Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended March 31, 2015

or

 

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

For the Transition Period From                      To                     

Commission File Number: 000-30421

 

 

HANMI FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   95-4788120

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3660 Wilshire Boulevard, Penthouse Suite A

Los Angeles, California

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

(213) 382-2200

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

 

 

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

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

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

 

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

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

As of April 30, 2015, there were 31,936,384 outstanding shares of the Registrant’s Common Stock.

 

 

 


Table of Contents

Hanmi Financial Corporation and Subsidiaries

Quarterly Report on Form 10-Q

Three months ended March 31, 2015

Table of Contents

Part 1 – Financial Information

 

Item 1.

Financial Statements   3   

Consolidated Balance Sheets (Unaudited)

  3   

Consolidated Statements of Income (Unaudited)

  4   

Consolidated Statements of Comprehensive Income (Unaudited)

  5   

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

  6   

Consolidated Statements of Cash Flows (Unaudited)

  7   

Notes to Consolidated Financial Statements (Unaudited)

  8   

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations   42   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk   64   

Item 4.

Controls and Procedures   64   
Part II – Other Information

Item 1.

Legal Proceedings   65   

Item 1A.

Risk Factors   65   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds   65   

Item 3.

Defaults Upon Senior Securities   65   

Item 4.

Mine Safety Disclosures   65   

Item 5.

Other Information   65   

Item 6.

Exhibits   65   
Signatures   66   

 

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Part I — Financial Information

Item 1. Financial Statements

Hanmi Financial Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)

 

     March 31,
2015
    December 31,
2014
 

Assets

    

Cash and cash equivalents

   $ 182,054      $ 158,320   

Securities available for sale, at fair value (amortized cost of $849,190 as of March 31, 2015 and $1,061,703 as of December 31, 2014)

     858,064        1,060,717   

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

     8,677        5,451   

Loans receivable, net of allowance for loan losses of $52,951 as of March 31, 2015 and $52,666 as of December 31, 2014

     2,767,080        2,735,832   

Accrued interest receivable

     9,238        9,749   

Premises and equipment, net

     30,934        30,912   

Other real estate owned (“OREO”), net

     12,114        15,790   

Customers’ liability on acceptances

     2,598        1,847   

Servicing assets

     13,321        13,773   

Other intangible assets, net

     1,985        2,080   

Investment in Federal Home Loan Bank stock (“FHLB”), at cost

     17,581        17,580   

Investment in Federal Reserve Bank (“FRB”) stock, at cost

     12,273        12,273   

Income tax asset

     86,478        84,371   

Bank-owned life insurance

     47,795        48,866   

Prepaid expenses

     3,918        2,672   

Other assets

     29,905        32,210   
  

 

 

   

 

 

 

Total assets

$ 4,084,015    $ 4,232,443   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

Liabilities:

Deposits:

Noninterest-bearing

$ 1,064,695    $ 1,022,972   

Interest-bearing

  2,487,981      2,533,774   
  

 

 

   

 

 

 

Total deposits

  3,552,676      3,556,746   

Accrued interest payable

  3,497      3,450   

Bank’s liability on acceptances

  2,598      1,847   

FHLB advances

  —        150,000   

Servicing liabilities

  5,529      5,971   

FDIC loss sharing liability

  543      2,074   

Rescinded stock obligation

  150      933   

Subordinated debentures

  18,582      18,544   

Accrued expenses and other liabilities

  32,970      39,491   
  

 

 

   

 

 

 

Total liabilities

  3,616,545      3,779,056   
  

 

 

   

 

 

 

Stockholders’ equity:

Common stock, $0.001 par value; authorized 62,500,000 shares; issued 32,511,528 shares (31,933,634 shares outstanding) as of March 31, 2015 and 32,488,097 shares (31,910,203 shares outstanding) as of December 31, 2014

  257      257   

Additional paid-in capital

  555,710      554,904   

Accumulated other comprehensive income, net of tax expense (benefit) of $2,691 as of March 31, 2015 and ($1,432) as of December 31, 2014

  6,199      463   

Accumulated deficit

  (24,838   (32,379

Less: treasury stock, at cost; 577,894 shares as of March 31, 2015 and December 31, 2014

  (69,858   (69,858
  

 

 

   

 

 

 

Total stockholders’ equity

  467,470      453,387   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 4,084,015    $ 4,232,443   
  

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

(In thousands, except share and per share data)

 

     Three Months Ended March 31,  
     2015     2014  

Interest and Dividend Income:

    

Interest and fees on loans

   $ 37,250      $ 27,329   

Taxable interest on investment securities

     3,854        2,537   

Tax-exempt interest on investment securities

     20        76   

Interest on interest-bearing deposits in other banks

     48        21   

Dividends on FRB stock

     184        168   

Dividends on FHLB stock

     298        236   
  

 

 

   

 

 

 

Total interest and dividend income

  41,654      30,367   
  

 

 

   

 

 

 

Interest Expense:

Interest on deposits

  3,780      3,221   

Interest on FHLB advances

  56      48   

Interest on subordinated debentures

  145      —     
  

 

 

   

 

 

 

Total interest expense

  3,981      3,269   
  

 

 

   

 

 

 

Net interest income before provision for credit losses

  37,673      27,098   

Negative provision for credit losses

  (1,985   (3,300
  

 

 

   

 

 

 

Net interest income after provision for credit losses

  39,658      30,398   
  

 

 

   

 

 

 

Noninterest Income:

Service charges on deposit accounts

  3,211      2,474   

Remittance fees

  561      438   

Trade finance fees

  281      252   

Other service charges and fees

  425      331   

Bank-owned life insurance income

  253      223   

Gain on sale of SBA loans

  1,684      547   

Net gain on sales of investment securities

  2,184      1,421   

Disposition gains on PCI loans

  881      —     

Other operating income

  1,154      528   
  

 

 

   

 

 

 

Total noninterest income

  10,634      6,214   
  

 

 

   

 

 

 

Noninterest Expense:

Salaries and employee benefits

  16,384      10,259   

Occupancy and equipment

  4,303      2,396   

Merger and integration costs

  1,611      85   

Deposit insurance premiums and regulatory assessments

  893      437   

Data processing

  2,132      1,158   

OREO expense

  417      6   

Professional fees

  2,341      748   

Directors and officers liability insurance

  176      191   

Supplies and communications

  830      501   

Advertising and promotion

  523      581   

Loan-related expense

  669      83   

Amortization of other intangible assets

  95      —     

Other operating expenses

  1,330      1,354   
  

 

 

   

 

 

 

Total noninterest expense

  31,704      17,799   
  

 

 

   

 

 

 

Income from continuing operations before provision for income taxes

  18,588      18,813   

Provision for income taxes

  7,534      7,844   
  

 

 

   

 

 

 

Income from continuing operations, net of taxes

$ 11,054    $ 10,969   

Discontinued operations:

Income from operations of discontinued subsidiaries

$ —      $ 37   

Income tax expense

  —        15   
  

 

 

   

 

 

 

Income from discontinued operations

  —        22   

Net income

$ 11,054    $ 10,991   
  

 

 

   

 

 

 

Basic earnings per share:

Income from continuing operations, net of taxes

$ 0.35    $ 0.35   

Income from discontinued operations, net of taxes

  —        —     
  

 

 

   

 

 

 

Basic earnings per share

$ 0.35    $ 0.35   

Diluted earnings per share:

Income from continuing operations, net of taxes

$ 0.35    $ 0.34   

Income from discontinued operations, net of taxes

  —        —     
  

 

 

   

 

 

 

Diluted earnings per share

$ 0.35    $ 0.34   

Weighted-average shares outstanding:

Basic

  31,747,299      31,659,705   

Diluted

  32,026,723      31,934,163   

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

     Three Months Ended March 31,  
         2015             2014      

Net Income

   $ 11,054      $ 10,991   

Other comprehensive income, net of tax

    

Unrealized gain on securities

    

Unrealized holding gain arising during period

     12,043        8,098   

Less: reclassification adjustment for net gain included in net income

     (2,184     (1,421

Unrealized loss on interest-only strip of servicing assets

     —          1   

Income tax expense related to items of other comprehensive income

     (4,123     (2,807
  

 

 

   

 

 

 

Other comprehensive income

  5,736      3,871   
  

 

 

   

 

 

 

Comprehensive Income

$ 16,790    $ 14,862   
  

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except 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, 2014

    32,339,444        (577,894     31,761,550      $ 257      $ 552,270      $ (9,380   $ (73,212   $ (69,858   $ 400,077   

Exercises of stock options

    15,195        —          15,195        —          190        —          —          —          190   

Exercises of stock warrants

    363        —          363        —          2        —          —          —          2   

Restricted stock awards, net of shares forfeited

    18,000        —          18,000        —          —          —          —          —          —     

Share-based compensation expense

    —          —          —          —          605        —          —          —          605   

Cash dividends declared

    —          —          —          —          —          —          (2,225     —          (2,225

Comprehensive income:

                 

Net income

    —          —          —          —          —          —          10,991        —          10,991   

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

    —          —          —          —          —          3,871        —          —          3,871   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2014

  32,373,002      (577,894   31,795,108    $ 257    $ 553,067    $ (5,509 $ (64,446 $ (69,858 $ 413,511   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2015

  32,488,097      (577,894   31,910,203    $ 257    $ 554,904    $ 463    $ (32,379 $ (69,858 $ 453,387   

Exercises of stock options

  19,581      —        19,581      —        278      —        —        —        278   

Restricted stock awards, net of shares forfeited

  3,850      —        3,850      —        —        —        —        —        —     

Share-based compensation expense

  —        —        —        —        528      —        —        —        528   

Cash dividends declared

  —        —        —        —        —        (3,513   —        (3,513

Comprehensive income:

Net income

  —        —        —        —        —        —        11,054      —        11,054   

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

  —        —        —        —        —        5,736      —        —        5,736   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

  32,511,528      (577,894   31,933,634    $ 257    $ 555,710    $ 6,199    $ (24,838 $ (69,858 $ 467,470   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

     Three Months Ended March 31,  
         2015             2014      

Cash flows from operating activities:

    

Net income

   $ 11,054      $ 10,991   

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

    

Depreciation and amortization

     5,441        1,556   

Share-based compensation expense

     528        605   

Negative provision for credit losses

     (1,985     (3,300

Gain on sales of investment securities

     (2,184     (1,421

Gain on sales of loans

     (1,684     (547

Disposition gains on PCI loans

     (881     —     

Loss on sales of other real estate owned

     —          2   

Valuation adjustment on OREO

     (215     —     

Origination of loans held for sale

     (23,108     (6,354

Proceeds from sales of SBA loans guaranteed portion

     21,996        6,626   

Change in accrued interest receivable

     511        (52

Change in FDIC loss sharing liability

     (1,531     —     

Change in bank-owned life insurance

     (253     (223

Change in prepaid expenses

     (1,246     (847

Change in other assets

     989        7,388   

Change in income tax assets

     (6,230     7,534   

Change in accrued interest payable

     47        (47

Change in other liabilities

     (6,256     1,354   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

  (5,007   23,265   
  

 

 

   

 

 

 

Cash flows from investing activities:

Proceeds from matured or called securities available for sale

  34,613      13,049   

Proceeds from sales of securities available for sale

  176,848      85,234   

Proceeds from sales of other real estate owned

  4,038      734   

Proceeds from liquidation on bank-owned life insurance

  1,323      —     

Change in loans receivable

  13,611      (40,728

Purchases of securities available for sale

  —        (55,751

Purchases of premises and equipment

  (903   (120

Purchases of loans receivable

  (43,979   —     

Purchases of FRB stock

  (1   —     
  

 

 

   

 

 

 

Net cash provided by investing activities

  185,550      2,418   
  

 

 

   

 

 

 

Cash flows from financing activities:

Change in deposits

  (4,070   (5,745

Change in short-term FHLB advances

  (150,000   4,899   

Redemption of rescinded stock obligation

  (783   —     

Proceeds from exercise of stock options

  278      190   

Cash dividends paid

  (2,234   —     
  

 

 

   

 

 

 

Net cash used in financing activities

  (156,809   (656
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

  23,734      25,027   

Cash and cash equivalents at beginning of year

  158,320      179,357   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

$ 182,054    $ 204,384   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

$ 3,934    $ 3,316   

Income taxes

$ 13,172    $ 16   

Non-cash activities:

Transfer of loans receivable to other real estate owned

$ 627    $ —     

Conversion of stock warrants into common stock

$ —      $ 2   

Income tax expense related to items of other comprehensive income

$ (4,123 $ (2,807

Change in unrealized gain in accumulated other comprehensive income

$ (12,043 $ (8,099

Cash dividends declared

$ (3,513 $ (2,225

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

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Hanmi Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three months ended March 31, 2015 and 2014

Note 1 — Basis of Presentation

Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we,” “us” or “our”) was formed as a holding company of Hanmi Bank (the “Bank”) and registered with the Securities and Exchange Commission under the Act on March 17, 2001. Our primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money through operation of the Bank.

On August 31, 2014, Hanmi Financial completed its acquisition of Central Bancorp, Inc., a Texas corporation (“CBI”). See “Note 2 — Acquisition” and “Note 6 — Loans” for accounting policies regarding purchased loans. During the second quarter of 2014, we sold 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.”

In management’s 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 March 31, 2015, 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, 2014 (the “2014 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 the CBI acquisition as discussed in “Note 2 – Acquisition.” The acquired assets and assumed liabilities of CBI 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 2014 Annual Report on Form 10-K. During the second quarter of 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.”

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 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 net assets of $1.27 billion, $1.17 billion and $93.3 million, respectively. Total loans and deposits were $297.3 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. The 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 the 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

 

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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. Such changes to the preliminary estimates during the measurement period are recorded as retrospective adjustments to the consolidated financial statements. During the measurement period, the Company identified retrospective adjustments to certain of the provisional amounts recorded that had the net effect of increasing the bargain purchase gain, net of deferred taxes by $8.0 million.

The following table presents the purchase price allocation reported as of the acquisition date:

 

     (In thousands)  

Consideration paid:

  

CBI stockholders

   $ 50,000   

Redemption of preferred and cumulative unpaid dividends

     28,675   
  

 

 

 
  78,675   

Assets acquired:

Cash and cash equivalents

  197,209   

Securities available for sale

  663,497   

Loans

  297,272   

Premises and equipment

  17,925   

Other real estate owned

  25,952   

Income tax assets, net

  12,011   

Core deposit intangible

  2,213   

FDIC loss sharing assets

  11,413   

Bank-owned life insurance

  18,296   

Servicing assets

  7,497   

Other assets

  14,636   
  

 

 

 

Total assets acquired

  1,267,921   

Liabilities assumed:

Deposits

  1,098,997   

Subordinated debentures

  18,473   

Rescinded stock obligation

  15,485   

FHLB advances

  10,000   

Servicing liabilities

  6,039   

Other liabilities

  25,675   
  

 

 

 

Total liabilities assumed

  1,174,669   
  

 

 

 

Total identifiable net assets

$ 93,252   
  

 

 

 

Bargain purchase gain, net of deferred taxes

$ 14,577   
  

 

 

 

The provisional application of the acquisition method of accounting resulted in a bargain purchase gain of $14.6 million. The operations of CBI are included in our operating results since the acquisition date. Acquisition-related costs of $6.6 million for the year ended December 31, 2014 were expensed as incurred as merger and integration costs. These expenses are comprised primarily of system conversion costs and professional fees. For the three months ended March 31, 2015, acquisition-related costs of $1.6 million were expensed as incurred as merger and integration costs. The $297.3 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 CBI’s allowance for loan losses associated with the loans acquired as loans were initially recorded at fair value.

 

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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

   $ 93,623   

Nonaccretable discount

     (17,421
  

 

 

 

Undiscounted cash flow to be collected

  76,202   

Estimated fair value of PCI loans

  65,346   
  

 

 

 

Accretable yield

$ 10,856   
  

 

 

 

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 three months ended March 31, 2015 was $95,000.

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 the 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 $7.4 million with $1.6 million amortized for the three months ended March 31, 2015.

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 three months ended March 31, 2015 was $38,000.

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, 2014. 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 2014. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions.

 

     Three Months Ended March 31,  
         2015              2014      
     (In thousands, except per share data)  

Pro forma revenues (net interest income plus noninterest income)

   $ 53,531       $ 56,245   

Pro forma net income from continuing operations

   $ 12,611       $ 16,280   

Pro forma earnings per share from continuing operations:

     

Basic

   $ 0.40       $ 0.51   

Diluted

   $ 0.39       $ 0.51   

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.

 

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The cumulative effect of the retrospective application of this accounting principle as of January 1, 2012 was a negative $1.1 million. Net incomes for the three months ended March 31, 2014 decreased $44,000 due to the change in accounting principle.

The following tables present the effect of the retrospective application of this change in accounting principle on the Company’s 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 March 31, 2014  
     As Previously
Reported
     Effect of Change in
Accounting Principle
     As Adjusted  
     (In thousands)  

Assets

        

Cash and cash equivalents

   $ 204,384       $ —         $ 204,384   

Securities available for sale

     520,990         —           520,990   

Loans receivable

     2,221,520         —           2,221,520   

Income tax assets

     53,227         273         53,500   

Other assets

     96,841         (1,477      95,364   
  

 

 

    

 

 

    

 

 

 

Total assets

$ 3,096,962    $ (1,204 $ 3,095,758   
  

 

 

    

 

 

    

 

 

 

Liabilities and stockholders’ equity

Liabilities

$ 2,682,247    $ —      $ 2,682,247   

Stockholders’ equity

  414,715      (1,204   413,511   
  

 

 

    

 

 

    

 

 

 

Total liabilities and stockholders’ equity

$ 3,096,962    $ (1,204 $ 3,095,758   
  

 

 

    

 

 

    

 

 

 

Hanmi Financial Corporations and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

     As Previously
Reported
     Effect of Change in
Accounting Principle
     As Adjusted  
     (In thousands, except per share data)  

For the Three Months Ended March 31, 2014

        

Interest and dividend income

   $ 30,367       $ —         $ 30,367   

Interest expense

     3,269         —           3,269   

Negative provision for credit losses

     (3,300      —           (3,300
  

 

 

    

 

 

    

 

 

 

Net interest income

  30,398      —        30,398   

Noninterest income

  6,214      —        6,214   

Noninterest expense

  17,961      (162   17,799   
  

 

 

    

 

 

    

 

 

 

Income before provision for income taxes

  18,651      162      18,813   

Provision for income taxes

  7,638      206      7,844   
  

 

 

    

 

 

    

 

 

 

Income from continuing operations

$ 11,013    $ (44 $ 10,969   
  

 

 

    

 

 

    

 

 

 

Earnings per share from continuing operations

Basic

$ 0.35    $ —      $ 0.35   

Diluted

$ 0.35    $ (0.01 $ 0.34   

 

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Hanmi Financial Corporations and Subsidiaries

Consolidated Statement of Cash Flows (Unaudited)

 

     As Previously
Reported
     Effect of Change in
Accounting Principle
     As Adjusted  
     (In thousands)  

For the Three Months Ended March 31, 2014

        

Cash flows from operating activities:

        

Net income

   $ 11,035       $ (44    $ 10,991   

Total adjustment in net income

     12,230         44         12,274   
  

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities

  23,265      —        23,265   

Cash flows from investing activities:

Net cash provided by investing activities

  2,418      —        2,418   

Cash flows from financing activities:

Net cash used in financing activities

  (656   —        (656
  

 

 

    

 

 

    

 

 

 

Net increase in cash and cash equivalents

  25,027      —        25,027   

Cash and cash equivalents at beginning of period

  179,357      —        179,357   
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

$ 204,384    $ —      $ 204,384   
  

 

 

    

 

 

    

 

 

 

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 March 31, 2015 or December 31, 2014. The investment in low income housing was $20.7 million and $21.3 million as of March 31, 2015 and December 31, 2014, respectively. The Bank’s unfunded commitments related to low income housing investments were $9.9 million and $11.9 million as of March 31, 2015 and December 31, 2014, respectively. The Bank recognized $584,000 and $171,000 as a component of income tax expense during the three months ended March 31, 2015 and 2014, respectively, and tax credits and other benefits received from the tax expenses were $829,000 and $255,000 during the three months ended March 31, 2015 and 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 when total assets and net assets of Chun-Ha and All World were $5.6 million and $3.3 million as of June 30, 2014, respectively. The total sales price was $3.5 million, of which $2.0 million was paid upon signing. 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, offset by a $470,000 capital gain tax, a $14,000 operating loss and an $11,000 income tax expense. Consequently, the net loss from discontinued operations for the second quarter of 2014 was $444,000, or $0.01 per diluted share. For the three months ended March 31, 2014, the discontinued operations generated noninterest income, primarily in the line item for insurance commissions, of $1.4 million and incurred noninterest expense of $1.4 million in various line items.

 

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Summarized financial information for our discontinued operations related to Chun-Ha and All World are as follows:

 

     March 31,
2014
 
     (In thousands)  

Cash and cash equivalents

   $ 1,628   

Premises and equipment, net

     73   

Other intangible assets, net

     1,130   

Other assets

     2,764   
  

 

 

 

Total assets

$ 5,595   
  

 

 

 

Income tax payable

$ 1,319   

Accrued expenses and other liabilities

  1,785   
  

 

 

 

Total liabilities

$ 3,104   
  

 

 

 

Net assets of discontinued operations

$ 2,491   
  

 

 

 
     Three Months
Ended March 31,
2014
 
     (In thousands)  

Noninterest income

   $ 37   

Provision for income taxes

     15   
  

 

 

 

Net income from discontinued operations

$ 22   
  

 

 

 

 

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Table of Contents

Note 5 — Investment Securities

The following is a summary of investment securities available for sale as of March 31, 2015 and December 31, 2014:

 

     Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Estimated
Fair

Value
 
     (In thousands)  

March 31, 2015

           

Mortgage-backed securities (1) (2)

   $ 485,112       $ 8,329       $ 545       $ 492,896   

Collateralized mortgage obligations (1)

     164,163         1,719         477         165,405   

U.S. government agency securities

     63,967         12         624         63,355   

SBA loan pool securities

     75,236         70         279         75,027   

Municipal bonds-tax exempt

     3,604         72         —           3,676   

Municipal bonds-taxable

     16,562         561         81         17,042   

Corporate bonds

     17,018         14         48         16,984   

U.S. treasury securities

     162         1         —           163   

Other securities

     22,916         260         76         23,100   

Equity securities

     450         —           34         416   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

$ 849,190    $ 11,038    $ 2,164    $ 858,064   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

Mortgage-backed securities (1) (2)

$ 571,678    $ 2,811    $ 1,203    $ 573,286   

Collateralized mortgage obligations (1)

  188,704      417      1,074      188,047   

U.S. government agency securities

  129,857      172      1,822      128,207   

SBA loan pool securities

  109,983      52      588      109,447   

Municipal bonds-tax exempt

  4,319      71      —        4,390   

Municipal bonds-taxable

  16,615      398      91      16,922   

Corporate bonds

  17,018      2      72      16,948   

U.S. treasury securities

  163      —        —        163   

Other securities

  22,916      57      80      22,893   

Equity securities

  450      —        36      414   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

$ 1,061,703    $ 3,980    $ 4,966    $ 1,060,717   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 March 31, 2015, 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      Estimated  
     Cost      Fair Value  
     (In thousands)  

Within one year

   $ 11,995       $ 11,948   

Over one year through five years

     11,341         11,363   

Over five years through ten years

     88,960         89,001   

Over ten years

     64,253         63,935   

Mortgage-backed securities

     485,112         492,896   

Collateralized mortgage obligations

     164,163         165,405   

Other securities

     22,916         23,100   

Equity securities

     450         416   
  

 

 

    

 

 

 

Total

$ 849,190    $ 858,064   
  

 

 

    

 

 

 

 

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FASB ASC 320, Investments – Debt and Equity Securities, requires us to periodically evaluate our investments for other-than-temporary impairment (“OTTI”). There was no OTTI charge during the three months ended March 31, 2015.

Gross unrealized losses on investment securities available for sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of March 31, 2015 and December 31, 2014:

 

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

March 31, 2015

                          

Mortgage-backed securities

   $ 88       $ 29,430         13       $ 457       $ 23,906         9       $ 545       $ 53,336         22   

Collateralized mortgage obligations

     51         34,752         9         426         30,146         12         477         64,898         21   

U.S. government agency securities

     127         23,864         9         497         30,480         10         624         54,344         19   

SBA loan pool securities

     12         14,781         3         267         11,837         4         279         26,618         7   

Municipal bonds-taxable

     2         1,517         2         79         802         1         81         2,319         3   

Corporate bonds

     —           —           —           48         7,947         2         48         7,947         2   

Other securities

     —           —           —           76         949         3         76         949         3   

Equity Securities

     34         216         1         —           —           —           34         216         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 314    $ 104,560      37    $ 1,850    $ 106,067      41    $ 2,164    $ 210,627      78   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

Mortgage-backed securities

$ 288    $ 102,704      21    $ 915    $ 50,625      19    $ 1,203    $ 153,329      40   

Collateralized mortgage obligations

  350      78,191      21      724      33,308      13      1,074      111,499      34   

U.S. government agency securities

  —        5,000      1      1,822      73,142      26      1,822      78,142      27   

SBA loan pool securities

  155      85,062      15      433      11,975      4      588      97,037      19   

Municipal bonds-taxable

  —        —        —        91      5,538      5      91      5,538      5   

Corporate bonds

  4      5,021      1      68      7,925      2      72      12,946      3   

Other securities

  —        —        —        80      1,945      4      80      1,945      4   

Equity Securities

  36      214      1      —        —        —        36      214      1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 833    $ 276,192      60    $ 4,133    $ 184,458      73    $ 4,966    $ 460,650      133   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of March 31, 2015 and December 31, 2014 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status as of March 31, 2015 and December 31, 2014. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

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

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 management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of March 31, 2015 and December 31, 2014 were not other-than-temporarily impaired, and therefore, no impairment charges as of March 31, 2015 and December 31, 2014 were warranted.

 

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Table of Contents

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

 

     Three Months Ended March 31,  
         2015              2014      
     (In thousands)  

Gross realized gains on sales of investment securities

   $ 2,194       $ 1,421   

Gross realized losses on sales of investment securities

     (10      —     
  

 

 

    

 

 

 

Net realized gains on sales of investment securities

$ 2,184    $ 1,421   
  

 

 

    

 

 

 

Proceeds from sales of investment securities

$ 176,848    $ 85,234   

For the three months ended March 31, 2015, there was a $2.2 million gain in earnings resulting from the sale of investment securities that had previously been recorded as net unrealized gains of $535,000 in comprehensive income. For the three months ended March 31, 2014, there was a $1.4 million net gain in earnings resulting from the sale of investment securities that had previously been recorded as net unrealized gains of $59,000 in comprehensive income.

Investment securities available for sale with market values of $73.5 million and $76.2 million as of March 31, 2015 and December 31, 2014, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.

 

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Table of Contents

Note 6 — Loans

The loan portfolio includes originated and purchased loans. Loans are originated by the Company with the intent to hold them for investment and are stated at the principal amount outstanding, net of unearned income. Unearned income includes deferred unamortized nonrefundable loan fees and direct loan origination costs. Net deferred fees or costs 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. The amortization of loan fees or costs is discontinued when a loan is placed on nonaccrual status. Interest income is recorded on an accrual basis in accordance with the terms of the respective loan and includes prepayment penalties.

Purchased loans, which are loans we have acquired through our acquisition of other banks, are stated at the principal amount outstanding, net of unearned discounts or unamortized premiums. All loans acquired in our acquisitions are initially measured and recorded at their fair value on the acquisition date. A component of the initial fair value measurement is an estimate of the credit losses over the life of the purchased loans. Purchased loans are also evaluated for impairment as of the acquisition date and are accounted for as “acquired non-impaired” or “purchased credit impaired” loans.

Acquired non-impaired loans are those 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. Acquired non-impaired loans, together with originated loans, are referred to as non-purchased credit impaired (“Non-PCI”) loans. Purchase discount or premium on acquired non-impaired loans is recognized as an adjustment to interest income over the contractual life of such loans using the effective interest method or taken into income when the related loans are paid off or sold.

Purchased credit impaired (“PCI”) loans are accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” A purchased loan is deemed to be credit impaired when there is evidence of credit deterioration since its origination and it is probable at the acquisition date that we would be unable to collect all contractually required payments. We apply PCI loan accounting when we acquire loans deemed to be impaired.

For PCI loans, at the time of acquisition we (i) calculated the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”) and (ii) estimated 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 nonaccretable difference represents an estimate of the loss exposure of principal and interest related to the PCI loan portfolios; 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.

The excess of expected cash flows at acquisition over the initial fair value of acquired impaired loans is referred to as the “accretable yield” and is recorded as interest income over the estimated life of the loans using the effective yield. If estimated cash flows are indeterminable, the recognition of interest income will cease to be recognized.

At acquisition, the Company may aggregate PCI loans into pools having common credit risk characteristics such as product type, geographic location 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.

The Board of Directors and management review and approve the Bank’s loan policy and procedures on a regular basis to reflect issues such as regulatory and organizational structure changes, strategic planning revisions, concentrations of credit, loan delinquencies and 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, personal loans, and home equity lines of credit. We maintain management loan review and monitoring departments that review and monitor pass graded loans as well as problem loans to prevent further deterioration.

 

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Table of Contents

The majority of the Bank’s loan portfolio consists of commercial real estate, and commercial and industrial loans. The Bank has been diversifying and monitoring commercial real estate loans based on property types, tightening underwriting standards and portfolio liquidity and management, and has not exceeded certain specified limits set forth in the Bank’s loan policy.

Loans Receivable

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

 

     March 31, 2015     December 31, 2014  
     Non-PCI Loans     PCI Loans     Total     Non-PCI Loans     PCI Loans     Total  
     (In thousands)  

Real estate loans:

            

Commercial property (1)

            

Retail

   $ 679,938      $ 10,565      $ 690,503      $ 675,072      $ 8,535      $ 683,607   

Hotel/motel

     481,960        11,720        493,680        454,499        7,682        462,181   

Gas station

     346,798        6,441        353,239        362,240        7,745        369,985   

Other

     820,707        10,174        830,881        842,126        5,796        847,922   

Construction

     15,123        —          15,123        9,517        —          9,517   

Residential property

     154,797        1,716        156,513        120,932        14,371        135,303   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

  2,499,323      40,616      2,539,939      2,464,386      44,129      2,508,515   

Commercial and industrial loans:

Commercial term

  116,252      281      116,533      116,073      327      116,400   

Commercial lines of credit

  97,761      —        97,761      93,860      —        93,860   

International loans

  36,338      —        36,338      38,929      —        38,929   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial and industrial loans

  250,351      281      250,632      248,862      327      249,189   

Consumer loans

  25,942      44      25,986      27,512      45      27,557   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross loans

  2,775,616      40,941      2,816,557      2,740,760      44,501      2,785,261   

Allowance for loans losses

  (51,515   (1,436   (52,951   (51,640   (1,026   (52,666

Deferred loan costs

  3,474      —        3,474      3,237      —        3,237   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable, net

$ 2,727,575    $ 39,505    $ 2,767,080    $ 2,692,357    $ 43,475    $ 2,735,832   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Includes owner-occupied property loans of $1.14 billion and $1.12 billion as of March 31, 2015 and December 31, 2014, respectively.

Accrued interest on loans receivable was $6.2 million and $6.4 million at March 31, 2015 and December 31, 2014, respectively. At March 31, 2015 and December 31, 2014, loans receivable totaling $802.0 million and $840.0 million, respectively, were pledged to secure advances from the FHLB and the FRB’s Federal Reserve 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 March 31, 2015 and 2014:

 

     Real Estate      Commercial
and Industrial
     Consumer      Total
Non-PCI
 
     (In thousands)  

March 31, 2015

           

Balance at beginning of period

   $ 3,323       $ 2,128       $ —         $ 5,451   

Origination of loans held for sale

     16,927         6,181         —           23,108   

Sales of loans held for sale

     (13,014      (6,840      —           (19,854

Principal payoffs and amortization

     (10      (18      —           (28
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

$ 7,226    $ 1,451    $ —      $ 8,677   
  

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2014

Balance at beginning of period

$ —      $ —      $ —      $ —     

Origination of loans held for sale

  6,269      85      —        6,354   

Sales of loans held for sale

  (5,874   (84   —        (5,958

Principal payoffs and amortization

  (5   (1   —        (6
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

$ 390    $ —      $ —      $ 390   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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For the three months ended March 31, 2015, there was no reclassification of Non-PCI loans receivable as Non-PCI loans held for sale, and Non-PCI loans held for sale of $19.9 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 March 31, 2015. For the three months ended March 31, 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 $6.0 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 March 31, 2014.

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:

 

     March 31, 2015     March 31
2014
 
     Non-PCI Loans     PCI Loans     Total    
     (In thousands)  

Allowance for loan losses:

        

Balance at beginning of period

   $ 51,640      $ 1,026      $ 52,666      $ 57,555   

Charge-offs

     (34     (52     (86     (1,604

Recoveries on loans previously charged off

     1,692        352        2,044        4,251   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loan recoveries (charge-offs)

  1,658      300      1,958      2,647   

(Negative provision) provision charged to operating expense

  (1,783   110      (1,673   (3,609
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

$ 51,515    $ 1,436    $ 52,951    $ 56,593   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for off-balance sheet items:

Balance at beginning of period

$ 1,366    $ —      $ 1,366    $ 1,248   

(Negative provision) provision charged to operating expense

  (312   —        (312   309   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

$ 1,054    $ —      $ 1,054    $ 1,557   
  

 

 

   

 

 

   

 

 

   

 

 

 

The allowance for off-balance sheet items is maintained at a level believed to be sufficient to absorb 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 March 31, 2015 and 2014, the allowance for off-balance sheet items amounted to $1.1 million and $1.6 million, respectively. Net adjustments to the allowance for off-balance sheet items are included in the provision for credit losses.

 

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The following table details the information on the allowance for loan losses by portfolio segment for the three months ended March 31, 2015 and 2014:

 

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

March 31, 2015

          

Allowance for loan losses on Non-PCI loans:

          

Beginning balance

   $ 41,194      $ 9,142      $ 220      $ 1,084      $ 51,640   

Charge-offs

     —          (34     —          —          (34

Recoveries on loans previously charged off

     32        1,660        —          —          1,692   

(Negative provision) provision

     1,324        (2,982     (35     (90     (1,783
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

$ 42,550    $ 7,786    $ 185    $ 994    $ 51,515   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

$ 3,386    $ 1,913    $ —      $ —      $ 5,299   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

$ 39,164    $ 5,873    $ 185    $ 994    $ 46,216   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-PCI loans receivable:

Ending balance

$ 2,499,323    $ 250,351    $ 25,942    $ —      $ 2,775,616   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

$ 33,537    $ 11,570    $ 1,823    $ —      $ 46,930   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

$ 2,465,786    $ 238,781    $ 24,119    $ —      $ 2,728,686   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses on PCI loans:

Beginning balance

$ 895    $ 131    $ —      $ —      $ 1,026   

Charge-offs

  (52   —        —        —        (52

Recoveries on loans previously charged off

  —        352      —        —        352   

Provision

  475      (365   —        —        110   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: acquired with deteriorated credit quality

$ 1,318    $ 118    $ —      $ —      $ 1,436   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PCI loans receivable:

Ending balance: acquired with deteriorated credit quality

$ 40,633    $ 282    $ 44    $ —      $ 40,959   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2014

Allowance for loan losses on Non-PCI loans :

Beginning balance

$ 43,550    $ 11,287    $ 1,427    $ 1,291    $ 57,555   

Charge-offs

  (1,128   (422   (54   —        (1,604

Recoveries on loans previously charged off

  2,918      1,321      12      —        4,251   

Provision (negative provision)

  (1,110   (1,761   (752   14      (3,609
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

$ 44,230    $ 10,425    $ 633    $ 1,305    $ 56,593   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

$ 1,029    $ 3,973    $ 117    $ —      $ 5,119   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

$ 43,201    $ 6,452    $ 516    $ 1,305    $ 51,474   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-PCI loans receivable:

Ending balance

$ 2,027,914    $ 219,102    $ 29,356    $ —      $ 2,276,372   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

$ 34,294    $ 14,503    $ 1,553    $ —      $ 50,350   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

$ 1,993,620    $ 204,599    $ 27,803    $ —      $ 2,226,022   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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 Bank’s 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 Bank’s loan grading system. It incorporates all performing loans with no credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans.

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

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

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

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

Under regulatory guidance, loans graded special mention or worse are considered criticized loans and loans graded substandard or worse are considered classified loans.

 

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Table of Contents

As of March 31, 2015 and December 31, 2014, pass/pass-watch, special mention and classified loans (excluding PCI loans), disaggregated by loan class, were as follows:

 

     Pass/Pass-Watch      Special Mention      Classified      Total  
            (In thousands)         

March 31, 2015

           

Real estate loans:

           

Commercial property

           

Retail

   $ 658,292       $ 12,141       $ 9,505       $ 679,938   

Hotel/motel

     425,710         42,938         13,312         481,960   

Gas station

     330,319         9,861         6,618         346,798   

Other

     800,758         9,087         10,862         820,707   

Construction

     15,123         —           —           15,123   

Residential property

     152,673         —           2,124         154,797   

Commercial and industrial loans:

           

Commercial term

     106,066         1,089         9,097         116,252   

Commercial lines of credit

     95,482         —           2,279         97,761   

International loans

     35,987         152         199         36,338   

Consumer loans

     23,674         121         2,147         25,942   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

$ 2,644,084    $ 75,389    $ 56,143    $ 2,775,616   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

Real estate loans:

Commercial property

Retail

$ 654,360    $ 18,013    $ 2,699    $ 675,072   

Hotel/motel

  397,437      46,365      10,697      454,499   

Gas station

  345,775      8,899      7,566      362,240   

Other

  822,037      9,543      10,546      842,126   

Construction

  9,517      —        —        9,517   

Residential property

  118,688      66      2,178      120,932   

Commercial and industrial loans:

Commercial term

  106,326      1,225      8,522      116,073   

Commercial lines of credit

  92,312      993      555      93,860   

International loans

  36,121      252      2,556      38,929   

Consumer loans

  25,313      131      2,068      27,512   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

$ 2,607,886    $ 85,487    $ 47,387    $ 2,740,760   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following is an aging analysis of gross loans (excluding PCI loans), disaggregated by loan class, as of the dates indicated:

 

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

March 31, 2015

                   

Real estate loans:

                   

Commercial property

                   

Retail

   $ 1,943      $ 6,031       $ 2,950       $ 10,924       $ 669,014       $ 679,938       $ —     

Hotel/motel

     2,659        —           3,421         6,080         475,880         481,960         —     

Gas station

     580        480         4,088         5,148         341,650         346,798         —     

Other

     1,770        278         3,544         5,592         815,115         820,707         —     

Construction

     —          —           —           —           15,123         15,123         —     

Residential property

     —          —           547         547         154,250         154,797         —     

Commercial and industrial loans:

                   

Commercial term

     (30     87         3,062         3,119         113,133         116,252         —     

Commercial lines of credit

     1,407        —           819         2,226         95,535         97,761         —     

International loans

     131        —           —           131         36,207         36,338         —     

Consumer loans

     —          239         348         587         25,355         25,942         —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

$ 8,460    $ 7,115    $ 18,779    $ 34,354    $ 2,741,262    $ 2,775,616    $ —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

Real estate loans:

Commercial property

Retail

$ 1,554    $ 281    $ 1,920    $ 3,755    $ 671,317    $ 675,072    $ —     

Hotel/motel

  1,531      2,340      433      4,304      450,195      454,499      —     

Gas station

  2,991      1,113      353      4,457      357,783      362,240      —     

Other

  1,674      2,156      1,142      4,972      837,154      842,126      —     

Construction

  —        —        —        —        9,517      9,517      —     

Residential property

  167      —        687      854      120,078      120,932      —     

Commercial and industrial loans:

Commercial term

  1,107      490      2,847      4,444      111,629      116,073      —     

Commercial lines of credit

  —        —        227      227      93,633      93,860      —     

International loans

  200      —        —        200      38,729      38,929      —     

Consumer loans

  489      349      248      1,086      26,426      27,512      —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

$ 9,713    $ 6,729    $ 7,857    $ 24,299    $ 2,716,461    $ 2,740,760    $ —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 because, due to the financial difficulties of the borrowers, we have granted concessions to the borrowers we would not otherwise consider; or when current information or events make it unlikely to collect in full according to the contractual terms of the loan agreements; or there is a deterioration in the borrower’s financial condition that raises uncertainty as to timely collection of either principal or interest; or full payment of both interest and principal is in doubt according to the original contractual terms.

We evaluate loan impairment in accordance with applicable GAAP. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, less estimated costs to sell. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency is either charged off against the allowance for loan losses or we establish a specific allocation in the allowance for loan losses. 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.

 

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Table of Contents

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
     Average
Recorded
Investment
     Interest
Income
Recognized
 
                   (In thousands)                       

March 31, 2015

                    

Real estate loans:

                    

Commercial property

                    

Retail

   $ 5,963       $ 6,133       $ 3,496       $ 2,467       $ 189       $ 5,990       $ 72   

Hotel/motel

     6,228         6,910         4,974         1,254         2,767         6,272         182   

Gas station

     7,968         8,608         7,527         441         137         7,993         93   

Other

     10,291         11,896         9,120         1,171         293         10,254         208   

Residential property

     3,087         3,242         3,087         —           —           3,102         32   

Commercial and industrial loans:

                    

Commercial term

     8,147         8,716         3,912         4,235         1,881         8,078         99   

Commercial lines of credit

     2,092         2,210         442         1,650         8         2,439         7   

International loans

     1,331         1,331         767         563         24         1,360         —     

Consumer loans

     1,823         2,005         1,823         —           —           1,830         17   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

$ 46,930    $ 51,051    $ 35,148    $ 11,781    $ 5,299    $ 47,318    $ 710   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

Real estate loans:

Commercial property

Retail

$ 4,436    $ 4,546    $ 1,938    $ 2,498    $ 220    $ 5,373    $ 251   

Hotel/motel

  5,835      6,426      4,581      1,254      1,828      4,583      398   

Gas station

  8,974      9,594      8,526      448      150      11,281      787   

Other

  10,125      11,591      8,890      1,235      319      10,579      885   

Residential property

  3,127      3,268      3,127      —        —        2,924      115   

Commercial and industrial loans:

Commercial term

  7,614      8,133      2,999      4,615      2,443      9,458      566   

Commercial lines of credit

  466      575      466      —        —        1,205      66   

International loans

  3,546      3,546      2,628      918      286      1,736      33   

Consumer loans

  1,742      1,907      1,742      —        —        1,651      59   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

$ 45,865    $ 49,586    $ 34,897    $ 10,968    $ 5,246    $ 48,790    $ 3,160   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended  
     March 31      March 31  
     2015      2014  
     (In thousands)  

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

   $ 740       $ 1,213   

Less: Interest income recognized on impaired loans

     (710      (764
  

 

 

    

 

 

 

Interest foregone on impaired loans

$ 30    $ 449   
  

 

 

    

 

 

 

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 loan’s delinquency. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Nonaccrual loans may be restored to accrual status when principal and interest payments become current and full repayment is expected.

 

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The following table details nonaccrual loans (excluding PCI loans), disaggregated by loan class, as of the dates indicated:

 

     March 31      December 31  
     2015      2014  
     (In thousands)  

Real estate loans:

     

Commercial property

     

Retail

   $ 3,988       $ 2,160   

Hotel/motel

     4,431         3,835   

Gas station

     5,023         3,478   

Other

     5,548         4,961   

Residential property

     1,537         1,588   

Commercial and industrial loans:

     

Commercial term

     5,867         7,052   

Commercial lines of credit

     1,041         466   

Consumer loans

     1,823         1,742   
  

 

 

    

 

 

 

Total nonaccrual Non-PCI loans

$ 29,258    $ 25,282   
  

 

 

    

 

 

 

The following table details nonperforming assets (excluding PCI loans) as of the dates indicated:

 

     March 31      December 31  
     2015      2014  
     (In thousands)  

Nonaccrual Non-PCI loans

   $ 29,258       $ 25,282   

Loans 90 days or more past due and still accruing

     —           —     
  

 

 

    

 

 

 

Total nonperforming Non-PCI loans

  29,258      25,282   

Other real estate owned

  12,114      15,790   
  

 

 

    

 

 

 

Total nonperforming assets

$ 41,372    $ 41,072   
  

 

 

    

 

 

 

As of March 31, 2015, OREOs consisted of nineteen properties with a combined carrying value of $12.1 million. Of the $12.1 million, $11.8 million were OREOs acquired in the CBI acquisition or were obtained as a result of PCI loan collateral foreclosures subsequent to the acquisition date. As of December 31, 2014, OREOs consisted of twenty-five properties with a combined carrying value of $15.8 million. Of the $15.8 million, $15.3 million were OREOs acquired in the CBI acquisition or were obtained as a result of PCI loan collateral foreclosures subsequent to the acquisition date.

 

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Troubled Debt Restructuring

The following table details TDRs (excluding PCI loans), disaggregated by concession type and by loan type, as of March 31, 2015 and December 31, 2014:

 

     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)                              

March 31, 2015

                      

Real estate loans:

                            

Commercial property

                            

Retail

   $ —         $ —        $ —         $ 2,003       $ 2,003       $ 304       $ —         $ —         $ —         $ 304   

Hotel/motel

     1,073         (64     —           —           1,009         1,802         —           —           —           1,802   

Gas station

     3,033         —          —           —           3,033         352         —           —           —           352   

Other

     932         1,766        407         20         3,125         2,318         —           771         1,373         4,462   

Residential property

     729         —          —           —           729         —           —           —           306         306   

Commercial and industrial loans:

                            

Commercial term

     12         (3     2,507         1,632         4,148         53         223         481         1,533         2,290   

Commercial lines of credit

     220         —          124         98         442         1,650         —           —           —           1,650   

International loans

     —           —          —           —           —           —           —           199         —           199   

Consumer loans

     —           —          127         —           127         —           —           —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

$ 5,999    $ 1,699    $ 3,165    $ 3,753    $ 14,616    $ 6,479    $ 223    $ 1,451    $ 3,212    $ 11,365   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

Real estate loans:

Commercial property

Retail

$ —      $ —      $ —      $ 2,032    $ 2,032    $ 306    $ —      $ —      $ —      $ 306   

Hotel/motel

  1,115      (53   —        —        1,062      1,807      —        —        —        1,807   

Gas station

  1,075      —        —        —        1,075      2,335      —        —        —        2,335   

Other

  943      1,498      433      24      2,898      2,343      —        782      1,372      4,497   

Residential property

  742      —        —        —        742      —        —        —        308      308   

Commercial and industrial loans:

Commercial term

  14      (1   2,556      1,481      4,050      57      226      567      1,358      2,208   

Commercial lines of credit

  227      —        126      113      466      2,156      —        —        —        2,156   

International loans

  —        —        —        —        —        —        —        200      —        200   

Consumer loans

  —        —        131      —        131      —        —        —        —        —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

$ 4,116    $ 1,444    $ 3,246    $ 3,650    $ 12,456    $ 9,004    $ 226    $ 1,549    $ 3,038    $ 13,817   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2015 and December 31, 2014, total TDRs, excluding loans held for sale, were $26.0 million and $26.3 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered to the borrower, for economic or legal reasons related to the borrower’s financial difficulties. Loans are considered to be TDRs if they were restructured through payment structure modifications such as reducing the amount of principal and interest due monthly and/or allowing for interest only monthly payments for three months or more. All TDRs are impaired and are individually evaluated for specific impairment using one of these three criteria: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent.

At March 31, 2015 and December 31, 2014, TDRs, excluding loans held for sale, were subjected to specific impairment analysis, and $2.2 million and $2.9 million, respectively, of reserves relating to these loans were included in the allowance for loan losses.

The following table details TDRs (excluding PCI loans), disaggregated by loan class, for the three months ended March 31, 2015 and 2014:

 

     March 31, 2015      March 31, 2014  
     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

                 

Other (1)

     —         $ —         $ —           1       $ 943       $ 943   

Commercial and industrial loans:

                 

Commercial term (2)

     4         543         508         5         829         788   

Commercial lines of credit (3)

     —           —           —           1         250         242   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

  4    $ 543    $ 508      7    $ 2,022    $ 1,973   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

 

(1)  Includes a modification of $943,000 through a payment deferral for the three months ended March 31, 2014.
(2)  Includes modifications of $508,000 through extensions of maturity for the three months ended March 31, 2015, and modifications of $491,000 through a payment deferral, $107,000 through reductions of principal or accrued interest and $190,000 through an extension of maturity for the three months ended March 31, 2014
(3)  Includes a modification of $242,000 through a payment deferral for the three months ended March 31, 2014.

During the three months ended March 31, 2015, we restructured monthly payments on four loans, with a net carrying value of $508,000 as of March 31, 2015, through 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 TDRs (excluding PCI loans) that defaulted subsequent to the modifications occurring within the previous twelve months, disaggregated by loan class, for the three months ended March 31, 2015 and 2014, respectively:

 

     Three Months Ended  
     March 31, 2015      March 31, 2014  
     Number of
Loans
     Recorded
Investment
     Number of
Loans
     Recorded
Investment
 
     (In thousands, except number of loans)  

Real estate loans:

           

Commercial property

           

Retail

     1       $ 1,832         1       $ 310   

Hotel/motel

     —           —           1         1,000   

Gas station

     1         1,990         1         87   

Other

     1         379         2         481   

Commercial and industrial loans:

           

Commercial term

     —           —           1         53   

Commercial lines of credit

     1         124         —           —     

Consumer loans

     —           —           1         149   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-PCI loans

  4    $ 4,325      7    $ 2,080   
  

 

 

    

 

 

    

 

 

    

 

 

 

Purchased Credit Impaired Loans

As part of the acquisition of CBI, 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 summarizes the changes in carrying value of PCI loans during the year ended March 31, 2015:

 

     Carrying      Accretable  
     Amount      Yield  
     (In thousands)  

Balance at January 1, 2015

   $ 43,475       $ (11,025

Accretion

     843         843   

Payments received

     (5,425      —     

Disposal/transfer to OREO

     722         —     

Changes in expected cash flows, net

     —           376   

Provision for credit losses

     (110      —     
  

 

 

    

 

 

 

Balance at March 31, 2015

$ 39,505    $ (9,806
  

 

 

    

 

 

 

 

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Table of Contents

As of March 31, 2015, pass/pass-watch, special mention and classified PCI loans, disaggregated by loan class, were as follows:

 

                                           
     Pass/Pass-Watch      Special Mention      Classified      Total      Allowance      Total
PCI Loans
 
                   (In thousands)                

March 31, 2015

                 

Real estate loans:

                 

Commercial property

                 

Retail

   $ 1,201       $ 168       $ 9,196       $ 10,565       $ 404       $ 10,161   

Hotel/motel

     252         —           11,468         11,720         146         11,574   

Gas station

     —           178         6,263         6,441         555         5,886   

Other

     —           —           10,174         10,174         167         10,007   

Residential property

     —           —           1,716         1,716         46         1,670   

Commercial and industrial loans:

                 

Commercial term

     —           —           281         281         118         163   

Consumer loans

     —           —           44         44         —           44   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PCI loans

$ 1,453    $ 346    $ 39,142    $ 40,941    $ 1,436    $ 39,505   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

Real estate loans:

Commercial property

Retail

$ 1,207    $ 219    $ 7,109    $ 8,535    $ 401    $ 8,134   

Hotel/motel

  —        —        7,682      7,682      99      7,583   

Gas station

  —        1,242      6,503      7,745      302      7,443   

Other

  —        —        5,796      5,796      65      5,731   

Residential property

  —        —        14,371      14,371      28      14,343   

Commercial and industrial loans:

Commercial term

  —        —        327      327      131      196   

Consumer loans

  —        —        45      45      —        45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PCI loans

$ 1,207    $ 1,461    $ 41,833    $ 44,501    $ 1,026    $ 43,475   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans accounted for as PCI are generally considered accruing and performing loans as the accretable discount is accreted to interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, PCI loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans are classified as nonaccrual loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated. As of March 31, 2015 and December 31, 2014, we had no PCI loans on nonaccrual status and included in the delinquency table below.

 

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The following table presents a summary of the borrowers’ underlying payment status of PCI loans as of the dates indicated:

 

     30-59 Days Past
Due
     60-89 Days Past
Due
     90 Days or
More Past Due
     Total Past Due      Current      Total      Allowance
Amount
     Total
PCI Loans
 
                          (In thousands)                       

March 31, 2015

                       

Real estate loans:

                       

Commercial property

                       

Retail

   $ 13       $ —         $ 6,424       $ 6,437       $ 4,128       $ 10,565       $ 404       $ 10,161   

Hotel/motel

     —           —           6,801         6,801         4,919         11,720         146         11,574   

Gas station

     831         —           3,868         4,699         1,742         6,441         555         5,886   

Other

     62         —           9,719         9,781         393         10,174         167         10,007   

Residential property

     —           —           1,056         1,056         660         1,716         46         1,670   

Commercial and industrial loans:

                       

Commercial term

     —           6         110         116         165         281         118         163   

Consumer loans

     —           16         28         44         —           44         —           44   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PCI loans

$ 906    $ 22    $ 28,006    $ 28,934    $ 12,007    $ 40,941    $ 1,436    $ 39,505   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

Real estate loans:

Commercial property

Retail

$ 93    $ 287    $ 3,815    $ 4,195    $ 4,340    $ 8,535    $ 401    $ 8,134   

Hotel/motel

  312      —        2,490      2,802      4,880      7,682      99      7,583   

Gas station

  1,139      1,053      3,178      5,370      2,375      7,745      302      7,443   

Other

  —        —        5,235      5,235      561      5,796      65      5,731   

Residential property

  —        —        13,594      13,594      777      14,371      28      14,343   

Commercial and industrial loans:

Commercial term

  30      —        135      165      162      327      131      196   

Consumer loans

  —        17      28      45      —        45      —        45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PCI loans

$ 1,574    $ 1,357    $ 28,475    $ 31,406    $ 13,095    $ 44,501    $ 1,026    $ 43,475   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Servicing Assets and liabilities

The changes in servicing assets for the three months ended March 31, 2015 and 2014 were as follows:

 

     Three Months Ended March 31,  
     2015      2014  
     (In thousands)  

Servicing assets:

     

Balance at beginning of period

   $ 13,773       $ 6,833   

Addition related to sale of SBA loans

     617         200   

Amortization

     (1,069      (474
  

 

 

    

 

 

 

Balance at end of period

$ 13,321    $ 6,559   
  

 

 

    

 

 

 

Servicing liabilities:

Balance at beginning of period

$ 5,971    $ 33   

Amortization

  (442   (3
  

 

 

    

 

 

 

Balance at end of period

$ 5,529    $ 30   
  

 

 

    

 

 

 

At March 31, 2015 and 2014, we serviced loans sold to unaffiliated parties in the amounts of $486.1 million and $340.5 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 and Liability

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 CBI’s acquisition of Mutual Bank. The loss sharing asset was measured at its fair value as of August 31, 2014 in conjunction with the acquisition of CBI. During the third quarter of 2014, the Bank submitted losses in excess of the stated reimbursement threshold of $611.0 million, increasing the reimbursable percentage to 95 from 80. The three-year recovery period on the Commercial Share-Loss Portfolio commenced on October 1, 2014. During this period, 95 percent of any recoveries of previously charged-off and reimbursed Commercial SLA loans need to be reimbursed to the FDIC, less any reasonable recovery costs incurred until cumulative submitted losses fall below the stated reimbursement threshold. As of March 31, 2015, the

 

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Table of Contents

FDIC loss sharing liability was related to $543,000 net payables to the FDIC, consisting of $935,000 of FDIC recoveries partially offset by $392,000 of reimbursable expense owed to the Bank. Of the $543,000 net payable to the FDIC, all activity is related to the non Single Family SLA Portfolio.

Note 7 — Income Taxes

The Company’s income tax expense for continuing operations was $7.5 million for the three months ended March 31, 2015, compared to $7.8 million for the same period in 2014. The effective income tax rate was 40.53 percent for the three months ended March 31, 2015, compared to 41.69 percent for the same period in 2014. The decrease in the effective tax rate for the three months ended March 31, 2015 was due mainly to an increased benefit from low income housing investment compared to the three months ended March 31, 2014. Management concluded that no valuation allowance is required for the deferred tax assets as of March 31, 2015.

As of March 31, 2015, 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 March 31, 2015, 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, the Company assumed CBI’s Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) with an unpaid principal 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 in Subordinated Debentures. The Subordinated Debentures will mature on December 31, 2035, however, the Bank may redeem the Subordinated Debentures at an earlier date if certain conditions are met. The TPS will be subject to mandatory redemption if the Subordinated Debentures are repaid by the Company. Interest is payable quarterly, and the Company has the option to defer interest payments on the Subordinated Debentures from time to time for a period not to exceed five consecutive years. The discount amortization was $38,000 for the three months ended March 31, 2015.

Rescinded Stock Obligation

Hanmi Finanical assumed a rescinded stock obligation of $15.5 million and related accrued interest payable of $4.5 million at the closing date of the CBI acquisition. The obligation resulted from the issuance of CBI common shares that CBI was not legally authorized to issue in 2010 and 2009. Interest has been accrued on the obligation at statutory interest rates that vary from state to state. The rescinded stock obligation and accrued interest as of March 31, 2015 were $150,000 and $65,000, respectively, and were $933,000 and $288,000, respectively, as of December 31, 2014.

Note 9 — Stockholders’ Equity

Stock Warrants

As part of an 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 had an exercise price of $9.60 per share. According to the agreement, the warrants vested on October 14, 2010 and were exercisable until their expiration on October 14, 2015. The Company followed the guidance of FASB ASC Topic 815-40, Derivatives and Hedging—Contracts in Entity’s Own Stock, which established a framework for determining whether certain freestanding and embedded instruments are indexed to a company’s own stock for purposes of evaluation of the accounting for such instruments under existing accounting literature. Under GAAP, the issuer is required to measure the fair value of the equity instruments in the transaction as of the earlier of (i) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty’s performance is complete. The fair value of the warrants at the date of issuance totaling $2.0 million was recorded as a liability and a cost of equity, which was determined by the Black-Scholes option pricing model. The expected stock volatility was based on historical volatility of our common stock over the expected term of the warrants. We used a weighted average expected stock volatility of 111.46 percent. The expected life assumption was based on the contract term of five years. The dividend yield of zero was based on the fact that we had no intention to pay cash dividends for the term at the grant date. The risk free rate of 2.07 percent used for the warrants was equal to the zero coupon rate in effect at the time of the grant. During the years of 2012, 2013 and 2014, all the stock warrants were exercised and there were no outstanding stock warrants as of December 31, 2014.

 

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Note 10 – Accumulated Other Comprehensive Income

Activity in accumulated other comprehensive income for the three months ended March 31, 2015 and 2014 was as follows:

 

    

Unrealized Gains

and Losses on

Available-for-Sale

   

Unrealized Gains

and Losses on

Interest-Only

              
                   
          Tax Benefit        
     Securities     Strip      (Expense)     Total  
           (In thousands)        

For the three months ended March 31, 2015

         

Balance at beginning of period

   $ (985   $ 16       $ 1,432      $ 463   

Other comprehensive income (loss) before reclassification

     12,043        —           (4,123     7,920   

Reclassification from accumulated other comprehensive income

     (2,184     —           —          (2,184
  

 

 

   

 

 

    

 

 

   

 

 

 

Period change

  9,859      —        (4,123   5,736   
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance at end of period

$ 8,874    $ 16    $ (2,691 $ 6,199   
  

 

 

   

 

 

    

 

 

   

 

 

 

For the three months ended March 31, 2014

Balance at beginning of period

$ (18,187 $ 16    $ 8,791    $ (9,380

Other comprehensive income (loss) before reclassification

  8,098      1      (2,807   5,292   

Reclassification from accumulated other comprehensive income

  (1,421   —        —        (1,421
  

 

 

   

 

 

    

 

 

   

 

 

 

Period change

  6,677      1      (2,807   3,871   
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance at end of period

$ (11,510 $ 17    $ 5,984    $ (5,509
  

 

 

   

 

 

    

 

 

   

 

 

 

For the three months ended March 31, 2015, there was a $2.2 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $2.2 million reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under noninterest income. The securities sold had a recorded unrealized gain of $535,000 in accumulated other comprehensive income as of December 31, 2014.

For the three months ended March 31, 2014, there was a $1.4 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $1.4 million reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under noninterest income. The securities sold had a recorded unrealized gain of $59,000 in accumulated other comprehensive income as of December 31, 2013.

Note 11 — Regulatory Matters

Risk-Based Capital

In July 2013, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation approved the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The rules also revise the regulatory capital elements, add a new common equity Tier I capital ratio, and increase the minimum Tier I capital ratio requirement. The revisions permit banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. Additionally, a new rule on the capital conservation buffer will be implemented beginning January 1, 2016. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if certain capital levels fall below newly required amounts. The rules became effective January 1, 2015 for smaller, non-complex banking organizations with full implementation of certain deductions and adjustments to regulatory capital through January 1, 2019.

 

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The capital ratios of Hanmi Financial and the Bank as of March 31, 2015 and December 31, 2014 were as follows:

 

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

March 31, 2015

               

Total capital (to risk-weighted assets):

               

Hanmi Financial

   $ 493,598         15.40   $ 252,777         8.00     N/A         N/A   

Hanmi Bank

   $ 482,965         15.33   $ 252,348         8.00   $ 315,435         10.00

Tier 1 capital (to risk-weighted assets):

               

Hanmi Financial

   $ 454,582         14.15   $ 189,583         6.00     N/A         N/A   

Hanmi Bank

   $ 443,946         14.08   $ 189,261         6.00   $ 252,348         8.00

Common equity Tier 1 capital (to risk-weighted assets)

               

Hanmi Financial

   $ 454,582         14.15   $ 142,187         4.50     N/A         N/A   

Hanmi Bank

   $ 443,946         14.08   $ 141,946         4.50   $ 205,033         6.50

Tier 1 capital (to average assets):

               

Hanmi Financial

   $ 454,582         10.78   $ 165,895         4.00     N/A         N/A   

Hanmi Bank

   $ 443,946         10.72   $ 165,710         4.00   $ 207,137         5.00

December 31, 2014

               

Total capital (to risk-weighted assets):

               

Hanmi Financial

   $ 493,598         15.89   $ 248,501         8.00     N/A         N/A   

Hanmi Bank

   $ 470,934         15.18   $ 248,157         8.00   $ 310,196         10.00

Tier 1 capital (to risk-weighted assets):

               

Hanmi Financial

   $ 454,582         14.63   $ 124,250         4.00     N/A         N/A   

Hanmi Bank

   $ 431,971         13.93   $ 124,078         4.00   $ 186,118         6.00

Tier 1 capital (to average assets):

               

Hanmi Financial

   $ 454,582         10.91   $ 166,600         4.00     N/A         N/A   

Hanmi Bank

   $ 431,971         10.39   $ 166,332         4.00   $ 207,915         5.00

Note 12 — Fair Value Measurements

Fair Value Measurements

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:

 

    Level 1— Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

    Level 2— Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

 

    Level 3— Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

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

 

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

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

SBA loans held for sale – SBA loans held for sale are carried at the lower of cost or fair value. As of March 31, 2015 and December 31, 2014, we had $8.7 million and $5.5 million SBA loans held for sale, respectively. Management obtains quotes, bids or pricing indication sheets on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At March 31, 2015, the entire balance of SBA loans held for sale was recorded at its cost. We record SBA loans held for sale on a nonrecurring basis with Level 2 inputs.

Impaired loans (excluding PCI loans) – Nonaccrual loans and performing restructured loans are considered impaired for reporting purposes and are measured and recorded at fair value on a non-recurring basis. Nonaccrual Non-PCI loans with an unpaid principal balance over $100,000 and all performing restructured loans are reviewed individually for the amount of impairment, if any. Nonaccrual Non-PCI loans with an unpaid principal balance of $100,000 or less are evaluated for impairment collectively. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement.

Other real estate owned – Fair value of OREO is based primarily on third party appraisals, less costs to sell and result in a Level 2 classification of the inputs for determining fair value. Appraisals are required annually and may be updated more frequently as circumstances require and the fair value adjustments are made to OREO based on the updated appraised value of the property.

Nonperforming loans held for sale – We reclassify certain nonperforming loans as held for sale when we decide to sell those loans. The fair value of nonperforming loans held for sale is generally based upon the quotes, bids or sales contract prices which approximate their fair value. Nonperforming loans held for sale are recorded at estimated fair value less anticipated liquidation cost. As of March 31, 2015 and December 31, 2014, we did not have nonperforming loans held for sale, which are measured on a nonrecurring basis with Level 2 inputs.

 

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

There were no transfers of assets between Level 1 and Level 2 of the fair value hierarchy for the three months ended March 31, 2015. As of March 31, 2015 and December 31, 2014, assets and liabilities measured at fair value on a recurring basis are as follows:

 

     Level 1      Level 2      Level 3         
     Quoted Prices in
Active Markets
for Identical
Assets
     Significant
Observable
Inputs with No
Active Market
with Identical
Characteristics
     Significant
Unobservable
Inputs
     Balance  
     (In thousands)  

March 31, 2015

           

Assets:

           

Securities available for sale:

           

Mortgage-backed securities

   $ —         $ 492,896       $ —         $ 492,896   

Collateralized mortgage obligations

     —           165,405         —           165,405   

U.S. government agency securities

     63,355         —           —           63,355   

SBA loan pools securities

     —           75,027         —           75,027   

Municipal bonds-tax exempt

     —           3,676         —           3,676   

Municipal bonds-taxable

     —           17,042         —           17,042   

Corporate bonds

     —           16,984         —           16,984   

U.S. treasury securities

     163         —           —           163   

Other securities

     —           23,100         —           23,100   

Equity securities

     —           —           416         416   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

$ 63,518    $ 794,130    $ 416    $ 858,064   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

Assets:

Securities available for sale:

Mortgage-backed securities

$ —      $ 573,286    $ —      $ 573,286   

Collateralized mortgage obligations

  —        188,047      —        188,047   

U.S. government agency securities

  128,207      —        —        128,207   

SBA loan pools securities

  —        109,447      —        109,447   

Municipal bonds-tax exempt

  —        3,681      709      4,390   

Municipal bonds-taxable

  —        16,922      —        16,922   

Corporate bonds

  —        16,948      —        16,948   

U.S. treasury securities

  163      —        —        163   

Other securities

  —        22,893      —        22,893   

Equity securities

  —        —        414      414   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

$ 128,370    $ 931,224    $ 1,123    $ 1,060,717   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The table below presents a reconciliation and income statement classification of gains and losses for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2015:

 

     Beginning
Balance as of
January 1,
2015
     Purchases,
Issuances
and
Settlement
    Realized
Gains or
Losses
in Earnings
     Unrealized
Gains or
Losses
in Other
Comprehensive
Income
     Ending
Balance as of
March 31,
2015
 
            (In thousands)         

Assets:

             

Municipal bonds-tax exempt (1)

   $ 709       $ (709   $ —         $ —         $ —     

Equity securities (2)

     414         —          —           2         416   

 

(1)  A zero coupon tax credit municipal bond matured during the first quarter of 2015.
(2)  Reflects two equity securities that are not actively traded. The fair value of one equity security with a fair value of $216,000 was computed using valuation multiples (price to book and price to earnings) derived from market transactions for comparable companies. The other equity security with a fair value of $200,000 was computed using valuation multiples (price to book and price to earnings) derived from 1) market transactions for comparable companies, and 2) publicly-traded comparable companies.

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

As of March 31, 2015 and December 31, 2014, assets and liabilities measured at fair value on a non-recurring basis are as follows:

 

     Level 1      Level 2      Level 3         
     Quoted Prices in
Active Markets
for Identical
Assets
     Significant
Observable
Inputs With No
Active Market
With  Identical
Characteristics
     Significant
Unobservable
Inputs
     Loss During the
Three Months Ended
March 31, 2015
 
            (In thousands)         

March 31, 2015

           

Assets:

           

Impaired loans (excluding PCI loans) (1)

   $ —         $ 32,116       $ 956       $ 1,200   

Other real estate owned (2)

     —           12,114         —           —     
     Level 1      Level 2      Level 3         
     Quoted Prices in
Active Markets
for Identical
Assets
     Significant
Observable
Inputs With No
Active Market
With Identical
Characteristics
     Significant
Unobservable
Inputs
     Loss During the
Twelve Months Ended
December 31, 2014
 
            (In thousands)         

December 31, 2014

     

Assets:

           

Impaired loans (3)

   $ —         $ 32,171       $ 781       $ 2,774   

Other real estate owned (4)

     —           15,790         —           —     

 

(1)  Include real estate loans of $30.1 million, commercial and industrial loans of $1.1 million, and consumer loans of $1.8 million.
(2)  Includes properties from the foreclosure of commercial property loans of $12.0 million and residential property loans of $163,000.
(3)  Include real estate loans of $30.0 million, commercial and industrial loans of $1.2 million, and consumer loans of $1.7 million.
(4)  Includes properties from the foreclosure of commercial property loans of $13.2 million and residential property loans of 2.6 million.

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

 

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

The estimated fair values of financial instruments were as follows:

 

     March 31, 2015  
     Carrying      Fair Value  
     Amount      Level 1      Level 2      Level 3  
            (In thousands)         

Financial assets:

           

Cash and cash equivalents

   $ 182,054       $ 182,054       $ —         $ —     

Securities available for sale

     858,064         63,518         794,130         416   

Loans receivable, net of allowance for loan losses

     2,767,080         —           —           2,772,612   

Loans held for sale

     8,677         —           8,677         —     

Accrued interest receivable

     9,238         9,238         —           —     

Servicing assets

     13,321         —           —           13,321   

Investment in FHLB stock

     17,581         17,581         —           —     

Investment in FRB stock

     12,273         12,273         —           —     

Financial liabilities:

           

Noninterest-bearing deposits

     1,064,695         —           1,064,695         —     

Interest-bearing deposits

     2,487,981         —           —           2,500,027   

Servicing liabilities

     5,529         —           —           5,529   

Borrowings

     18,582         —           —           18,582   

Accrued interest payable

     3,497         3,497         —           —     

Off-balance sheet items:

           

Commitments to extend credit

     297,912         —           —           297,912   

Standby letters of credit

     6,299         —           —           6,299   
     December 31, 2014  
     Carrying      Fair Value  
     Amount      Level 1      Level 2      Level 3  
            (In thousands)         

Financial assets:

           

Cash and cash equivalents

   $ 158,320       $ 158,320       $ —         $ —     

Securities available for sale

     1,060,717         128,370         931,224         1,123   

Loans receivable, net of allowance for loan losses

     2,735,932         —           —           2,738,401   

Loans held for sale

     5,451         —           5,451         —     

Accrued interest receivable

     9,749         9,749         —           —     

Servicing assets

     13,773         —           —           13,773   

Investment in FHLB stock

     17,580         17,580         —           —     

Investment in FRB stock

     12,273         12,273         —           —     

Financial liabilities:

           

Noninterest-bearing deposits

     1,022,972         —           1,022,972         —     

Interest-bearing deposits

     2,533,774         —           —           2,528,304   

Servicing liabilities

     5,971         —           —           5,971   

Borrowings

     168,544         —           —           168,544   

Accrued interest payable

     3,450         3,450         —           —     

Off-balance sheet items:

           

Commitments to extend credit

     309,584         —           —           309,584   

Standby letters of credit

     8,982         —           —           8,982   

 

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

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

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

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

The fair value of PCI loans receivable was estimated based on discounted expected cash flows. Increases in expected cash flows and improvements in the timing of cash flows over those previously estimated increase the amount of accretable yield and are recognized as an increase in yield and interest income prospectively. Decreases in the amount and delays in the timing of expected cash flows compared to those previously estimated decrease the amount of accretable yield and usually result in a provision for loan losses and the establishment of an allowance for loan losses (Level 3).

The fair value of impaired loans (excluding PCI loans) is estimated based on the net realizable fair value of the collateral or the observable market price of the most recent sale or quoted price from loans held for sale. The Company does not record loans at fair value on a recurring basis. Nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on the current appraised value of the collateral (Level 3).

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

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

Servicing assets or servicing liabilities – Servicing assets or servicing liabilities are carried at implied fair value. The fair values of the servicing assets or servicing liabilities are estimated by discounting future cash flows using market-based discount rates and prepayments speeds. The discount rate is based on the current U.S. Treasury yield curve, as published by the Department of the Treasury, plus a spread for the marketplace risk associated with these assets. (Level 3)

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

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

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

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

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

 

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Table of Contents

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

Note 13 — Share-Based Compensation

Share-Based Compensation Expense

For the three months ended March 31, 2015 and 2014, share-based compensation expenses were $528,000 and $605,000, respectively. Net tax benefits recognized from stock option exercises and restricted stock awards vesting were $30,000 and $112,000 for the three months ended March 31, 2015 and 2014, respectively.

Unrecognized Share-Based Compensation Expense

As of March 31, 2015, unrecognized share-based compensation expense was as follows:

 

            Average Expected  
     Unrecognized      Recognition  
     Expense      Period  
     (In thousands)  

Stock option awards

   $ 1,137         1.6 years   

Restricted stock awards

     2,360         2.0 years   
  

 

 

    

Total unrecognized share-based compensation expense

$ 3,497      1.8 years   
  

 

 

    

The table below provides stock option information for the three months ended March 31, 2015:

 

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

Options outstanding at beginning of period

     603,872       $ 23.78         8.3 years       $ 2,853 (1) 

Options exercised

     (19,581    $ 14.20         8.0 years      

Options forfeited

     (501    $ 12.54         7.7 years      

Options expired

     (125    $ 144.00         1.1 years      
  

 

 

          

Options outstanding at end of period

  583,665    $ 24.09      8.0 years    $ 2,383 (2) 
  

 

 

          

Options exercisable at end of period

  205,058    $ 35.12      6.8 years    $ 1,158 (2) 

 

(1)  Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $21.81 as of December 31, 2014, over the exercise price, multiplied by the number of options.
(2)  Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $21.15 as of March 31, 2015, over the exercise price, multiplied by the number of options.

There were 19,581 stock options exercised during the three months ended March 31, 2015, compared to 15,195 stock options exercised during the same period in 2014.

Restricted Stock Awards

Restricted stock awards under the Company’s 2007 and 2013 Equity Compensation Plans typically vest over three to five years, and are subject to forfeiture if employment terminates prior to the lapse of restrictions. Hanmi Financial becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued. Forfeitures of restricted stock are treated as cancelled shares.

 

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The table below provides information for restricted stock awards for the three months ended March 31, 2015:

 

     Number of
Shares
     Weighted-
Average

Grant Date
Fair Value
Per Share
 

Restricted stock at beginning of period

     173,222       $ 19.58   

Restricted stock granted

     3,850       $ 20.33   

Restricted stock vested

     (2,000    $ 24.45   
  

 

 

    

Restricted stock at end of period

  175,072    $ 19.55   
  

 

 

    

Note 14 — Earnings Per Share

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

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

 

     Three Months Ended March 31,  
     2015      2014  
            Weighted-                    Weighted-         
     Net      Average      Per      Net      Average      Per  
     Income      Shares      Share      Income      Shares      Share  
     (Numerator)      (Denominator)      Amount      (Numerator)      (Denominator)      Amount  
     (In thousands, except share and per share data)  

Basic EPS

                 

Income from continuing operations, net of taxes

   $ 11,054         31,747,299       $ 0.35       $ 10,969         31,659,705       $ 0.35   

Income from discontinued operations, net of taxes

     —           31,747,299         —           22         31,659,705         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Basic EPS

$ 11,054      31,747,299    $ 0.35    $ 10,991      31,659,705    $ 0.35   

Effect of dilutive securities - options and unvested restricted stock

  —        279,424      —        —        274,458      —     

Diluted EPS

Income from continuing operations, net of taxes

$ 11,054      32,026,723    $ 0.35    $ 10,969      31,934,163    $ 0.34   

Income from discontinued operations, net of taxes

  —        32,026,723      —        22      31,934,163      —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

$ 11,054      32,026,723    $ 0.35    $ 10,991      31,934,163    $ 0.34   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2015 and 2014, stock options totaling 138,725 and 34,250 respectively, were not included in the computation of diluted EPS because their effect would be anti-dilutive.

Note 15 — Off-Balance Sheet Commitments

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to the risk involved with on-balance sheet items recognized in the Consolidated Balance Sheets.

The Bank’s exposure to credit losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, was based on management’s credit evaluation of the counterparty.

 

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Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-producing or borrower-occupied properties. The following table shows the distribution of undisbursed loan commitments as of the dates indicated:

 

     March 31,      December 31,  
     2015      2014  
     (In thousands)  

Commitments to extend credit

   $ 297,912       $ 309,584   

Standby letters of credit

     6,299         8,982   

Commercial letters of credit

     4,590         7,046   
  

 

 

    

 

 

 

Total undisbursed loan commitments

$ 308,801    $ 325,612   
  

 

 

    

 

 

 

Note 16 — Liquidity

Hanmi Financial

Management believes that Hanmi Financial, on a stand-alone basis, has adequate liquid assets to meet its operating cash needs through March 31, 2016.

Hanmi Bank

The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash flow requirements of our customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances and brokered deposits. As of March 31, 2015, the Bank had $99,000 of brokered deposits assumed from the CBI acquisition.

We monitor the sources and uses of funds on a regular basis to maintain an acceptable liquidity position. The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 30 percent of its assets. As of March 31, 2015, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $649.6 million and $649.6 million, respectively, compared to $649.5 million and $499.5 million, respectively, as of December 31, 2014. The Bank’s FHLB borrowings as of March 31, 2015 and December 31, 2014 totaled zero and $150.0 million, respectively, which represented zero percent and 3.54 percent of assets as of March 31, 2015 and December 31, 2014, respectively.

The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged by the Bank, and the advance rates for qualifying collateral may be adjusted upwards or downwards by the FHLB from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans and investment securities and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.

As a means of augmenting its liquidity, the Bank had an available borrowing source of $55.9 million from the Federal Reserve Discount Window, to which the Bank pledged loans with a carrying value of $77.4 million, and had no borrowings as of December 31, 2015. The Bank has a line of credit with Raymond James & Associates, Inc. for repurchase agreements up to $100.0 million. The Bank has an unsecured federal funds lines of credit totaling $95.0 million from three financial institutions to support short-term liquidity.

The Bank has Contingency Funding Plans (“CFPs”) designed to ensure that liquidity sources are sufficient to meet its ongoing obligations and commitments, particularly in the event of a liquidity contraction. The CFPs are designed to examine and quantify its liquidity under various “stress” scenarios. Furthermore, the CFPs provide a framework for management and other critical personnel to follow in the event of a liquidity contraction or in anticipation of such an event. The CFPs address authority for activation and decision making, liquidity options and the responsibilities of key departments in the event of a liquidity contraction.

Note 17 — Segment Reporting

Through our branch network and lending units, we provide a broad range of financial services to individuals and companies. These services include demand, time and savings deposits, and real estate, commercial, industrial and consumer lending. While our chief decision makers monitor the revenue streams of our various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, we consider all of our operations to be aggregated in one reportable operating segment.

 

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