Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended September 30, 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 October 31, 2013, there were 31,756,615 outstanding shares of the Registrant’s Common Stock.

 

 

 


Table of Contents

Hanmi Financial Corporation and Subsidiaries

Quarterly Report on Form 10-Q

Three and Nine Months Ended September 30, 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

     38   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     64   
Item 4.  

Controls and Procedures

     64   
Part II – Other Information   
Item 1.  

Legal Proceedings

     65   
Item 1A.  

Risk Factors

     65   
Item 2.  

Unregistered Sales of Equity Securities and use of Proceeds

     65   
Item 3.  

Defaults Upon Senior Securities

     65   
Item 4.  

Mine Safety Disclosures

     65   
Item 5.  

Other Information

     65   
Item 6.  

Exhibits

     65   

Signatures

     67   

 

2


Table of Contents

Part I — Financial Information

Item 1. Financial Statements

Hanmi Financial Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)

 

     September 30,     December 31,  
     2013     2012  

Assets

    

Cash and due from banks

   $ 78,810      $ 92,350   

Interest-bearing deposits in other banks

     115,044        175,697   
  

 

 

   

 

 

 

Cash and cash equivalents

     193,854        268,047   

Restricted cash

     —          5,350   

Securities available-for-sale, at fair value (amortized cost of $392,773 as of September 30, 2013 and $443,712 as of December 31, 2012)

     383,057        451,060   

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

     5,228        8,306   

Loans receivable, net of allowance for loan losses of $57,639 as of September 30, 2013 and $63,305 as of December 31, 2012

     2,102,621        1,986,051   

Accrued interest receivable

     6,957        7,581   

Premises and equipment, net

     14,205        15,150   

Other real estate owned, net

     290        774   

Customers’ liability on acceptances

     1,535        1,336   

Servicing assets

     6,385        5,542   

Other intangible assets, net

     1,212        1,335   

Investment in federal home loan bank stock, at cost

     14,060        17,800   

Investment in federal reserve bank stock, at cost

     13,200        12,222   

Income tax assets

     61,747        60,028   

Bank-owned life insurance

     29,468        29,054   

Prepaid expenses

     1,986        2,084   

Other assets

     9,332        10,800   
  

 

 

   

 

 

 

Total assets

   $ 2,845,137      $ 2,882,520   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing

   $ 778,345      $ 720,931   

Interest-bearing

     1,651,362        1,675,032   
  

 

 

   

 

 

 

Total deposits

     2,429,707        2,395,963   

Accrued interest payable

     2,705        11,775   

Bank’s liability on acceptances

     1,535        1,336   

Federal home loan bank advances

     2,645        2,935   

Junior subordinated debentures

     —          82,406   

Accrued expenses and other liabilities

     10,589        9,741   
  

 

 

   

 

 

 

Total liabilities

     2,447,181        2,504,156   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock, $0.001 par value; authorized 62,500,000 shares; issued 32,332,009 shares (31,754,115 shares outstanding) and 32,074,434 shares (31,496,540 shares outstanding) as of September 30, 2013 and December 31, 2012

     257        257   

Additional paid-in capital

     551,881        550,066   

Accumulated other comprehensive (loss) income, net of tax (benefit) expense of ($5,230) as of September 30, 2013 and $1,946 as of December 31, 2012

     (4,469     5,418   

Accumulated deficit

     (79,855     (107,519

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

     (69,858     (69,858
  

 

 

   

 

 

 

Total stockholders’ equity

     397,956        378,364   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,845,137      $ 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 share and per share data)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

Interest and Dividend Income:

        

Interest and fees on loans

   $ 29,098      $ 26,781      $ 83,736      $ 81,564   

Taxable interest on investment securities

     2,040        1,992        6,256        6,280   

Tax-exempt interest on investment securities

     69        98        237        299   

Interest on term federal funds sold

     —          191        —          684   

Interest on federal funds sold

     —          20        6        53   

Interest on interest-bearing deposits in other banks

     28        142        140        269   

Dividends on federal reserve bank stock

     198        154        577        430   

Dividends on federal home loan bank stock

     194        24        449        82   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     31,627        29,402        91,401        89,661   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense:

        

Interest on deposits

     3,117        3,639        9,376        12,511   

Interest on federal home loan bank advances

     36        40        115        126   

Interest on junior subordinated debentures

     —          804        678        2,400   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     3,153        4,483        10,169        15,037   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income before provision for credit losses

     28,474        24,919        81,232        74,624   

Provision for credit losses

     —          —          —          6,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     28,474        24,919        81,232        68,624   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-Interest Income:

        

Service charges on deposit accounts

     2,730        2,851        8,662        8,955   

Insurance commissions

     1,273        1,092        3,904        3,622   

Remittance fees

     481        476        1,519        1,417   

Trade finance fees

     248        274        801        858   

Other service charges and fees

     349        361        1,082        1,105   

Bank-owned life insurance income

     230        235        693        872   

Gain on sales of SBA loans guaranteed portion

     994        1,772        6,064        7,245   

Net loss on sales of other loans

     —          (515     (557     (8,234

Net gain on sales of investment securities

     611        10        923        1,392   

Other-than-temporary impairment loss on investment securities

     —          (176     —          (292

Other operating income

     410        140        742        402   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     7,326        6,520        23,833        17,342   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-Interest Expense:

        

Salaries and employee benefits

     9,926        9,148        28,692        27,707   

Occupancy and equipment

     2,634        2,623        7,745        7,839   

Deposit insurance premiums and regulatory assessments

     308        283        1,059        3,182   

Data processing

     1,158        1,211        3,470        3,762   

Other real estate owned expense

     (59     352        (47     377   

Professional fees

     907        1,112        5,428        2,950   

Directors and officers liability insurance

     219        296        658        888   

Supplies and communications

     562        669        1,687        1,803   

Advertising and promotion

     1,140        1,023        2,817        2,633   

Loan-related expense

     91        164        328        452   

Amortization of other intangible assets

     41        41        123        157   

Other operating expenses

     2,039        1,882        6,137        5,563   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     18,966        18,804        58,097        57,313   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision (benefit) for income taxes

     16,834        12,635        46,968        28,653   

Provision (benefit) for income taxes

     6,584        (644     17,089        (47,742
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 10,250      $ 13,279      $ 29,879      $ 76,395   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 0.32      $ 0.42      $ 0.95      $ 2.43   

Diluted

   $ 0.32      $ 0.42      $ 0.94      $ 2.42   

Weighted-average shares outstanding:

        

Basic

     31,621,049        31,475,976        31,583,897        31,474,042   

Diluted

     31,733,004        31,545,111        31,652,795        31,506,767   

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     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

Net Income

   $ 10,250      $ 13,279      $ 29,879      $ 76,395   

Other comprehensive (loss) income, net of tax

        

Unrealized (loss) gain on securities

        

Unrealized holding (loss) gain arising during period

     (10,020     1,655        (16,141     2,248   

Unrealized holding gain arising from the reclassification of held-to-maturity securities to available-for-sale securities

     —          1,968        —          1,968   

Less: reclassification adjustment for (gain) loss included in net income

     (611     166        (923     (1,100

Unrealized gain on interest rate swap

     —          —          —          9   

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

     —          2        1        (4

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

     4,528        (1,581     7,176        (1,281
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (6,103     2,210        (9,887     1,840   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 4,147      $ 15,489      $ 19,992      $ 78,235   
  

 

 

   

 

 

   

 

 

   

 

 

 

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     Comprehensive     Earnings     Stock,     Stockholders’  
    Outstanding     Shares     Outstanding     Stock     Capital     Income (Loss)     (Deficit)     at Cost     Equity  

Balance at January 1, 2012

    32,067,095        (577,894     31,489,201      $ 257      $ 549,578      $ 3,524      $ (197,893   $ (69,858   $  285,608   

Share-based compensation expense

    —          —          —          —          144        —          —          —          144   

Comprehensive income:

                 

Net income

    —          —          —          —          —          —          76,395        —          76,395   

Change in unrealized gain on securities

                 

Available-for-sale and interest-only strips, net of income taxes

    —          —          —          —          —          1,840        —          —          1,840   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

                    78,235   
                 

 

 

 

Balance at September 30, 2012

    32,067,095        (577,894     31,489,201      $ 257      $ 549,722      $ 5,364      $ (121,498   $ (69,858   $ 363,987   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2013

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

Share-based compensation expense

    —          —          —          —          387        —          —          —          387   

Exercises of stock options

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

Exercises of stock warrants

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

Restricted stock awards

    111,332        —          111,332        —          —          —          —          —          —     

Restricted stock cancellation

    (750     —          (750     —          —          —          —          —          —     

Cash dividend

    —          —          —          —          —          —          (2,215     —          (2,215

Comprehensive income:

                 

Net income

    —          —          —          —          —          —          29,879        —          29,879   

Change in unrealized loss on securities

                 

Available-for-sale and interest-only strips, net of income taxes

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

                    19,992   
                 

 

 

 

Balance at September 30, 2013

    32,332,009        (577,894     31,754,115      $ 257      $ 551,881      $ (4,469   $ (79,855   $ (69,858   $ 397,956   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Nine Months Ended  
     September 30,  
     2013     2012  

Cash flows from operating activities:

    

Net income

   $ 29,879      $ 76,395   

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

    

Depreciation and amortization of premises and equipment

     1,525        1,606   

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

     1,961        2,743   

Amortization of other intangible assets

     123        157   

Amortization of servicing assets

     1,152        720   

Share-based compensation expense

     387        144   

Provision for credit losses

     —          6,000   

Other-than-temporary loss on investment securities

     —          292   

Gain on sales of investment securities

     (923     (1,392

Loss on investment in affordable housing partnership

     552        660   

Gain on sales of loans

     (5,507     (1,311

(Gain) loss on sales of other real estate owned

     (71     92   

(Gain) loss on sale of premises and equipment

     (13     5   

Valuation adjustment on other real estate owned

     7        301   

Valuation adjustment for loans held for sale

     —          2,300   

Origination of loans held for sale

     (63,113     (86,311

Proceeds from sales of SBA loans guaranteed portion

     77,338        95,856   

Change in restricted cash

     5,350        (2,575

Change in accrued interest receivable

     624        362   

Change in cash surrender value of bank-owned life insurance

     (693     (872

Change in prepaid expenses

     98        (641

Change in other assets

     717        (2,843

Change in income tax assets

     5,139        (52,714

Change in accrued interest payable

     (9,070     (766

Change in stock warrants payable

     80        177   

Change in other liabilities

     2,435        1,923   
  

 

 

   

 

 

 

Net cash provided by operating activities

     47,977        40,308   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from matured term federal funds

     —          215,000   

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

     3,740        3,233   

Proceeds from matured or called securities available-for-sale

     62,104        108,701   

Proceeds from sales of securities available-for-sale

     41,560        96,538   

Proceeds from matured or called securities held to maturity

     —          6,704   

Proceeds from sales of other real estate owned

     1,645        1,850   

Proceeds from sales of loans held for sale

     5,380        87,979   

Proceeds from insurance settlement on bank-owned life insurance

     279        345   

Change in loans receivable

     (131,169     (59,026

Purchases of term federal fund

     —          (155,000

Purchases of securities available-for-sale

     (53,762     (179,080

Purchases of premises and equipment

     (567     (420

Purchases of loans receivable

     —          (82,885

Purchases of federal reserve bank stock

     (978     (1,703
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (71,768     42,236   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Change in deposits

     33,744        18,475   

Repayment of long-term federal home loan bank advances

     (290     (274

Redemption of junior subordinated debentures

     (82,406     —     

Proceeds from exercise of stock options

     460        —     

Proceeds from exercise of stock warrants

     305        —     

Cash dividend paid

     (2,215     —     
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (50,402     18,201   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (74,193     100,745   

Cash and cash equivalents at beginning of year

     268,047        201,683   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 193,854      $ 302,428   
  

 

 

   

 

 

 

 

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Supplemental disclosures of cash flow information:

     

Cash paid during the period for:

     

Interest paid

   $ 19,239       $ 15,803   

Income taxes paid

   $ 11,910       $ 4,912   

Non-cash activities:

     

Transfer of loans receivable to other real estate owned

   $ 1,090       $ 2,558   

Transfer of loans receivable to loans held for sale

   $ 8,010       $ 89,792   

Transfer of loans held for sale to loans receivable

   $ 2,534       $ 1,779   

Reclassification of held-to-maturity securities to available-for-sale securities

   $ —         $ 52,674   

Conversion of stock warrants into common stock

   $ 981       $ —     

Income tax benefit related to items of other comprehensive loss

   $ 7,176       $ —     

Change in unrealized loss in accumulated other comprehensive income

   $ 16,140       $ —     

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Hanmi Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 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 its subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended September 30, 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 as of September 30, 2013 and December 31, 2012:

 

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

September 30, 2013

           

Mortgage-backed securities (1)

   $ 129,463       $ 793       $ 3,171       $ 127,085   

U.S. government agency securities

     98,844         4         5,970         92,878   

Collateralized mortgage obligations (1)

     85,191         773         854         85,110   

Municipal bonds-tax exempt

     6,438         61         13         6,486   

Municipal bonds-taxable

     35,290         219         721         34,788   

Corporate bonds

     20,478         210         205         20,483   

SBA loan pool securities

     13,826         —           905         12,921   

Other securities

     3,025         —           104         2,921   

Equity securities

     218         167         —           385   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available-for-sale

   $ 392,773       $ 2,227       $ 11,943       $ 383,057   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

           

Mortgage-backed securities (1)

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

U.S. government agency securities

     92,990         222         94         93,118   

Collateralized mortgage obligations (1)

     98,821         1,775         109         100,487   

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 as of September 30, 2013, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2063, 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

     33,325         33,315   

Over five years through ten years

     105,186         100,320   

Over ten years

     39,390         36,842   

Mortgage-backed securities

     129,463         127,085   

Collateralized mortgage obligations

     85,191         85,110   

Equity securities

     218         385   
  

 

 

    

 

 

 

Total

   $ 392,773       $ 383,057   
  

 

 

    

 

 

 

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

September 30, 2013

                          

Mortgage-backed securities

   $ 1,552       $ 64,931         21       $ 1,619       $ 22,774         9       $ 3,171       $ 87,705         30   

U.S. government agency securities

     4,577         70,263         26         1,393         19,603         7         5,970         89,866         33   

Collateralized mortgage obligations

     500         24,478         12         354         9,610         4         854         34,088         16   

Municipal bonds-tax exempt

     13         4,065         2         —           —           —           13         4,065         2   

Municipal bonds-taxable

     479         19,783         14         242         3,876         4         721         23,659         18   

Corporate bonds

     91         4,899         1         114         6,874         2         205         11,773         3   

SBA loan pool securities

     229         2,714         1         676         10,207         3         905         12,921         4   

Other securities

     18         1,994         3         86         927         2         104         2,921         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,459       $ 193,127         80       $ 4,484       $ 73,871         31       $ 11,943       $ 266,998         111   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

                          

Mortgage-backed securities

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

U.S. government agency securities

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

Collateralized mortgage obligations

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

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 September 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 September 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 September 30, 2013 and December 31, 2012 were not other-than-temporarily impaired, and therefore, no impairment charges as of September 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      Nine Months Ended  
     September 30,      September 30,  
     2013     2012      2013     2012  
     (In thousands)  

Gross realized gains on sales of investment securities

   $ 619      $ 10       $ 932      $ 1,442   

Gross realized losses on sales of investment securities

     (8     —           (9     (50
  

 

 

   

 

 

    

 

 

   

 

 

 

Net realized gains on sales of investment securities

   $ 611      $ 10       $ 923      $ 1,392   
  

 

 

   

 

 

    

 

 

   

 

 

 

Proceeds from sales of investment securities

   $ 26,661      $ 8,000       $ 51,425      $ 96,538   

Tax expense on sales of investment securities

   $ 257      $ 4       $ 388      $ 585   

For the three months ended September 30, 2013, there was a $611,000 net gain in earnings resulting from the sale of investment securities that had previously been recorded as net unrealized gains of $899,000 in comprehensive income. For the three months ended September 30, 2012, there was a $10,000 net gain in earnings resulting from the redemption of investment securities that had previously been recorded as net unrealized gains of $4,000 in comprehensive income.

For the nine months ended September 30, 2013, there was a $923,000 net gain in earnings resulting from the redemption and sale of investment securities that had previously been recognized as net unrealized gains of $2.4 million in comprehensive income. For the nine months ended September 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 $50.5 million and $18.2 million as of September 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 Small Business Administration (“SBA”) loans. Consumer loans consist of auto loans, credit cards, personal loans, and home equity lines of credit. We maintain management loan review and monitoring 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:

 

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

Real estate loans:

    

Commercial property

   $ 887,576      $ 787,094   

Residential property

     82,519        101,778   
  

 

 

   

 

 

 

Total real estate loans

     970,095        888,872   

Commercial and industrial loans:

    

Commercial term (1)

     913,021        884,364   

Commercial lines of credit (2)

     54,374        56,121   

SBA loans (3)

     153,990        148,306   

International loans

     33,726        34,221   
  

 

 

   

 

 

 

Total commercial and industrial loans

     1,155,111        1,123,012   

Consumer loans

     34,065        36,676   
  

 

 

   

 

 

 

Total gross loans

     2,159,271        2,048,560   

Allowance for loans losses

     (57,639     (63,305

Deferred loan fees

     989        796   
  

 

 

   

 

 

 

Loans receivable, net

   $ 2,102,621      $ 1,986,051   
  

 

 

   

 

 

 

 

(1) Includes owner-occupied property loans of $816.0 million and $774.2 million as of September 30, 2013 and December 31, 2012, respectively.
(2) Includes owner-occupied property loans of $540,000 and $1.4 million as of September 30, 2013 and December 31, 2012, respectively.
(3) Includes owner-occupied property loans of $145.0 million and $128.4 million as of September 30, 2013 and December 31, 2012, respectively.

Accrued interest on loans receivable was $5.1 million and $5.4 million at September 30, 2013 and December 31, 2012, respectively. At September 30, 2013 and December 31, 2012, loans receivable totaling $629.7 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 September 30, 2013 and 2012:

 

           Commercial               
     Real Estate     and Industrial     Consumer      Total  
     (In thousands)  

September 30, 2013

         

Balance at beginning of period

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

Origination of loans held for sale

     —          17,135        —           17,135   

Reclassification from loans held for sale to loans receivable

     (774     (1,760     —           (2,534

Sales of loans held for sale

     —          (11,906     —           (11,906

Principal payoffs and amortization

     (6     (14     —           (20
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ —        $ 5,228      $ —         $ 5,228   
  

 

 

   

 

 

   

 

 

    

 

 

 

September 30, 2012

         

Balance at beginning of period

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

Origination of loans held for sale

     —          25,722        —           25,722   

Reclassification from loans receivable to loans held for sale

     8,917        16,404        —           25,321   

Sales of loans held for sale

     (8,828     (36,050     —           (44,878

Principal payoffs and amortization

     (21     (27     —           (48

Valuation adjustments

     —          (519     —           (519
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 1,357      $ 9,379      $ —         $ 10,736   
  

 

 

   

 

 

   

 

 

    

 

 

 

For the three months ended September 30, 2013, there was no reclassification of loans receivable as loans held for sale, and loans held for sale of $11.9 million were sold. For the three months ended September 30, 2012, loans receivable of $25.3 million were reclassified as loans held for sale, and loans held for sale of $44.9 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 nine months ended September 30, 2013 and 2012:

 

           Commercial               
     Real Estate     and Industrial     Consumer      Total  
     (In thousands)  

September 30, 2013

         

Balance at beginning of period

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

Origination of loans held for sale

     —          63,113        —           63,113   

Reclassification from loans receivable to loans held for sale

     780        7,230        —           8,010   

Reclassification from Loans held for sale to loan receivables

     (774     (1,760     —           (2,534

Sales of loans held for sale

     —          (71,627     —           (71,627

Principal payoffs and amortization

     (6     (34     —           (40
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ —        $ 5,228      $ —         $ 5,228   
  

 

 

   

 

 

   

 

 

    

 

 

 

September 30, 2012

         

Balance at beginning of period

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

Origination of loans held for sale

     —          86,311        —           86,311   

Reclassification from loans receivable to loans held for sale

     41,141        48,651        —           89,792   

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

     (47,531     (135,505     —           (183,036

Principal payoffs and amortization

     (190     (289     —           (479

Valuation adjustments

     (1,124     (1,176     —           (2,300
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 1,357      $ 9,379      $ —         $ 10,736   
  

 

 

   

 

 

   

 

 

    

 

 

 

For the nine months ended September 30, 2013, loans receivable of $8.0 million were reclassified as loans held for sale, and loans held for sale of $71.6 million were sold. For the nine months ended September 30, 2012, loans receivable of $89.8 million were reclassified as loans held for sale, and loans held for sale of $183.0 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 the prior quarter. Under the previous methodology, the Bank would have recognized a negative provision of $5.9 million in the second quarter of 2013, 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     Nine Months Ended  
     September 30,     June 30,     September 30,     September 30,     September 30,  
     2013     2013     2012     2013     2012  
     (In thousands)  

Allowance for loan losses:

          

Balance at beginning of period

   $ 59,876      $ 61,191      $ 71,893      $ 63,305      $ 89,936   

Actual charge-offs

     (4,610     (3,490     (7,223     (11,124     (34,260

Recoveries on loans previously charged off

     2,383        1,867        1,320        4,964        3,681   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loan charge-offs

     (2,227     (1,623     (5,903     (6,160     (30,579

Provision charged to operating expense

     (10     308        117        494        6,750   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 57,639      $ 59,876      $ 66,107      $ 57,639      $ 66,107   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for off-balance sheet items:

          

Balance at beginning of period

   $ 1,320      $ 1,628      $ 2,348      $ 1,824      $ 2,981   

Provision charged to operating expense

     10        (308     (117     (494     (750
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 1,330      $ 1,320      $ 2,231      $ 1,330      $ 2,231   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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

September 30, 2013

          

Allowance for loan losses:

          

Beginning balance

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

Charge-offs

     —          (4,592     (18     —          (4,610

Recoveries on loans previously charged off

     726        1,652        5        —          2,383   

Provision

     (118     (1,289     (232     1,629        (10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 19,088      $ 34,805      $ 1,639      $ 2,107      $ 57,639   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 25      $ 2,014      $ 330      $ —        $ 2,369   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 19,063      $ 32,791      $ 1,309      $ 2,107      $ 55,270   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable:

          

Ending balance

   $ 970,095      $ 1,155,111      $ 34,065      $ —        $ 2,159,271   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 6,385      $ 35,507      $ 1,574      $ —        $ 43,466   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 963,710      $ 1,119,604      $ 32,491      $ —        $ 2,115,805   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2012

          

Allowance for loan losses:

          

Beginning balance

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

Charge-offs

     (1,321     (5,571     (331     —          (7,223

Recoveries on loans previously charged off

     58        1,251        11        —          1,320   

Provision

     1,080        174        783        (1,920     117   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 21,223      $ 42,664      $ 2,220      $ —        $ 66,107   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 768      $ 5,148      $ 398      $ —        $ 6,314   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 20,455      $ 37,516      $ 1,822      $ —        $ 59,793   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable:

          

Ending balance

   $ 840,061      $ 1,079,814      $ 38,415      $ —        $ 1,958,290   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 16,315      $ 41,084      $ 1,238      $ —        $ 58,637   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 823,746      $ 1,038,730      $ 37,177      $ —        $ 1,899,653   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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

September 30, 2013

          

Allowance for loan losses:

          

Beginning balance

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

Charge-offs

     (359     (10,547     (218     —          (11,124

Recoveries on loans previously charged off

     1,776        3,128        60        —          4,964   

Provision

     (509     296        (483     1,190        494   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 19,088      $ 34,805      $ 1,639      $ 2,107      $ 57,639   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 25      $ 2,014      $ 330      $ —        $ 2,369   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 19,063      $ 32,791      $ 1,309      $ 2,107      $ 55,270   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable:

          

Ending balance

   $ 970,095      $ 1,155,111      $ 34,065      $ —        $ 2,159,271   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 6,385      $ 35,507      $ 1,574      $ —        $ 43,466   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 963,710      $ 1,119,604      $ 32,491      $ —        $ 2,115,805   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2012

          

Allowance for loan losses:

          

Beginning balance

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

Charge-offs

     (9,406     (24,079     (775     —          (34,260

Recoveries on loans previously charged off

     575        3,053        53        —          3,681   

Provision

     10,419        (2,317     699        (2,051     6,750   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 21,225      $ 42,662      $ 2,220      $ —          66,107   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 768      $ 5,148      $ 398      $ —          6,314   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 20,457      $ 37,514      $ 1,822      $ —          59,793   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable:

          

Ending balance

   $ 840,061      $ 1,079,814      $ 38,415      $ —          1,958,290   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 16,315      $ 41,084      $ 1,238      $ —          58,637   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 823,746      $ 1,038,730      $ 37,177      $ —          1,899,653   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 September 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)  

September 30, 2013

           

Real estate loans:

           

Commercial property

           

Retail

   $ 448,429       $ 11,435       $ 4,778       $ 464,642   

Land

     5,430         —           164         5,594   

Other

     396,021         8,750         12,569         417,340   

Residential property

     80,568         —           1,951         82,519   

Commercial and industrial loans:

           

Commercial term

           

Unsecured

     82,806         1,797         12,391         96,994   

Secured by real estate

     764,787         13,568         37,672         816,027   

Commercial lines of credit

     52,630         198         1,546         54,374   

SBA loans

     142,346         664         10,980         153,990   

International loans

     32,046         500         1,180         33,726   

Consumer loans

     31,342         175         2,548         34,065   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

   $ 2,036,405       $ 37,087       $ 85,779       $ 2,159,271   
  

 

 

    

 

 

    

 

 

    

 

 

 

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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The following is an aging analysis of past due loans, disaggregated by loan class, as of September 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)  

September 30, 2013

                    

Real estate loans:

                    

Commercial property

                    

Retail

   $ 2,270       $ —         $ —         $ 2,270       $ 462,372       $ 464,642       $ —     

Land

     —           —           —           —           5,594         5,594         —     

Other

     —           1,768         —           1,768         415,572         417,340         —     

Residential property

     —           —           561         561         81,958         82,519         —     

Commercial and industrial loans:

                    

Commercial term

                    

Unsecured

     1,309         389         692         2,390         94,604         96,994         —     

Secured by real estate

     285         300         415         1,000         815,027         816,027         —     

Commercial lines of credit

     —           —           —           —           54,374         54,374         —     

SBA loans

     1,743         1,086         4,542         7,371         146,619         153,990         —     

International loans

     —           —           —           —           33,726         33,726         —     

Consumer loans

     316         27         295         638         33,427         34,065         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

   $ 5,923       $ 3,570       $ 6,505       $ 15,998       $ 2,143,273       $ 2,159,271       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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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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)  

September 30, 2013

              

Real estate loans:

              

Commercial property

              

Retail

   $ 2,234       $ 2,309       $ 2,234       $ —         $ —     

Land

     —           —           —           —           —     

Other

     1,169         1,169         649         520         25   

Residential property

     2,982         3,072         2,982         —           —     

Commercial and industrial loans:

              

Commercial term

              

Unsecured

     10,072         10,361         1,743         8,329         1,371   

Secured by real estate

     17,948         19,181         17,193         755         163   

Commercial lines of credit

     830         1,055         830         —           471   

SBA loans

     5,477         8,785         4,112         1,365         9   

International loans

     1,180         1,180         608         572         330   

Consumer loans

     1,574         1,662         399         1,175         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

   $ 43,466       $ 48,774       $ 30,750       $ 12,716       $ 2,369   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 Nine
Months Ended
     Interest Income
Recognized for
the Nine
Months Ended
 
     (In thousands)  

September 30, 2013

           

Real estate loans:

           

Commercial property

           

Retail

   $ 2,243       $ 21       $ 2,287       $ 65   

Land

     —           —           1,116         80   

Other

     1,170         13         740         23   

Residential property

     2,992         33         3,026         92   

Commercial and industrial loans:

           

Commercial term

           

Unsecured

     10,179         148         12,122         555   

Secured by real estate

     18,023         336         17,358         954   

Commercial lines of credit

     840         23         1,137         48   

SBA loans

     5,542         299         5,870         851   

International loans

     1,197         —           1,342         —     

Consumer loans

     1,581         27         1,624         54   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

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

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2012

           

Real estate loans:

           

Commercial property

           

Retail

   $ 2,597       $ 47       $ 2,162       $ 95   

Land

     2,054         45         2,134         136   

Other

     534         5         937         38   

Construction

     7,868         29         8,016         207   

Residential property

     3,279         34         3,265         118   

Commercial and industrial loans:

           

Commercial term

           

Unsecured

     13,723         214         14,079         644   

Secured by real estate

     19,990         342         21,834         1,300   

Commercial lines of credit

     1,555         16         1,742         46   

SBA loans

     6,168         330         7,489         813   

Consumer loans

     1,257         49         1,021         59   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

   $ 59,025       $ 1,111       $ 62,679       $ 3,456   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,     September 30,     September 30,  
     2013     2012     2013     2012  
     (In thousands)  

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

   $ 1,058      $ 1,382      $ 3,183      $ 4,315   

Less: Interest income recognized on impaired loans

     (900     (1,111     (2,722     (3,456
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest foregone on impaired loans

   $ 158      $ 271      $ 461      $ 859   
  

 

 

   

 

 

   

 

 

   

 

 

 

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:

 

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

Real estate loans:

  

Commercial property

     

Retail

   $ 768       $ 1,079   

Land

     —           2,097   

Residential property

     1,659         1,270   

Commercial and industrial loans:

     

Commercial term

     

Unsecured

     2,490         8,311   

Secured by real estate

     5,591         8,679   

Commercial lines of credit

     830         1,521   

SBA loans

     9,959         12,563   

Consumer loans

     1,479         1,759   
  

 

 

    

 

 

 

Total non-accrual loans

   $ 22,776       $ 37,279   
  

 

 

    

 

 

 

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

 

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

Non-accrual loans

   $ 22,776       $ 37,279   

Loans 90 days or more past due and still accruing

     —           —     
  

 

 

    

 

 

 

Total non-performing loans

     22,776         37,279   

Other real estate owned

     290         774   
  

 

 

    

 

 

 

Total non-performing assets

   $ 23,066       $ 38,053   
  

 

 

    

 

 

 

Loans on non-accrual status totaled $22.8 million as of September 30, 2013, compared to $37.3 million as of December 31, 2012, representing a 38.9 percent decrease. Delinquent loans (defined as 30 days or more past due) were $16.0 million as of September 30, 2013, compared to $16.5 million as of December 31, 2012, representing a 2.8 percent decrease.

As of September 30, 2013, there was one other real estate owned (“OREO”) located in Washington with a carrying value of $290,000 and no valuation adjustment. As of December 31, 2012, there were two OREOs 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.

 

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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.

The following table details troubled debt restructurings, disaggregated by concession type and by loan type, as of September 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)

 

September 30, 2013

               

Real estate loans:

                   

Commercial property

                   

Retail

  $ —        $ —        $ —        $ 768      $ 768      $ —        $      $ —        $ —        $ —     

Other

    —          —          —          —          —          520        —          —          649        1,169   

Residential property

    803        —          —          —          803        —          —          —          —          —     

Commercial and industrial loans:

                   

Commercial term

                   

Unsecured

    —          205        651        644        1,500        1,271        —          1,983        3,002        6,256   

Secured by real estate

    2,167        993        263        —          3,423        3,458        —          598        4,487        8,543   

Commercial lines of credit

    641        —          —          188        829        —          —          —          —          —     

SBA loans

    915        1,140        773        —          2,828        445        —          70        —          515   

International loans

    —          —          —          —          —          —          —          1,180        —          1,180   

Consumer loans

    —          —          —          —          —          —          —          149        —          149   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,526      $ 2,338      $ 1,687      $ 1,600      $ 10,151      $ 5,694      $ —        $ 3,980      $ 8,138      $ 17,812   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2013 and December 31, 2012, total TDRs were $28.0 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 September 30, 2013 and December 31, 2012, TDRs were subjected to specific impairment analysis, and $944,000 and $3.6 million, respectively, of reserves relating to these loans were included in the allowance for loan losses.

The following table details troubled debt restructuring, disaggregated by loan class, for the three months ended September 30, 2013 and 2012:

 

    September 30, 2013     September 30, 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, except number of loans)

 

Real estate loans:

           

Commercial property

           

Retail (1)

    —        $ —        $ —          1      $ 131      $ 177   

Other (2)

    1        646        649        1        538        532   

Commercial and industrial loans:

           

Commercial term

           

Unsecured (3)

    8        1,015        1,002        5        777        759   

Secured by real estate (4)

    2        1,365        1,365        3        4,525        4,475   

SBA loans (5)

    1        107        91        3        78        89   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    12      $ 3,133      $ 3,107        13      $ 6,049      $ 6,032   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) Includes a modification of $177,000 through an extension of maturity for the three months ended September 30, 2012.
(2) Includes a modification of $649,000 through an extension of maturity for the three months ended September 30, 2013, and a modification of $532,000 through a payment deferral for the three months ended September 30, 2012.
(3) Includes modifications of $381,000 through payment deferrals and $621,000 through extensions of maturity for the three months ended September 30, 2013, and modifications of $750,000 through extensions of maturity and $9,000 through payment deferrals for the three months ended September 30, 2012.
(4) Includes modifications of $1.4 million through payment deferrals for the three months ended September 30, 2013, and modifications of $3.1 million through payment deferrals and $1.4 million through an extension of maturity for the three months ended September 30, 2012.
(5) Includes a modification of $91,000 through a payment deferral for the three months ended September 30, 2013, and modifications of $48,000 through payment deferrals and $41,000 through a reduction of principal or accrued interest for the three months ended September 30, 2012.

During the three months ended September 30, 2013, we restructured monthly payments on 12 loans, with a net carrying value of $3.1 million as of September 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.

The following table details troubled debt restructuring, disaggregated by loan class, for the nine months ended September 30, 2013 and 2012:

 

    September 30, 2013     September 30, 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, except number of loans)

 

Real estate loans:

           

Commercial property

           

Retail (1)

    —        $ —        $ —          1      $ 184      $ 177   

Land (2)

    —          —          —          1        547        532   

Other (3)

    1        658        649        —          —          —     

Commercial and industrial loans:

           

Commercial term

           

Unsecured (4)

    14        1,780        1,618        31        5,362        4,940   

Secured by real estate (5)

    2        1,365        1,365        5        5,584        5,307   

Commercial lines of credit (6)

    1        —          —          1        202        188   

SBA loans (7)

    3        273        228        11        1,060        1,000   

International loans (8)

    2        1,584        1,180        —          —          —     

Consumer loans (9)

    1        149        149        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    24      $ 5,809      $ 5,189        50      $ 12,939      $ 12,144   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes a modification of $177,000 through an extension of maturity for the nine months ended September 30, 2012.
(2) Includes a modification of $532,000 through a payment deferral for the nine months ended September 30, 2012.
(3) Includes a modification of $649,000 through an extension of maturity for the nine months ended September 30, 2013.
(4) Includes modifications of $381,000 through payment deferrals and $1.2 million through extensions of maturity for the nine months ended September 30, 2013, and modifications of $2.2 million through extensions of maturity, $1.9 million through reductions of principal or accrued interest and $884,000 through payment deferrals for the nine months ended September 30, 2012.
(5) Includes modifications of $1.4 million through payment deferrals for the nine months ended September 30, 2013, and modifications of $3.1 million through payment deferrals, $1.9 million through extensions of maturity and $338,000 through a reduction of principal or accrued interest for the nine months ended September 30, 2012.
(6) Includes a modification of zero through a reduction of principal or accrued interest for the three months ended September 30, 2013, and a modification of $188,000 through a reduction of principal or accrued interest for the nine months ended September 30, 2012.
(7) Includes modifications of $98,000 through payments deferrals and $130,000 through a reduction of principal or accrued interest for the nine months ended September 30, 2013, and modifications of $551,000 through payment deferrals and $449,000 through reductions of principal or accrued interest for the nine months ended September 30, 2012.
(8) Includes modifications of $1.2 million through reductions of principal or accrued interest for the nine months ended September 30, 2013.
(9) Includes a modification of $149,000 through a reduction of principal or accrued interest for the nine months ended September 30, 2013.

During the nine months ended September 30, 2013, we restructured monthly payments on 24 loans, with a net carrying value of $5.2 million as of September 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 that defaulted subsequent to the modifications occurring within the previous twelve months, disaggregated by loan class, for the three and nine months ended September 30, 2013 and 2012, respectively:

 

    Three Months Ended     Nine Months Ended  
    September 30, 2013     September 30, 2012     September 30, 2013     September 30, 2012  
    Number of
Loans
    Recorded
Investment
    Number of
Loans
    Recorded
Investment
    Number of
Loans
    Recorded
Investment
    Number of
Loans
    Recorded
Investment
 
   

(In thousands, except number of loans)

 

Commercial and industrial loans:

               

Commercial term

               

Unsecured

    —        $ —          3      $ 171        1      $ 29        6      $ 431   

Secured by real estate

    —          —          —          —          —          —          —          —     

Commercial lines of credit

    —          —          —          —          —          —          1        258   

SBA loans

    1        130        6        272        1        130        6        272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1      $ 130        9      $ 443        2      $ 159        13      $ 961   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Servicing Assets

The changes in servicing assets for the nine months ended September 30, 2013 and 2012 were as follows:

 

     Nine Months Ended
September 30,
 
     2013     2012  
     (In thousands)  

Balance at beginning of period

   $ 5,542      $ 3,720   

Additions

     1,996        2,148   

Amortization

     (1,152     (720
  

 

 

   

 

 

 

Balance at end of period

   $ 6,386      $ 5,148   
  

 

 

   

 

 

 

At September 30, 2013 and 2012, we serviced loans sold to unaffiliated parties in the amounts of $332.9 million and $277.7 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 income tax expenses were $6.6 million and $17.1 million for the three and nine months ended September 30, 2013, respectively, compared to income tax benefits of $644,000 and $47.7 million for the three and nine months ended September 30, 2012, respectively. The effective income tax rate was 39.1 percent and 36.4 percent for the three and nine months ended September 30, 2013, respectively, as compared to (5.1) percent and (166.6) percent for the three and nine months ended September 30, 2012. The change in the effective tax rate for the three and nine months ended September 30, 2013, as compared to the three and nine months ended September 30, 2012, was due primarily to a net tax benefit of $47.7 million resulting from the reversal of $57.9 million of valuation allowance on the Company’s deferred tax asset in the nine months ended September 30, 2012. The income tax expenses for the three and nine months ended September 30, 2013 include discrete items of $85,000 and ($682,000), respectively, related mainly to the revision of the deferred tax estimate from stock options and state tax attributes. Management concluded that deferred tax assets were more likely than not to be realized, and therefore, maintaining a valuation allowance was not required as of September 30, 2013.

As of September 30, 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. Management does not anticipate any material changes in our financial statements due to the results of those audits.

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”, 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

 

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complete. The fair value of the warrants at the date of issuance totaling $2.0 million was recorded as a liability and a cost of equity, which was determined by the Black-Scholes option pricing model. The expected stock volatility was based on historical volatility of our common stock over the expected term of the warrants. We used a weighted average expected stock volatility of 111.46 percent. The expected life assumption was based on the contract term of five years. The dividend yield of zero was based on the fact that we had no intention to pay cash dividends for the term at the grant date. The risk free rate of 2.07 percent used for the warrants was equal to the zero coupon rate in effect at the time of the grant.

Upon re-measuring the fair value of the stock warrants at September 30, 2013, the fair value decreased by $3,000, which we have included in other operating expenses for the three months ended September 30, 2013. We used a weighted average expected stock volatility of 25.78 percent and a remaining contractual life of 1.8 years based on the contract terms. We also used a dividend yield of 1.65 percent and the risk free rate of 0.47 percent used for the warrants was 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 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 assets, referred to as the leverage ratio, of 5.0 percent.

The capital ratios of Hanmi Financial and the Bank as of September 30, 2013 and December 31, 2012 were as follows:

 

                  Minimum     Minimum to Be  
                  Regulatory     Categorized as  
     Actual     Requirement     “Well Capitalized”  
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (In thousands)  

September 30, 2013

               

Total capital (to risk-weighted assets):

               

Hanmi Financial

   $ 409,551         17.72   $ 184,934         8.00     N/A         N/A   

Hanmi Bank

   $ 392,743         17.02   $ 184,604         8.00   $ 230,755         10.00

Tier 1 capital (to risk-weighted assets):

               

Hanmi Financial

   $ 380,256         16.45   $ 92,467         4.00     N/A         N/A   

Hanmi Bank

   $ 363,527         15.75   $ 92,302         4.00   $ 138,453         6.00

Tier 1 capital (to average assets):

               

Hanmi Financial

   $ 380,256         13.68   $ 111,197         4.00     N/A         N/A   

Hanmi Bank

   $ 363,527         13.10   $ 110,995         4.00   $ 138,743         5.00

December 31, 2012

               

Total capital (to risk-weighted assets):

               

Hanmi Financial

   $ 451,784         20.65   $ 175,050         8.00     N/A         N/A   

Hanmi Bank

   $ 433,570         19.85   $ 174,734         8.00   $ 218,418         10.00

Tier 1 capital (to risk-weighted assets):

               

Hanmi Financial

   $ 423,937         19.37   $ 87,525         4.00     N/A         N/A   

Hanmi Bank

   $ 405,801         18.58   $ 87,367         4.00   $ 131,051         6.00

Tier 1 capital (to average assets):

               

Hanmi Financial

   $ 423,937         14.95   $ 113,464         4.00     N/A         N/A   

Hanmi Bank

   $ 405,801         14.33   $ 113,278         4.00   $ 141,597         5.00

 

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Regulatory Capital Rule Adjustments

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

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.

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.

 

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As of September 30, 2013, we had a zero coupon tax credit municipal bond of $756,000 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 September 30, 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 1.5 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 0.70 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 – SBA loans held for sale are carried at the lower of cost or fair value. As of September 30, 2013 and December 31, 2012, we had $5.2 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 September 30, 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 September 30, 2013 and December 31, 2012, we had zero 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”, 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 September 30, 2013. As of September 30, 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        
          Significant              
          Observable              
    Quoted Prices in     Inputs with No              
    Active Markets     Active Market     Significant        
    for Identical     with Identical     Unobservable        
    Assets     Characteristics     Inputs     Balance  
    (In thousands)  

September 30, 2013

       

Assets:

       

Debt securities available-for-sale:

       

Mortgage-backed securities

  $ —        $ 127,085      $ —        $ 127,085   

U.S. government agency securities

    92,878        —          —          92,878   

Collateralized mortgage obligations

    —          85,110        —          85,110   

Municipal bonds-tax exempt

    —          5,730        756        6,486   

Municipal bonds-taxable

    —          34,788        —          34,788   

Corporate bonds

    —          20,483        —          20,483   

SBA loan pools securities

    —          12,921        —          12,921   

Other securities

    —          2,921        —          2,921   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total debt securities available-for-sale

    92,878        289,038        756        382,672   
 

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities available-for-sale:

       

Financial services industry

    385        —          —          385   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities available-for-sale

    385        —          —          385   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available-for-sale

  $ 93,263      $ 289,038      $ 756      $ 383,057   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Stock warrants

  $ —        $ —        $ 2      $ 2   
 

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012

       

Assets:

       

Debt securities available-for-sale:

       

Mortgage-backed securities

  $ —        $ 160,326      $ —        $ 160,326   

Collateralized mortgage obligations

    —          100,487        —          100,487   

U.S. government agency securities

    93,118        —          —          93,118   

Municipal bonds-tax exempt

    —          12,033        779        12,812   

Municipal bonds-taxable

    —          46,142        —          46,142   

Corporate bonds

    —          20,400        —          20,400   

SBA loan pools securities

    —          14,026        —          14,026   

Other securities

    —          3,357        —          3,357   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total debt securities available-for-sale

    93,118        356,771        779        450,668   
 

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities available-for-sale:

       

Financial services industry

    392        —          —          392   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities available-for-sale

    392        —          —          392   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available-for-sale

  $ 93,510      $ 356,771      $ 779      $ 451,060   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Stock warrants

  $ —        $ —        $ 906      $ 906   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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The table below presents a reconciliation and income statement classification of gains and losses for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2013:

 

                        Unrealized        
                        Gains or        
     Beginning      Purchases     Realized     Losses     Ending  
     Balance as of      Issuances,     Gains or     in Other     Balance as of  
     January 1,      and     Losses     Comprehensive     September 30,  
     2013      Settlement     In Earnings     Income     2013  
     (In thousands)  

Assets:

           

Municipal bonds-tax exempt (1)

   $ 779       $ —        $ —        $ (23   $ 756   

Liabilities:

           

Stock warrants (2)

   $ 906       $ (843   $ (61   $ —        $ 2   

 

(1) Reflects a zero coupon tax credit municipal bond. As the Company was not able to obtain a price from independent external pricing service providers, the discounted cash flow method was used to determine its fair value. The bond carried a par value of $700,000 and an amortized value of $699,000 with a remaining life of 1.5 years at September 30, 2013.
(2) Reflects warrants for our common stock issued in connection with services Cappello Capital Corp. provided to us as a placement agent in connection with our best efforts public offering and as our financial adviser in connection with our completed rights offering. The warrants were immediately exercisable when issued at an exercise price of $9.60 per share of our common stock and expire on October 14, 2015. See “Note 5 – Stockholders’ Equity” for more details.

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

As of September 30, 2013 and December 31, 2012, assets and liabilities measured at fair value on a non-recurring basis are as follows:

 

    Level 1     Level 2     Level 3        
          Significant              
          Observable              
    Quoted Prices in     Inputs With No              
    Active Markets     Active Market     Significant     Loss During The  
    for Identical     With Identical     Unobservable     Nine Months Ended  
    Assets     Characteristics     Inputs     September 30, 2013  
    (In thousands)  

September 30, 2013

       

Assets:

       

Non-performing loans held for sale

  $ —        $ —        $ —        $ —     

Impaired loans (1)

    —          30,353        1,099        1,048   

Other real estate owned (2)

    —          290        —          7   
    Level 1     Level 2     Level 3        
          Significant              
          Observable              
    Quoted Prices in     Inputs With No              
    Active Markets     Active Market     Significant     Loss During The  
    for Identical     With Identical     Unobservable     Twelve Months Ended  
    Assets     Characteristics     Inputs     December 31, 2012  
    (In thousands)  

December 31, 2012

   

Assets:

       

Non-performing loans held for
sale (3)

  $ —        $ 484      $ —        $ 3,747   

Impaired loans (4)

    —          27,844        8,888        580   

Other real estate owned (5)

    —          774        —          301   

 

(1) Includes real estate loans of $6.4 million, commercial and industrial loans of $23.8 million, and consumer loans of $1.2 million.
(2) Includes properties from the foreclosure of a residential property loan of $290,000.
(3) Includes a SBA loan of $484,000.
(4) Includes real estate loans of $8.7 million, commercial and industrial loans of $27.0 million, and consumer loans of $1.0 million.
(5) Includes properties from the foreclosure of real estate loans of $774,000.

 

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

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

The estimated fair values of financial instruments were as follows:

 

     September 30, 2013      December 31, 2012  
     Carrying or             Carrying or         
     Contract      Estimated      Contract      Estimated  
     Amount      Fair Value      Amount      Fair Value  
     (In thousands)  

Financial assets:

           

Cash and cash equivalents

   $ 193,854       $ 193,854       $ 268,047       $ 268,047   

Restricted cash

     —           —           5,350         5,350   

Investment securities available-for-sale

     383,057         383,057         451,060         451,060   

Loans receivable, net of allowance for loan losses

     2,102,621         2,096,928         1,986,051         1,981,669   

Loans held for sale

     5,228         5,228         8,306         8,306   

Accrued interest receivable

     6,957         6,957         7,581         7,581   

Investment in federal home loan bank stock

     14,060         14,060         17,800         17,800   

Investment in federal reserve bank stock

     13,200         13,200         12,222         12,222   

Financial liabilities:

           

Noninterest-bearing deposits

     778,345         778,345         720,931         720,931   

Interest-bearing deposits

     1,651,362         1,656,011         1,675,032         1,680,211   

Borrowings

     2,645         2,674         85,341         85,414   

Accrued interest payable

     2,705         2,705         11,775         11,775   

Off-balance sheet items:

           

Commitments to extend credit

     225,070         190         182,746         146   

Standby letters of credit

     9,326         42         10,588         24   

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

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

Restricted cash – The carrying amount of restricted cash approximates its fair value (Level 1).

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

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

 

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

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

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

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

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

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

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

Stock warrants – The fair value of stock warrants is determined by the Black-Scholes option pricing model. The expected stock volatility is based on historical volatility of our common stock over expected term of the warrants. The expected life assumption is based on the contract term and dividend yield is based on the company’s annual dividend divided by the current share price. The risk free rate used for the warrants is equal to the zero coupon rate in effect at the time of the grant (Level 3).

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

Note 8 — Share-Based Compensation

Share-Based Compensation Expense

For the three months ended September 30, 2013 and 2012, share-based compensation expense was $197,000 and $42,000, respectively, and the related tax benefits on non-qualified stock options were $0 and $18,000, respectively. For the nine months ended September 30, 2013 and 2012, share-based compensation expense was $387,000 and $144,000, respectively, and the related tax benefits on non-qualified stock options were $32,000 and $61,000, respectively.

Unrecognized Share-Based Compensation Expense

As of September 30, 2013, unrecognized share-based compensation expense was as follows:

 

          Average Expected  
    Unrecognized     Recognition  
    Expense     Period  
    (In thousands)  

Stock option awards

  $ 2,158        2.7 years   

Restricted stock awards

    1,794        2.9 years   
 

 

 

   

Total unrecognized share-based compensation expense

  $ 3,952        2.8 years   
 

 

 

   

 

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The table below provides stock option information for the three months ended September 30, 2013:

 

                         Aggregate  
           Weighted-      Weighted      Intrinsic  
           Average      Average      Value of  
           Exercise      Remaining      In-the-  
     Number of     Price Per      Contractual      Money  
     Shares     Share      Life      Options  
     (In thousands, except share and per share data)  

Options outstanding at beginning of period

     329,970      $ 37.43         7.5 years       $ 1,015 (1) 

Options granted

     305,000      $ 16.43         9.9 years      

Options exercised

     (38,437   $ 11.18         7.7 years      

Options forfeited

     (16,125   $ 12.46         9.0 years      

Options expired

     (8,750   $ 45.28         4.7 years      
  

 

 

         

Options outstanding at end of period

     571,658      $ 28.58         8.6 years       $ 636 (2) 
  

 

 

         

Options exercisable at end of period

     124,220      $ 76.83         4.9 years       $ 258 (2) 

 

(1) Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $17.67 as of June 30, 2013, over the exercise price, multiplied by the number of options.
(2) Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $16.57 as of September 30, 2013, over the exercise price, multiplied by the number of options.

The table below provides stock option information for the nine months ended September 30, 2013:

 

                         Aggregate  
           Weighted-      Weighted      Intrinsic  
           Average      Average      Value of  
           Exercise      Remaining      In-the-  
     Number of     Price Per      Contractual      Money  
     Shares     Share      Life      Options  
     (In thousands, except share and per share data)  

Options outstanding at beginning of period

     342,950      $ 37.44         8.0 years       $ 359 (1) 

Options granted

     305,000      $ 16.43         9.9 years      

Options exercised

     (40,678   $ 11.25         7.7 years      

Options forfeited

     (22,501   $ 12.48         9.1 years      

Options expired

     (13,113   $ 59.36         4.3 years      
  

 

 

         

Options outstanding at end of period

     571,658      $ 28.58         8.6 years       $ 636 (2) 
  

 

 

         

Options exercisable at end of period

     124,220      $ 76.83         4.9 years       $ 258 (2) 

 

(1) Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $13.59 as of December 31, 2012, over the exercise price, multiplied by the number of options.
(2) Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $16.57 as of September 30, 2013, over the exercise price, multiplied by the number of options.

There were 38,437 and 40,678 stock options exercised during the three and nine months ended September 30, 2013, respectively, compared to none during the same periods in 2012.

Restricted Stock Awards

Restricted stock awards under the 2013 Plan generally become fully vested after three to five years of continued employment from the date of grant. Hanmi Financial becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted stock awards when the restrictions are released and the shares are issued. Restricted stock awards are forfeited if officers and employees terminate prior to the lapsing of restrictions. Forfeitures of restricted stock awards are treated as cancelled shares.

 

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The table below provides information for restricted stock awards for the three and nine months ended September 30, 2013:

 

     Three Months Ended      Nine Months Ended  
           Weighted-            Weighted-  
           Average            Average  
           Grant Date            Grant Date  
     Number of     Fair Value      Number of     Fair Value  
     Shares     Per Share      Shares     Per Share  

Restricted stock at beginning of period

     3,500      $ 10.99         10,500      $ 10.83   

Restricted stock granted

     111,332      $ 16.43         111,332      $ 16.43   

Restricted stock vested

     —          —           (7,000   $ 10.75   

Restricted stock forfeited

     (750   $ 10.80         (750   $ 10.80   
  

 

 

      

 

 

   

Restricted stock at end of period

     114,082      $ 16.30         114,082      $ 16.30   
  

 

 

      

 

 

   

Note 9 — Earnings Per Share

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

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

 

     2013     2012  
     (Numerator)      (Denominator)            (Numerator)      (Denominator)         
            Weighted-      Per            Weighted-      Per  
     Net      Average      Share     Net     </