Quarterly report pursuant to Section 13 or 15(d)

Acquisition

v3.2.0.727
Acquisition
 6 Months Ended
Jun. 30, 2015
Business Combinations [Abstract]  
Acquisition
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 $50.0 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 $1.10 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. 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 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 income tax assets and liabilities were based on a preliminary estimates 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 stock 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

OREO
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 and six months ended June 30, 2015, acquisition costs of $136,000 and $1.7 million, respectively, 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.

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 of the CDI for the three and six months ended June 30, 2015 was $95,000 and $190,000, respectively.

The fair value of savings and transactional deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Expected cash flows were utilized for fair value calculation of the certificates of deposit based on the contractual terms of the certificates of deposit and the cash flows were discounted based on a current market rate for certificates of deposit with corresponding maturities. The premium of $11.3 million was recognized for certificates of deposit acquired from CBI. The amortization of premium for the three and six months ended June 30, 2015 were $1.5 million and $3.1 million, respectively.

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 of discount for the three and six months ended June 30, 2015 were $41,000 and $79,000, respectively.

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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except per share data)
Pro forma revenues (net interest income plus noninterest income)
$
53,491

 
$
49,343

 
$
107,022

 
$
105,589

Pro forma net income from continuing operations
$
15,276

 
$
8,521

 
$
27,887

 
$
24,801

Pro forma earnings per share from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.48

 
$
0.27

 
$
0.88

 
$
0.78

Diluted
$
0.48

 
$
0.27

 
$
0.87

 
$
0.78