UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 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 October 31, 2014, there were 31,904,031 outstanding shares of the Registrants Common Stock.
Hanmi Financial Corporation and Subsidiaries
Quarterly Report on Form 10-Q
Three and Nine Months Ended September 30, 2014
Table of Contents
Part 1 Financial Information | ||||||
Item 1. | 3 | |||||
3 | ||||||
4 | ||||||
5 | ||||||
Consolidated Statements of Changes in Stockholders Equity (Unaudited) |
6 | |||||
7 | ||||||
8 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
46 | ||||
Item 3. |
69 | |||||
Item 4. |
69 | |||||
Part II Other Information | ||||||
Item 1. | 70 | |||||
Item 1A. | 70 | |||||
Item 2. | 70 | |||||
Item 3. | 70 | |||||
Item 4. | 70 | |||||
Item 5. | 70 | |||||
Item 6. | 70 | |||||
72 |
2
Part I Financial Information
Item 1. | Financial Statements |
Hanmi Financial Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
September 30, 2014 |
December 31, 2013 |
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Assets |
||||||||
Cash and cash equivalents |
$ | 197,016 | $ | 179,357 | ||||
Securities available for sale, at fair value (amortized cost of $1,139,173 as of September 30, 2014 and $549,113 as of December 31, 2013) |
1,128,624 | 530,926 | ||||||
Loans held for sale, at the lower of cost or fair value |
7,757 | | ||||||
Loans receivable, net of allowance for loan losses of $51,179 as of September 30, 2014 and $57,555 as of December 31, 2013 |
2,628,091 | 2,177,498 | ||||||
Accrued interest receivable |
9,880 | 7,055 | ||||||
Premises and equipment, net |
31,187 | 14,221 | ||||||
Other real estate owned, net |
24,781 | 756 | ||||||
Customers liability on acceptances |
2,428 | 2,018 | ||||||
Servicing assets |
7,844 | 6,833 | ||||||
FDIC loss sharing asset |
7,696 | | ||||||
Other intangible assets, net |
2,179 | 1,171 | ||||||
Investment in federal home loan bank stock, at cost |
17,579 | 14,060 | ||||||
Investment in federal reserve bank stock, at cost |
12,273 | 11,196 | ||||||
Income tax assets |
72,330 | 63,841 | ||||||
Bank-owned life insurance |
48,670 | 29,699 | ||||||
Prepaid expenses |
2,753 | 1,415 | ||||||
Other assets |
27,244 | 14,333 | ||||||
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Total assets |
$ | 4,228,332 | $ | 3,054,379 | ||||
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Liabilities and Stockholders Equity |
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Liabilities: |
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Deposits: |
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Noninterest-bearing |
$ | 1,029,343 | $ | 819,015 | ||||
Interest-bearing |
2,568,811 | 1,693,310 | ||||||
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Total deposits |
3,598,154 | 2,512,325 | ||||||
Accrued interest payable |
3,030 | 3,366 | ||||||
Banks liability on acceptances |
2,428 | 2,018 | ||||||
Federal home loan bank advances |
110,000 | 127,546 | ||||||
Rescinded stock obligation |
15,720 | | ||||||
Subordinated debentures |
18,509 | | ||||||
Accrued expenses and other liabilities |
45,297 | 9,047 | ||||||
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Total liabilities |
3,793,138 | 2,654,302 | ||||||
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Stockholders equity: |
||||||||
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 32,472,323 shares (31,894,429 shares outstanding) as of September 30, 2014 and 32,339,444 shares (31,761,550 shares outstanding) as of December 31, 2013 |
257 | 257 | ||||||
Additional paid-in capital |
554,446 | 552,270 | ||||||
Accumulated other comprehensive loss, net of tax benefit of $5,469 as of September 30, 2014 and $8,791 as of December 31, 2013 |
(5,065 | ) | (9,380 | ) | ||||
Accumulated deficit |
(44,586 | ) | (73,212 | ) | ||||
Less: treasury stock, at cost; 577,894 shares as of September 30, 2014 and December 31, 2013 |
(69,858 | ) | (69,858 | ) | ||||
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Total stockholders equity |
435,194 | 400,077 | ||||||
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Total liabilities and stockholders equity |
$ | 4,228,332 | $ | 3,054,379 | ||||
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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 September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Interest and Dividend Income: |
||||||||||||||||
Interest and fees on loans |
$ | 30,499 | $ | 29,098 | $ | 87,044 | $ | 83,736 | ||||||||
Taxable interest on investment securities |
3,138 | 2,040 | 8,050 | 6,256 | ||||||||||||
Tax-exempt interest on investment securities |
20 | 69 | 116 | 237 | ||||||||||||
Interest on federal funds sold |
| | | 6 | ||||||||||||
Interest on interest-bearing deposits in other banks |
29 | 28 | 67 | 140 | ||||||||||||
Dividends on federal reserve bank stock |
173 | 198 | 513 | 577 | ||||||||||||
Dividends on federal home loan bank stock |
290 | 194 | 762 | 449 | ||||||||||||
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Total interest and dividend income |
34,149 | 31,627 | 96,552 | 91,401 | ||||||||||||
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Interest Expense: |
||||||||||||||||
Interest on deposits |
3,278 | 3,117 | 9,653 | 9,376 | ||||||||||||
Interest on federal home loan bank advances |
37 | 36 | 116 | 115 | ||||||||||||
Interest on subordinated debentures |
73 | | 73 | 678 | ||||||||||||
Interest on rescinded stock obligation |
87 | | 87 | | ||||||||||||
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Total interest expense |
3,475 | 3,153 | 9,929 | 10,169 | ||||||||||||
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Net interest income before provision for credit losses |
30,674 | 28,474 | 86,623 | 81,232 | ||||||||||||
Negative provision for credit losses |
| | (7,166 | ) | | |||||||||||
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Net interest income after provision for credit losses |
30,674 | 28,474 | 93,789 | 81,232 | ||||||||||||
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Noninterest Income: |
||||||||||||||||
Bargain purchase gain, net of deferred taxes |
6,593 | | 6,593 | | ||||||||||||
Service charges on deposit accounts |
2,883 | 2,730 | 7,924 | 8,662 | ||||||||||||
Remittance fees |
459 | 481 | 1,388 | 1,519 | ||||||||||||
Trade finance fees |
314 | 248 | 873 | 801 | ||||||||||||
Other service charges and fees |
380 | 349 | 1,080 | 1,082 | ||||||||||||
Bank-owned life insurance income |
225 | 230 | 672 | 693 | ||||||||||||
Gain on sales of SBA loans guaranteed portion |
1,221 | 994 | 2,267 | 6,064 | ||||||||||||
Net loss on sales of other loans |
| | | (557 | ) | |||||||||||
Net gain on sales of investment securities |
67 | 611 | 1,852 | 923 | ||||||||||||
Other operating income |
2,179 | 416 | 2,588 | 758 | ||||||||||||
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Total noninterest income |
14,321 | 6,059 | 25,237 | 19,945 | ||||||||||||
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Noninterest Expense: |
||||||||||||||||
Salaries and employee benefits |
12,847 | 9,101 | 33,386 | 26,126 | ||||||||||||
Occupancy and equipment |
3,098 | 2,561 | 7,964 | 7,532 | ||||||||||||
Merger and integration costs |
3,415 | | 3,572 | | ||||||||||||
Unconsummated acquisition costs |
| 307 | | 1,331 | ||||||||||||
Deposit insurance premiums and regulatory assessments |
513 | 308 | 1,349 | 1,059 | ||||||||||||
Data processing |
1,476 | 1,146 | 3,746 | 3,436 | ||||||||||||
Other real estate owned expense |
78 | (59 | ) | 84 | (47 | ) | ||||||||||
Professional fees |
1,386 | 599 | 2,786 | 4,095 | ||||||||||||
Directors and officers liability insurance |
191 | 219 | 574 | 657 | ||||||||||||
Supplies and communications |
628 | 533 | 1,725 | 1,593 | ||||||||||||
Advertising and promotion |
809 | 1,039 | 2,142 | 2,419 | ||||||||||||
Loan-related expense |
58 | 91 | 203 | 328 | ||||||||||||
Amortization of other intangible assets |
33 | | 33 | | ||||||||||||
Other operating expenses |
2,231 | 1,791 | 6,031 | 5,369 | ||||||||||||
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Total noninterest expense |
26,763 | 17,636 | 63,595 | 53,898 | ||||||||||||
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Income from continuting operations before provision for income taxes |
18,232 | 16,897 | 55,431 | 47,279 | ||||||||||||
Provision for income taxes |
4,968 | 6,582 | 19,667 | 17,510 | ||||||||||||
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Income from continuting operations, net of taxes |
$ | 13,264 | $ | 10,315 | $ | 35,764 | $ | 29,769 | ||||||||
Discontinued operations |
||||||||||||||||
Income from operations of discontinued subsidiaries (including gain on disposal of $51 in the second quarter of 2014) |
$ | | $ | 112 | $ | 37 | $ | 242 | ||||||||
Income tax expense |
| 42 | 481 | 81 | ||||||||||||
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Income (loss) from discontinued operations |
| 70 | (444 | ) | 161 | |||||||||||
Net income |
$ | 13,264 | $ | 10,385 | $ | 35,320 | $ | 29,930 | ||||||||
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Basic earnings per share: |
||||||||||||||||
Income from continuing operations, net of taxes |
$ | 0.42 | $ | 0.33 | $ | 1.13 | $ | 0.94 | ||||||||
Income from discontinued operations, net of taxes |
| | (0.02 | ) | 0.01 | |||||||||||
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Basic earnings per share |
$ | 0.42 | $ | 0.33 | $ | 1.11 | $ | 0.95 | ||||||||
Diluted earnings per share: |
||||||||||||||||
Income from continuing operations, net of taxes |
$ | 0.41 | $ | 0.33 | $ | 1.12 | $ | 0.94 | ||||||||
Income from discontinued operations, net of taxes |
| | (0.01 | ) | 0.01 | |||||||||||
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Diluted earnings per share |
$ | 0.41 | $ | 0.33 | $ | 1.10 | $ | 0.95 | ||||||||
Weighted-average shares outstanding: |
||||||||||||||||
Basic |
31,708,581 | 31,621,049 | 31,683,288 | 31,583,897 | ||||||||||||
Diluted |
32,001,419 | 31,733,004 | 31,967,876 | 31,652,795 |
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 September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net Income |
$ | 13,264 | $ | 10,385 | $ | 35,320 | $ | 29,930 | ||||||||
Other comprehensive income, net of tax |
||||||||||||||||
Unrealized gain (loss) on securities |
||||||||||||||||
Unrealized holding (loss) gain arising during period |
(4,947 | ) | (10,020 | ) | 9,491 | (16,141 | ) | |||||||||
Less: reclassification adjustment for net gain included in net income |
(67 | ) | (611 | ) | (1,852 | ) | (923 | ) | ||||||||
Unrealized (loss) gain on interest-only strip of servicing assets |
(3 | ) | | (2 | ) | 1 | ||||||||||
Income tax benefit (expense) related to items of other comprehensive income |
2,102 | 4,528 | (3,322 | ) | 7,176 | |||||||||||
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Other comprehensive (loss) income |
(2,915 | ) | (6,103 | ) | 4,315 | (9,887 | ) | |||||||||
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Comprehensive Income |
$ | 10,349 | $ | 4,282 | $ | 39,635 | $ | 20,043 | ||||||||
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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 | |||||||||||||||||||||||||||||||||||
Shares Issued |
Treasury Shares |
Shares Outstanding |
Common Stock |
Additional Paid-in Capital |
Accumulated Other Comprehensive Income (Loss) |
Accumulated 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 |
40,678 | | 40,678 | | 139 | | | | 139 | |||||||||||||||||||||||||||
Exercises of stock warrants |
106,315 | | 106,315 | | 1,289 | | | | 1,289 | |||||||||||||||||||||||||||
Restricted stock awards |
110,582 | | 110,582 | | | | | | | |||||||||||||||||||||||||||
Share-based compensation expense |
| | | | 387 | | | | 387 | |||||||||||||||||||||||||||
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 |
| | | | | (9,887 | ) | | | (9,887 | ) | |||||||||||||||||||||||||
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Balance at September 30, 2013 |
32,332,009 | (577,894 | ) | 31,754,115 | $ | 257 | $ | 551,881 | $ | (4,469 | ) | $ | (89,086 | ) | $ | (69,858 | ) | $ | 388,725 | |||||||||||||||||
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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 |
34,382 | | 34,382 | | 427 | | | | 427 | |||||||||||||||||||||||||||
Exercises of stock warrants |
429 | | 429 | | 2 | | | | 2 | |||||||||||||||||||||||||||
Restricted stock awards |
98,068 | | 98,068 | | | | | | | |||||||||||||||||||||||||||
Share-based compensation expense |
| | | | 1,747 | | | | 1,747 | |||||||||||||||||||||||||||
Cash dividends |
| | | | | | (6,694 | ) | | (6,694 | ) | |||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
Net income |
| | | | | | 35,320 | | 35,320 | |||||||||||||||||||||||||||
Change in unrealized loss on securities available for sale and interest-only strips, net of income taxes |
| | | | | 4,315 | | | 4,315 | |||||||||||||||||||||||||||
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Balance at September 30, 2014 |
32,472,323 | (577,894 | ) | 31,894,429 | $ | 257 | $ | 554,446 | $ | (5,065 | ) | $ | (44,586 | ) | $ | (69,858 | ) | $ | 435,194 | |||||||||||||||||
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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)
Nine Months Ended September 30, |
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2014 | 2013 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 35,320 | $ | 29,930 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization of premises and equipment |
1,418 | 1,525 | ||||||
Amortization of premiums and accretion of discounts on investment securities, net |
2,754 | 1,961 | ||||||
Amortization of other intangible assets |
33 | 123 | ||||||
Amortization of servicing assets |
1,318 | 1,152 | ||||||
Amortization of investment in affordable housing partnerships |
592 | 552 | ||||||
Amortization of subordinated debentures |
36 | | ||||||
Share-based compensation expense |
1,747 | 387 | ||||||
Negative provision for credit losses |
(7,166 | ) | | |||||
Gain on sales of investment securities |
(1,852 | ) | (923 | ) | ||||
Gain on sales of loans |
(2,267 | ) | (5,507 | ) | ||||
Bargain purchase gain on acquisition |
(6,593 | ) | | |||||
Gain (loss) on sales of other real estate owned |
2 | (71 | ) | |||||
Loss on sales of subsidiaries |
419 | | ||||||
Valuation adjustment on other real estate owned |
| 7 | ||||||
Origination of loans held for sale |
(34,798 | ) | (63,113 | ) | ||||
Proceeds from sales of SBA loans guaranteed portion |
29,826 | 77,338 | ||||||
Change in restricted cash |
| 5,350 | ||||||
Change in accrued interest receivable |
609 | 624 | ||||||
Change in FDIC loss sharing asset |
1,996 | | ||||||
Change in bank-owned life insurance |
(672 | ) | (693 | ) | ||||
Change in prepaid expenses |
(1,338 | ) | 98 | |||||
Change in other assets |
(4,462 | ) | 767 | |||||
Change in income tax assets |
(3,066 | ) | 5,038 | |||||
Change in accrued interest payable |
(821 | ) | (9,070 | ) | ||||
Change in stock warrants payable |
| 80 | ||||||
Change in other liabilities |
11,670 | 2,422 | ||||||
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Net cash provided by operating activities |
24,705 | 47,977 | ||||||
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Cash flows from investing activities: |
||||||||
Proceeds from redemption of federal home loan bank and federal reserve bank stock |
| 3,740 | ||||||
Proceeds from matured or called securities available for sale |
61,145 | 62,104 | ||||||
Proceeds from sales of securities available for sale |
135,834 | 41,560 | ||||||
Proceeds from sales of other real estate owned |
9,932 | 1,645 | ||||||
Proceeds from sales of loans held for sale |
| 5,380 | ||||||
Proceeds from insurance settlement on bank-owned life insurance |
| 279 | ||||||
Cash acquired in acquisition, net of cash consideration paid |
116,967 | | ||||||
Net proceeds from sales of subsidiaries |
398 | | ||||||
Change in loans receivable |
(157,988 | ) | (131,169 | ) | ||||
Purchases of securities available for sale |
(124,442 | ) | (53,762 | ) | ||||
Purchases of premises and equipment |
(739 | ) | (567 | ) | ||||
Purchases of federal reserve bank stock |
(3,403 | ) | (978 | ) | ||||
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Net cash provided by (used) in investing activities |
37,704 | (71,768 | ) | |||||
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Cash flows from financing activities: |
||||||||
Change in deposits |
(13,168 | ) | 33,744 | |||||
Change in short-term federal home loan bank advances |
(25,135 | ) | | |||||
Redemption of Federal Home Loan Bank advances |
(2,411 | ) | (290 | ) | ||||
Redemption of subordinated debentures |
| (82,406 | ) | |||||
Proceeds from exercise of stock options |
427 | 460 | ||||||
Proceeds from exercise of stock warrants |
| 305 | ||||||
Cash dividends paid |
(4,463 | ) | (2,215 | ) | ||||
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Net cash used in financing activities |
(44,750 | ) | (50,402 | ) | ||||
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Net increase (decrease) in cash and cash equivalents |
17,659 | (74,193 | ) | |||||
Cash and cash equivalents at beginning of year |
179,357 | 268,047 | ||||||
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Cash and cash equivalents at end of period |
$ | 197,016 | $ | 193,854 | ||||
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Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Interest |
$ | 10,750 | $ | 19,239 | ||||
Income taxes |
$ | 20,930 | $ | 11,910 | ||||
Non-cash activities: |
||||||||
Transfer of loans receivable to other real estate owned |
$ | 7,501 | $ | 1,090 | ||||
Transfer of loans receivable to loans held for sale |
$ | | $ | 8,010 | ||||
Transfer of loans held for sale to loans receivable |
$ | | $ | 2,534 | ||||
Note receivable from sale of insurance subsidiaries |
$ | 1,394 | $ | | ||||
Conversion of stock warrants into common stock |
$ | 2 | $ | 981 | ||||
Income tax (expense) benefit related to items of other comprehensive income |
$ | (3,322 | ) | $ | 7,176 | |||
Change in unrealized (gain) loss in accumulated other comprehensive income |
$ | (9,489 | ) | $ | 16,140 | |||
Cash dividend declared |
$ | (2,231 | ) | $ | |
See Accompanying Notes to Consolidated Financial Statements (Unaudited)
7
Hanmi Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Three and Nine Months Ended September 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 two subsidiaries, Chun-Ha Insurance Services, Inc., a California corporation (Chun-Ha), and All World Insurance Services, Inc., a California corporation (All World). See Note 4 Sale of Insurance Subsidiaries and Discontinued Operations. On August 31, 2014, Hanmi Financial completed its acquisition of Central Bancorp, Inc. See Note 2 Acquisition.
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 September 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. Material estimates subject to change include, among other items, the fair value estimates of assets acquired and liabilities assumed in Central Bancorp, Inc. (CBI) acquisition as discussed in Note 2 Acquisition. The acquired assets and assumed liabilities of Central Bancorp, Inc. were measured at their estimated fair values. The Company made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and assumed liabilities.
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 3 Accounting for Investments in Qualified Affordable Housing Projects. During the three months ended September 30, 2014, we completed acquisition of CBI and our acquisition was accounted for using the acquisition method of accounting. See Note 2 Acquisition for more information about the CBI acquisition and Note 6 Loans for accounting policies regarding purchased loans.
Note 2 Acquisition
Acquisition of Central Bancorp, Inc.
On August 31, 2014, Hanmi Financial completed its acquisition of CBI, the parent company of United Central Bank (UCB). In the merger with CBI, each share of CBI common stock was exchanged for $17.64 per share or $50 million in the aggregate. In addition, Hanmi Financial paid $28.7 million to redeem CBI preferred stock and cumulative unpaid dividends and $1.6 million for accrued interest payable on CBI subordinated debentures immediately prior to the consummation of the merger. The merger consideration was funded from consolidated cash of Hanmi Financial. At August 31, 2014, CBI had total assets, liabilities and equity of $1.26 billion, $1.17 billion and $86.8 million, respectively. Total loans and deposits were $294.0 million and $1.1 billion, respectively, at August 31, 2014.
CBI was headquartered in Garland, Texas and through UCB, operated 23 branch locations within Texas, Illinois, Virginia, New York, New Jersey and California. The combined companies operate as Hanmi Financial Corporation and Hanmi Bank, respectively, with banking operations under the Hanmi Bank brand. Following the acquisition, Hanmi Bank has expanded its geographic presence through a network of 49 branches located throughout the United States. Key strategic benefits of the merger include 1) access to highly attractive markets with large Asian-American communities, creating business opportunities by leveraging Hanmi Banks brand and business strategies, 2) ability to realize significant cost savings and operational efficiencies for the combined company, and 3) opportunity to prudently deploy capital at an attractive return for our shareholders.
8
In connection with the acquisition, the consideration paid, the provisional estimate of the fair value of the assets acquired and the liabilities assumed as of August 31, 2014 are summarized in the following table:
(In thousands) | ||||
Consideration paid: |
||||
CBI Stockholders |
$ | 50,000 | ||
Redemption of preferred stock and cumulative unpaid dividends |
28,675 | |||
Accrued interest on subordinated debentures |
1,566 | |||
|
|
|||
80,241 | ||||
Assets acquired: |
||||
Cash and cash equivalents |
197,209 | |||
Securities available for sale |
663,497 | |||
Loans |
294,032 | |||
Premises and equipment |
17,735 | |||
Other real estate owned |
28,027 | |||
Income tax assets, net |
8,800 | |||
Core deposit intangible |
2,213 | |||
FDIC loss sharing assets |
9,692 | |||
Bank-owned life insurance |
18,296 | |||
Other assets |
16,428 | |||
|
|
|||
Total assets acquired |
1,255,929 | |||
Liabilities assumed: |
||||
Deposits |
1,098,997 | |||
Subordinated debentures |
18,473 | |||
Rescinded stock obligation |
15,720 | |||
FHLB advances |
10,000 | |||
Other liabilities |
25,905 | |||
|
|
|||
Total liabilities assumed |
1,169,095 | |||
|
|
|||
Total identifiable net assets |
$ | 86,834 | ||
|
|
|||
Bargain purchase gain, net of deferred taxes |
$ | 6,593 | ||
|
|
The CBI acquisition was accounted for under the acquisition method of accounting pursuant to ASC 805, Business Combinations. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of acquisition date. The Company made significant estimates and exercised significant judgment in estimating the fair values and accounting for such acquired assets and assumed liabilities. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. The fair values are based on provisional valuation estimates of the fair values of the acquired assets and assumed liabilities. The valuation of acquired loans, income taxes and the core deposit intangibles are based on a preliminary estimate and are subject to change as the provisional amounts are finalized. The provisional application of the acquisition method of accounting resulted in a bargain purchase gain of $6.6 million. The operations of CBI are included in our operating results since the acquisition date for the third quarter of 2014. Acquisition-related costs of $3.6 million for the nine months ended September 30, 2014 are expensed as incurred as merger and integration costs. These expenses are comprised primarily of system conversion costs and professional fees.
The $294.0 million estimated fair value of loans acquired from CBI was determined by utilizing a discounted cash flow methodology considering credit and interest rate risk. Cash flows were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value based on a current market rate for similar loans. There was no carryover of CBIs allowance for loan losses associated with the loans acquired as loans were initially recorded at fair value.
The following table summarizes the accretable yield on the purchased credit impaired loans acquired from the CBI merger at August 31, 2014.
(In thousands) | ||||
Undiscounted contractual cash flows |
$ | 117,301 | ||
Nonaccretable discount |
(18,565 | ) | ||
|
|
|||
Undiscounted cash flow to be collected |
98,736 | |||
Estimated fair value of PCI loans |
75,878 | |||
|
|
|||
Accretable yield |
$ | 22,858 | ||
|
|
9
The core deposit intangible (CDI) of $2.2 million was recognized for the core deposits acquired from CBI. The CDI is amortized over its useful life of approximately ten years on an accelerated basis and reviewed for impairment at least quarterly. The amortization expense for the third quarter of 2014 was $33,000.
The fair value of savings and transactional deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Expected cash flows were utilized for fair value calculation of the certificates of deposit based on the contractual terms of the certificates of deposit and the cash flows were discounted based on a current market rate for certificates of deposit with corresponding maturities. The premium for certificates of deposit was $11.3 million with $591,000 amortized in the third quarter of 2014.
The fair value of subordinated debentures was determined by estimating projected future cash flows and discounting them at a market rate of interest. A discount of $8.3 million was recognized for subordinated debentures, which will be amortized over their contractual term. The amortization for the third quarter of 2014 was $35,000.
Unaudited Pro Forma Results of Operations
The following table presents our unaudited pro forma results of operations for the periods presented as if the CBI acquisition had been completed on January 1, 2013. The unaudited pro forma results of operations include the historical accounts of Hanmi Financial and CBI and pro forma adjustments as may be required, including the amortization of intangibles with definite lives and the amortization or accretion of any premiums or discounts arising from fair value adjustments for assets acquired and liabilities assumed. The unaudited pro forma information is intended for informational purposes only and is not necessarily indicative of our future operating results or operating results that would have occurred had the CBI acquisition been completed at the beginning of 2013. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Pro forma revenues (net interest income plus noninterest income) |
$ | 62,427 | $ | 55,727 | $ | 170,923 | $ | 182,135 | ||||||||
Pro forma net income from continuing operations |
$ | 18,359 | $ | 12,826 | $ | 43,546 | $ | 47,201 | ||||||||
Pro forma earnings per share from continuing operations: |
||||||||||||||||
Basic |
$ | 0.58 | $ | 0.41 | $ | 1.37 | $ | 1.49 | ||||||||
Diluted |
$ | 0.57 | $ | 0.40 | $ | 1.36 | $ | 1.49 |
Note 3 Accounting for Investments in Qualified Affordable Housing Projects
The Bank invests in qualified affordable housing projects (low income housing) and previously accounted for them under the equity method of accounting. The Bank recognized its share of partnership losses in other operating expenses with the tax benefits recognized in the income tax provision. In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, which amends ASC 323 to provide the ability to elect the proportional amortization method with the amortization expense and tax benefits recognized through the income tax provision. This ASU is effective for the annual period beginning after December 15, 2014, with early adoption being permitted. The Bank elected to early adopt the provisions of the ASU in the second quarter of 2014 and elected the proportional amortization method as 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 January 1, 2012 was a negative $1.1 million. Net income in the three and nine months ended September 30, 2013 increased by $135,000 and $51,000, respectively, due to the change in accounting principle.
10
The following tables present the effect of the retrospective application of this change in accounting principle on the Companys Consolidated Balance Sheets, Statements 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 |
||||||||||||
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 | ||||||||
|
|
|
|
|
|
|||||||
Total assets |
$ | 3,055,539 | $ | (1,160 | ) | $ | 3,054,379 | |||||
|
|
|
|
|
|
|||||||
Liabilities and stockholders equity |
||||||||||||
Liabilities |
$ | 2,654,302 | $ | | $ | 2,654,302 | ||||||
Stockholders equity |
401,237 | (1,160 | ) | 400,077 | ||||||||
|
|
|
|
|
|
|||||||
Total liabilities and stockholders equity |
$ | 3,055,539 | $ | (1,160 | ) | $ | 3,054,379 | |||||
|
|
|
|
|
|
11
Hanmi Financial Corporations and Subsidiaries
Consolidated Statements of Income (Unaudited)
For the Three Months Ended September 30, 2013 | ||||||||||||
As Previously Reported |
Effect of Change in Accounting Principle |
As Adjusted |
||||||||||
(In thousands, except per share data) | ||||||||||||
Interest and dividend income |
$ | 31,627 | $ | | $ | 31,627 | ||||||
Interest expense |
3,153 | | 3,153 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income |
$ | 28,474 | $ | | $ | 28,474 | ||||||
Noninterest income |
6,059 | | 6,059 | |||||||||
Noninterest expense |
17,811 | (175 | ) | 17,636 | ||||||||
|
|
|
|
|
|
|||||||
Income before provision for income taxes |
$ | 16,722 | $ | 175 | $ | 16,897 | ||||||
Provision for income taxes |
6,542 | 40 | 6,582 | |||||||||
|
|
|
|
|
|
|||||||
Income from continuing operations |
$ | 10,180 | $ | 135 | $ | 10,315 | ||||||
|
|
|
|
|
|
|||||||
Earnings per share from continuing operations |
||||||||||||
Basic |
$ | 0.32 | $ | 0.01 | $ | 0.33 | ||||||
Diluted |
$ | 0.32 | $ | 0.01 | $ | 0.33 |
For the Nine Months Ended September 30, 2013 | ||||||||||||
As Previously Reported |
Effect of Change in Accounting Principle |
As Adjusted |
||||||||||
(In thousands, except per share data) | ||||||||||||
Interest and dividend income |
$ | 91,401 | $ | | $ | 91,401 | ||||||
Interest expense |
10,169 | | 10,169 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income |
$ | 81,232 | $ | | $ | 81,232 | ||||||
Noninterest income |
19,945 | | 19,945 | |||||||||
Noninterest expense |
54,451 | (553 | ) | 53,898 | ||||||||
|
|
|
|
|
|
|||||||
Income before provision for income taxes |
$ | 46,726 | $ | 553 | $ | 47,279 | ||||||
Provision for income taxes |
17,008 | 502 | 17,510 | |||||||||
|
|
|
|
|
|
|||||||
Income from continuing operations |
$ | 29,718 | $ | 51 | $ | 29,769 | ||||||
|
|
|
|
|
|
|||||||
Earnings per share from continuing operations |
||||||||||||
Basic |
$ | 0.94 | $ | | $ | 0.94 | ||||||
Diluted |
$ | 0.94 | $ | | $ | 0.94 |
Hanmi Financial Corporations and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2013 | ||||||||||||
As Previously Reported |
Effect of Change in Accounting Principle |
As Adjusted |
||||||||||
(In thousands) | ||||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 29,879 | $ | 51 | $ | 29,930 | ||||||
Total adjustment in net income |
18,098 | (51 | ) | 18,047 | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
$ | 47,977 | $ | | $ | 47,977 | ||||||
Cash flows from investing activities: |
||||||||||||
Net cash used in investing activities |
(71,768 | ) | | (71,768 | ) | |||||||
Cash flows from financing activities: |
||||||||||||
Net cash used in financing activities |
(50,402 | ) | | (50,402 | ) | |||||||
|
|
|
|
|
|
|||||||
Net decrease in cash and cash equivalents |
$ | (74,193 | ) | $ | | $ | (74,193 | ) | ||||
Cash and cash equivalents at beginning of period |
268,047 | | 268,047 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents at end of period |
$ | 193,854 | $ | | $ | 193,854 | ||||||
|
|
|
|
|
|
12
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 September 30, 2014 or December 31, 2013. The investment in low income housing was $21.8 million and $3.0 million as of September 30, 2014 and December 31, 2013, respectively. The Banks unfunded commitments related to low income housing investments was $12.6 million as of September 30, 2014 and there were none as of December 31, 2013. The Bank recognized $592,000 and $1.0 million as a component of income tax expense during the three and nine months ended September 30, 2014, respectively, and tax credits and other benefits received from the tax expenses were $821,000 and $1.4 million during the three and nine months ended September 30, 2014, respectively.
Note 4 Sale of Insurance Subsidiaries and Discontinued Operations
In June 2014, Hanmi Financial sold its insurance subsidiaries, Chun-Ha and All World, and entered into a stock purchase agreement for their sale. The subsidiaries were classified as held for sale in April 2014 and accounted for as discontinued operations. The operations and cash flows of the businesses have been eliminated and in accordance with the provisions of ASC 205, Presentation of Financial Statements, the results are reported as discontinued operations for all periods presented.
Hanmi Financial completed the sale of its two insurance subsidiaries to Chunha Holding Corporation on June 30, 2014. 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 noninterest 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 noninterest expense of $2.7 million in various line items in the first six months of 2014 and $1.4 million in the first quarter of 2014.
Summarized financial information for our discontinued operations related to Chun-Ha and All World are as follows:
June 30, 2014 |
December 31, 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 | ||||||
|
|
|
|
|||||
Total assets |
$ | 5,636 | $ | 5,944 | ||||
|
|
|
|
|||||
Income tax payable |
$ | 415 | $ | 1,304 | ||||
Accrued expenses and other liabilities |
1,878 | 2,171 | ||||||
|
|
|
|
|||||
Total liabilities |
$ | 2,293 | $ | 3,475 | ||||
|
|
|
|
|||||
Net assets of discontinued operations |
$ | 3,343 | $ | 2,469 | ||||
|
|
|
|
Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||
2013 | 2014 | 2013 | ||||||||||
(In thousands) | ||||||||||||
Noninterest income (loss) |
$ | 112 | $ | (14 | ) | $ | 242 | |||||
Gain on disposal |
| 51 | | |||||||||
|
|
|
|
|
|
|||||||
Income before taxes |
$ | 112 | $ | 37 | $ | 242 | ||||||
Provision for income taxes |
42 | 481 | 81 | |||||||||
|
|
|
|
|
|
|||||||
Net income (loss) from discontinued operations |
$ | 70 | $ | (444 | ) | $ | 161 | |||||
|
|
|
|
|
|
13
Note 5 Investment Securities
The following is a summary of investment securities available for sale as of September 30, 2014 and December 31, 2013:
Amortized Cost |
Gross Unrealized Gain |
Gross Unrealized Loss |
Estimated Fair Value |
|||||||||||||
(In thousands) | ||||||||||||||||
September 30, 2014 |
||||||||||||||||
Mortgage-backed securities (1) (2) |
$ | 588,638 | $ | 230 | $ | 4,711 | $ | 584,157 | ||||||||
Collateralized mortgage obligations (1) |
197,784 | 146 | 1,719 | 196,211 | ||||||||||||
U.S. government agency securities |
176,449 | | 3,656 | 172,793 | ||||||||||||
SBA loan pool securities |
114,753 | 64 | 700 | 114,117 | ||||||||||||
Municipal bonds-tax exempt |
4,335 | 94 | | 4,429 | ||||||||||||
Municipal bonds-taxable |
16,666 | 141 | 147 | 16,660 | ||||||||||||
Corporate bonds |
17,018 | 11 | 89 | 16,940 | ||||||||||||
U.S. treasury securities |
164 | | 1 | 163 | ||||||||||||
Other securities |
22,916 | | 212 | 22,704 | ||||||||||||
Equity security |
450 | | | 450 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities available for sale |
$ | 1,139,173 | $ | 686 | $ | 11,235 | $ | 1,128,624 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2013 |
||||||||||||||||
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 securities |
19,998 | | 1 | 19,997 | ||||||||||||
SBA loan pool securities |
13,598 | | 969 | 12,629 | ||||||||||||
Other securities |
3,030 | | 144 | 2,886 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities available for sale |
$ | 549,113 | $ | 782 | $ | 18,969 | $ | 530,926 | ||||||||
|
|
|
|
|
|
|
|
(1) | Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities |
(2) | A portion of the mortgage-backed securities is comprised of home mortgage-backed securities backed by home equity conversion mortgages |
The amortized cost and estimated fair value of investment securities as of September 30, 2014, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2064, expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available for Sale | ||||||||
Amortized Cost |
Estimated Fair Value |
|||||||
(In thousands) | ||||||||
Within one year |
$ | 15,702 | $ | 15,721 | ||||
Over one year through five years |
73,633 | 73,247 | ||||||
Over five years through ten years |
139,745 | 136,900 | ||||||
Over ten years |
100,305 | 99,234 | ||||||
Mortgage-backed securities |
588,638 | 584,157 | ||||||
Collateralized mortgage obligations |
197,784 | 196,211 | ||||||
Other securities |
22,916 | 22,704 | ||||||
Equity security |
450 | 450 | ||||||
|
|
|
|
|||||
Total |
$ | 1,139,173 | $ | 1,128,624 | ||||
|
|
|
|
14
FASB ASC 320, Investments Debt and Equity Securities, requires us to periodically evaluate our investments for other-than-temporary impairment (OTTI). There was no OTTI charge during the nine months ended September 30, 2014.
Gross unrealized losses on investment securities available for sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of September 30, 2014 and December 31, 2013:
Holding Period | ||||||||||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||
Gross Unrealized Loss |
Estimated Fair Value |
Number of Securities |
Gross Unrealized Loss |
Estimated Fair Value |
Number of Securities |
Gross Unrealized Loss |
Estimated Fair Value |
Number of Securities |
||||||||||||||||||||||||||||
(In thousands, except number of securities) | ||||||||||||||||||||||||||||||||||||
September 30, 2014 |
||||||||||||||||||||||||||||||||||||
Mortgage-backed securities |
$ | 2,947 | $ | 422,318 | 73 | $ | 1,764 | $ | 60,057 | 22 | $ | 4,711 | $ | 482,375 | 95 | |||||||||||||||||||||
Collateralized mortgage obligations |
914 | 145,816 | 30 | 805 | 21,188 | 9 | 1,719 | 167,004 | 39 | |||||||||||||||||||||||||||
U.S. government agency securities |
537 | 85,948 | 22 | 3,119 | 71,843 | 26 | 3,656 | 157,791 | 48 | |||||||||||||||||||||||||||
SBA loan pool securities |
27 | 87,088 | 15 | 673 | 12,037 | 4 | 700 | 99,125 | 19 | |||||||||||||||||||||||||||
Municipal bonds-taxable |
9 | 2,238 | 2 | 138 | 5,511 | 5 | 147 | 7,749 | 7 | |||||||||||||||||||||||||||
Corporate bonds |
| | | 89 | 7,902 | 2 | 89 | 7,902 | 2 | |||||||||||||||||||||||||||
U.S. treasury securities |
1 | 163 | 1 | | | | 1 | 163 | 1 | |||||||||||||||||||||||||||
Other securities |
111 | 19,775 | 1 | 101 | 2,924 | 5 | 212 | 22,699 | 6 | |||||||||||||||||||||||||||
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|
|
|
|||||||||||||||||||
Total |
$ | 4,546 | $ | 763,346 | 144 | $ | 6,689 | $ | 181,462 | 73 | $ | 11,235 | $ | 944,808 | 217 | |||||||||||||||||||||
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|
|||||||||||||||||||
December 31, 2013 |
||||||||||||||||||||||||||||||||||||
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 September 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 September 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 more likely than not that we will not be required to sell the investments before the recovery of its amortized cost basis. In addition, the unrealized losses on municipal and corporate bonds are not considered other-than-temporarily impaired, as the bonds are rated investment grade and there are no credit quality concerns with the issuers. Interest payments have been made as scheduled, and management believes this will continue in the future and that the bonds will be repaid in full as scheduled. Therefore, in managements opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of September 30, 2014 and December 31, 2013 were not other-than-temporarily impaired, and therefore, no impairment charges as of September 30, 2014 and December 31, 2013 were warranted.
15
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 September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In thousands) | ||||||||||||||||
Gross realized gains on sales of investment securities |
$ | 67 | $ | 619 | $ | 1,853 | $ | 932 | ||||||||
Gross realized losses on sales of investment securities |
| (8 | ) | (1 | ) | (9 | ) | |||||||||
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Net realized gains on sales of investment securities |
$ | 67 | $ | 611 | $ | 1,852 | $ | 923 | ||||||||
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|||||||||
Proceeds from sales of investment securities |
$ | 9,778 | $ | 26,661 | $ | 140,855 | $ | 51,425 |
For the three months ended September 30, 2014, there was a $67,000 gain in earnings resulting from the sale of investment securities that had previously been recorded as net unrealized gains of $23,000 in comprehensive income. For the three months ended September 30, 2013, there was a $611,000 net gain in earnings resulting from the sale of investment securities that had previously been recorded as net unrealized gains of $899,000 in comprehensive income.
For the nine months ended September 30, 2014, there was a $1.9 million net gain in earnings resulting from the redemption and sale of investment securities that had previously been recorded as net unrealized losses of $498,000 in comprehensive income. For the nine months ended September 30, 2013, there was a $923,000 net gain in earnings resulting from the redemption and sale of investment securities that had previously been recorded as net unrealized gains of $2.4 million in comprehensive income.
Investment securities available for sale with par values of $79.9 million and $47.6 million as of September 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.
16
Note 6 Loans
The loan portfolio includes originated and purchased loans. Originated loans and purchased loans for which there was no evidence of credit deterioration at their acquisition date and it was probable that we would be able to collect all contractually required payments, are referred to collectively as non-purchased credit impaired loans, or Non-PCI loans. Purchased loans for which there was, at the acquisition date, evidence of credit deterioration since their origination and it was probable that we would be unable to collect all contractually required payments are referred to as purchased credit impaired loans, or PCI loans.
Non-PCI loans are carried at the principal amount outstanding, net of deferred fees and costs, and in the case of acquired loans, net of purchase discounts and premiums. Deferred fees and costs and purchase discounts and premiums on acquired non-impaired loans are recognized as an adjustment to interest income over the contractual life of the loans using the effective interest method or taken into income when the related loans are paid off or sold.
PCI loans are accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. For PCI loans, at the time of acquisition, we (i) calculate the contractual amount and timing of undiscounted principal and interest payments (the undiscounted contractual cash flows) and (ii) estimate the amount and timing of undiscounted expected principal and interest payments (the undiscounted expected cash flows). The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The difference between the undiscounted cash flows expected to be collected and the estimated fair value of the acquired loans is the accretable yield. The accretable yield is recorded as interest income over the estimated life of the loans using the effective yield method if the timing and amount of the future cash flows is reasonably estimable. PCI loans may be placed on nonaccrual status, including use of the cost recovery method or cash basis method of income recognition, if information is not available to reasonably estimate cash flows expected to be collected to compute its yield. The nonaccretable difference represents an estimate of the loss exposure of principal and interest related to PCI loans; such amount is subject to change over time based on the performance of such loans. The carrying value of PCI loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.
As part of the fair value process and the subsequent accounting, the Company aggregates PCI loans into pools having common credit risk characteristics such as type and risk rating. Increases in expected cash flows over those previously estimated increase the accretable yield and are recognized as interest income prospectively. Decreases in the amount and changes in the timing of expected cash flows compared to those previously estimated decrease the accretable yield and usually result in a provision for loan losses and the establishment of an allowance for loan losses. As the accretable yield increases or decreases from changes in cash flow expectations, the offset is a decrease or increase to the nonaccretable difference. The accretable yield is measured at each financial reporting date based on information then currently available and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans.
PCI loans that are contractually past due are still considered to be accruing and performing as long as there is an expectation that the estimated cash flows will be received. If the timing and amount of cash flows is not reasonably estimable, the loans may be classified as nonaccrual with interest income recognized on either a cash basis or as a reduction of the principal amount outstanding.
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 nonperforming loans, problem loans, and policy adjustments.
Real estate loans are loans secured by liens or interest in real estate, to provide purchase, construction, and refinance on real estate properties. Commercial and industrial loans consist of commercial term loans, commercial lines of credit, and Small Business Administration (SBA) loans. Consumer loans consist of auto loans, 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, underwriting standards, and portfolio liquidity and management, and certain specified limits set forth in the Banks loan policy. To date, most of the Banks lending activity occurred within Southern California. With the acquisition of CBI, our lending activities in other areas of the country will increase.
17
Loans Receivable
Loans receivable consisted of the following as of the dates indicated:
September 30, 2014 | December 31, | |||||||||||||||
Non-PCI Loans | PCI Loans | Total | 2013 | |||||||||||||
(In thousands) | ||||||||||||||||
Real estate loans: |
||||||||||||||||
Commercial property (1) |
||||||||||||||||
Retail |
$ | 635,861 | $ | 15,940 | $ | 651,801 | $ | 543,619 | ||||||||
Hotel/Motel |
452,405 | 14,206 | 466,611 | 322,927 | ||||||||||||
Gas station |
340,386 | 18,069 | 358,455 | 292,557 | ||||||||||||
Other |
805,696 | 15,715 | 821,411 | 731,617 | ||||||||||||
Construction |
4,146 | | 4,146 | | ||||||||||||
Residential property |
106,044 | 2,686 | 108,730 | 79,078 | ||||||||||||
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|||||||||
Total real estate loans |
2,344,538 | 66,616 | 2,411,154 | 1,969,798 | ||||||||||||
Commercial and industrial loans: |
||||||||||||||||
Commercial term |
119,175 | 350 | 119,525 | 124,391 | ||||||||||||
Commercial lines of credit |
75,246 | | 75,246 | 71,042 | ||||||||||||
International loans |
41,127 | | 41,127 | 36,353 | ||||||||||||
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|||||||||
Total commercial and industrial loans |
235,548 | 350 | 235,898 | 231,786 | ||||||||||||
Consumer loans |
28,849 | 58 | 28,907 | 32,505 | ||||||||||||
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|||||||||
Total gross loans |
2,608,935 | 67,024 | 2,675,959 | 2,234,089 | ||||||||||||
Allowance for loans losses |
(51,179 | ) | | (51,179 | ) | (57,555 | ) | |||||||||
Deferred loan costs |
3,311 | | 3,311 | 964 | ||||||||||||
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|||||||||
Loans receivable, net |
$ | 2,561,067 | $ | 67,024 | $ | 2,628,091 | $ | 2,177,498 | ||||||||
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(1) | Includes owner-occupied property loans of $1.10 billion and $957.3 million as of September 30, 2014 and December 31, 2013, respectively. |
Accrued interest on loans receivable was $5.8 million and $5.4 million at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014 and December 31, 2013, loans receivable totaling $872.2 million and $568.7 million, respectively, were pledged to secure advances from the FHLB and the Federal Reserve Banks (FRB) federal discount window.
The following table details the information on the sales and reclassifications of loans receivable to loans held for sale (excluding PCI loans) by portfolio segment for the three months ended September 30, 2014 and 2013:
Real Estate | Commercial and Industrial |
Consumer | Total Non-PCI |
|||||||||||||
(In thousands) | ||||||||||||||||
September 30, 2014 |
||||||||||||||||
Balance at beginning of period |
$ | 2,568 | $ | 1,274 | $ | | $ | 3,842 | ||||||||
Origination of loans held for sale |
15,198 | 3,031 | | 18,229 | ||||||||||||
Sales of loans held for sale |
(12,135 | ) | (2,133 | ) | | (14,268 | ) | |||||||||
Principal payoffs and amortization |
(20 | ) | (26 | ) | | (46 | ) | |||||||||
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Balance at end of period |
$ | 5,611 | $ | 2,146 | $ | | $ | 7,757 | ||||||||
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|
|||||||||
September 30, 2013 |
||||||||||||||||
Balance at beginning of period |
$ | 2,137 | $ | 416 | $ | | $ | 2,553 | ||||||||
Origination of loans held for sale |
15,634 | 1,501 | | 17,135 | ||||||||||||
Reclassification from loans held for sale to loans receivable |
(2,118 | ) | (416 | ) | | (2,534 | ) | |||||||||
Sales of loans held for sale |
(10,725 | ) | (1,181 | ) | | (11,906 | ) | |||||||||
Principal payoffs and amortization |
(20 | ) | | | (20 | ) | ||||||||||
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Balance at end of period |
$ | 4,908 | $ | 320 | $ | | $ | 5,228 | ||||||||
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18
For the three months ended September 30, 2014, there was no reclassification of Non-PCI loans receivable as Non-PCI loans held for sale, and Non-PCI loans held for sale of $14.3 million were sold. In addition, there was no reclassification from Non-PCI loans held for sale to Non-PCI loans receivable. For the three months ended September 30, 2013, there was no reclassification of Non-PCI loans receivable as Non-PCI loans held for sale, and Non-PCI loans held for sale of $11.9 million were sold.
The following table details the information on the sales and reclassifications of loans receivable to loans held for sale (excluding PCI loans) by portfolio segment for the nine months ended September 30, 2014 and 2013:
Real Estate | Commercial and Industrial |
Consumer | Total Non-PCI |
|||||||||||||
(In thousands) | ||||||||||||||||
September 30, 2014 |
||||||||||||||||
Balance at beginning of period |
$ | | $ | | $ | | $ | | ||||||||
Origination of loans held for sale |
29,591 | 5,207 | | 34,798 | ||||||||||||
Sales of loans held for sale |
(23,953 | ) | (3,033 | ) | | (26,986 | ) | |||||||||
Principal payoffs and amortization |
(27 | ) | (28 | ) | | (55 | ) | |||||||||
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Balance at end of period |
$ | 5,611 | $ | 2,146 | $ | | $ | 7,757 | ||||||||
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|||||||||
September 30, 2013 |
||||||||||||||||
Balance at beginning of period |
$ | 7,977 | $ | 329 | $ | | $ | 8,306 | ||||||||
Origination of loans held for sale |
58,725 | 4,387 | | 63,112 | ||||||||||||
Reclassification from loans receivable to loans held for sale |
7,593 | 416 | | 8,009 | ||||||||||||
Reclassification from loans held for sale to loans receivable |
(2,118 | ) | (416 | ) | | (2,534 | ) | |||||||||
Sales of loans held for sale |
(67,235 | ) | (4,391 | ) | | (71,626 | ) | |||||||||
Principal payoffs and amortization |
(34 | ) | (5 | ) | | (39 | ) | |||||||||
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Balance at end of period |
$ | 4,908 | $ | 320 | $ | | $ | 5,228 | ||||||||
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For the nine months ended September 30, 2014, there was no reclassification of Non-PCI loans receivable as Non-PCI loans held for sale, and Non-PCI loans held for sale of $27.0 million were sold. In addition, there was no reclassification from Non-PCI loans held for sale to Non-PCI loans receivable. For the nine months ended September 30, 2013, Non-PCI loans receivable of $8.0 million were reclassified as Non-PCI loans held for sale, and Non-PCI loans held for sale of $71.6 million were sold.
Allowance for Loan Losses and Allowance for Off-Balance Sheet Items
Activity in the allowance for loan losses and allowance for off-balance sheet items was as follows for the periods indicated:
As of and for the Three Months Ended |
As of and for the Nine Months Ended |
|||||||||||||||
September 30, 2014 |
September 30, 2013 |
September 30, 2014 |
September 30, 2013 |
|||||||||||||
(In thousands) | ||||||||||||||||
Allowance for loan losses: |
||||||||||||||||
Balance at beginning of period |
$ | 51,886 | $ | 59,876 | $ | 57,555 | $ | 63,305 | ||||||||
Charge-offs |
(1,418 | ) | (4,610 | ) | (5,569 | ) | (11,124 | ) | ||||||||
Recoveries on loans previously charged off |
663 | 2,383 | 6,656 | 4,964 | ||||||||||||
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|
|||||||||
Net loan (charge-offs) recoveries |
(755 | ) | (2,227 | ) | 1,087 | (6,160 | ) | |||||||||
Provision (negative provision) charged to operating expense |
48 | (10 | ) | (7,463 | ) | 494 | ||||||||||
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|
|||||||||
Balance at end of period |
$ | 51,179 | $ | 57,639 | $ | 51,179 | $ | 57,639 | ||||||||
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|
|
|
|
|
|||||||||
Allowance for off-balance sheet items: |
||||||||||||||||
Balance at beginning of period |
$ | 1,592 | $ | 1,320 | $ | 1,247 | $ | 1,824 | ||||||||
(Negative provision) provision charged to operating expense |
(48 | ) | 10 | 297 | (494 | ) | ||||||||||
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|
|||||||||
Balance at end of period |
$ | 1,544 | $ | 1,330 | $ | 1,544 | $ | 1,330 | ||||||||
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19
There was no allowance for loan losses on our PCI loans as of September 30, 2014. 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 September 30, 2014 and 2013, the allowance for off-balance sheet items amounted to $1.5 million and $1.3 million, respectively. Net adjustments to the allowance for off-balance sheet items are included in the provision for credit losses.
The following table details the information on the allowance for loan losses by portfolio segment for the three months ended September 30, 2014 and 2013:
Real Estate | Commercial and Industrial |
Consumer | Unallocated | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
September 30, 2014 |
||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 40,303 | $ | 9,738 | $ | 540 | $ | 1,305 | $ | 51,886 | ||||||||||
Charge-offs |
(884 | ) | (499 | ) | (35 | ) | | (1,418 | ) | |||||||||||
Recoveries on loans previously charged off |
293 | 365 | 5 | | 663 | |||||||||||||||
(Negative provision) provision |
179 | 260 | (186 | ) | (205 | ) | 48 | |||||||||||||
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|
|
|
|||||||||||
Ending balance |
$ | 39,891 | $ | 9,864 | $ | 324 | $ | 1,100 | $ | 51,179 | ||||||||||
|
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|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 2,027 | $ | 3,757 | $ | | $ | | $ | 5,784 | ||||||||||
|
|
|
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|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 37,864 | $ | 6,107 | $ | 324 | $ | 1,100 | $ | 45,395 | ||||||||||
|
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|
|||||||||||
Loans receivable: |
||||||||||||||||||||
Ending balance |
$ | 2,411,154 | $ | 235,898 | $ | 28,907 | $ | | $ | 2,675,959 | ||||||||||
|
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|
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|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 35,654 | $ | 11,970 | $ | 1,758 | $ | | $ | 49,382 | ||||||||||
|
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|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 2,308,884 | $ | 223,578 | $ | 27,091 | $ | | $ | 2,559,553 | ||||||||||
|
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|
|
|
|
|
|||||||||||
Ending balance: acquired with deteriorated credit quality |
$ | 66,616 | $ | 350 | $ | 58 | $ | | $ | 67,024 | ||||||||||
|
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|
|
|
|
|
|
|
Real Estate | Commercial and Industrial |
Consumer | Unallocated | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
September 30, 2013 |
||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 46,396 | $ | 11,118 | $ | 1,884 | $ | 478 | $ | 59,876 | ||||||||||
Charge-offs |
(1,017 | ) | (3,575 | ) | (18 | ) | | (4,610 | ) | |||||||||||
Recoveries on loans previously charged off |
1,641 | 737 | 5 | | 2,383 | |||||||||||||||
Provision (negative provision) |
(1,795 | ) | 388 | (232 | ) | 1,629 | (10 | ) | ||||||||||||
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|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 45,225 | $ | 8,668 | $ | 1,639 | $ | 2,107 | $ | 57,639 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 564 | $ | 1,475 | $ | 330 | $ | | $ | 2,369 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 44,661 | $ | 7,193 | $ | 1,309 | $ | 2,107 | $ | 55,270 | ||||||||||
|
|
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|
|
|
|
|
|
|
|||||||||||
Loans receivable: |
||||||||||||||||||||
Ending balance |
$ | 1,921,659 | $ | 203,547 | $ | 34,065 | $ | | $ | 2,159,271 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 29,424 | $ | 12,468 | $ | 1,574 | $ | | $ | 43,466 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 1,892,235 | $ | 191,079 | $ | 32,491 | $ | | $ | 2,115,805 | ||||||||||
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20
The following table details the information on the allowance for loan losses by portfolio segment for the nine months ended September 30, 2014 and 2013:
Real Estate | Commercial and Industrial |
Consumer | Unallocated | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
September 30, 2014 |
||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 43,550 | $ | 11,287 | $ | 1,427 | $ | 1,291 | $ | 57,555 | ||||||||||
Charge-offs |
(2,073 | ) | (3,394 | ) | (102 | ) | | (5,569 | ) | |||||||||||
Recoveries on loans previously charged off |
3,298 | 3,338 | 20 | | 6,656 | |||||||||||||||
(Negative provision) provision |
(4,884 | ) | (1,367 | ) | (1,021 | ) | (191 | ) | (7,463 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 39,891 | $ | 9,864 | $ | 324 | $ | 1,100 | $ | 51,179 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 2,027 | $ | 3,757 | $ | | $ | | $ | 5,784 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 37,864 | $ | 6,107 | $ | 324 | $ | 1,100 | $ | 45,395 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans receivable: |
||||||||||||||||||||
Ending balance |
$ | 2,411,154 | $ | 235,898 | $ | 28,907 | $ | | $ | 2,675,959 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 35,654 | $ | 11,970 | $ | 1,758 | $ | | $ | 49,382 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 2,308,884 | $ | 223,578 | $ | 27,091 | $ | | $ | 2,559,553 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: acquired with deteriorated credit quality |
$ | 66,616 | $ | 350 | $ | 58 | $ | | $ | 67,024 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Real Estate | Commercial and Industrial |
Consumer | Unallocated | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
September 30, 2013 |
||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 49,472 | $ | 10,636 | $ | 2,280 | $ | 917 | $ | 63,305 | ||||||||||
Charge-offs |
(4,592 | ) | (6,314 | ) | (218 | ) | | (11,124 | ) | |||||||||||
Recoveries on loans previously charged off |
2,923 | 1,981 | 60 | | 4,964 | |||||||||||||||
Provision (negative provision) |
(2,578 | ) | 2,365 | (483 | ) | 1,190 | 494 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 45,225 | $ | 8,668 | $ | 1,639 | $ | 2,107 | $ | 57,639 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 564 | $ | 1,475 | $ | 330 | $ | | $ | 2,369 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 44,661 | $ | 7,193 | $ | 1,309 | $ | 2,107 | $ | 55,270 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans receivable: |
||||||||||||||||||||
Ending balance |
$ | 1,921,659 | $ | 203,547 | $ | 34,065 | $ | | $ | 2,159,271 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 29,424 | $ | 12,468 | $ | 1,574 | $ | | $ | 43,466 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 1,892,235 | $ | 191,079 | $ | 32,491 | $ | | $ | 2,115,805 | ||||||||||
|
|
|
|
|
|
|
|
|
|
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.
21
Doubtful: A Doubtful credit, grade (7), is one that has critical weaknesses that would make the collection or liquidation of the full amount due improbable. However, there may be pending events which may work to strengthen the credit, and therefore the amount or timing of a possible loss cannot be determined at the current time.
Loss: A loan classified as Loss, grade (8), is considered uncollectible and of such little value that their continuance as active bank assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans classified as Loss will be charged off in a timely manner.
As of September 30, 2014 and December 31, 2013, pass/pass-watch (grade 0-4), criticized (grade 5) and classified (grade 6-7) loans (excluding PCI loans), disaggregated by loan class, were as follows:
As of September 30, 2014 | ||||||||||||||||
Pass/Pass-Watch (Grade 0-4) |
Criticized (Grade 5) |
Classified (Grade 6-7) |
Total | |||||||||||||
(In thousands) | ||||||||||||||||
Real estate loans: |
||||||||||||||||
Commercial property |
||||||||||||||||
Retail |
$ | 620,511 | $ | 12,821 | $ | 2,529 | $ | 635,861 | ||||||||
Hotel/Motel |
399,006 | 48,995 | 4,404 | 452,405 | ||||||||||||
Gas station |
320,501 | 10,054 | 9,831 | 340,386 | ||||||||||||
Other |
780,400 | 13,599 | 11,697 | 805,696 | ||||||||||||
Construction |
4,146 | | | 4,146 | ||||||||||||
Residential property |
103,812 | 122 | 2,110 | 106,044 | ||||||||||||
Commercial and industrial loans: |
||||||||||||||||
Commercial term |
108,908 | 1,315 | 8,952 | 119,175 | ||||||||||||
Commercial lines of credit |
74,286 | | 960 | 75,246 | ||||||||||||
International loans |
38,676 | | 2,451 | 41,127 | ||||||||||||
Consumer loans |
26,626 | 140 | 2,083 | 28,849 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Non-PCI loans |
$ | 2,476,872 | $ | 87,046 | $ | 45,017 | $ | 2,608,935 | ||||||||
|
|
|
|
|
|
|
|
As of December 31, 2013 | ||||||||||||||||
Pass/Pass-Watch (Grade 0-4) |
Criticized (Grade 5) |
Classified (Grade 6-7) |
Total | |||||||||||||
(In thousands) | ||||||||||||||||
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 Non-PCI loans |
$ | 2,130,392 | $ | 21,479 | $ | 82,218 | $ | 2,234,089 | ||||||||
|
|
|
|
|
|
|
|
22
The following is an aging analysis of past due loans (excluding PCI loans), disaggregated by loan class, as of the dates indicated:
As of September 30, 2014 | ||||||||||||||||||||||||||||
30-59 Days Past Due |
60-89 Days Past Due |
90 Days or More Past Due |
Total Past Due | Current | Total | Accruing 90 Days or More Past Due |
||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||||||
Commercial property |
||||||||||||||||||||||||||||
Retail |
$ | 1,927 | $ | 146 | $ | 182 | $ | 2,255 | $ | 633,606 | $ | 635,861 | $ | | ||||||||||||||
Hotel/Motel |
52 | 733 | 1,203 | 1,988 | 450,417 | 452,405 | | |||||||||||||||||||||
Gas station |
4,781 | 794 | 544 | 6,119 | 334,267 | 340,386 | | |||||||||||||||||||||
Other |
1,867 | 67 | 380 | 2,314 | 803,382 | 805,696 | 15 | |||||||||||||||||||||
Construction |
| | | | 4,146 | 4,146 | | |||||||||||||||||||||
Residential property |
113 | 121 | 486 | 720 | 105,324 | 106,044 | | |||||||||||||||||||||
Commercial and industrial loans: |
||||||||||||||||||||||||||||
Commercial term |
1,410 | 587 | 2,873 | 4,870 | 114,305 | 119,175 | | |||||||||||||||||||||
Commercial lines of credit |
274 | 197 | | 471 | 74,775 | 75,246 | | |||||||||||||||||||||
International loans |
251 | | | 251 | 40,876 | 41,127 | | |||||||||||||||||||||
Consumer loans |
| | 248 | 248 | 28,601 | 28,849 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total Non-PCI loans |
$ | 10,675 | $ | 2,645 | $ | 5,916 | $ | 19,236 | $ | 2,589,699 | $ | 2,608,935 | $ | 15 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013 | ||||||||||||||||||||||||||||
30-59 Days Past Due |
60-89 Days Past Due |
90 Days or More Past Due |
Total Past Due | Current | Total | Accruing 90 Days or More Past Due |
||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||||||
Commercial property |
||||||||||||||||||||||||||||
Retail |
$ | 202 | $ | 426 | $ | 2,196 | $ | 2,824 | $ | 540,794 | $ | 543,618 | $ | | ||||||||||||||
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 | 3,298 | 728,320 | 731,618 | | |||||||||||||||||||||
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 Non-PCI loans |
$ | 3,607 | $ | 4,072 | $ | 8,595 | $ | 16,274 | $ | 2,217,815 | $ | 2,234,089 | $ | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
Loans are considered impaired when nonaccrual 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 nonperforming. We continue to monitor the collateral coverage, using recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.
23
The following tables provide information on impaired loans (excluding PCI loans), disaggregated by loan class, as of the dates indicated:
Recorded Investment |
Unpaid Principal Balance |
With No Related Allowance Recorded |
With an Allowance Recorded |
Related Allowance |
||||||||||||||||
(In thousands) | ||||||||||||||||||||
September 30, 2014 |
||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||
Commercial property |
||||||||||||||||||||
Retail |
$ | 4,443 | $ | 4,543 | $ | 1,940 | $ | 2,503 | $ | 256 | ||||||||||
Hotel/Motel |
4,042 | 4,855 | 4,042 | | 1,261 | |||||||||||||||
Gas station |
14,152 | 14,681 | 13,692 | 460 | 166 | |||||||||||||||
Other |
9,856 | 11,266 | 8,518 | 1,338 | 344 | |||||||||||||||
Residential property |
3,161 | 3,292 | 3,161 | | | |||||||||||||||
Commercial and industrial loans: |
||||||||||||||||||||
Commercial term |
7,958 | 8,408 | 1,914 | 6,044 | 3,469 | |||||||||||||||
Commercial lines of credit |
2,874 | 2,976 | 2,692 | 182 | 183 | |||||||||||||||
International loans |
1,138 | 1,138 | 460 | 678 | 105 | |||||||||||||||
Consumer loans |
1,758 | 1,910 | 1,758 | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Non-PCI loans |
$ | 49,382 | $ | 53,069 | $ | 38,177 | $ | 11,205 | $ | 5,784 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
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 Non-PCI loans |
$ | 53,066 | $ | 56,563 | $ | 33,292 | $ | 19,774 | $ | 6,468 | ||||||||||
|
|
|
|
|
|
|
|
|
|
24
Average Recorded Investment for the Three Months Ended |
Interest Income Recognized for the Three Months Ended |
Average Recorded Investment for the Nine Months Ended |
Interest Income Recognized for the Nine Months Ended |
|||||||||||||
(In thousands) | ||||||||||||||||
September 30, 2014 |
||||||||||||||||
Real estate loans: |
||||||||||||||||
Commercial property |
||||||||||||||||
Retail |
$ | 4,456 | $ | 36 | $ | 5,682 | $ | 215 | ||||||||
Hotel/Motel |
4,206 | 102 | 4,149 | 232 | ||||||||||||
Gas station |
14,181 | 218 | 12,023 | 587 | ||||||||||||
Other |
9,898 | 232 | 10,716 | 682 | ||||||||||||
Residential property |
3,173 | 30 | 2,853 | 87 | ||||||||||||
Commercial and industrial loans: |
||||||||||||||||
Commercial term |
8,118 | 126 | 10,007 | 443 | ||||||||||||
Commercial lines of credit |
2,884 | 36 | 1,447 | 61 | ||||||||||||
International loans |
1,146 | | 1,136 | | ||||||||||||
Consumer loans |
1,765 | 16 | 1,619 | 46 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Non-PCI loans |
$ | 49,827 | $ | 796 | $ | 49,632 | $ | 2,353 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
September 30, 2013 |
||||||||||||||||
Real estate loans: |
||||||||||||||||
Commercial property |
||||||||||||||||
Retail |
$ | 2,723 | $ | 27 | $ | 3,703 | $ | 105 | ||||||||
Hotel/Motel |
6,377 | 127 | 4,752 | 384 | ||||||||||||
Gas station |
8,777 | 229 | 8,775 | 569 | ||||||||||||
Other |
8,699 | 243 | 9,512 | 779 | ||||||||||||
Residential property |
2,992 | 33 | 3,026 | 92 | ||||||||||||
Commercial and industrial loans: |
||||||||||||||||
Commercial term |
10,581 | 191 | 12,751 | 692 | ||||||||||||
Commercial lines of credit |
840 | 23 | 1,137 | 47 | ||||||||||||
International loans |
1,197 | | 1,342 | | ||||||||||||
Consumer loans |
1,581 | 27 | 1,624 | 54 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Non-PCI loans |
$ | 43,767 | $ | 900 | $ | 46,622 | $ | 2,722 | ||||||||
|
|
|
|
|
|
|
|
The following is a summary of interest foregone on impaired loans (excluding PCI loans) for the periods indicated:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2014 |
September 30, 2013 |
September 30, 2014 |
September 30, 2013 |
|||||||||||||
(In thousands) | ||||||||||||||||
Interest income that would have been recognized had impaired loans performed in accordance with their original terms |
$ | 1,063 | $ | 1,058 | $ | 3,490 | $ | 3,183 | ||||||||
Less: Interest income recognized on impaired loans |
(796 | ) | (900 | ) | (2,353 | ) | (2,722 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest foregone on impaired loans |
$ | 267 | $ | 158 | $ | 1,137 | $ | 461 | ||||||||
|
|
|
|
|
|
|
|
There were no commitments to lend additional funds to borrowers whose loans are included above.
Nonaccrual Loans
Loans are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on nonaccrual status earlier, depending upon the individual circumstances surrounding the loans delinquency. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income.
25
Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Nonaccrual loans may be restored to accrual status when principal and interest payments become current and full repayment is expected.
The following table details nonaccrual loans (excluding PCI loans), disaggregated by loan class, as of the dates indicated:
September 30, 2014 |
December 31, 2013 |
|||||||
(In thousands) | ||||||||
Real estate loans: |
||||||||
Commercial property |
||||||||
Retail |
$ | 2,062 | $ | 2,946 | ||||
Hotel/Motel |
3,051 | 5,200 | ||||||
Gas station |
5,208 | 2,492 | ||||||
Other |
3,674 | 4,808 | ||||||
Residential property |
1,516 | 1,365 | ||||||
Commercial and industrial loans: |
||||||||
Commercial term |
6,060 | 7,146 | ||||||
Commercial lines of credit |
674 | 423 | ||||||
Consumer loans |
1,758 | 1,497 | ||||||
|
|
|
|
|||||
Total nonaccrual Non-PCI loans |
$ | 24,003 | $ | 25,877 | ||||
|
|
|
|
The following table details nonperforming assets (excluding PCI loans) as of the dates indicated:
September 30, 2014 |
December 31, 2013 |
|||||||
(In thousands) | ||||||||
Nonaccrual Non-PCI loans |
$ | 24,003 | $ | 25,877 | ||||
Loans 90 days or more past due and still accruing |
15 | | ||||||
|
|
|
|
|||||
Total nonperforming Non-PCI loans |
24,018 | 25,877 | ||||||
Other real estate owned |
24,781 | 756 | ||||||
|
|
|
|
|||||
Total nonperforming assets |
$ | 48,799 | $ | 26,633 | ||||
|
|
|
|
Loans on nonaccrual status, excluding loans held for sale, totaled $24.0 million as of September 30, 2014, compared to $25.9 million as of December 31, 2013, representing a 7.2 percent decrease. Delinquent loans (defined as 30 days or more past due), excluding loans held for sale, were $19.2 million as of September 30, 2014, compared to $16.3 million as of December 31, 2013, representing a 18.2 percent increase.
As of September 30, 2014, other real estate owned (OREO) consisted of forty properties, of which $20.2 million and $4.6 million were commercial and residential properties, respectively, with a combined carrying value of $24.8 million and no valuation adjustment. Of $24.8 million, $22.3 million was OREOs assumed in the CBI acquisition. As of December 31, 2013, there were three OREOs 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.
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.
26
The following table details troubled debt restructurings (excluding PCI loans), disaggregated by concession type and by loan type, as of September 30, 2014 and December 31, 2013:
Nonaccrual TDRs | Accrual TDRs | |||||||||||||||||||||||||||||||||||||||
Deferral of Principal |
Deferral of Principal and Interest |
Reduction of Principal and Interest |
Extension of Maturity |
Total | Deferral of Principal |
Deferral of Principal and Interest |
Reduction of Principal and Interest |
Extension of Maturity |
Total | |||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||
September 30, 2014 |
||||||||||||||||||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||||||||||||||||||
Commercial property |
||||||||||||||||||||||||||||||||||||||||
Retail |
$ | | $ | | $ | | $ | 1,856 | $ | 1,856 | $ | 307 | $ | | $ | | $ | | $ | 307 | ||||||||||||||||||||
Hotel/Motel |
1,158 | 727 | | | 1,885 | 991 | | | | 991 | ||||||||||||||||||||||||||||||
Gas station |
1,106 | | | | 1,106 | 2,351 | | | | 2,351 | ||||||||||||||||||||||||||||||
Other |
| 1,532 | 465 | 59 | 2,056 | 3,310 | | 792 | 1,378 | 5,480 | ||||||||||||||||||||||||||||||
Residential property |
755 | | | | 755 | | | | 311 | 311 | ||||||||||||||||||||||||||||||
Commercial and industrial loans: |
||||||||||||||||||||||||||||||||||||||||
Commercial term |
118 | 2 | 1,007 | 1,567 | 2,694 | 61 | 227 | 2,118 | 1,176 | 3,582 | ||||||||||||||||||||||||||||||
Commercial lines of credit |
230 | | 316 | 128 | 674 | 2,200 | | | | 2,200 | ||||||||||||||||||||||||||||||
Consumer loans |
| | 135 | | 135 | | | | | | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total Non-PCI loans |
$ | 3,367 | $ | 2,261 | $ | 1,923 | $ | 3,610 | $ | 11,161 | $ | 9,220 | $ | 227 | $ | 2,910 | $ | 2,865 | $ | 15,222 | ||||||||||||||||||||
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|
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|
|
|
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|
|
|
|
|
|
|||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total Non-PCI loans |
$ | 3,786 | $ | 2,243 | $ | 2,733 | $ | 1,774 | $ | 10,536 | $ | 5,524 | $ | | $ | 4,966 | $ | 8,927 | $ | 19,417 | ||||||||||||||||||||
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|
|
|
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|
|
As of September 30, 2014 and December 31, 2013, total TDRs, excluding loans held for sale, were $26.4 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 September 30, 2014 and December 31, 2013, TDRs, excluding loans held for sale, were subjected to specific impairment analysis, and $3.7 million and $2.8 million, respectively, of reserves relating to these loans were included in the allowance for loan losses.
The following table details troubled debt restructurings (excluding PCI loans), disaggregated by loan class, for the three months ended September 30, 2014 and 2013:
September 30, 2014 | September 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 |
||||||||||||||||||||||||
Hotel/Motel (1) |
| $ | | $ | | 1 | $ | 1,000 | $ | 1,000 | ||||||||||||||
Gas station (2) |
1 | 2,014 | 1,991 | 1 | 107 | 91 | ||||||||||||||||||
Other (3) |
1 | 395 | 385 | 2 | 1,011 | 1,014 | ||||||||||||||||||
Commercial and industrial loans: |
||||||||||||||||||||||||
Commercial term (4) |
| | | 8 | 1,015 | 1,002 | ||||||||||||||||||
Commercial lines of credit (5) |
1 | 2,092 | 2,200 | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Non-PCI loans |
3 | $ | 4,501 | $ | 4,576 | 12 | $ | 3,133 | $ | 3,107 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes a modification of $1.0 million through a payment deferral for the three months ended September 30, 2013. |
(2) | Includes a modification of $2.0 million through a payment deferral for the three months ended September 30, 2014, and a modification of $91,000 through a payment deferral for the three months ended September 30, 2013. |
27
(3) | Includes a modification of $385,000 through a payment deferral for the three months ended September 30, 2014, and modifications of $365,000 through a payment deferral and reduction of principal or accrued interest and $649,000 through an extension of maturity for the three months ended September 30, 2013. |
(4) | Includes modifications of $381,000 through payment deferrals and $621,000 through extensions of maturity for the three months ended September 30, 2013. |
(5) | Includes a modification of $2.2 million through a payment deferral for the three months ended September 30, 2014. |
During the three months ended September 30, 2014, we restructured monthly payments on three loans, with a net carrying value of $4.6 million as of September 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 (excluding PCI loans), disaggregated by loan class, for the nine months ended September 30, 2014 and 2013:
September 30, 2014 | September 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 | $ | 1,856 | | $ | | $ | | ||||||||||||||
Hotel/Motel (2) |
| | | 1 | 1,000 | 1,000 | ||||||||||||||||||
Gas station (3) |
1 | 2,040 | 1,991 | 1 | 113 | 91 | ||||||||||||||||||
Other (4) |
3 | 1,422 | 1,386 | 3 | 1,176 | 1,144 | ||||||||||||||||||
Residential property (5) |
1 | 317 | 311 | | | | ||||||||||||||||||
Commercial and industrial loans: |
||||||||||||||||||||||||
Commercial term (6) |
5 | 327 | 263 | 15 | 1,787 | 1,625 | ||||||||||||||||||
Commercial lines of credit (7) |
3 | 2,366 | 2,563 | | | | ||||||||||||||||||
International loans (8) |
| | | 2 | 1,584 | 1,180 | ||||||||||||||||||
Consumer loans (9) |
| | | 1 | 149 | 149 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Non-PCI loans |
14 | $ | 8,474 | $ | 8,370 | 23 | $ | 5,809 | $ | 5,189 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes a modification of $1.9 million through an extension of maturity for the nine months ended September 30, 2014. |
(2) | Includes a modification of $1.0 million through an extension of maturity for the nine months ended September 30, 2013. |
(3) | Includes a modification of $2.0 million through a payment deferral for the nine months ended September 30, 2014, and a modification of $91,000 a payment deferral for the nine months ended September 30, 2013. |
(4) | Includes modifications of $1.3 million through payment deferrals and $59,000 through an extension of maturity for the nine months ended September 30, 2014, and modifications of $356,000 through a payment deferral, $130,000 through a reduction of principal or accrued interests and $649,000 through an extension of maturity for the nine months ended September 30, 2013. |
(5) | Includes a modification of $311,000 through an extension of maturity for the nine months ended September 30, 2014. |
(6) | Includes modifications of $39,000 through a payment deferral, $51,000 through reductions of principal or accrued interest and $173,000 through an extension of maturity for the nine months ended September 30, 2014, and modifications of $388,000 through payment deferrals and $1.2 million through extensions of maturity for the nine months ended September 30, 2013. |
(7) | Includes modifications of $2.4 million through payment deferrals and $134,000 through a reduction of principal or accrued interest for the nine months ended September 30, 2014. |
(8) | Includes modifications of $1.2 million through reductions of principal or accrued interest for the nine months ended September 30, 2013. |
(9) | Includes a modification of $149,000 through a reduction of principal or accrued interest for the nine months ended September 30, 2013. |
During the nine months ended September 30, 2014, we restructured monthly payments on 14 loans, with a net carrying value of $8.4 million as of September 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.
28
The following table details troubled debt restructurings, excluding PCI loans, that defaulted subsequent to the modifications occurring within the previous twelve months, disaggregated by loan class, for the three and nine months ended September 30, 2014 and 2013, respectively:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, 2014 | September 30, 2013 | September 30, 2014 | September 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 | $ | 1,856 | | $ | | 1 | $ | 1,856 | | $ | | ||||||||||||||||||||
Other |
| | 1 | 130 | | | 1 | 130 | ||||||||||||||||||||||||
Commercial and industrial loans: |
||||||||||||||||||||||||||||||||
Commercial term |
2 | 47 | | | 2 | 47 | 1 | 29 | ||||||||||||||||||||||||
Commercial lines of credit |
2 | 412 | | | 3 | 546 | | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Non-PCI loans |
5 | $ | 2,315 | 1 | $ | 130 | 6 | $ | 2,449 | 2 | $ | 159 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Credit Impaired Loans
As part of the CBI acquisition during the third quarter ended September 30, 2014, the Company purchased loans for which there was, at acquisition, evidence of deterioration of credit quality subsequent to origination and it was probable, at acquisition, that all contractually required payments would not be collected. The following table presents the outstanding balance and carrying amount of those PCI loans as of the dates indicated:
Carrying Amount |
Accretable Yield |
|||||||
(In thousands) | ||||||||
Balance at January 1, 2014 |
$ | | $ | | ||||
Additions from CBI acquisition at August 31, 2014 |
75,878 | (22,858 | ) | |||||
Accretion |
491 | 491 | ||||||
Payment received |
(5,892 | ) | | |||||
Disposals/transfers to OREO |
(3,453 | ) | 212 | |||||
|
|
|
|
|||||
Balance at September 30, 2014 |
$ | 67,024 | $ | (22,155 | ) | |||
|
|
|
|
29
As of September 30, 2014, pass/pass-watch (grade 0-4), criticized (grade 5) and classified (grade 6-7) PCI loans, disaggregated by loan class, were as follows:
As of September 30, 2014 | ||||||||||||||||
Pass/Pass-Watch (Grade 0-4) |
Criticized (Grade 5) |
Classified (Grade 6-7) |
Total | |||||||||||||
Real estate loans: |
||||||||||||||||
Commercial property |
||||||||||||||||
Retail |
$ | 2,939 | $ | 215 | $ | 12,786 | $ | 15,940 | ||||||||
Hotel/Motel |
248 | | 13,958 | 14,206 | ||||||||||||
Gas station |
10,200 | 1,205 | 6,664 | 18,069 | ||||||||||||
Other |
2,154 | | 13,561 | 15,715 | ||||||||||||
Residential property |
| | 2,686 | 2,686 | ||||||||||||
Commercial and industrial loans: |
||||||||||||||||
Commercial term |
| | 350 | 350 | ||||||||||||
Consumer loans |
| | 58 | 58 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total PCI loans |
$ | 15,541 | $ | 1,420 | $ | 50,063 | $ | 67,024 | ||||||||
|
|
|
|
|
|
|
|
Servicing Assets
The changes in servicing assets for the nine months ended September 30, 2014 and 2013 were as follows:
Nine Months Ended September 30, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Balance at beginning of period |
$ | 6,833 | $ | 5,542 | ||||
Additions from CBI acquisition |
1,458 | | ||||||
Addition related to sale of SBA loans |
871 | 1,996 | ||||||
Amortization |
(1,318 | ) | (1,152 | ) | ||||
|
|
|
|
|||||
Balance at end of period |
$ | 7,844 | $ | 6,386 | ||||
|
|
|
|
At September 30, 2014 and 2013, we serviced loans sold to unaffiliated parties in the amounts of $341.6 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.
FDIC Loss Sharing Asset
The FDIC loss sharing asset related to the assumption of Single Family and Commercial Shared-Loss Agreement (SLAs) between CBI and the FDIC arising from the CBIs acquisition of Mutual Bank. The loss sharing asset was measured at its fair value as of August 31, 2014 in conjunction with the CBI acquisition. There is a three-year recovery period which begins at the expiration of the Commercial SLA. During this period, 80% of any recoveries of previously charged-off and reimbursed Commercial SLA loans need to be reimbursed to the FDIC. As of September 30, 2014, the FDIC loss sharing asset was related to $7.7 million net receivable from the FDIC. Single-family loans under the Single family SLA as of September 30, 2014 were $3.7 million.
Note 7 Income Taxes
The Companys income tax expenses for the continuing operations were $5.0 million for the three months ended September 30, 2014, compared to $6.6 million for the same period in 2013. The effective income tax rate was 27.25 percent for the three months ended September 30, 2014, compared to 38.95 percent for the same period in 2013. For the nine months ended September 30, 2014, income tax expense for the continuing operations were $19.7 million, compared to $17.5 million for the same period in 2013. The effective income tax rate was 35.48 percent, compared to 41.42 percent for the same period in 2013. The decrease in the effective tax rate for the three months ended September 30, 2014 was due mainly to tax rate reduction to the adjustment for the nontaxable bargain purchase gain, which is excluded from taxable income. The decrease in the effective tax rate for the nine months ended September 30, 2014, as compared to the same period in 2013, was due mainly to tax rate reduction to the adjustment for the bargain purchase gain,
30
a $400,000 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, offset by the expiration of the California EZ net interest deduction and EZ hiring credits. Management concluded that no valuation allowance is required for the deferred tax assets except for the portion related to certain state net operating losses as of September 30, 2014.
As of September 30, 2014, the Company was subject to examinations by various federal and state tax authorities for the tax years ended December 31, 2004 through 2013. As of September 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 8 Subordinated Debentures and Rescinded Stock Obligation
Subordinated Debentures
During the third quarter of 2014 with the acquisition of CBI, the Company assumed CBIs Junior Subordinated Deferrable Interest Debentures (Subordinated Debentures) with a notional balance of $26.8 million and an estimated fair value of $18.5 million. The $8.3 million discount will be amortized to interest expense over the remaining term. In December 2005, a trust was formed by CBI and issued $26.0 million Trust Preferred Securities (TPS) at 6.26 percent fixed rate for the first five years and a variable rate at the 3 month LIBOR plus 140 basis thereafter and invested the proceeds Subordinated Debentures. The Subordinated Debentures will mature on December 31, 2035, which date may be shortened to, at the Banks option if certain conditions are met. The TPS will be subject to mandatory redemption if the Subordinated Debentures are repaid by the Bank. Interest is payable quarterly, and the Bank has the option to defer interest payments on the Subordinated Debentures from time to time for a period not to exceed five consecutive years. Interest expense related to the amortization discount was 35,000 for the three months ended September 30, 2014.
Rescinded Stock Obligation
Hanmi Finanical assumed a rescinded stock obligation of $15.7 million and related accrued interest payable of $4.9 million at the closing date. The obligation resulted from the issuance of CBI common shares more than what was legally authorized in 2009 and 2010. Interest has been accrued on the obligation with interest rates varying state to state. Interest expense of $87,000 was recorded in September 2014, reflecting a weighted average rate of 6.79%. Accrued interest on the obligation as of September 30, 2014 was $5.1 million. Hanmi Financial has been in the process of paying off the obligation since the acquisition date.
Note 9 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. During the third quarter of 2014, the remaining stock warrants were exercised and there were no outstanding stock warrants as of September 30, 2014.
31
Note 10 Accumulated Other Comprehensive Income
Activity in accumulated other comprehensive income for the three months ended September 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 Benefit | Total | |||||||||||||
(In thousands) | ||||||||||||||||
For the three months ended September 30 2014: |
||||||||||||||||
Balance at beginning of period |
$ | (5,534 | ) | $ | 17 | $ | 3,367 | $ | (2,150 | ) | ||||||
Other comprehensive (loss) income before reclassification |
(4,947 | ) | (3 | ) | 2,102 | (2,848 | ) | |||||||||
Reclassification from accumulated other comprehensive income |
(67 | ) | | | (67 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Period change |
(5,014 | ) | (3 | ) | 2,102 | (2,915 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | (10,548 | ) | $ | 14 | $ | 5,469 | $ | (5,065 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
For the three months ended September 30, 2013: |
||||||||||||||||
Balance at beginning of period |
$ | 915 | $ | 17 | $ | 702 | $ | 1,634 | ||||||||
Other comprehensive (loss) income before reclassification |
(10,020 | ) | | 4,528 | (5,492 | ) | ||||||||||
Reclassification from accumulated other comprehensive income |
(611 | ) | | | (611 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Period change |
(10,631 | ) | | 4,528 | (6,103 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | (9,716 | ) | $ | 17 | $ | 5,230 | $ | (4,469 | ) | ||||||
|
|
|
|
|
|
|
|
For the three months ended September 30, 2014, there were a $2.8 million of net unrealized loss on available-for-sale securities and interest-only strip, and a $67,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $67,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under noninterest income. The securities were previously recorded as unrealized gains of $23,000 in accumulated other comprehensive income.
For the three months ended September 30, 2013, there were a $5.5 million of net unrealized loss on available-for-sale securities and interest-only strip, and a $611,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the redemption and sale of available-for-sale securities. The $611,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under noninterest income. The securities were previously recorded as unrealized gains of $899,000 in accumulated other comprehensive income.
32
Activity in accumulated other comprehensive income for the nine months ended September 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 Benefit (Expense) |
Total | |||||||||||||
(In thousands) | ||||||||||||||||
For the nine months ended September 30 2014: |
||||||||||||||||
Balance at beginning of period |
$ | (18,187 | ) | $ | 16 | $ | 8,791 | $ | (9,380 | ) | ||||||
Other comprehensive income (loss) before reclassification |
9,491 | (2 | ) | (3,322 | ) | 6,167 | ||||||||||
Reclassification from accumulated other comprehensive income |
(1,852 | ) | | | (1,852 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Period change |
7,639 | (2 | ) | (3,322 | ) | 4,315 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | (10,548 | ) | $ | 14 | $ | 5,469 | $ | (5,065 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
For the nine months ended September 30, 2013: |
||||||||||||||||
Balance at beginning of period |
$ | 7,348 | $ | 16 | $ | (1,946 | ) | $ | 5,418 | |||||||
Other comprehensive (loss) income before reclassification |
(16,141 | ) | 1 | 7,176 | (8,964 | ) | ||||||||||
Reclassification from accumulated other comprehensive income |
(923 | ) | | | (923 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Period change |
(17,064 | ) | 1 | 7,176 | (9,887 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | (9,716 | ) | $ | 17 | $ | 5,230 | $ | (4,469 | ) | ||||||
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2014, there were a $6.2 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 noninterest income. The securities were previously recorded as unrealized losses of $498,000 in accumulated other comprehensive income.
For the nine months ended September 30, 2013, there were a $9.0 million of net unrealized loss on available-for-sale securities and interest-only strip, and a $923,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the redemption of available-for-sale securities. The $923,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under noninterest income. The securities were previously recorded as unrealized gains of $2.4 million in accumulated other comprehensive income.
Note 11 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.
33
The capital ratios of Hanmi Financial and the Bank as of September 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) | ||||||||||||||||||||||||
September 30, 2014 |
||||||||||||||||||||||||
Total capital (to risk-weighted assets): |
||||||||||||||||||||||||
Hanmi Financial |
$ | 482,481 | 16.33 | % | $ | 236,338 | 8.00 | % | N/A | N/A | ||||||||||||||
Hanmi Bank |
$ | 482,802 | 16.28 | % | $ | 237,193 | 8.00 | % | $ | 296,492 | 10.00 | % | ||||||||||||
Tier 1 capital (to risk-weighted assets): |
||||||||||||||||||||||||
Hanmi Financial |
$ | 445,357 | 15.08 | % | $ | 118,169 | 4.00 | % | N/A | N/A | ||||||||||||||
Hanmi Bank |
$ | 444,771 | 15.00 | % | $ | 118,597 | 4.00 | % | $ | 177,895 | 6.00 | % | ||||||||||||
Tier 1 capital (to average assets): |
||||||||||||||||||||||||
Hanmi Financial |
$ | 445,357 | 12.80 | % | $ | 139,169 | 4.00 | % | N/A | N/A | ||||||||||||||
Hanmi Bank |
$ | 444,771 | 12.81 | % | $ | 138,926 | 4.00 | % | $ | 173,658 | 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 |