UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2014
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 |
(Registrants Telephone Number, Including Area Code) |
Not Applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ¨ | Accelerated Filer | x | |||
Non-Accelerated Filer | ¨ (Do Not Check if a Smaller Reporting Company) | Smaller Reporting Company | ¨ |
Indicate | by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x |
As | of July 31, 2014, there were 31,861,426 outstanding shares of the Registrants Common Stock. |
Hanmi Financial Corporation and Subsidiaries
Quarterly Report on Form 10-Q
Three and Six Months Ended June 30, 2014
Part 1 Financial Information | ||||||
Item 1. | 3 | |||||
Consolidated Balance Sheets (Unaudited) | 3 | |||||
Consolidated Statements of Income (Unaudited) | 4 | |||||
Consolidated Statements of Comprehensive Income (Unaudited) | 5 | |||||
Consolidated Statements of Changes in Stockholders Equity (Unaudited) | 6 | |||||
Consolidated Statements of Cash Flows (Unaudited) | 7 | |||||
Notes to Consolidated Financial Statements (Unaudited) | 9 | |||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
43 | ||||
Item 3. | 65 | |||||
Item 4. | 65 | |||||
Part II Other Information | ||||||
Item 1. | 67 | |||||
Item 1A. | 67 | |||||
Item 2. | 67 | |||||
Item 3. | 67 | |||||
Item 4. | 67 | |||||
Item 5. | 67 | |||||
Item 6. | 67 | |||||
Signatures | 69 |
2
Part I Financial Information
Hanmi Financial Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
June 30, 2014 |
December 31, 2013 |
|||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 123,782 | $ | 179,357 | ||||
Securities available for sale, at fair value (amortized cost of $511,511 as of June 30, 2014 and $549,113 as of December 31, 2013) |
505,977 | 530,926 | ||||||
Loans held for sale, at the lower of cost or fair value |
3,842 | | ||||||
Loans receivable, net of allowance for loan losses of $51,886 as of June 30, 2014 and $57,555 as of December 31, 2013 |
2,300,810 | 2,177,498 | ||||||
Accrued interest receivable |
6,355 | 7,055 | ||||||
Premises and equipment, net |
13,929 | 14,221 | ||||||
Other real estate owned, net |
1,714 | 756 | ||||||
Customers liability on acceptances |
3,186 | 2,018 | ||||||
Servicing assets |
6,355 | 6,833 | ||||||
Other intangible assets, net |
| 1,171 | ||||||
Investment in federal home loan bank stock, at cost |
16,385 | 14,060 | ||||||
Investment in federal reserve bank stock, at cost |
11,514 | 11,196 | ||||||
Income tax assets |
53,160 | 63,841 | ||||||
Bank-owned life insurance |
30,147 | 29,699 | ||||||
Prepaid expenses |
2,570 | 1,415 | ||||||
Other assets |
15,049 | 14,333 | ||||||
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Total assets |
$ | 3,094,775 | $ | 3,054,379 | ||||
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Liabilities and Stockholders Equity |
||||||||
Liabilities: |
||||||||
Deposits: |
||||||||
Noninterest-bearing |
$ | 910,320 | $ | 819,015 | ||||
Interest-bearing |
1,634,529 | 1,693,310 | ||||||
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Total deposits |
2,544,849 | 2,512,325 | ||||||
Accrued interest payable |
3,423 | 3,366 | ||||||
Banks liability on acceptances |
3,186 | 2,018 | ||||||
Federal home loan bank advances |
97,000 | 127,546 | ||||||
Accrued expenses and other liabilities |
19,969 | 9,047 | ||||||
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|
|
|||||
Total liabilities |
2,668,427 | 2,654,302 | ||||||
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|
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Stockholders equity: |
||||||||
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 32,438,850 shares (31,860,956 shares outstanding) as of
June 30, 2014 and 32,339,444 shares |
257 | 257 | ||||||
Additional paid-in capital |
553,741 | 552,270 | ||||||
Accumulated other comprehensive loss, net of tax benefit of $3,367 as of June 30, 2014 and $8,791 as of December 31, 2013 |
(2,150 | ) | (9,380 | ) | ||||
Accumulated deficit |
(55,642 | ) | (73,212 | ) | ||||
Less: treasury stock, at cost; 577,894 shares as of June 30, 2014 and December 31, 2013 |
(69,858 | ) | (69,858 | ) | ||||
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|
|
|
|||||
Total stockholders equity |
426,348 | 400,077 | ||||||
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|
|
|
|||||
Total liabilities and stockholders equity |
$ | 3,094,775 | $ | 3,054,379 | ||||
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements (Unaudited)
3
Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
(In thousands, except share and per share data)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Interest and Dividend Income: |
||||||||||||||||
Interest and fees on loans |
$ | 28,355 | $ | 27,839 | $ | 56,545 | $ | 54,638 | ||||||||
Taxable interest on investment securities |
2,375 | 2,100 | 4,912 | 4,216 | ||||||||||||
Tax-exempt interest on investment securities |
20 | 73 | 96 | 168 | ||||||||||||
Interest on federal funds sold |
| | | 6 | ||||||||||||
Interest on interest-bearing deposits in other banks |
18 | 24 | 38 | 112 | ||||||||||||
Dividends on federal reserve bank stock |
172 | 196 | 340 | 379 | ||||||||||||
Dividends on federal home loan bank stock |
236 | 147 | 472 | 255 | ||||||||||||
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|
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|
|
|||||||||
Total interest and dividend income |
31,176 | 30,379 | 62,403 | 59,774 | ||||||||||||
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|
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Interest Expense: |
||||||||||||||||
Interest on deposits |
3,153 | 3,100 | 6,375 | 6,259 | ||||||||||||
Interest on federal home loan bank advances |
30 | 41 | 78 | 79 | ||||||||||||
Interest on junior subordinated debentures |
| 84 | | 678 | ||||||||||||
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|
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|
|||||||||
Total interest expense |
3,183 | 3,225 | 6,453 | 7,016 | ||||||||||||
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|
|||||||||
Net interest income before provision for credit losses |
27,993 | 27,154 | 55,950 | 52,758 | ||||||||||||
Negative provision for credit losses |
(3,866 | ) | | (7,166 | ) | | ||||||||||
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|
|||||||||
Net interest income after provision for credit losses |
31,859 | 27,154 | 63,116 | 52,758 | ||||||||||||
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|
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Non-Interest Income: |
||||||||||||||||
Service charges on deposit accounts |
2,568 | 2,884 | 5,041 | 5,932 | ||||||||||||
Remittance fees |
491 | 541 | 929 | 1,038 | ||||||||||||
Trade finance fees |
306 | 276 | 559 | 553 | ||||||||||||
Other service charges and fees |
369 | 335 | 700 | 733 | ||||||||||||
Bank-owned life insurance income |
224 | 233 | 447 | 463 | ||||||||||||
Gain on sales of SBA loans guaranteed portion |
498 | 2,378 | 1,045 | 5,070 | ||||||||||||
Net loss on sales of other loans |
| (460 | ) | | (557 | ) | ||||||||||
Net gain on sales of investment securities |
364 | 303 | 1,785 | 312 | ||||||||||||
Other operating income |
253 | 248 | 395 | 343 | ||||||||||||
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|
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Total non-interest income |
5,073 | 6,738 | 10,901 | 13,887 | ||||||||||||
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|
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Non-Interest Expense: |
||||||||||||||||
Salaries and employee benefits |
10,280 | 8,638 | 20,539 | 17,025 | ||||||||||||
Occupancy and equipment |
2,469 | 2,486 | 4,866 | 4,971 | ||||||||||||
Deposit insurance premiums and regulatory assessments |
399 | 517 | 836 | 751 | ||||||||||||
Data processing |
1,112 | 1,131 | 2,270 | 2,289 | ||||||||||||
Other real estate owned expense |
| (20 | ) | 5 | 12 | |||||||||||
Professional fees |
724 | 2,364 | 1,557 | 4,520 | ||||||||||||
Directors and officers liability insurance |
191 | 219 | 383 | 439 | ||||||||||||
Supplies and communications |
595 | 599 | 1,097 | 1,060 | ||||||||||||
Advertising and promotion |
753 | 834 | 1,333 | 1,380 | ||||||||||||
Loan-related expense |
61 | 91 | 144 | 237 | ||||||||||||
Other operating expenses |
1,973 | 1,748 | 3,800 | 3,579 | ||||||||||||
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|
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Total non-interest expense |
18,557 | 18,607 | 36,830 | 36,263 | ||||||||||||
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|
|||||||||
Income from continuting operations before provision for income taxes |
18,375 | 15,285 | 37,187 | 30,382 | ||||||||||||
Provision for income taxes |
6,866 | 5,958 | 14,710 | 10,926 | ||||||||||||
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Income from continuting operations, net of taxes |
$ | 11,509 | $ | 9,327 | $ | 22,477 | $ | 19,456 | ||||||||
Discontinued operations |
||||||||||||||||
(Loss) income from operations of discontinued subsidiaries (including gain on disposal of $51 in the second quarter of 2014) |
$ | (1 | ) | $ | 244 | $ | 37 | $ | 128 | |||||||
Income tax expense |
466 | 84 | 481 | 39 | ||||||||||||
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|
|||||||||
(Loss) income from discontinued operations |
(467 | ) | 160 | (444 | ) | 89 | ||||||||||
Net income |
$ | 11,042 | $ | 9,487 | $ | 22,033 | $ | 19,545 | ||||||||
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Basic earnings per share: |
||||||||||||||||
Income from continuing operations, net of taxes |
$ | 0.36 | $ | 0.30 | $ | 0.71 | $ | 0.62 | ||||||||
Income from discontinued operations, net of taxes |
(0.01 | ) | | (0.01 | ) | | ||||||||||
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|
|||||||||
Basic earnings per share |
$ | 0.35 | $ | 0.30 | $ | 0.70 | $ | 0.62 | ||||||||
Diluted earnings per share: |
||||||||||||||||
Income from continuing operations, net of taxes |
$ | 0.36 | $ | 0.29 | $ | 0.70 | $ | 0.62 | ||||||||
Income from discontinued operations, net of taxes |
(0.01 | ) | 0.01 | (0.01 | ) | | ||||||||||
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|
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Diluted earnings per share |
$ | 0.35 | $ | 0.30 | $ | 0.69 | $ | 0.62 | ||||||||
Weighted-average shares outstanding: |
||||||||||||||||
Basic |
31,681,033 | 31,590,760 | 31,670,436 | 31,565,013 | ||||||||||||
Diluted |
31,974,253 | 31,655,988 | 31,950,313 | 31,633,535 |
See Accompanying Notes to Consolidated Financial Statements (Unaudited)
4
Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net Income |
$ | 11,042 | $ | 9,487 | $ | 22,033 | $ | 19,545 | ||||||||
Other comprehensive income (loss), net of tax |
||||||||||||||||
Unrealized gain (loss) on securities |
||||||||||||||||
Unrealized holding gain (loss) arising during period |
6,340 | (5,553 | ) | 14,438 | (6,121 | ) | ||||||||||
Less: reclassification adjustment for net gain included in net income |
(364 | ) | (303 | ) | (1,785 | ) | (312 | ) | ||||||||
Unrealized (loss) gain on interest-only strip of servicing assets |
| (2 | ) | 1 | 1 | |||||||||||
Income tax (expense) benefit related to items of other comprehensive income |
(2,617 | ) | 2,397 | (5,424 | ) | 2,648 | ||||||||||
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|
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Other comprehensive income (loss) |
3,359 | (3,461 | ) | 7,230 | (3,784 | ) | ||||||||||
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|
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Comprehensive Income |
$ | 14,401 | $ | 6,026 | $ | 29,263 | $ | 15,761 | ||||||||
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|
See Accompanying Notes to Consolidated Financial Statements (Unaudited)
5
Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders Equity (Unaudited)
(In thousands, except share data)
Common Stock - Number of Shares | Stockholders Equity | |||||||||||||||||||||||||||||||||||
Gross Shares Issued and Outstanding |
Treasury Shares |
Net Shares Issued and Outstanding |
Common Stock |
Additional Paid-in Capital |
Accumulated Other Comprehensive Income (Loss) |
Retained Earnings (Deficit) |
Treasury Stock, at Cost |
Total Stockholders Equity |
||||||||||||||||||||||||||||
Balance at January 1, 2013 |
32,074,434 | (577,894 | ) | 31,496,540 | $ | 257 | $ | 550,066 | $ | 5,418 | $ | (107,519 | ) | $ | (69,858 | ) | $ | 378,364 | ||||||||||||||||||
Adjustment for the cumulative effect on prior years of retrospectively applying the new method of accounting |
| | | | | | (1,112 | ) | | (1,112 | ) | |||||||||||||||||||||||||
Exercises of stock options |
2,241 | | 2,241 | | (291 | ) | | | | (291 | ) | |||||||||||||||||||||||||
Exercises of stock warrants |
106,056 | | 106,056 | | 1,289 | | | | 1,289 | |||||||||||||||||||||||||||
Restricted stock awards |
| | | | 24 | | | | 24 | |||||||||||||||||||||||||||
Share-based compensation expense |
| | | | 165 | | | | 165 | |||||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
Net income |
| | | | | | 19,545 | | 19,545 | |||||||||||||||||||||||||||
Change in unrealized gain on securities available for sale and interest-only strips, net of income taxes |
| | | | | (3,784 | ) | | | (3,784 | ) | |||||||||||||||||||||||||
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|
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Total comprehensive income |
15,761 | |||||||||||||||||||||||||||||||||||
Balance at June 30, 2013 |
32,182,731 | (577,894 | ) | 31,604,837 | $ | 257 | $ | 551,253 | $ | 1,634 | $ | (89,086 | ) | $ | (69,858 | ) | $ | 394,200 | ||||||||||||||||||
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Balance at January 1, 2014 |
32,339,444 | (577,894 | ) | 31,761,550 | $ | 257 | $ | 552,270 | $ | (9,380 | ) | $ | (73,212 | ) | $ | (69,858 | ) | $ | 400,077 | |||||||||||||||||
Exercises of stock options |
33,695 | | 33,695 | | 418 | | | | 418 | |||||||||||||||||||||||||||
Exercises of stock warrants |
363 | | 363 | | 2 | | | | 2 | |||||||||||||||||||||||||||
Restricted stock awards |
65,348 | | 65,348 | | | | | | | |||||||||||||||||||||||||||
Share-based compensation expense |
| | | | 1,051 | | | | 1,051 | |||||||||||||||||||||||||||
Cash dividends |
| | | | | | (4,463 | ) | | (4,463 | ) | |||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
Net income |
| | | | | | 22,033 | | 22,033 | |||||||||||||||||||||||||||
Change in unrealized loss on securities available for sale and interest-only strips, net of income taxes |
| | | | | 7,230 | | | 7,230 | |||||||||||||||||||||||||||
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Total comprehensive income |
29,263 | |||||||||||||||||||||||||||||||||||
Balance at June 30, 2014 |
32,438,850 | (577,894 | ) | 31,860,956 | $ | 257 | $ | 553,741 | $ | (2,150 | ) | $ | (55,642 | ) | $ | (69,858 | ) | $ | 426,348 | |||||||||||||||||
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See Accompanying Notes to Consolidated Financial Statements (Unaudited)
6
Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six Months Ended June 30, |
||||||||
2014 | 2013 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 22,033 | $ | 19,545 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization of premises and equipment |
813 | 997 | ||||||
Amortization of premiums and accretion of discounts on investment securities, net |
1,221 | 1,443 | ||||||
Amortization of other intangible assets |
82 | 82 | ||||||
Amortization of servicing assets |
891 | 739 | ||||||
Amortization of investment in affordable housing partnership |
276 | 402 | ||||||
Share-based compensation expense |
1,051 | 189 | ||||||
Negative provision for credit losses |
(7,166 | ) | | |||||
Gain on sales of investment securities |
(1,785 | ) | (312 | ) | ||||
Gain on sales of loans |
(1,045 | ) | (4,513 | ) | ||||
Loss on sales of other real estate owned |
2 | | ||||||
Loss on sales of subsidiaries |
419 | | ||||||
Valuation adjustment on other real estate owned |
| 7 | ||||||
Origination of loans held for sale |
(16,569 | ) | (45,978 | ) | ||||
Proceeds from sales of SBA loans guaranteed portion |
14,009 | 60,562 | ||||||
Change in restricted cash |
| 5,350 | ||||||
Change in accrued interest receivable |
700 | 140 | ||||||
Change in cash surrender value of bank-owned life insurance |
(447 | ) | (463 | ) | ||||
Change in prepaid expenses |
(1,155 | ) | (488 | ) | ||||
Change in other assets |
(3,622 | ) | 1,489 | |||||
Change in income tax assets |
5,202 | (1,365 | ) | |||||
Change in accrued interest payable |
57 | (9,205 | ) | |||||
Change in stock warrants payable |
| 82 | ||||||
Change in other liabilities |
11,416 | 1,239 | ||||||
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Net cash provided by operating activities |
26,383 | 29,942 | ||||||
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|
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Cash flows from investing activities: |
||||||||
Proceeds from redemption of federal home loan bank and federal reserve bank stock |
| 3,603 | ||||||
Proceeds from matured or called securities available for sale |
36,553 | 40,247 | ||||||
Proceeds from sales of securities available for sale |
126,056 | 24,764 | ||||||
Proceeds from sales of other real estate owned |
734 | 548 | ||||||
Proceeds from sales of loans held for sale |
| 5,380 | ||||||
Net proceeds from sales of subsidiaries |
398 | | ||||||
Change in loans receivable |
(118,166 | ) | (154,739 | ) | ||||
Purchases of securities available for sale |
(124,442 | ) | (22,329 | ) | ||||
Purchases of premises and equipment |
(611 | ) | (310 | ) | ||||
Purchases of federal reserve bank stock |
(2,643 | ) | (978 | ) | ||||
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Net cash used in investing activities |
(82,121 | ) | (103,814 | ) | ||||
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Cash flows from financing activities: |
||||||||
Change in deposits |
32,524 | (34,050 | ) | |||||
Change in short-term federal home loan bank advances |
(28,135 | ) | | |||||
Redemption of federal home loan bank advances |
(2,411 | ) | (192 | ) | ||||
Redemption of junior subordinated debentures |
| (82,406 | ) | |||||
Proceeds from exercise of stock options |
418 | 28 | ||||||
Proceeds from exercise of stock warrants |
| 305 | ||||||
Cash dividend paid |
(2,233 | ) | | |||||
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|||||
Net cash provided by (used in) financing activities |
163 | (116,315 | ) | |||||
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|||||
Net decrease in cash and cash equivalents |
(55,575 | ) | (190,187 | ) | ||||
Cash and cash equivalents at beginning of year |
179,357 | 268,047 | ||||||
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Cash and cash equivalents at end of period |
$ | 123,782 | $ | 77,860 | ||||
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7
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Interest paid |
$ | 6,396 | $ | 12,430 | ||||
Income taxes paid |
$ | 8,916 | $ | 11,910 | ||||
Non-cash activities: |
||||||||
Transfer of loans receivable to other real estate owned |
$ | 1,714 | $ | 800 | ||||
Transfer of loans receivable to loans held for sale |
$ | | $ | 8,010 | ||||
Note receivable from sale of insurance subsidiaries |
$ | 1,394 | $ | | ||||
Conversion of stock warrants into common stock |
$ | 2 | $ | 983 | ||||
Income tax (expense) benefit related to items of other comprehensive income |
$ | (5,424 | ) | $ | 2,648 | |||
Change in unrealized (gain) loss in accumulated other comprehensive income |
$ | (14,438 | ) | $ | 6,120 | |||
Cash dividend declared |
$ | (2,230 | ) | $ | |
See Accompanying Notes to Consolidated Financial Statements (Unaudited)
8
Hanmi Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2014 and 2013
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. Hanmi Bank (the Bank), a California state chartered bank, is a wholly owned subsidiary of Hanmi Financial. During the second quarter of 2014, we disposed of our other subsidiaries, Chun-Ha Insurance Services, Inc., a California corporation (Chun-Ha), and All World Insurance Services, Inc., a California corporation (All World). See Note 3 Sale of Insurance Subsidiaries and Discontinued Operations.
In managements opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial and its subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended June 30, 2014, 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, 2013 (the 2013 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 1 Summary of Significant Accounting Policies in our 2013 Annual Report on Form 10-K. During the three months ended June 30, 2014, we adopted an accounting policy related to accounting for investments in low-income housing tax credit according to Financial Accounting Standards Board (FASB) ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. See Note 2 Accounting for Investments in Qualified Affordable Housing Projects.
Note 2 Accounting for Investments in Qualified Affordable Housing Projects
The Bank invests in qualified affordable housing projects (low income housing) and previously accounted for them under the equity method of accounting. The Bank recognized its share of partnership losses in other operating expenses with the tax benefits recognized in the income tax provision. In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, which amends ASC 323-720 to provide the ability to elect the proportional amortization method with the amortization expense and tax benefits recognized through the income tax provision. This ASU is effective for the annual period beginning after December 15, 2014, with early adoption being permitted. The Bank elected to early adopt the provisions of the ASU in the second quarter of 2014 and elected the proportional amortization method as retrospective transition. This accounting change in the amortization methodology resulted in changes to account for amortization recognized in prior periods, which impacted the balance of tax credit investments and related tax accounts. The investment amortization expense is presented as a component of the income tax provision.
The cumulative effect of the retrospective application of this accounting principle as of Jauary 1, 2012 was a negative $1.1 million. Net income in the three and six months ended June 30, 2013 decreased by $32,000 and $84,000, respectively, due to the change in accounting principle.
9
The following tables present the effect of the retrospective application of this change in accounting principle on the Companys Balance Sheets, Statement of Income and Statement of Cash Flows for the respective periods:
Hanmi Financial Corporations and Subsidiaries
Consolidated Balance Sheet (Unaudited)
As of December 31, 2013 | ||||||||||||
As Previously Reported |
Effect of Change in Accounting Principle |
As Adjusted | ||||||||||
(In thousands) | ||||||||||||
Assets |
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Cash and cash equivalents |
$ | 179,357 | $ | | $ | 179,357 | ||||||
Securities available for sale |
530,926 | | 530,926 | |||||||||
Loans receivable |
2,177,498 | | 2,177,498 | |||||||||
Income tax assets |
63,536 | 305 | 63,841 | |||||||||
Other assets |
104,222 | (1,465 | ) | 102,757 | ||||||||
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Total assets |
$ | 3,055,539 | $ | (1,160 | ) | $ | 3,054,379 | |||||
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Liabilities and stockholders equity |
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Liabilities |
$ | 2,654,302 | $ | | $ | 2,654,302 | ||||||
Stockholders equity |
401,237 | (1,160 | ) | 400,077 | ||||||||
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Total liabilities and stockholders equity |
$ | 3,055,539 | $ | (1,160 | ) | $ | 3,054,379 | |||||
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Hanmi Financial Corporations and Subsidiaries
Consolidated Statement of Income (Unaudited)
For the Three Months Ended June 30, 2013 | ||||||||||||
As Previously Reported |
Effect of Change in Accounting Principle |
As Adjusted |
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(In thousands, except per share data) | ||||||||||||
Interest and dividend income |
$ | 30,379 | $ | | $ | 30,379 | ||||||
Interest expense |
3,225 | | 3,225 | |||||||||
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Net interest income |
$ | 27,154 | $ | | $ | 27,154 | ||||||
Non-interest income |
6,738 | | 6,738 | |||||||||
Non-interest expense |
18,796 | (189 | ) | 18,607 | ||||||||
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Income before provision for income taxes |
$ | 15,096 | $ | 189 | $ | 15,285 | ||||||
Provision for income taxes |
5,737 | 221 | 5,958 | |||||||||
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Income from continuing operations |
$ | 9,359 | $ | (32 | ) | $ | 9,327 | |||||
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Earnings per share from continuing operations |
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Basic |
$ | 0.30 | $ | | $ | 0.30 | ||||||
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Diluted |
$ | 0.29 | $ | | $ | 0.29 | ||||||
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For the Six Months Ended June 30, 2013 | ||||||||||||
As Previously Reported |
Effect of Change in Accounting Principle |
As Adjusted | ||||||||||
(In thousands, except per share data) | ||||||||||||
Interest and dividend income |
$ | 59,774 | $ | | $ | 59,774 | ||||||
Interest expense |
7,016 | | 7,016 | |||||||||
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Net interest income |
$ | 52,758 | $ | | $ | 52,758 | ||||||
Non-interest income |
13,887 | | 13,887 | |||||||||
Non-interest expense |
36,640 | (377 | ) | 36,263 | ||||||||
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Income before provision for income taxes |
$ | 30,005 | $ | 377 | $ | 30,382 | ||||||
Provision for income taxes |
10,465 | 461 | 10,926 | |||||||||
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Income from continuing operations |
$ | 19,540 | $ | (84 | ) | $ | 19,456 | |||||
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Earnings per share from continuing operations |
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Basic |
$ | 0.62 | $ | | $ | 0.62 | ||||||
Diluted |
$ | 0.62 | $ | | $ | 0.62 |
10
Hanmi Financial Corporations and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2013 | ||||||||||||
As Previously | Effect of Change in | |||||||||||
Reported | Accounting Principle | As Adjusted | ||||||||||
(In thousands) | ||||||||||||
Cash flows from operating activities: |
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Net income |
$ | 19,629 | $ | (84 | ) | $ | 19,545 | |||||
Total adjustment in net income |
10,313 | 84 | 10,397 | |||||||||
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Net cash provided by operating activities |
$ | 29,942 | $ | | $ | 29,942 | ||||||
Cash flows from investing activities: |
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Net cash used in investing activities |
(103,814 | ) | | (103,814 | ) | |||||||
Cash flows from financing activities: |
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Net cash used in financing activities |
(116,315 | ) | | (116,315 | ) | |||||||
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Net decrease in cash and cash equivalents |
$ | (190,187 | ) | $ | | $ | (190,187 | ) | ||||
Cash and cash equivalents at beginning of period |
268,047 | | 268,047 | |||||||||
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Cash and cash equivalents at end of period |
$ | 77,860 | $ | | $ | 77,860 | ||||||
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The Bank determined that there were no events or changes in circumstances indicating that it is more likely than not that the carrying amount of the investment will not be realized. Therefore, no impairment was recognized as of June 30, 2014 or December 31, 2013. The investment in low income housing was $12.4 million and $3.0 million as of June 30, 2014 and December 31, 2013, respectively. The Banks unfunded commitments related to low income housing investments was $9.8 million as of June 30, 2014 and zero as of December 31, 2013. The Bank recognized $276,000 and $447,000 as a component of income tax expense during the three and six months ended June 30, 2014, respectively, and tax credits and other benefits received from the tax expenses were $423,000 and $665,000 during the three and six months ended June 30, 2014, respectively.
Note 3 Sale of Insurance Subsidiaries and Discontinued Operations
In June 2014, Hanmi Financial sold its insurance subsidiaries, Chun-Ha and All World, and entered into a stock purchase agreement for their sale. The subsidiaries were classified as held for sale in April 2014 and accounted for as discontinued operations. The operations and cash flows of the businesses have been eliminated and in accordance with the provisions of ASC 205, Presentation of Financial Statements, the results are reported as discontinued operations for all periods presented.
Hanmi Financial completed the sale of its two insurance subsidiaries to Chunha Holding Corporation on June 30, 2014. The total sales price was $3.5 million, of which $2.0 million was paid upon signing. The $2.0 million was reduced by $1.6 million cash and cash equivalents included in net assets of Chun-Ha and All World, resulting in $398,000 net cash proceeds. The remaining $1.5 million will be payable in three equal installments on each anniversary of the closing date through June 30, 2017.
The sale resulted in a $51,000 gain and a $4,000 income tax benefit from operating loss, offset by a $470,000 capital gain tax and a $52,000 operating loss. Consequently, net loss from discontinued operations in the second quarter of 2014 was $467,000, or $0.01 per diluted share. The discontinued operations generated non-interest income, primarily in the line item for insurance commissions, of $2.7 million in the first six months of 2014 and $1.3 million in the first quarter of 2014. They also incurred non-interest expense in various line items of $2.7 million in the first six months of 2014 and $1.4 million in the first quarter of 2014.
11
Summarized financial information for our discontinued operations related to Chun-Ha and All World are as follows:
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Cash and cash equivalents |
$ | 1,602 | $ | 1,396 | ||||
Premises and equipment, net |
90 | 79 | ||||||
Other intangible assets, net |
1,089 | 1,171 | ||||||
Other assets |
2,855 | 3,298 | ||||||
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Total assets |
$ | 5,636 | $ | 5,944 | ||||
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Income tax payable |
$ | 415 | $ | 1,304 | ||||
Accrued expenses and other liabilities |
1,878 | 2,171 | ||||||
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Total liabilities |
$ | 2,293 | $ | 3,475 | ||||
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Net assets of discontinued operations |
$ | 3,343 | $ | 2,469 | ||||
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In thousands) | ||||||||||||||||
Non-interest (loss) income |
$ | (52 | ) | $ | 244 | $ | (14 | ) | $ | 128 | ||||||
Gain on disposal |
51 | | 51 | | ||||||||||||
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(Loss) income before taxes |
$ | (1 | ) | $ | 244 | $ | 37 | $ | 128 | |||||||
Provision for income taxes |
466 | 84 | 481 | 39 | ||||||||||||
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Net (loss) income from discontinued operations |
$ | (467 | ) | $ | 160 | $ | (444 | ) | $ | 89 | ||||||
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12
Note 4 Investment Securities
The following is a summary of investment securities available for sale as of June 30, 2014 and December 31, 2013:
Amortized Cost |
Gross Unrealized Gain |
Gross Unrealized Loss |
Estimated Fair Value |
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(In thousands) | ||||||||||||||||
June 30, 2014 |
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Mortgage-backed securities (1) |
$ | 215,542 | $ | 1,103 | $ | 2,010 | $ | 214,635 | ||||||||
Collateralized mortgage obligations (1) |
160,422 | 240 | 1,037 | 159,625 | ||||||||||||
U.S. government agency securities |
80,960 | | 3,096 | 77,864 | ||||||||||||
Municipal bonds-tax exempt |
4,350 | 97 | | 4,447 | ||||||||||||
Municipal bonds-taxable |
16,718 | 158 | 145 | 16,731 | ||||||||||||
Corporate bonds |
17,017 | 11 | 103 | 16,925 | ||||||||||||
SBA loan pool securities |
13,222 | | 661 | 12,561 | ||||||||||||
Other securities |
3,030 | | 91 | 2,939 | ||||||||||||
Equity security |
250 | | | 250 | ||||||||||||
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Total securities available for sale |
$ | 511,511 | $ | 1,609 | $ | 7,143 | $ | 505,977 | ||||||||
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December 31, 2013 |
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Mortgage-backed securities (1) |
$ | 222,768 | $ | 317 | $ | 6,026 | $ | 217,059 | ||||||||
Collateralized mortgage obligations (1) |
130,636 | 274 | 3,217 | 127,693 | ||||||||||||
U.S. government agency securities |
90,852 | | 7,316 | 83,536 | ||||||||||||
Municipal bonds-tax exempt |
13,857 | 110 | 30 | 13,937 | ||||||||||||
Municipal bonds-taxable |
33,361 | 73 | 1,080 | 32,354 | ||||||||||||
Corporate bonds |
21,013 | 8 | 186 | 20,835 | ||||||||||||
U.S. treasury bills |
19,998 | | 1 | 19,997 | ||||||||||||
SBA loan pool securities |
13,598 | | 969 | 12,629 | ||||||||||||
Other securities |
3,030 | | 144 | 2,886 | ||||||||||||
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Total securities available for sale |
$ | 549,113 | $ | 782 | $ | 18,969 | $ | 530,926 | ||||||||
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(1) | Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities |
The amortized cost and estimated fair value of investment securities as of June 30, 2014, 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 |
$ | 699 | $ | 728 | ||||
Over one year through five years |
27,879 | 27,642 | ||||||
Over five years through ten years |
74,439 | 72,430 | ||||||
Over ten years |
32,280 | 30,667 | ||||||
Mortgage-backed securities |
215,542 | 214,635 | ||||||
Collateralized mortgage obligations |
160,422 | 159,625 | ||||||
Equity security |
250 | 250 | ||||||
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Total |
$ | 511,511 | $ | 505,977 | ||||
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FASB ASC 320, Investments Debt and Equity Securities, requires us to periodically evaluate our investments for other-than-temporary impairment (OTTI). There was no OTTI charge during the six months ended June 30, 2014.
13
Gross unrealized losses on investment securities available for sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of June 30, 2014 and December 31, 2013:
Holding Period | ||||||||||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||
Gross | Estimated | Number | Gross | Estimated | Number | Gross | Estimated | Number | ||||||||||||||||||||||||||||
Unrealized | Fair | of | Unrealized | Fair | of | Unrealized | Fair | of | ||||||||||||||||||||||||||||
Loss | Value | Securities | Loss | Value | Securities | Loss | Value | Securities | ||||||||||||||||||||||||||||
(In thousands, except number of securities) | ||||||||||||||||||||||||||||||||||||
June 30, 2014 |
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Mortgage-backed securities |
$ | 220 | $ | 21,601 | 5 | $ | 1,790 | $ | 68,558 | 24 | $ | 2,010 | $ | 90,159 | 29 | |||||||||||||||||||||
Collateralized mortgage obligations |
363 | 67,236 | 16 | 674 | 19,818 | 9 | 1,037 | 87,054 | 25 | |||||||||||||||||||||||||||
U.S. government agency securities |
| | | 3,096 | 74,864 | 27 | 3,096 | 74,864 | 27 | |||||||||||||||||||||||||||
Municipal bonds-taxable |
| | | 145 | 6,996 | 7 | 145 | 6,996 | 7 | |||||||||||||||||||||||||||
Corporate bonds |
| | | 103 | 7,885 | 2 | 103 | 7,885 | 2 | |||||||||||||||||||||||||||
SBA loan pool securities |
| | | 661 | 12,561 | 4 | 661 | 12,561 | 4 | |||||||||||||||||||||||||||
Other securities |
| | | 91 | 2,935 | 5 | 91 | 2,935 | 5 | |||||||||||||||||||||||||||
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Total |
$ | 583 | $ | 88,837 | 21 | $ | 6,560 | $ | 193,617 | 78 | $ | 7,143 | $ | 282,454 | 99 | |||||||||||||||||||||
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December 31, 2013 |
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Mortgage-backed securities |
$ | 3,437 | $ | 170,324 | 51 | $ | 2,589 | $ | 30,947 | 12 | $ | 6,026 | $ | 201,271 | 63 | |||||||||||||||||||||
Collateralized mortgage obligations |
2,353 | 87,026 | 27 | 864 | 14,657 | 7 | 3,217 | 101,683 | 34 | |||||||||||||||||||||||||||
U.S. government agency securities |
3,942 | 50,932 | 19 | 3,374 | 32,606 | 12 | 7,316 | 83,538 | 31 | |||||||||||||||||||||||||||
Municipal bonds-tax exempt |
30 | 8,562 | 5 | | | | 30 | 8,562 | 5 | |||||||||||||||||||||||||||
Municipal bonds-taxable |
787 | 22,817 | 16 | 293 | 3,813 | 4 | 1,080 | 26,630 | 20 | |||||||||||||||||||||||||||
Corporate bonds |
9 | 5,024 | 1 | 177 | 11,803 | 3 | 186 | 16,827 | 4 | |||||||||||||||||||||||||||
U.S. treasury bills |
1 | 19,996 | 2 | | | | 1 | 19,996 | 2 | |||||||||||||||||||||||||||
SBA loan pool securities |
| | | 969 | 12,629 | 4 | 969 | 12,629 | 4 | |||||||||||||||||||||||||||
Other securities |
48 | 1,957 | 3 | 96 | 929 | 3 | 144 | 2,886 | 6 | |||||||||||||||||||||||||||
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Total |
$ | 10,607 | $ | 366,638 | 124 | $ | 8,362 | $ | 107,384 | 45 | $ | 18,969 | $ | 474,022 | 169 | |||||||||||||||||||||
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All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of June 30, 2014 and December 31, 2013 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securities and the various rating agencies have reaffirmed these securities long-term investment grade status as of June 30, 2014 and December 31, 2013. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.
FASB ASC 320 requires other-than-temporarily impaired investment securities to be written down when fair value is below amortized cost in circumstances where: (1) an entity has the intent to sell a security; (2) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the securitys amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income.
The Company does not intend to sell these securities and it is 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 managements opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of June 30, 2014 and December 31, 2013 were not other-than-temporarily impaired, and therefore, no impairment charges as of June 30, 2014 and December 31, 2013 were warranted.
14
Realized gains and losses on sales of investment securities, proceeds from sales of investment securities and tax expense on sales of investment securities were as follows for the periods indicated:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In thousands) | ||||||||||||||||
Gross realized gains on sales of investment securities |
$ | 365 | $ | 304 | $ | 1,786 | $ | 313 | ||||||||
Gross realized losses on sales of investment securities |
(1 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||
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Net realized gains on sales of investment securities |
$ | 364 | $ | 303 | $ | 1,785 | $ | 312 | ||||||||
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Proceeds from sales of investment securities |
$ | 45,843 | $ | 15,764 | $ | 131,077 | $ | 24,764 | ||||||||
Tax expense on sales of investment securities |
$ | 153 | $ | 127 | $ | 751 | $ | 131 |
For the three months ended June 30, 2014, there was a $364,000 net gain in earnings resulting from the sale of investment securities that had previously been recorded as net unrealized gains of $100,000 in comprehensive income. For the three months ended June 30, 2013, there was a $303,000 net gain in earnings resulting from the redemption and sale of investment securities that had previously been recorded as net unrealized gains of $812,000 in comprehensive income.
For the six months ended June 30, 2014, there was a $1.8 million net gain in earnings resulting from the sale of investment securities that had previously been recorded as net unrealized losses of $177,000 in comprehensive income. For the six months ended June 30, 2013, there was a $312,000 net gain in earnings resulting from the redemption and sale of investment securities that had previously been recorded as net unrealized gains of $856,000 in comprehensive income.
Investment securities available for sale with par values of $69.7 million and $47.6 million as of June 30, 2014 and December 31, 2013, respectively, were pledged to secure Federal Home Loan Bank (FHLB) advances, public deposits and for other purposes as required or permitted by law.
15
Note 5 Loans
The Board of Directors and management review and approve the Banks 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 functions that review and monitor pass graded loans as well as problem loans to prevent further deterioration.
The majority of the Banks 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 Banks loan policy. Most of the Banks lending activity occurs within Southern California.
Loans Receivable
Loans receivable consisted of the following as of the dates indicated:
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Real estate loans: |
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Commercial property (1) |
||||||||
Retail |
$ | 561,654 | $ | 543,619 | ||||
Hotel/Motel |
338,128 | 322,927 | ||||||
Gas station |
283,097 | 292,557 | ||||||
Other |
797,176 | 731,617 | ||||||
Construction |
1,467 | | ||||||
Residential property |
108,561 | 79,078 | ||||||
|
|
|
|
|||||
Total real estate loans |
2,090,083 | 1,969,798 | ||||||
Commercial and industrial loans: |
||||||||
Commercial term |
115,493 | 124,391 | ||||||
Commercial lines of credit |
70,801 | 71,042 | ||||||
International loans |
44,015 | 36,353 | ||||||
|
|
|
|
|||||
Total commercial and industrial loans |
230,309 | 231,786 | ||||||
Consumer loans |
28,843 | 32,505 | ||||||
|
|
|
|
|||||
Total gross loans |
2,349,235 | 2,234,089 | ||||||
Allowance for loans losses |
(51,886 | ) | (57,555 | ) | ||||
Deferred loan costs |
3,461 | 964 | ||||||
|
|
|
|
|||||
Loans receivable, net |
$ | 2,300,810 | $ | 2,177,498 | ||||
|
|
|
|
(1) | Includes owner-occupied property loans of $962.7 million and $957.3 million as of June 30, 2014 and December 31, 2013, respectively. |
Accrued interest on loans receivable was $5.1 million and $5.4 million at June 30, 2014 and December 31, 2013, respectively. At June 30, 2014 and December 31, 2013, loans receivable totaling $921.2 million and $568.7 million, respectively, were pledged to secure advances from the FHLB and the Federal Reserve Banks (FRB) federal discount window.
16
The following table details the information on the sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the three months ended June 30, 2014 and 2013:
Real Estate | Commercial and Industrial |
Consumer | Total | |||||||||||||
(In thousands) | ||||||||||||||||
June 30, 2014 |
||||||||||||||||
Balance at beginning of period |
$ | 390 | $ | | $ | | $ | 390 | ||||||||
Origination of loans held for sale |
8,124 | 2,091 | | 10,215 | ||||||||||||
Sales of loans held for sale |
(5,944 | ) | (815 | ) | | (6,759 | ) | |||||||||
Principal payoffs and amortization |
(2 | ) | (2 | ) | | (4 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 2,568 | $ | 1,274 | $ | | $ | 3,842 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
June 30, 2013 |
||||||||||||||||
Balance at beginning of period |
$ | 5,769 | $ | 274 | $ | | $ | 6,043 | ||||||||
Origination of loans held for sale |
21,752 | 1,082 | | 22,834 | ||||||||||||
Reclassification from loans receivable to loans held for sale |
1,066 | 3,571 | | 4,637 | ||||||||||||
Sales of loans held for sale |
(25,213 | ) | (5,743 | ) | | (30,956 | ) | |||||||||
Principal payoffs and amortization |
(1 | ) | (4 | ) | | (5 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 3,373 | $ | (820 | ) | $ | | $ | 2,553 | |||||||
|
|
|
|
|
|
|
|
For the three months ended June 30, 2014, there was no reclassification of loans receivable as loans held for sale, and loans held for sale of $6.8 million were sold. For the three months ended June 30, 2013, loans receivable of $4.6 million were reclassified as loans held for sale, and loans held for sale of $31.0 million were sold.
The following table details the information on the sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the six months ended June 30, 2014 and 2013:
Real Estate | Commercial and Industrial |
Consumer | Total | |||||||||||||
(In thousands) | ||||||||||||||||
June 30, 2014 |
||||||||||||||||
Balance at beginning of period |
$ | | $ | | $ | | $ | | ||||||||
Origination of loans held for sale |
14,393 | 2,176 | | 16,569 | ||||||||||||
Sales of loans held for sale |
(11,818 | ) | (899 | ) | | (12,717 | ) | |||||||||
Principal payoffs and amortization |
(7 | ) | (3 | ) | | (10 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 2,568 | $ | 1,274 | $ | | $ | 3,842 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
June 30, 2013 |
||||||||||||||||
Balance at beginning of period |
$ | 7,977 | $ | 329 | $ | | $ | 8,306 | ||||||||
Origination of loans held for sale |
43,092 | 2,886 | | 45,978 | ||||||||||||
Reclassification from loans receivable to loans held for sale |
4,439 | 3,571 | | 8,010 | ||||||||||||
Sales of loans held for sale |
(52,120 | ) | (7,601 | ) | | (59,721 | ) | |||||||||
Principal payoffs and amortization |
(15 | ) | (5 | ) | | (20 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 3,373 | $ | (820 | ) | $ | | $ | 2,553 | |||||||
|
|
|
|
|
|
|
|
For the six months ended June 30, 2014, there was no reclassification of loans receivable as loans held for sale, and loans held for sale of $12.7 million were sold. For the six months ended June 30, 2013, loans receivable of $8.0 million were reclassified as loans held for sale, and loans held for sale of $59.7 million were sold.
17
Allowance for Loan Losses and Allowance for Off-Balance Sheet Items
Activity in the allowance for loan losses and allowance for off-balance sheet items was as follows for the periods indicated:
As of and for the | As of and for the | |||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In thousands) | ||||||||||||||||
Allowance for loan losses: |
||||||||||||||||
Balance at beginning of period |
$ | 56,593 | $ | 61,191 | $ | 57,555 | $ | 63,305 | ||||||||
Charge-offs |
(2,547 | ) | (3,490 | ) | (4,151 | ) | (6,514 | ) | ||||||||
Recoveries on loans previously charged off |
1,741 | 1,867 | 5,992 | 2,581 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loan (charge-offs) recoveries |
(806 | ) | (1,623 | ) | 1,841 | (3,933 | ) | |||||||||
(Negative provision) provision charged to operating expense |
(3,901 | ) | 308 | (7,510 | ) | 504 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 51,886 | $ | 59,876 | $ | 51,886 | $ | 59,876 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Allowance for off-balance sheet items: |
||||||||||||||||
Balance at beginning of period |
$ | 1,557 | $ | 1,628 | $ | 1,248 | $ | 1,822 | ||||||||
Provision (negative provision) charged to operating expense |
35 | (308 | ) | 344 | (502 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 1,592 | $ | 1,320 | $ | 1,592 | $ | 1,320 | ||||||||
|
|
|
|
|
|
|
|
The allowance for off-balance sheet items is maintained at a level believed to be sufficient to absorb estimated probable losses related to these unfunded credit facilities. The determination of the allowance adequacy is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. As of June 30, 2014 and December 31, 2013, the allowance for off-balance sheet items amounted to $1.6 million and $1.2 million, respectively. Net adjustments to the allowance for off-balance sheet items are included in the provision for credit losses.
18
The following table details the information on the allowance for loan losses by portfolio segment for the three months ended June 30, 2014 and 2013:
Real Estate | Commercial and Industrial |
Consumer | Unallocated | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
June 30, 2014 |
||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 44,230 | $ | 10,425 | $ | 633 | $ | 1,305 | $ | 56,593 | ||||||||||
Charge-offs |
(60 | ) | (2,474 | ) | (13 | ) | | (2,547 | ) | |||||||||||
Recoveries on loans previously charged off |
87 | 1,652 | 2 | | 1,741 | |||||||||||||||
(Negative provision) provision |
(3,954 | ) | 135 | (82 | ) | | (3,901 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 40,303 | $ | 9,738 | $ | 540 | $ | 1,305 | $ | 51,886 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 2,448 | $ | 2,605 | $ | 113 | $ | | $ | 5,166 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 37,855 | $ | 7,133 | $ | 427 | $ | 1,305 | $ | 46,720 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans receivable: |
||||||||||||||||||||
Ending balance |
$ | 2,090,083 | $ | 230,309 | $ | 28,843 | $ | | $ | 2,349,235 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 35,616 | $ | 10,741 | $ | 1,529 | $ | | $ | 47,886 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 2,054,467 | $ | 219,568 | $ | 27,314 | $ | | $ | 2,301,349 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
June 30, 2013 |
||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 46,328 | $ | 11,064 | $ | 1,795 | $ | 2,004 | $ | 61,191 | ||||||||||
Charge-offs |
(2,289 | ) | (1,165 | ) | (36 | ) | | (3,490 | ) | |||||||||||
Recoveries on loans previously charged off |
1,101 | 760 | 6 | | 1,867 | |||||||||||||||
Provision (negative provision) |
1,256 | 459 | 119 | (1,526 | ) | 308 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 46,396 | $ | 11,118 | $ | 1,884 | $ | 478 | $ | 59,876 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 711 | $ | 4,328 | $ | 385 | $ | | $ | 5,424 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 45,685 | $ | 6,790 | $ | 1,499 | $ | 478 | $ | 54,452 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans receivable: |
||||||||||||||||||||
Ending balance |
$ | 1,964,853 | $ | 187,156 | $ | 35,380 | $ | | $ | 2,187,389 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 28,267 | $ | 15,760 | $ | 1,647 | $ | | $ | 45,674 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 1,936,586 | $ | 171,396 | $ | 33,733 | $ | | $ | 2,141,715 | ||||||||||
|
|
|
|
|
|
|
|
|
|
19
The following table details the information on the allowance for loan losses by portfolio segment for the six months ended June 30, 2014 and 2013:
Real Estate | Commercial and Industrial |
Consumer | Unallocated | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
June 30, 2014 |
||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 43,550 | $ | 11,287 | $ | 1,427 | $ | 1,291 | $ | 57,555 | ||||||||||
Charge-offs |
(1,188 | ) | (2,896 | ) | (67 | ) | | (4,151 | ) | |||||||||||
Recoveries on loans previously charged off |
3,005 | 2,973 | 14 | | 5,992 | |||||||||||||||
(Negative provision) provision |
(5,064 | ) | (1,626 | ) | (834 | ) | 14 | (7,510 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 40,303 | $ | 9,738 | $ | 540 | $ | 1,305 | $ | 51,886 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 2,448 | $ | 2,605 | $ | 113 | $ | | $ | 5,166 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 37,855 | $ | 7,133 | $ | 427 | $ | 1,305 | $ | 46,720 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans receivable: |
||||||||||||||||||||
Ending balance |
$ | 2,090,083 | $ | 230,309 | $ | 28,843 | $ | | $ | 2,349,235 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 35,616 | $ | 10,741 | $ | 1,529 | $ | | $ | 47,886 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 2,054,467 | $ | 219,568 | $ | 27,314 | $ | | $ | 2,301,349 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
June 30, 2013 |
||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 49,472 | $ | 10,636 | $ | 2,280 | $ | 917 | $ | 63,305 | ||||||||||
Charge-offs |
(3,575 | ) | (2,740 | ) | (199 | ) | | (6,514 | ) | |||||||||||
Recoveries on loans previously charged off |
1,282 | 1,244 | 55 | | 2,581 | |||||||||||||||
(Negative provision) provision |
(783 | ) | 1,978 | (251 | ) | (440 | ) | 504 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 46,396 | $ | 11,118 | $ | 1,885 | $ | 477 | 59,876 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 711 | $ | 4,328 | $ | 385 | $ | | 5,424 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 45,685 | $ | 6,790 | $ | 1,500 | $ | 477 | 54,452 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans receivable: |
||||||||||||||||||||
Ending balance |
$ | 1,964,853 | $ | 187,156 | $ | 35,380 | $ | | 2,187,389 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 28,267 | $ | 15,760 | $ | 1,647 | $ | | 45,674 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 1,936,586 | $ | 171,396 | $ | 33,733 | $ | | 2,141,715 | |||||||||||
|
|
|
|
|
|
|
|
|
|
Credit Quality Indicators
As part of the on-going monitoring of the credit quality of our loan portfolio, we utilize an internal loan grading system to identify credit risk and assign an appropriate grade (from (0) to (8)) for each and every loan in our loan portfolio. A third party loan review is required on an annual basis. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:
Pass and Pass-Watch: Pass and Pass-Watch loans, grades (0-4), are in compliance in all respects with the Banks credit policy and regulatory requirements, and do not exhibit any potential or defined weaknesses as defined under Special Mention, Substandard or Doubtful. This category is the strongest level of the Banks loan grading system. It incorporates all performing loans with no credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans.
Special Mention: A Special Mention credit, grade (5), has potential weaknesses that deserve managements 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.
20
Loss: A loan classified as Loss, grade (8), is considered uncollectible and of such little value that their continuance as active bank assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans classified as Loss will be charged off in a timely manner.
As of June 30, 2014 and December 31, 2013, pass/pass-watch (grade 0-4), criticized (grade 5) and classified (grade 6-7) loans, disaggregated by loan class, were as follows:
Pass/Pass-Watch (Grade 0-4) |
Criticized (Grade 5) |
Classified (Grade 6-7) |
Total Loans | |||||||||||||
(In thousands) | ||||||||||||||||
June 30, 2014 |
||||||||||||||||
Real estate loans: |
||||||||||||||||
Commercial property |
||||||||||||||||
Retail |
$ | 549,750 | $ | 6,625 | $ | 5,279 | $ | 561,654 | ||||||||
Hotel/Motel |
325,745 | 7,386 | 4,997 | 338,128 | ||||||||||||
Gas station |
273,300 | 1,846 | 7,951 | 283,097 | ||||||||||||
Other |
773,540 | 10,903 | 12,733 | 797,176 | ||||||||||||
Construction |
1,467 | | | 1,467 | ||||||||||||
Residential property |
106,801 | | 1,760 | 108,561 | ||||||||||||
Commercial and industrial loans: |
||||||||||||||||
Commercial term |
103,734 | 1,953 | 9,806 | 115,493 | ||||||||||||
Commercial lines of credit |
69,070 | | 1,731 | 70,801 | ||||||||||||
International loans |
43,764 | 251 | | 44,015 | ||||||||||||
Consumer loans |
26,795 | 148 | 1,900 | 28,843 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total gross loans |
$ | 2,273,966 | $ | 29,112 | $ | 46,157 | $ | 2,349,235 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2013 |
||||||||||||||||
Real estate loans: |
||||||||||||||||
Commercial property |
||||||||||||||||
Retail |
$ | 531,014 | $ | 5,309 | $ | 7,296 | $ | 543,619 | ||||||||
Hotel/Motel |
308,483 | 1,796 | 12,648 | 322,927 | ||||||||||||
Gas station |
279,636 | 3,104 | 9,817 | 292,557 | ||||||||||||
Other |
690,481 | 8,524 | 32,612 | 731,617 | ||||||||||||
Residential property |
77,422 | | 1,656 | 79,078 | ||||||||||||
Commercial and industrial loans: |
||||||||||||||||
Commercial term |
107,712 | 2,007 | 14,672 | 124,391 | ||||||||||||
Commercial lines of credit |
69,823 | | 1,219 | 71,042 | ||||||||||||
International loans |
35,777 | 576 | | 36,353 | ||||||||||||
Consumer loans |
30,044 | 163 | 2,298 | 32,505 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total gross loans |
$ | 2,130,392 | $ | 21,479 | $ | 82,218 | $ | 2,234,089 | ||||||||
|
|
|
|
|
|
|
|
21
The following is an aging analysis of past due loans, disaggregated by loan class, as of the dates indicated:
30-59 Days Past Due |
60-89 Days Past Due |
90 Days or More Past Due |
Total Past Due | Current | Total Loans | Accruing 90 Days or More Past Due |
||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
June 30, 2014 |
||||||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||||||
Commercial property |
||||||||||||||||||||||||||||
Retail |
$ | 820 | $ | | $ | 732 | $ | 1,552 | $ | 560,102 | $ | 561,654 | $ | | ||||||||||||||
Hotel/Motel |
53 | | 2,462 | 2,515 | 335,613 | 338,128 | | |||||||||||||||||||||
Gas station |
166 | | 3,947 | 4,113 | 278,984 | 283,097 | | |||||||||||||||||||||
Other |
356 | 11 | 930 | 1,297 | 795,879 | 797,176 | | |||||||||||||||||||||
Construction |
| | | | 1,467 | 1,467 | | |||||||||||||||||||||
Residential property |
884 | | 113 | 997 | 107,564 | 108,561 | | |||||||||||||||||||||
Commercial and industrial loans: |
||||||||||||||||||||||||||||
Commercial term |
1,975 | 587 | 2,623 | 5,185 | 110,308 | 115,493 | | |||||||||||||||||||||
Commercial lines of credit |
140 | 795 | | 935 | 69,866 | 70,801 | | |||||||||||||||||||||
International loans |
| | | | 44,015 | 44,015 | | |||||||||||||||||||||
Consumer loans |
249 | 21 | 46 | 316 | 28,527 | 28,843 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total gross loans |
$ | 4,643 | $ | 1,414 | $ | 10,853 | $ | 16,910 | $ | 2,332,325 | $ | 2,349,235 | $ | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
December 31, 2013 |
||||||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||||||
Commercial property |
||||||||||||||||||||||||||||
Retail |
$ | 202 | $ | 426 | $ | 2,196 | $ | 2,825 | $ | 540,794 | $ | 543,619 | $ | | ||||||||||||||
Hotel/Motel |
1,087 | | 1,532 | 2,619 | 320,308 | 322,927 | | |||||||||||||||||||||
Gas station |
141 | 410 | 153 | 704 | 291,853 | 292,557 | | |||||||||||||||||||||
Other |
423 | 2,036 | 839 | 3,297 | 728,320 | 731,617 | | |||||||||||||||||||||
Residential property |
| 122 | 279 | 401 | 78,677 | 79,078 | | |||||||||||||||||||||
Commercial and industrial loans: |
||||||||||||||||||||||||||||
Commercial term |
1,443 | 886 | 3,269 | 5,598 | 118,793 | 124,391 | | |||||||||||||||||||||
Commercial lines of credit |
| 150 | 250 | 400 | 70,642 | 71,042 | | |||||||||||||||||||||
International loans |
| | | | 36,353 | 36,353 | | |||||||||||||||||||||
Consumer loans |
311 | 42 | 77 | 430 | 32,075 | 32,505 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total gross loans |
$ | 3,607 | $ | 4,072 | $ | 8,595 | $ | 16,274 | $ | 2,217,815 | $ | 2,234,089 | $ | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 borrowers 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 loans effective interest rate or, as a practical expedient, at the loans 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.
22
The following table provides information on impaired loans, disaggregated by loan class, as of the dates indicated:
Recorded Investment |
Unpaid Principal Balance |
With No Related Allowance Recorded |
With an Allowance Recorded |
Related Allowance |
||||||||||||||||
(In thousands) | ||||||||||||||||||||
June 30, 2014 |
||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||
Commercial property |
||||||||||||||||||||
Retail |
$ | 5,198 | $ | 5,427 | $ | 2,665 | 2,533 | $ | 403 | |||||||||||
Hotel/Motel |
4,627 | 5,337 | 4,166 | 461 | 1,500 | |||||||||||||||
Gas station |
12,400 | 12,905 | 11,779 | 621 | 238 | |||||||||||||||
Other |
10,569 | 11,905 | 8,475 | 2,094 | 307 | |||||||||||||||
Residential property |
2,822 | 2,942 | 2,822 | | | |||||||||||||||
Commercial and industrial loans: |
||||||||||||||||||||
Commercial term |
8,952 | 9,429 | 2,400 | 6,552 | 2,570 | |||||||||||||||
Commercial lines of credit |
704 | 799 | 521 | 183 | 3 | |||||||||||||||
International loans |
1,085 | 1,085 | 450 | 635 | 32 | |||||||||||||||
Consumer loans |
1,529 | 1,664 | 622 | 907 | 113 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total gross loans |
$ | 47,886 | $ | 51,493 | $ | 33,900 | $ | 13,986 | $ | 5,166 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2013 |
||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||
Commercial property |
||||||||||||||||||||
Retail |
$ | 6,244 | $ | 6,332 | $ | 3,767 | $ | 2,477 | $ | 305 | ||||||||||
Hotel/Motel |
6,200 | 6,940 | 4,668 | 1,532 | 1,183 | |||||||||||||||
Gas station |
9,389 | 9,884 | 8,592 | 797 | 209 | |||||||||||||||
Other |
11,451 | 12,882 | 9,555 | 1,896 | 351 | |||||||||||||||
Residential property |
2,678 | 2,773 | 2,678 | | | |||||||||||||||
Commercial and industrial loans: |
||||||||||||||||||||
Commercial term |
13,834 | 14,308 | 2,929 | 10,905 | 3,806 | |||||||||||||||
Commercial lines of credit |
614 | 686 | 173 | 441 | 252 | |||||||||||||||
International loans |
1,087 | 1,087 | 286 | 801 | 78 | |||||||||||||||
Consumer loans |
1,569 | 1,671 | 644 | 925 | 284 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total gross loans |
$ | 53,066 | $ | 56,563 | $ | 33,292 | $ | 19,774 | $ | 6,468 | ||||||||||
|
|
|
|
|
|
|
|
|
|
23
The following table provides information on impaired loans, disaggregated by loan class, as of the dates indicated:
Average Recorded Investment for the Three Months Ended |
Interest Income Recognized for the Three Months Ended |
Average Recorded Investment for the Six Months Ended |
Interest Income Recognized for the Six Months Ended |
|||||||||||||
(In thousands) | ||||||||||||||||
June 30, 2014 |
||||||||||||||||
Real estate loans: |
||||||||||||||||
Commercial property |
||||||||||||||||
Retail |
$ | 5,286 | $ | 108 | $ | 6,295 | $ | 179 | ||||||||
Hotel/Motel |
4,712 | 80 | 4,121 | 129 | ||||||||||||
Gas station |
12,432 | 181 | 10,944 | 369 | ||||||||||||
Other |
10,624 | 228 | 11,124 | 451 | ||||||||||||
Residential property |
2,833 | 30 | 2,692 | 57 | ||||||||||||
Commercial and industrial loans: |
||||||||||||||||
Commercial term |
9,085 | 140 | 10,952 | 317 | ||||||||||||
Commercial lines of credit |
713 | 11 | 729 | 25 | ||||||||||||
International loans |
1,131 | | 1,130 | | ||||||||||||
Consumer loans |
1,535 | 16 | 1,547 | 30 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total gross loans |
$ | 48,351 | $ | 794 | $ | 49,534 | $ | 1,557 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
June 30, 2013 |
||||||||||||||||
Real estate loans: |
||||||||||||||||
Commercial property |
||||||||||||||||
Retail |
$ | 3,098 | $ | 24 | $ | 4,193 | $ | 78 | ||||||||
Hotel/Motel |
3,944 | 121 | 3,940 | 257 | ||||||||||||
Gas station |
8,739 | 173 | 8,773 | 340 | ||||||||||||
Other |
9,583 | 290 | 9,919 | 536 | ||||||||||||
Residential property |
3,027 | 31 | 3,043 | 59 | ||||||||||||
Commercial and industrial loans: |
||||||||||||||||
Commercial term |
13,687 | 263 | 13,836 | 501 | ||||||||||||
Commercial lines of credit |
1,060 | 9 | 1,286 | 24 | ||||||||||||
International loans |
1,330 | | 1,414 | | ||||||||||||
Consumer loans |
1,649 | 15 | 1,646 | 27 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total gross loans |
$ | 46,117 | $ | 926 | $ | 48,050 | $ | 1,822 | ||||||||
|
|
|
|
|
|
|
|
The following is a summary of interest foregone on impaired loans for the periods indicated:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In thousands) | ||||||||||||||||
Interest income that would have been recognized had impaired loans performed in accordance with their original terms |
$ | 1,215 | $ | 1,057 | $ | 2,427 | $ | 2,125 | ||||||||
Less: Interest income recognized on impaired loans |
(794 | ) | (926 | ) | (1,557 | ) | (1,822 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest foregone on impaired loans |
$ | 421 | $ | 131 | $ | 870 | $ | 303 | ||||||||
|
|
|
|
|
|
|
|
There were no commitments to lend additional funds to borrowers whose loans are included above.
24
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 loans delinquency. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Non-accrual loans may be restored to accrual status when principal and interest payments become current and full repayment is expected.
The following table details non-accrual loans, disaggregated by loan class, as of the dates indicated:
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Real estate loans: |
||||||||
Commercial property |
||||||||
Retail |
$ | 2,802 | $ | 2,946 | ||||
Hotel/Motel |
3,631 | 5,200 | ||||||
Gas station |
5,356 | 2,492 | ||||||
Other |
4,369 | 4,808 | ||||||
Residential property |
1,162 | 1,365 | ||||||
Commercial and industrial loans: |
||||||||
Commercial term |
5,965 | 7,146 | ||||||
Commercial lines of credit |
521 | 423 | ||||||
Consumer loans |
1,575 | 1,497 | ||||||
|
|
|
|
|||||
Total non-accrual loans |
$ | 25,381 | $ | 25,877 | ||||
|
|
|
|
The following table details non-performing assets as of the dates indicated:
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Non-accrual loans |
$ | 25,381 | $ | 25,877 | ||||
Loans 90 days or more past due and still accruing |
| | ||||||
|
|
|
|
|||||
Total non-performing loans |
25,381 | 25,877 | ||||||
Other real estate owned |
1,714 | 756 | ||||||
|
|
|
|
|||||
Total non-performing assets |
$ | 27,095 | $ | 26,633 | ||||
|
|
|
|
Loans on non-accrual status, excluding loans held for sale, totaled $25.4 million as of June 30, 2014, compared to $25.9 million as of December 31, 2013, representing a 1.9 percent decrease. Delinquent loans (defined as 30 days or more past due), excluding loans held for sale, were $16.9 million as of June 30, 2014, compared to $16.3 million as of December 31, 2013, representing a 3.9 percent increase.
As of June 30, 2014, other real estate owned (OREO) consisted of two properties in California with a combined carrying value of $1.7 million and no valuation adjustment. As of December 31, 2013, there were three OREOs located in Washington and California with a combined carrying value of $756,000 and a valuation adjustment of $56,000.
Troubled Debt Restructuring
In April 2011, the FASB issued ASU 2011-02, A Creditors 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.
25
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 June 30, 2014 and December 31, 2013:
Non-Accrual TDRs | Accrual TDRs | |||||||||||||||||||||||||||||||||||||||
Deferral of Principal |
Deferral of Principal and Interest |
Reduction of Principal and Interest |
Extension of Maturity |
Total | Deferral of Principal |
Deferral of Principal and Interest |
Reduction of Principal and Interest |
Extension of Maturity |
Total | |||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||
June 30, 2014 |
||||||||||||||||||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||||||||||||||||||
Commercial property |
||||||||||||||||||||||||||||||||||||||||
Retail |
$ | | $ | | $ | | $ | 2,614 | $ | 2,614 | $ | 309 | $ | | $ | | $ | | $ | 309 | ||||||||||||||||||||
Hotel/Motel |
1,200 | 738 | | | 1,938 | 996 | | | | 996 | ||||||||||||||||||||||||||||||
Gas station |
1,138 | | | | 1,138 | 363 | | | | 363 | ||||||||||||||||||||||||||||||
Other |
| 1,199 | 494 | 62 | 1,755 | 3,334 | | 798 | 1,380 | 5,512 | ||||||||||||||||||||||||||||||
Residential property |
769 | | | | 769 | | | | 313 | 313 | ||||||||||||||||||||||||||||||
Commercial and industrial loans: |
||||||||||||||||||||||||||||||||||||||||
Commercial term |
62 | 4 | 1,246 | 902 | 2,214 | 129 | 227 | 2,169 | 2,286 | 4,811 | ||||||||||||||||||||||||||||||
Commercial lines of credit |
238 | | 140 | 143 | 521 | | | 183 | | 183 | ||||||||||||||||||||||||||||||
Consumer loans |
| | 139 | | 139 | | | | | | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | 3,407 | $ | 1,941 | $ | 2,019 | $ | 3,721 | $ | 11,088 | $ | 5,131 | $ | 227 | $ | 3,150 | $ | 3,979 | $ | 12,487 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
December 31, 2013 |
||||||||||||||||||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||||||||||||||||||
Commercial property |
||||||||||||||||||||||||||||||||||||||||
Retail |
$ | | $ | | $ | | $ | 750 | $ | 750 | $ | | $ | | $ | | $ | 474 | $ | 474 | ||||||||||||||||||||
Hotel/Motel |
1,272 | 758 | | | 2,030 | 1,000 | | | | 1,000 | ||||||||||||||||||||||||||||||
Gas station |
1,291 | | 729 | | 2,020 | 365 | | | 2,609 | 2,974 | ||||||||||||||||||||||||||||||
Other |
403 | 1,279 | 555 | | 2,237 | 2,956 | | 1,253 | 2,027 | 6,236 | ||||||||||||||||||||||||||||||
Residential property |
795 | | | | 795 | | | | | | ||||||||||||||||||||||||||||||
Commercial and industrial loans: |
||||||||||||||||||||||||||||||||||||||||
Commercial term |
25 | 206 | 1,449 | 851 | 2,531 | 1,203 | | 2,286 | 3,817 | 7,306 | ||||||||||||||||||||||||||||||
Commercial lines of credit |
| | | 173 | 173 | | | 191 | | 191 | ||||||||||||||||||||||||||||||
International loans |
| | | | | | | 1,087 | | 1,087 | ||||||||||||||||||||||||||||||
Consumer loans |
| | | | | | | 149 | | 149 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | 3,786 | $ | 2,243 | $ | 2,733 | $ | 1,774 | $ | 10,536 | $ | 5,524 | $ | | $ | 4,966 | $ | 8,927 | $ | 19,417 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2014 and December 31, 2013, total TDRs, excluding loans held for sale, were $23.6 million and $30.0 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 borrowers 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 loans effective interest rate; (2) the loans observable market price; or (3) the fair value of the collateral if the loan is collateral dependent.
At June 30, 2014 and December 31, 2013, TDRs, excluding loans held for sale, were subjected to specific impairment analysis, and $2.6 million and $2.8 million, respectively, of reserves relating to these loans were included in the allowance for loan losses.
26
The following table details troubled debt restructurings, disaggregated by loan class, for the three months ended June 30, 2014 and 2013:
June 30, 2014 | June 30, 2013 | |||||||||||||||||||||||
Number of Loans |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
Number of Loans |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
|||||||||||||||||||
(In thousands, except number of loans) | ||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||
Commercial property |
||||||||||||||||||||||||
Retail (1) |
1 | $ | 2,002 | $ | 1,882 | | $ | | $ | | ||||||||||||||
Other (2) |
1 | $ | 65 | $ | 62 | 1 | $ | 148 | $ | 140 | ||||||||||||||
Residential property (3) |
1 | 316 | 313 | | | | ||||||||||||||||||
Commercial and industrial loans: |
||||||||||||||||||||||||
Commercial term (4) |
2 | 59 | 53 | 6 | 518 | 498 | ||||||||||||||||||
Commercial lines of credit (5) |
1 | 146 | 140 | | | | ||||||||||||||||||
Consumer loans (6) |
| | | 1 | 149 | 149 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
6 | $ | 2,588 | $ | 2,450 | 8 | $ | 815 | $ | 787 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes a modification of $1.9 million through an extension of maturity for the three months ended June 30, 2014. |
(2) | Includes a modification of $62,000 through an extension of maturity for the three months ended June 30, 2014 and a modification of $140,000 through a reduction of principal or accrued interest for the three months ended June 30, 2013. |
(3) | Includes a modification of $313,000 through an extension of maturity for the three months ended June 30, 2014. |
(4) | Includes modifications of $41,000 through a payment deferral and $12,000 through a reduction of principal or accrued interest for the three months ended June 30, 2014, and modifications of $42,000 through a reduction of principal or accrued interest and $456,000 through extensions of maturity for the three months ended June 30, 2013. |
(5) | Includes a modification of $140,000 through a reduction of principal or accrued interest for the three months ended June 30, 2014. |
(6) | Includes a modification of $149,000 through a reduction of principal or accrued interest for the three months ended June 30, 2013. |
During the three months ended June 30, 2014, we restructured monthly payments on six loans, with a net carrying value of $2.5 million as of June 30, 2014, 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.
27
The following table details troubled debt restructurings, disaggregated by loan class, for the six months ended June 30, 2014 and 2013:
June 30, 2014 | June 30, 2013 | |||||||||||||||||||||||
Number of Loans |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
Number of Loans |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
|||||||||||||||||||
(In thousands, except number of loans) | ||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||
Commercial property |
||||||||||||||||||||||||
Retail (1) |
1 | $ | 2,002 | $ | 1,882 | | $ | | $ | | ||||||||||||||
Other (2) |
2 | 1,011 | 1,005 | 1 | 153 | 140 | ||||||||||||||||||
Residential property (3) |
1 | 317 | 313 | | | | ||||||||||||||||||
Commercial and industrial loans: |
||||||||||||||||||||||||
Commercial term (4) |
5 | 327 | 287 | 8 | 772 | 699 | ||||||||||||||||||
Commercial lines of credit (5) |
2 | 400 | 378 | | | | ||||||||||||||||||
International loans (6) |
| | | 2 | 1,584 | 1,280 | ||||||||||||||||||
Consumer loans (7) |
| | | 1 | 149 | 149 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
11 | $ | 4,057 | $ | 3,865 | 12 | $ | 2,658 | $ | 2,268 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes a modification of $1.9 million through an extension of maturity for the six months ended June 30, 2014. |
(2) | Includes modifications of $62,000 through an extension of maturity and $943,000 through a payment deferral for the six months ended June 30, 2014, and a modification of $140,000 through a reduction of principal or accrued interest for the six months ended June 30, 2013. |
(3) | Includes a modification of $313,000 through an extension of maturity for the six months ended June 30, 2014. |
(4) | Includes modifications of $41,000 through a payment deferral, $65,000 through reductions of principal or accrued interest and $181,000 through an extension of maturity for the six months ended June 30, 2014, and modifications of $7,000 through a payment deferral, $42,000 through a reduction of principal or accrued interests and $650,000 through extensions of maturity for the six months ended June 30, 2013. |
(5) | Includes modifications of $140,000 through a reduction of principal or accrued interest and $238,000 through a payment deferral for the six months ended June 30, 2014. |
(6) | Includes a modification of $1.3 million through reductions of principal or accrued interest for the six months ended June 30, 2013. |
(7) | Includes a modification of $149,000 through a reduction of principal or accrued interest for the six months ended June 30, 2013. |
During the six months ended June 30, 2014, we restructured monthly payments on eleven loans, with a net carrying value of $3.9 million as of June 30, 2014, 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 restructurings that defaulted subsequent to the modifications occurring within the previous twelve months, disaggregated by loan class, for the three and six months ended June 30, 2014 and 2013, respectively:
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, 2014 | June 30, 2013 | June 30, 2014 | June 30, 2013 | |||||||||||||||||||||||||||||
Number of Loans |
Recorded Investment |
Number of Loans |
Recorded Investment |
Number of Loans |
Recorded Investment |
Number of Loans |
Recorded Investment |
|||||||||||||||||||||||||
(In thousands, except number of loans) | ||||||||||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||||||||||
Commercial property |
||||||||||||||||||||||||||||||||
Retail |
| $ | | | $ | | 1 | $ | 309 | | $ | | ||||||||||||||||||||
Hotel/Motel |
| | | | 1 | 996 | | | ||||||||||||||||||||||||
Gas station |
| | | | | | 1 | 1,274 | ||||||||||||||||||||||||
Other |
| | 1 | 140 | 1 | 364 | 1 | 140 | ||||||||||||||||||||||||
Commercial and industrial loans: |
||||||||||||||||||||||||||||||||
Commercial term |
2 | 212 | 5 | 341 | 2 | 212 | 5 | 341 | ||||||||||||||||||||||||
Commercial lines of credit |
1 | 140 | | | 1 | 140 | | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
3 | $ | 352 | 6 | $ | 481 | 6 | $ | 2,021 | 7 | $ | 1,755 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Servicing Assets
The changes in servicing assets for the six months ended June 30, 2014 and 2013 were as follows:
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Balance at beginning of period |
$ | 6,833 | $ | 5,542 | ||||
Additions |
413 | 1,580 | ||||||
Amortization |
(891 | ) | (739 | ) | ||||
|
|
|
|
|||||
Balance at end of period |
$ | 6,355 | $ | 6,383 | ||||
|
|
|
|
At June 30, 2014 and 2013, we serviced loans sold to unaffiliated parties in the amounts of $333.0 million and $330.4 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 6 Income Taxes
The Companys income tax expenses for the continuing operations were $6.9 million for the three months ended June 30, 2014, compared to $6.0 million for the same period in 2013. The effective income tax rate was 37.37 percent for the three months ended June 30, 2014, compared to 38.98 percent for the same period in 2013. The decrease in the effective tax rate for the three months ended June 30, 2014, as compared to the same period in 2013, was due mainly to a $400,000 discrete deferred tax benefit generated from the sale of the insurance businesses and tax benefits to be realized from investments in low income tax credit funds, which further reduced tax rates in the quarter, offset by the expiration of the California EZ net interest deduction and EZ hiring credits. Management concluded that deferred tax assets were more likely than not to be realized, and therefore, no valuation allowance was required as of June 30, 2014.
As of June 30, 2014, the Company was subject to examinations by various federal and state tax authorities for the tax years ended December 31, 2004 through 2012. As of June 30, 2014, the Company was subjected to audits or examinations by the Internal Revenue Service for the 2009 tax year and the California Franchise Tax Board for the 2008 and 2009 tax years. Management does not anticipate any material changes in our financial statements due to the results of the audits.
Note 7 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 their expiration on October 14, 2015. The Company followed the guidance of FASB ASC Topic 815-40, Derivatives and HedgingContracts in Entitys Own Stock, which establishes a framework for determining whether certain freestanding and embedded instruments are indexed to a companys 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 counterpartys performance is complete. The fair value of the warrants at the date of issuance totaling $2.0 million was recorded as a liability and a cost of equity, which was determined by the Black-Scholes option pricing model. The expected stock volatility was based on historical volatility of our common stock over the expected term of the warrants. We used a weighted average expected stock volatility of 111.46 percent. The expected life assumption was based on the contract term of five years. The dividend yield of zero was based on the fact that we had no intention to pay cash dividends for the term at the grant date. The risk free rate of 2.07 percent used for the warrants was equal to the zero coupon rate in effect at the time of the grant.
Upon re-measuring the fair value of the stock warrants at June 30, 2014, the fair value decreased to $400 for the three months ended June 30, 2014. We used a weighted average expected stock volatility of 26.41 percent and a remaining contractual life of 1.1 years based on the contract terms. We also used a dividend yield of 1.30 percent and a risk free rate of 0.35 percent that was equal to the zero coupon rate in effect at the end of the measurement period.
29
Note 8 Accumulated Other Comprehensive Income
Activity in accumulated other comprehensive income for the three months ended June 30, 2014 and 2013 was as follows:
Unrealized Gains and Losses on Available-for-Sale Securities |
Unrealized Gains and Losses on Interest-Only Strip |
Tax (Expense) Benefit |
Total | |||||||||||||
(In thousands) | ||||||||||||||||
For the three months ended June 30 2014: |
||||||||||||||||
Balance at beginning of period |
$ | (11,510 | ) | $ | 17 | $ | 5,984 | $ | (5,509 | ) | ||||||
Other comprehensive income (loss) before reclassification |
6,340 | | (2,617 | ) | 3,723 | |||||||||||
Reclassification from accumulated other comprehensive income |
(364 | ) | | | (364 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Period change |
5,976 | | (2,617 | ) | 3,359 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | (5,534 | ) | $ | 17 | $ | 3,367 | $ | (2,150 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
For the three months ended June 30, 2013: |
||||||||||||||||
Balance at beginning of period |
$ | 6,771 | $ | 19 | $ | (1,695 | ) | $ | 5,095 | |||||||
Other comprehensive (loss) income before reclassification |
(5,553 | ) | (2 | ) | 2,397 | (3,158 | ) | |||||||||
Reclassification from accumulated other comprehensive income |
(303 | ) | | | (303 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Period change |
(5,856 | ) | (2 | ) | 2,397 | (3,461 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 915 | $ | 17 | $ | 702 | $ | 1,634 | ||||||||
|
|
|
|
|
|
|
|
For the three months ended June 30, 2014, there were a $3.7 million of net unrealized gain on available-for-sale securities and interest-only strip, and a $364,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $364,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under non-interest income. The securities were previously recorded as unrealized gains of $100,000 in accumulated other comprehensive income.
For the three months ended June 30, 2013, there were a $3.2 million of net unrealized loss on available-for-sale securities and interest-only strip, and a $303,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the redemption and sale of available-for-sale securities. The $303,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under non-interest income. The securities were previously recorded as unrealized gains of $812,000 in accumulated other comprehensive income.
Activity in accumulated other comprehensive income for the six months ended June 30, 2014 and 2013 was as follows:
Unrealized Gains and Losses on Available-for-Sale Securities |
Unrealized Gains and Losses on Interest-Only Strip |
Tax (Expense) Benefit |
Total | |||||||||||||
(In thousands) | ||||||||||||||||
For the six months ended June 30 2014: |
||||||||||||||||
Balance at beginning of period |
$ | (18,187 | ) | $ | 16 | $ | 8,791 | $ | (9,380 | ) | ||||||
Other comprehensive income (loss) before reclassification |
14,438 | 1 | (5,424 | ) | 9,015 | |||||||||||
Reclassification from accumulated other comprehensive income |
(1,785 | ) | | | (1,785 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Period change |
12,653 | 1 | (5,424 | ) | 7,230 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | (5,534 | ) | $ | 17 | $ | 3,367 | $ | (2,150 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
For the six months ended June 30, 2013: |
||||||||||||||||
Balance at beginning of period |
$ | 7,348 | $ | 16 | $ | (1,946 | ) | $ | 5,418 | |||||||
Other comprehensive (loss) income before reclassification |
(6,121 | ) | 1 | 2,648 | (3,472 | ) | ||||||||||
Reclassification from accumulated other comprehensive income |
(312 | ) | | | (312 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Period change |
(6,433 | ) | 1 | 2,648 | (3,784 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 915 | $ | 17 | $ | 702 | $ | 1,634 | ||||||||
|
|
|
|
|
|
|
|
30
For the six months ended June 30, 2014, there were a $9.0 million of net unrealized gain on available-for-sale securities and interest-only strip, and a $1.8 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $1.8 million reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under non-interest income. The securities were previously recorded as unrealized losses of $177,000 in accumulated other comprehensive income.
For the six months ended June 30, 2013, there were a $3.5 million of net unrealized loss on available-for-sale securities and interest-only strip, and a $312,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the redemption of available-for-sale securities. The $312,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under non-interest income. The securities were previously recorded as unrealized gains of $856,000 in accumulated other comprehensive income.
Note 9 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, the 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, the 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, the 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 June 30, 2014 and December 31, 2013 were as follows:
Actual | Minimum Regulatory Requirement |
Minimum to Be Categorized as Well Capitalized |
||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
June 30, 2014 |
||||||||||||||||||||||||
Total capital (to risk-weighted assets): |
||||||||||||||||||||||||
Hanmi Financial |
$ | 456,689 | 17.92 | % | $ | 203,828 | 8.00 | % | N/A | N/A | ||||||||||||||
Hanmi Bank |
$ | 436,987 | 17.17 | % | $ | 203,562 | 8.00 | % | $ | 254,453 | 10.00 | % | ||||||||||||
Tier 1 capital (to risk-weighted assets): |
||||||||||||||||||||||||
Hanmi Financial |
$ | 424,280 | 16.65 | % | $ | 101,914 | 4.00 | % | N/A | N/A | ||||||||||||||
Hanmi Bank |
$ | 404,913 | 15.91 | % | $ | 101,781 | 4.00 | % | $ | 152,672 | 6.00 | % | ||||||||||||
Tier 1 capital (to average assets): |
||||||||||||||||||||||||
Hanmi Financial |
$ | 424,280 | 14.09 | % | $ | 120,415 | 4.00 | % | N/A | N/A | ||||||||||||||
Hanmi Bank |
$ | 404,913 | 13.49 | % | $ | 120,056 | 4.00 | % | $ | 150,070 | 5.00 | % | ||||||||||||
December 31, 2013 |
||||||||||||||||||||||||
Total capital (to risk-weighted assets): |
||||||||||||||||||||||||
Hanmi Financial |
$ | 426,614 | 17.48 | % | $ | 195,210 | 8.00 | % | N/A | N/A | ||||||||||||||
Hanmi Bank |
$ | 409,095 | 16.79 | % | $ | 194,880 | 8.00 | % | $ | 243,600 | 10.00 | % | ||||||||||||
Tier 1 capital (to risk-weighted assets): |
||||||||||||||||||||||||
Hanmi Financial |
$ | 395,763 | 16.26 | % | $ | 97,605 | 4.00 | % | N/A | N/A | ||||||||||||||
Hanmi Bank |
$ | 378,295 | 15.53 | % | $ | 97,440 | 4.00 | % | $ | 146,160 | 6.00 | % | ||||||||||||
Tier 1 capital (to average assets): |
||||||||||||||||||||||||
Hanmi Financial |
$ | 395,763 | 13.62 | % | $ | 116,249 | 4.00 | % | N/A | N/A | ||||||||||||||
Hanmi Bank |
$ | 378,295 | 13.05 | % | $ | 115,984 | 4.00 | % | $ | 144,980 | 5.00 | % |
31
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, an institution is 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 10 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 companys 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, SBA loan pool securities, and equity securities in market that are not active. In determining the fair value of the securities categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security held as of each reporting date. The broker-dealers use prices obtained from nationally recognized pricing services to value our fixed income securities. The fair value of the municipal bonds is determined based on a proprietary model maintained by the broker-dealers. We review the prices obtained for reasonableness based on our understanding of the marketplace, and also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. Level 3 investment securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available, which necessitates the use of significant unobservable inputs.
32
As of June 30, 2014, we had a zero coupon tax credit municipal bond of $728,000 compared to $748,000 as of December 31, 2013. 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 June 30, 2014 were discount rate and cash flows. The discount rate was derived from the term structure of Bank Qualified (BQ) BBB rated municipal bonds, as the tax credit bonds guarantee had the similar credit strength. The contractual future cash flows were the tax credits to be received for a remaining life of 0.74 year. We do not anticipate a significant deterioration of the tax credit bonds 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 June 30, 2014 and December 31, 2013, we had $3.8 million and zero 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 June 30, 2014 and December 31, 2013, 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 June 30, 2014 and December 31, 2013, we did not have non-performing loans held for sale, 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 HedgingContracts in Entitys Own Stock, which establishes a framework for determining whether certain freestanding and embedded instruments are indexed to a companys 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 counterpartys 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.
33
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 June 30, 2014. As of June 30, 2014 and December 31, 2013, assets and liabilities measured at fair value on a recurring basis are as follows:
Level 1 | Level 2 | Level 3 | ||||||||||||||
Quoted Prices in Active Markets for Identical Assets |
Significant Observable Inputs with No Active Market with Identical Characteristics |
Significant Unobservable Inputs |
Balance | |||||||||||||
(In thousands) | ||||||||||||||||
June 30, 2014 |
||||||||||||||||
Assets: |
||||||||||||||||
Securities available for sale: |
||||||||||||||||
Mortgage-backed securities |
$ | | $ | 214,635 | $ | | $ | 214,635 | ||||||||
Collateralized mortgage obligations |
| 159,625 | | 159,625 | ||||||||||||
U.S. government agency securities |
77,864 | | | 77,864 | ||||||||||||
Municipal bonds-tax exempt |
| 3,719 | 728 | 4,447 | ||||||||||||
Municipal bonds-taxable |
| 16,731 | | 16,731 | ||||||||||||
Corporate bonds |
| 16,925 | | 16,925 | ||||||||||||
SBA loan pools securities |
| 12,561 | | 12,561 | ||||||||||||
Other securities |
| 2,939 | | 2,939 | ||||||||||||
Equity security |
| 250 | | 250 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities available for sale |
$ | 77,864 | $ | 427,385 | $ | 728 | $ | 505,977 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2013 |
||||||||||||||||
Assets: |
||||||||||||||||
Securities available for sale: |
||||||||||||||||
Mortgage-backed securities |
$ | | $ | 217,059 | $ | | $ | 217,059 | ||||||||
Collateralized mortgage obligations |
| 127,693 | | 127,693 | ||||||||||||
U.S. government agency securities |
83,536 | | | 83,536 | ||||||||||||
Municipal bonds-tax exempt |
| 13,189 | 748 | 13,937 | ||||||||||||
Municipal bonds-taxable |
| 32,354 | | 32,354 | ||||||||||||
Corporate bonds |
| 20,835 | | 20,835 | ||||||||||||
U.S. treasury bills |
19,997 | | | 19,997 | ||||||||||||
SBA loan pools securities |
| 12,629 | | 12,629 | ||||||||||||
Other securities |
| 2,886 | | 2,886 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities available for sale |
$ | 103,533 | $ | 426,645 | $ | 748 | $ | 530,926 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Stock warrants |
$ | | $ | | $ | 2 | $ | 2 | ||||||||
|
|
|
|
|
|
|
|
34
The table below presents a reconciliation and income statement classification of gains and losses for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2014:
Beginning Balance as of January 1, 2014 |
Purchases, Issuances and Settlement |
Realized Gains or Losses in Earnings |
Unrealized Gains or Losses in Other Comprehensive Income |
Ending Balance as of June 30, 2014 |
||||||||||||||||
(In thousands) | ||||||||||||||||||||
Assets: |
||||||||||||||||||||
Municipal bonds-tax exempt (1) |
$ | 748 | $ | | $ | | $ | (20 | ) | $ | 728 | |||||||||
Liabilities: |
||||||||||||||||||||
Stock warrants (2) |
$ | 2 | $ | (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 0.74 year at June 30, 2014. |
(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 7 Stockholders Equity for more details. The carrying value at June 30, 2014 was $400. |
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
As of June 30, 2014 and December 31, 2013, assets and liabilities measured at fair value on a non-recurring basis are as follows:
Level 1 | Level 2 | Level 3 | ||||||||||||||
Quoted Prices in Active Markets for Identical Assets |
Significant Observable Inputs With No Active Market With Identical Characteristics |
Significant Unobservable Inputs |
Loss During the Six Months Ended June 30, 2014 |
|||||||||||||
(In thousands) | ||||||||||||||||
June 30, 2014 |
||||||||||||||||
Assets: |
||||||||||||||||
Impaired loans (1) |
$ | | $ | 32,714 | $ | 3,251 | $ | 2,301 | ||||||||
Other real estate owned (2) |
| 1,714 | | 17 |
Level 1 | Level 2 | Level 3 | ||||||||||||||
Quoted Prices in Active Markets for Identical Assets |
Significant Observable Inputs With No Active Market With Identical Characteristics |
Significant Unobservable Inputs |
Loss During the Twelve Months Ended December 31, 2013 |
|||||||||||||
(In thousands) | ||||||||||||||||
December 31, 2013 |
||||||||||||||||
Assets: |
||||||||||||||||
Impaired loans (3) |
$ | | $ | 36,254 | $ | 1,738 | $ | 2,431 | ||||||||
Other real estate owned (4) |
| 756 | | 10 |
(1) | Include real estate loans of $33.2 million, commercial and industrial loans of $1.4 million, and consumer loans of $1.4 million. |
(2) | Includes properties from the foreclosure of real estate loans of $1.7 million. |
(3) | Include real estate loans of $32.2 million, commercial and industrial loans of $2.8 million, and consumer loans of $1.3 million. |
(4) | Includes properties from the foreclosure of real estate loans of $756,000. |
35
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:
June 30, 2014 | ||||||||||||||||
Carrying | Fair Value | |||||||||||||||
Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 123,782 | $ | 123,782 | $ | | $ | | ||||||||
Securities available for sale |
505,977 | 77,864 | 427,385 | 728 | ||||||||||||
Loans receivable, net of allowance for loan losses |
2,300,810 | | | 2,298,104 | ||||||||||||
Loans held for sale |
3,842 | | 3,842 | | ||||||||||||
Accrued interest receivable |
6,355 | 6,355 | | | ||||||||||||
Investment in federal home loan bank stock |
16,385 | 16,385 | | | ||||||||||||
Investment in federal reserve bank stock |
11,514 | 11,514 | | | ||||||||||||
Financial liabilities: |
||||||||||||||||
Noninterest-bearing deposits |