430       $ 11,704   

Income taxes paid

   $ 11,910       $ 4,912   

Non-cash activities:

     

Transfer of loans receivable to other real estate owned

   $ 800       $ 948   

Transfer of loans receivable to loans held for sale

   $ 8,010       $ 64,471   

Transfer of loans held for sale to loans receivable

   $ —         $ 1,779   

Conversion of stock warrants into common stock

   $ 983       $ —     

Income tax benefit related to items of other comprehensive income

   $ 2,648       $ —     

Change in unrealized loss in accumulated other comprehensive income

   $ 6,120       $ —     

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Table of Contents

Hanmi Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Six Months Ended June 30, 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 June 30, 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:

 

     Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Estimated
Fair

Value
 
     (In thousands)  

June 30, 2013:

           

Mortgage-backed securities (1)

   $ 125,177       $ 1,312       $ 1,871       $ 124,618   

Collateralized mortgage obligations (1)

     83,955         1,414         521         84,848   

U.S. government agency securities

     98,853         18         1,267         97,604   

Municipal bonds-tax exempt

     10,166         485         —           10,651   

Municipal bonds-taxable

     44,053         1,679         186         45,546   

Corporate bonds

     20,475         176         276         20,375   

SBA loan pool securities

     13,842         —           341         13,501   

Other securities

     3,025         1         93         2,933   

Equity securities

     354         385         —           739   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available-for-sale

   $ 399,900       $ 5,470       $ 4,555       $ 400,815   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 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

     29,404         29,406   

Over five years through ten years

     111,880         111,811   

Over ten years

     49,130         49,393   

Mortgage-backed securities

     125,177         124,618   

Collateralized mortgage obligations

     83,955         84,848   

Equity securities

     354         739   
  

 

 

    

 

 

 

Total

   $ 399,900       $ 400,815   
  

 

 

    

 

 

 

FASB ASC 320, “Investments – Debt and Equity Securities,” requires us to periodically evaluate our investments for other-than-temporary impairment (“OTTI”). There was no OTTI charge during the six months ended June 30, 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 June 30, 2013 and December 31, 2012:

 

    Holding Period  
    Less Than 12 Months     12 Months or More     Total  
    Gross     Estimated     Number     Gross     Estimated     Number     Gross     Estimated     Number  
    Unrealized     Fair     of     Unrealized     Fair     of     Unrealized     Fair     of  
    Loss     Value     Securities     Loss     Value     Securities     Loss     Value     Securities  
    (In thousands, except number of securities)  

June 30, 2013:

                 

Mortgage-backed securities

  $ 1,871      $ 79,024        26      $ —        $ —          —        $ 1,871      $ 79,024        26   

Collateralized mortgage obligations

    521        25,134        10        —          —          —          521        25,134        10   

U.S. government agency securities

    1,267        89,068        31        —          —          —          1,267        89,068        31   

Municipal bonds-taxable

    183        7,485        6        3        444        1        186        7,929        7   

Corporate bonds

    108        4,880        1        168        10,819        3        276        15,699        4   

SBA loan pool securities

    341        13,501        4        —          —          —          341        13,501        4   

Other securities

    10        2,016        4        83        918        1        93        2,934        5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,301      $ 221,108        82      $ 254      $ 12,181        5      $ 4,555      $ 233,289        87   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 June 30, 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 June 30, 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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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 basis. In addition, the unrealized losses on municipal and corporate bonds are not considered other-than-temporarily impaired as the bonds are rated investment grade and there are no credit quality concerns with the issuers. Interest payments have been made as scheduled, and management believes this will continue in the future and that the bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of June 30, 2013 and December 31, 2012 were not other-than-temporarily impaired, and therefore, no impairment charges as of June 30, 2013 and December 31, 2012 were 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     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  
     (In thousands)  

Gross realized gains on sales of investment securities

   $ 304      $ 1,431      $ 313      $ 1,432   

Gross realized losses on sales of investment securities

     (1     (50     (1     (50
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains on sales of investment securities

   $ 303      $ 1,381      $ 312      $ 1,382   
  

 

 

   

 

 

   

 

 

   

 

 

 

Proceeds from sales of investment securities

   $ 15,764      $ 85,538      $ 24,764      $ 88,538   

Tax expense on sales of investment securities

   $ 127      $ 581      $ 131      $ 581   

For the three months ended June 30, 2013, there was a $303,000 net gain in earnings resulting from the redemption and sale of investment securities that had previously been recorded as net unrealized gains of $812,000 in comprehensive income. For the three months ended June 30, 2012, there was a $1.4 million net gain in earnings resulting from the redemption and sale of investment securities that had previously been recorded as net unrealized gains of $1.9 million in comprehensive income.

For the six months ended June 30, 2013, there was a $312,000 net gain in earnings resulting from the redemption and sale of investment securities that had previously been recognized as net unrealized gains of $856,000 in comprehensive income. For the six months ended June 30, 2012, there was a $1.4 million net gain in earnings resulting from the redemption and sale of investment securities that had previously been recorded as net unrealized gains of $1.7 million in comprehensive income.

Investment securities available-for-sale with carrying values of $55.7 million and $18.2 million as of June 30, 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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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 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 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:

 

     June 30,     December 31,  
     2013     2012  
     (In thousands)  

Real estate loans:

    

Commercial property

   $ 887,782      $ 787,094   

Residential property

     88,654        101,778   
  

 

 

   

 

 

 

Total real estate loans

     976,436        888,872   

Commercial and industrial loans:

    

Commercial term (1)

     940,555        884,364   

Commercial lines of credit (2)

     45,195        56,121   

SBA loans (3)

     157,240        148,306   

International loans

     32,583        34,221   
  

 

 

   

 

 

 

Total commercial and industrial loans

     1,175,573        1,123,012   

Consumer loans

     35,380        36,676   
  

 

 

   

 

 

 

Total gross loans

     2,187,389        2,048,560   

Allowance for loans losses

     (59,876     (63,305

Deferred loan fees

     695        796   
  

 

 

   

 

 

 

Loans receivable, net

   $ 2,128,208      $ 1,986,051   
  

 

 

   

 

 

 

 

(1) Includes owner-occupied property loans of $838.5 million and $774.2 million as of June 30, 2013 and December 31, 2012, respectively.
(2) Includes owner-occupied property loans of $1.0 million and $1.4 million as of June 30, 2013 and December 31, 2012, respectively.
(3) Includes owner-occupied property loans of $142.9 million and $128.4 million as of June 30, 2013 and December 31, 2012, respectively.

Accrued interest on loans receivable was $5.7 million and $5.4 million at June 30, 2013 and December 31, 2012, respectively. At June 30, 2013 and December 31, 2012, loans receivable totaling $691.6 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 June 30, 2013 and 2012:

 

           Commercial               
     Real
Estate
    and
Industrial
    Consumer      Total  
           (In thousands)         

June 30, 2013

         

Balance at beginning of period

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

Origination of loans held for sale

     —          22,834        —           22,834   

Reclassification from loans receivable to loans held for sale

     780        3,857        —           4,637   

Sales of loans held for sale

     —          (30,956     —           (30,956

Principal payoffs and amortization

     —          (5     —           (5
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 780      $ 1,773      $ —         $ 2,553   
  

 

 

   

 

 

   

 

 

    

 

 

 

June 30, 2012

         

Balance at beginning of period

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

Origination of loans held for sale

     —          34,723        —           34,723   

Reclassification from loans receivable to loans held for sale

     15,148        11,842        —           26,990   

Reclassification from loans held for sale to loans receivable

     (1,647     (132     —           (1,779

Sales of loans held for sale

     (21,909     (87,552     —           (109,461

Principal payoffs and amortization

     (58     (146     —           (204

Valuation adjustments

     (1,124     —          —           (1,124
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 1,289      $ 3,849      $ —         $ 5,138   
  

 

 

   

 

 

   

 

 

    

 

 

 

For the three months ended June 30, 2013, loans receivable of $4.6 million were reclassified as loans held for sale, and loans held for sale of $31.0 million were sold. For the three months ended June 30, 2012, loans receivable of $27.0 million were reclassified as loans held for sale, and loans held for sale of $109.5 million were sold.

The following table details the information on the sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the six months ended June 30, 2013 and 2012:

 

           Commercial               
     Real Estate     and Industrial     Consumer      Total  
           (In thousands)         

June 30, 2013

         

Balance at beginning of period

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

Origination of loans held for sale

     —          45,978        —           45,978   

Reclassification from loans receivable to loans held for sale

     780        7,230        —           8,010   

Sales of loans held for sale

     —          (59,721     —           (59,721

Principal payoffs and amortization

     —          (20     —           (20
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 780      $ 1,773      $ —         $ 2,553   
  

 

 

   

 

 

   

 

 

    

 

 

 

June 30, 2012

         

Balance at beginning of period

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

Origination of loans held for sale

     —          60,589        —           60,589   

Reclassification from loans receivable to loans held for sale

     32,224        32,247        —           64,471   

Reclassification from loans held for sale to other real estate owned

     (360     —          —           (360

Reclassification from loans held for sale to loans receivable

     (1,647     (132     —           (1,779

Sales of loans held for sale

     (38,703     (99,455     —           (138,158

Principal payoffs and amortization

     (169     (262     —           (431

Valuation adjustments

     (1,124     (657     —           (1,781
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 1,289      $ 3,849      $ —         $ 5,138   
  

 

 

   

 

 

   

 

 

    

 

 

 

For the six months ended June 30, 2013, loans receivable of $8.0 million were reclassified as loans held for sale, and loans held for sale of $59.7 million were sold. For the six months ended June 30, 2012, loans receivable of $64.5 million were reclassified as loans held for sale, and loans held for sale of $138.2 million were sold.

 

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

In the first quarter of 2010, the look-back period was reduced from twelve quarters to eight quarters, with 60 percent weighting given to the most recent four quarters and 40 percent to the oldest four quarters, to place greater emphasis on losses taken by the Bank during the economic downturn. In the second quarter of 2013, management reevaluated the look-back period and restored the twelve quarter look-back period in order to capture a period of higher losses that would have otherwise been excluded. Risk factor calculations are weighted at 50 percent for the most recent four quarters, 33 percent for the next four quarters, and 17 percent for the oldest four quarters. As homogenous loans are bulk graded, the risk grade is not factored into the historical loss analysis. The change in methodology maintained the Bank’s allowance at a level consistent with prior quarter. Under the previous methodology, the Bank would have recognized a negative provision of $5.9 million, which the Bank did not consider to be prudent, given the uncertainty in the economy.

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     As of and for the  
     Three Months Ended     Six Months Ended  
     June 30,     March 31,     June 30,     June 30,     June 30,  
     2013     2013     2012     2013     2012  
     (In thousands)  

Allowance for loan losses:

          

Balance at beginning of period

   $ 61,191      $ 63,305      $ 81,052      $ 63,305      $ 89,936   

Actual charge-offs

     (3,490     (3,024     (14,716     (6,514     (27,037

Recoveries on loans previously charged off

     1,867        714        1,324        2,581        2,361   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loan charge-offs

     (1,623     (2,310     (13,392     (3,933     (24,676

Provision charged to operating expense

     308        196        4,233        504        6,633   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 59,876      $ 61,191      $ 71,893      $ 59,876      $ 71,893   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for off-balance sheet items:

          

Balance at beginning of period

   $ 1,628      $ 1,824      $ 2,581      $ 1,822      $ 2,981   

Provision charged to operating expense

     (308     (196     (233     (504     (633
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 1,320      $ 1,628      $ 2,348      $ 1,318      $ 2,348   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table details the information on the allowance for loan losses by portfolio segment for the three months ended June 30, 2013 and 2012:

 

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

June 30, 2013

          

Allowance for loan losses:

          

Beginning balance

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

Charge-offs

     (146     (3,308     (36     —          (3,490

Recoveries on loans previously charged off

     1,042        819        6        —          1,867   

Provision

     (248     1,963        119        (1,526     308   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 18,480      $ 39,034      $ 1,884      $ 478      $ 59,876   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 28      $ 5,011      $ 385      $ —        $ 5,424   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 18,452      $ 34,023      $ 1,499      $ 478      $ 54,452   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable:

          

Ending balance

   $ 976,436      $ 1,175,573      $ 35,380      $ —        $ 2,187,389   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 6,972      $ 37,055      $ 1,647      $ —        $ 45,674   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 969,464      $ 1,138,518      $ 33,733      $ —        $ 2,141,715   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2012

          

Allowance for loan losses:

          

Beginning balance

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

Charge-offs

     (5,243     (9,393     (80     —          (14,716

Recoveries on loans previously charged off

     517        789        18        —          1,324   

Provision

     3,902        776        (425     (20     4,233   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 21,406      $ 46,810      $ 1,757      $ 1,920      $ 71,893   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 437      $ 7,224      $ —        $ —        $ 7,661   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 20,969      $ 39,586      $ 1,757      $ 1,920      $ 64,232   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable:

          

Ending balance

   $ 839,816      $ 1,070,469      $ 39,339      $ —        $ 1,949,624   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 16,619      $ 42,087      $ 1,401      $ —        $ 60,107   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 823,197      $ 1,028,382      $ 37,938      $ —        $ 1,889,517   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table details the information on the allowance for loan losses by portfolio segment for the six months ended June 30, 2013 and 2012:

 

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

June 30, 2013

          

Allowance for loan losses:

          

Beginning balance

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

Charge-offs

     (359     (5,955     (200     —          (6,514

Recoveries on loans previously charged off

     1,050        1,476        55        —          2,581   

Provision

     (391     1,585        (251     (439     504   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 18,480      $ 39,034      $ 1,884      $ 478      $ 59,876   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 28      $ 5,011      $ 385      $ —        $ 5,424   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 18,452      $ 34,023      $ 1,499      $ 478      $ 54,452   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable:

          

Ending balance

   $ 976,436      $ 1,175,573      $ 35,380      $ —        $ 2,187,389   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 6,972      $ 37,055      $ 1,647      $ —        $ 45,674   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 969,464      $ 1,138,518      $ 33,733      $ —        $ 2,141,715   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2012

          

Allowance for loan losses:

          

Beginning balance

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

Charge-offs

     (8,085     (18,508     (444     —          (27,037

Recoveries on loans previously charged off

     517        1,802        42        —          2,361   

Provision

     9,337        (2,489     (84     (131     6,633   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 21,406      $ 46,810      $ 1,757      $ 1,920        71,893   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 437      $ 7,224      $ —        $ —          7,661   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 20,969      $ 39,586      $ 1,757      $ 1,920        64,232   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable:

             —     

Ending balance

   $ 839,816      $ 1,070,469      $ 39,339      $ —          1,949,624   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 16,619      $ 42,087      $ 1,401      $ —          60,107   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 823,197      $ 1,028,382      $ 37,938      $ —          1,889,517   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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. The 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 requirements, 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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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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As of June 30, 2013 and December 31, 2012, pass (grade 0-4), criticized (grade 5) and classified (grade 6-7) loans, disaggregated by loan class, were as follows:

 

     Pass
(Grade 0-4)
     Criticized
(Grade 5)
     Classified
(Grade 6-7)
     Total Loans  
     (In thousands)  

June 30, 2013

           

Real estate loans:

           

Commercial property

           

Retail

   $ 433,954       $ 3,755       $ 2,362       $ 440,071   

Land

     5,465         —           7,981         13,446   

Other

     419,664         12,026         2,575         434,265   

Residential property

     86,677         —           1,977         88,654   

Commercial and industrial loans:

           

Commercial term

           

Unsecured

     84,786         631         16,612         102,029   

Secured by real estate

     779,408         16,105         43,013         838,526   

Commercial lines of credit

     42,914         608         1,673         45,195   

SBA loans

     146,716         884         9,640         157,240   

International loans

     31,303         —           1,280         32,583   

Consumer loans

     32,617         181         2,582         35,380   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

   $ 2,063,504       $ 34,190       $ 89,695       $ 2,187,389   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 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)  

June 30, 2013

             

Real estate loans:

             

Commercial property

             

Retail

  $ —        $ —        $ —        $ —        $ 440,071      $ 440,071      $ —     

Land

    —          —          —          —          13,446        13,446        —     

Other

    —          —          —          —          434,265        434,265        —     

Residential property

    —          219        810        1,029        87,625        88,654        —     

Commercial and industrial loans:

             

Commercial term

             

Unsecured

    416        455        1,885        2,756        99,273        102,029        —     

Secured by real estate

    —          —          122        122        838,404        838,526        —     

Commercial lines of credit

    —          146        188        334        44,861        45,195        —     

SBA loans

    2,376        2,707        3,718        8,801        148,439        157,240        —     

International loans

    —          —          —          —          32,583        32,583        —     

Consumer loans

    492        962        413        1,867        33,513        35,380        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross loans

  $ 3,284      $ 4,489      $ 7,136      $ 14,909      $ 2,172,480      $ 2,187,389      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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        —     

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
 
     (In thousands)  

June 30, 2013

              

Real estate loans:

              

Commercial property

              

Retail

   $ 1,818       $ 1,818       $ 1,818       $ —         $ —     

Land

     1,612         1,902         1,612         —           —     

Other

     523         523         —           523         28   

Residential property

     3,019         3,091         3,019         —           —     

Commercial and industrial loans:

              

Commercial term

              

Unsecured

     12,689         13,742         3,440         9,249         3,863   

Secured by real estate

     16,492         17,649         15,887         605         119   

Commercial lines of credit

     1,052         1,259         1,052         —           —     

SBA loans

     5,541         8,832         3,363         2,178         998   

International loans

     1,281         1,280         572         709         31   

Consumer loans

     1,647         1,718         457         1,190         385   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

   $ 45,674       $ 51,814       $ 31,220       $ 14,454       $ 5,424   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

              

Real estate loans:

              

Commercial property

              

Retail

   $ 2,930       $ 3,024       $ 2,930       $ —         $ —     

Land

     2,097         2,307         2,097         —           —     

Other

     527         527         —           527         67   

Residential property

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

Commercial and industrial loans:

              

Commercial term

              

Unsecured

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

Secured by real estate

     22,050         23,221         9,520         12,530         2,319   

Commercial lines of credit

     1,521         1,704         848         673         230   

SBA loans

     6,170         10,244         4,294         1,876         762   

International loans

     —           —           —           —           —     

Consumer loans

     1,652         1,711         449         1,203         615   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

   $ 54,744       $ 61,561       $ 28,830       $ 25,914       $ 6,231   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

     Average
Recorded
Investment for
the Three
Months Ended
     Interest Income
Recognized for
the Three
Months Ended
     Average
Recorded
Investment for
the Six  Months
Ended
     Interest Income
Recognized for
the Six Months
Ended
 
     (In thousands)  

June 30, 2013

           

Real estate loans:

           

Commercial property

           

Retail

   $ 1,823       $ 18       $ 2,309       $ 44   

Land

     1,637         40         1,674         80   

Other

     524         6         525         10   

Residential property

     3,027         31         3,043         59   

Commercial and industrial loans:

           

Commercial term

           

Unsecured

     12,933         221         13,093         406   

Secured by real estate

     16,539         305         17,026         618   

Commercial lines of credit

     1,060         9         1,286         24   

SBA loans

     5,595         281         6,034         554   

International loans

     1,330         —           1,414         —     

Consumer loans

     1,649         15         1,646         27   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

   $ 46,117       $ 926       $ 48,050       $ 1,822   
  

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2012

           

Real estate loans:

           

Commercial property

           

Retail

   $ 2,546       $ 19       $ 1,945       $ 48   

Land

     2,137         45         2,175         91   

Other

     878         11         1,138         33   

Construction

     7,983         89         8,090         178   

Residential property

     3,177         48         3,259         84   

Commercial and industrial loans:

           

Commercial term

           

Unsecured

     13,474         192         14,257         430   

Secured by real estate

     19,021         525         22,756         958   

Commercial lines of credit

     1,788         22         1,835         30   

SBA loans

     8,336         286         8,150         483   

Consumer loans

     1,402         2         903         10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

   $ 60,742       $ 1,239       $ 64,508       $ 2,345   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,     June 30,     June 30,  
     2013     2012     2013     2012  
     (In thousands)  

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

   $ 1,057      $ 1,505      $ 2,125      $ 2,933   

Less: Interest income recognized on impaired loans

     (926     (1,239     (1,822     (2,345
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest foregone on impaired loans

   $ 131      $ 266      $ 303      $ 588   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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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.

The following table details non-accrual loans, disaggregated by loan class, as of the dates indicated:

 

     June 30,      December 31,  
     2013      2012  
     (In thousands)  

Real estate loans:

  

Commercial property

     

Retail

   $ —         $ 1,079   

Land

     1,612         2,097   

Residential property

     1,620         1,270   

Commercial and industrial loans:

     

Commercial term

     

Unsecured

     6,209         8,311   

Secured by real estate

     5,389         8,679   

Commercial lines of credit

     1,052         1,521   

SBA loans

     10,596         12,563   

Consumer loans

     1,497         1,759   
  

 

 

    

 

 

 

Total non-accrual loans

   $ 27,975       $ 37,279   
  

 

 

    

 

 

 

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

 

     June 30,      December 31,  
     2013      2012  
     (In thousands)  

Non-accrual loans

   $ 27,975       $ 37,279   

Loans 90 days or more past due and still accruing

     —           —     
  

 

 

    

 

 

 

Total non-performing loans

     27,975         37,279   

Other real estate owned

     900         774   
  

 

 

    

 

 

 

Total non-performing assets

   $ 28,875       $ 38,053   
  

 

 

    

 

 

 

Loans on non-accrual status, excluding loans held for sale, totaled $28.0 million as of June 30, 2013, compared to $37.3 million as of December 31, 2012, representing a 25.0 percent decrease. Delinquent loans (defined as 30 days or more past due), excluding loans held for sale, were $14.9 million as of June 30, 2013, compared to $16.5 million as of December 31, 2012, representing a 9.5 percent decrease.

As of June 30, 2013, other real estate owned consisted of two properties in Virginia and California with a combined carrying value of $900,000, 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 June 30, 2013, we restructured monthly payments on 9 loans, with a net carrying value of $787,000 as of June 30, 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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The following table details troubled debt restructurings, disaggregated by concession type and by loan type, as of June 30, 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)                          

June 30, 2013

                 

Real estate loans:

                   

Commercial property

                   

Retail

  $ —        $ —        $ —        $ —        $ —        $ 342      $ —        $ —        $ 174      $ 516   

Other

    —          —          —          —          —          523        —          —          —          523   

Residential property

    811        —          —          —          811        —          —          —          —          —     

Commercial and industrial loans:

                   

Commercial term

                   

Unsecured

    —          570        2,830        926        4,326        906        —          1,848        2,671        5,425   

Secured by real estate

    2,221        1,035        279        —          3,535        2,116        —          579        4,510        7,205   

Commercial lines of credit

    656        —          188        208        1,052        —          —          —          —          —     

SBA loans

   </