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HOPE BANCORP INC - Quarter Report: 2014 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________ 
FORM 10-Q
______________________________________________ 
(Mark One)
x
Quarterly report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2014
or
o
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: 000-50245
______________________________________________ 
BBCN BANCORP, INC.
(Exact name of registrant as specified in its charter)
______________________________________________ 
Delaware
 
95-4849715
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
 
 
 
3731 Wilshire Boulevard, Suite 1000, Los Angeles, California
 
90010
(Address of Principal executive offices)
 
(ZIP Code)
(213) 639-1700
(Registrant’s telephone number, including area code)
(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  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
x
 
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
o
 
Smaller Reporting Company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o   No  x
As of November 3, 2014, there were 79,497,331 outstanding shares of the issuer’s Common Stock, $0.001 par value.



Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Condensed Consolidated Statements of Financial Condition - September 30, 2014 (Unaudited) and December 31, 2013
 
 
 
 
Condensed Consolidated Statements of Income - Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Changes in Stockholders' Equity - Nine Months Ended September 30, 2014 and 2013 (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2014 and 2013 (Unaudited)
 
 
 
 
 
 
 
Item 2
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 


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Forward-Looking Statements

Some statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to, among other things, expectations regarding the business environment in which we operate, projections of future performance, perceived opportunities in the market and statements regarding our business strategies, objectives and vision. Forward-looking statements include, but are not limited to, statements preceded by, followed by or that include the words “will,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions. With respect to any such forward-looking statements the Company claims the protection provided for in the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties. Our actual results, performance or achievements may differ significantly from the results, performance or achievements expressed or implied in any forward-looking statements. The risks and uncertainties include: possible deterioration in economic conditions in our areas of operation; interest rate risk associated with volatile interest rates and related asset-liability matching risk; liquidity risks; risk of significant non-earning assets, and net credit losses that could occur, particularly in times of weak economic conditions or times of rising interest rates; and regulatory risks associated with current and future regulations. For additional information concerning these and other risk factors, see "Part II, Item 1A. Risk Factors" contained herein and “Part I, Item 1A. Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2013.
The Company does not undertake, and specifically disclaims any obligation, to update any forward looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.


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PART I
FINANCIAL INFORMATION

Item 1.
Financial Statements


BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
(Unaudited)
 
 
 
September 30,
2014
 
December 31,
2013
ASSETS
(In thousands, except share data)
Cash and cash equivalents:
 
 
 
Cash and due from banks
$
95,488

 
$
96,061

Interest bearing deposit at the Federal Reserve Bank ("FRB")
347,832

 
220,644

Total cash and cash equivalents
443,320

 
316,705

Securities available for sale, at fair value
710,625

 
705,751

Loans held for sale, at the lower of cost or fair value
45,695

 
44,115

Loans receivable, net of allowance for loan losses (September 30, 2014 - $68,232; December 31, 2013 - $67,320)
5,364,612

 
5,006,856

Other real estate owned ("OREO"), net
23,162

 
24,288

Federal Home Loan Bank ("FHLB") stock, at cost
28,361

 
27,941

Premises and equipment, net of accumulated depreciation and amortization (September 30, 2014 - $28,505; December 31, 2013 - $25,852)
30,999

 
30,894

Accrued interest receivable
13,142

 
13,403

Deferred tax assets, net
67,712

 
89,297

Customers’ liabilities on acceptances
3,822

 
5,602

Bank owned life insurance ("BOLI")
45,644

 
44,770

Investments in affordable housing partnerships
10,908

 
11,460

Goodwill
105,401

 
105,401

Core deposit intangible assets, net
4,211

 
5,184

Servicing assets
9,523

 
8,915

FDIC loss share receivable

 
1,110

Other assets
20,669

 
33,507

Total assets
$
6,927,806

 
$
6,475,199

 
 
 
 
(Continued)
 

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BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
(Unaudited)
 
 
 
September 30,
2014
 
December 31,
2013
LIABILITIES AND STOCKHOLDERS’ EQUITY
(In thousands, except share data)
LIABILITIES:
 
 
 
Deposits:
 
 
 
Noninterest bearing
$
1,503,275

 
$
1,399,454

Interest bearing:
 
 
 
Money market and NOW accounts
1,537,467

 
1,376,068

Savings deposits
199,953

 
222,446

Time deposits of $100,000 or more
1,595,213

 
1,498,784

Other time deposits
673,846

 
651,305

Total deposits
5,509,754

 
5,148,057

FHLB advances
467,071

 
421,352

Subordinated debentures
42,117

 
57,410

Accrued interest payable
6,173

 
4,821

Acceptances outstanding
3,822

 
5,602

Other liabilities
34,221

 
28,583

Total liabilities
6,063,158

 
5,665,825

STOCKHOLDERS’ EQUITY:
 
 
 
Common stock, $0.001 par value; authorized 150,000,000 shares at September 30, 2014 and December 31, 2013; issued and outstanding, 79,497,331and 79,441,525 shares at September 30, 2014 and December 31, 2013, respectively
79

 
79

Additional paid-in capital
541,406

 
540,876

Retained earnings
324,664

 
278,604

Accumulated other comprehensive loss, net
(1,501
)
 
(10,185
)
Total stockholders’ equity
864,648

 
809,374

Total liabilities and stockholders’ equity
$
6,927,806

 
$
6,475,199


See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share data)
INTEREST INCOME:
 
 
 
 
 
 
 
Interest and fees on loans
$
72,437

 
$
67,747

 
$
212,818

 
$
196,249

Interest on securities
3,999

 
3,802

 
12,171

 
10,755

Interest on federal funds sold and other investments
648

 
486

 
1,901

 
1,153

Total interest income
77,084

 
72,035

 
226,890

 
208,157

INTEREST EXPENSE:
 
 
 
 
 
 
 
Interest on deposits
7,419

 
5,959

 
21,381

 
17,014

Interest on FHLB advances
1,373

 
1,251

 
3,894

 
3,693

Interest on other borrowings
385

 
465

 
1,252

 
1,271

Total interest expense
9,177

 
7,675

 
26,527

 
21,978

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
67,907

 
64,360

 
200,363

 
186,179

PROVISION FOR LOAN LOSSES
4,256

 
744

 
10,278

 
9,050

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
63,651

 
63,616

 
190,085

 
177,129

NONINTEREST INCOME:
 
 
 
 
 
 
 
Service fees on deposit accounts
3,456

 
3,321

 
10,288

 
9,118

International service fees
958

 
1,196

 
3,074

 
3,700

Loan servicing fees, net
798

 
1,004

 
2,376

 
3,009

Wire transfer fees
876

 
916

 
2,700

 
2,619

Other income and fees
1,674

 
1,583

 
4,941

 
4,036

Net gains on sales of SBA loans
3,578

 
2,827

 
9,112

 
8,816

Net gains on sales of other loans

 

 

 
62

Net gains on sales of securities available for sale

 

 

 
54

Net gains (losses) on sales of OREO
29

 
(48
)
 
466

 
(57
)
Total noninterest income
11,369

 
10,799

 
32,957

 
31,357

NONINTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
19,346

 
16,535

 
56,428

 
49,086

Occupancy
4,722

 
4,360

 
14,060

 
13,206

Furniture and equipment
1,916

 
1,728

 
5,942

 
4,914

Advertising and marketing
1,535

 
1,393

 
4,131

 
3,856

Data processing and communication
2,206

 
1,983

 
6,626

 
5,488

Professional fees
1,567

 
1,440

 
4,195

 
4,184

FDIC assessments
1,135

 
818

 
3,238

 
2,370

Credit related expenses
3,531

 
2,646

 
7,969


6,564

Merger and integration expense
66

 
931

 
290

 
2,621

Other
3,396

 
3,912

 
10,555

 
11,161

Total noninterest expense
39,420

 
35,746

 
113,434

 
103,450

INCOME BEFORE INCOME TAX PROVISION
35,600

 
38,669

 
109,608

 
105,036

INCOME TAX PROVISION
14,180

 
15,117

 
43,680

 
41,352

NET INCOME
$
21,420

 
$
23,552

 
65,928

 
$
63,684

EARNINGS PER COMMON SHARE
 
 
 
 
 
 
 
Basic
$
0.27

 
$
0.30

 
$
0.83

 
$
0.81

Diluted
$
0.27

 
$
0.30

 
$
0.83

 
$
0.80


See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Net income
$
21,420

 
$
23,552

 
$
65,928

 
$
63,684

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized (losses) gains on securities available for sale and interest only strips
(3,004
)
 
2,021

 
14,790

 
(21,389
)
Reclassification adjustments for gains realized in income

 

 

 
(54
)
Tax (benefit) expense
(1,341
)
 
405

 
6,106

 
(8,972
)
Change in unrealized gains or losses on securities available for sale and interest only strips
(1,663
)
 
1,616

 
8,684

 
(12,471
)
Total comprehensive income
$
19,757

 
$
25,168

 
$
74,612

 
$
51,213



See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


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BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
 
 
Common stock
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional paid-in capital
 
Retained
earnings
 
Accumulated other comprehensive income (loss), net
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JANUARY 1, 2013
 
78,041,511

 
$
78

 
$
525,354

 
$
216,590

 
$
9,082

Acquisition of Pacific International Bancorp, Inc.
 
632,050

 
1

 
8,640

 
 
 
 
Acquisition of Foster Bankshares, Inc.
 
49,496

 
 
 
778

 
 
 
 
Issuance of additional shares pursuant to various stock plans
 
524,662

 

 
1,954

 

 

Tax effect of stock plans
 

 

 
208

 

 

Stock-based compensation
 

 

 
1,128

 

 

Redemption of common stock warrant
 
 
 
 
 

 
 
 
 
Cash dividends declared on common stock
 
 
 
 
 
 
 
(13,796
)
 
 
Comprehensive income:
 

 

 

 

 

Net income
 

 

 

 
63,684

 

Other comprehensive loss
 

 

 

 

 
(12,471
)
BALANCE, SEPTEMBER 30, 2013
 
79,247,719

 
$
79

 
$
538,062

 
$
266,478

 
$
(3,389
)
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JANUARY 1, 2014
 
79,441,525

 
$
79

 
$
540,876

 
$
278,604

 
$
(10,185
)
Issuance of additional shares pursuant to various stock plans
 
52,837

 

 

 


 


Tax effect of stock plans
 
 
 
 
 

 
 
 
 
Stock-based compensation
 


 


 
488

 


 


Redemption of Foster common stock
 
2,969

 
 
 
42

 
 
 
 
Cash dividends declared on common stock
 


 


 


 
(19,868
)
 


Comprehensive income:
 


 


 


 


 


Net income
 


 


 


 
65,928

 


Other comprehensive income
 


 


 


 


 
8,684

BALANCE, SEPTEMBER 30, 2014
 
79,497,331

 
$
79

 
$
541,406

 
$
324,664

 
$
(1,501
)

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


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BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES

 

Net income
$
65,928

 
$
63,684

Adjustments to reconcile net income to net cash from operating activities:

 


      Depreciation, amortization, net of discount accretion
(10,983
)
 
(13,402
)
Stock-based compensation expense
488

 
1,128

Provision for loan losses
10,278

 
9,050

Valuation adjustment of loans held for sale

 
53

Valuation adjustment of OREO
1,074

 
1,229

Proceeds from sales of loans held for sale
112,686

 
107,712

Originations of loans held for sale
(107,792
)
 
(89,832
)
Net gains on sales of SBA and other loans
(9,112
)
 
(8,878
)
Net change in BOLI
(874
)
 
(826
)
Net gains on sales of securities available for sale

 
(54
)
Net (gains) loss on sales of OREO
(466
)
 
57

Change in accrued interest receivable
261

 
539

Change in deferred income taxes
15,479

 
9,487

Change in prepaid FDIC insurance

 
7,771

Change in investments in affordable housing partnership
552

 
1,181

Change in FDIC loss share receivable
1,110

 
3,367

Increase in servicing assets
(2,943
)
 
(2,535
)
Change in other assets
12,873

 
20,052

Change in accrued interest payable
1,352

 
472

Change in other liabilities
5,638

 
(9,486
)
            Net cash provided by operating activities
95,549

 
100,769

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Net change in loans receivable
(350,828
)
 
(228,758
)
Proceeds from sales of securities available for sale

 
6,636

Proceeds from sales of OREO
7,072

 
1,708

Purchase of premises and equipment
(4,960
)
 
(6,524
)
Purchase of securities available for sale
(82,552
)
 
(167,850
)
Purchase of FHLB stock
(536
)
 
(1,969
)
Redemption of FHLB stock
116

 
49

Proceeds from matured or paid-down securities available for sale
89,719

 
143,627

Net cash received from acquisition - Pacific International Bancorp, Inc.

 
25,967

Net cash received from acquisition - Foster Bankshares, Inc.

 
41,167

Redemption of preferred stock upon the acquisition

 
(7,475
)
          Net cash used in investing activities
(341,969
)
 
(193,422
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net change in deposits
362,367

 
172,800

Redemption of subordinated debentures
(15,464
)
 
(4,124
)
Proceeds from FHLB advances
60,000

 
155,000

Repayment of FHLB advances
(14,000
)
 
(186,745
)
Cash dividends paid on Common Stock
(19,868
)
 
(13,796
)
Issuance of additional stock pursuant to various stock plans

 
1,954

            Net cash provided by financing activities
373,035

 
125,089

NET CHANGE IN CASH AND CASH EQUIVALENTS
126,615

 
32,436

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
316,705

 
312,916

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
443,320

 
$
345,352

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
      Interest paid
$
25,175

 
$
21,506

      Income taxes paid
$
18,423

 
$
23,650

SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES
 
 
 
Transfer from loans receivable to OREO
$
6,554

 
$
7,557

Transfer from loans receivable to loans held for sale
$
2,612

 
$
6,900

Loans to facilitate sales of loans held for sale
$
5,250

 
$

Pacific International Bancorp, Inc. Acquisition:
 
 
 
     Assets acquired
$

 
$
183,120

     Liabilities assumed
$

 
$
167,545

Foster Bankshares, Inc. Acquisition
 
 
 
     Assets acquired
$

 
$
333,243

     Liabilities assumed
$

 
$
358,274

 
 
 
 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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BBCN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)




1.
BBCN Bancorp, Inc.
BBCN Bancorp, Inc. ("BBCN Bancorp" on a parent-only basis and the "Company" on a consolidated basis), headquartered in Los Angeles, California, is the holding company for BBCN Bank ("BBCN Bank" or the "Bank"). The Bank has branches in California, New Jersey, and the New York City, Chicago, Seattle and Washington, D.C. metropolitan areas, as well as loan production offices in Atlanta, Dallas, Denver, Northern California, Seattle and Annandale. The Company is a corporation organized under the laws of the state of Delaware and a bank holding company registered under the Bank Holding Company Act of 1956, as amended.
         
2.
Basis of Presentation
The condensed consolidated financial statements included herein have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), except for the Condensed Consolidated Statement of Financial Condition as of December 31, 2013 which was derived from audited financial statements included in the Company's 2013 Annual Report on Form 10-K. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations.
The condensed consolidated financial statements include the accounts of BBCN Bancorp and its wholly-owned subsidiaries, principally BBCN Bank. All intercompany transactions and balances have been eliminated in consolidation.
The Company has made all adjustments, consisting solely of normal recurring accruals, that in the opinion of management, are necessary to fairly present the Company's financial position at September 30, 2014 and the results of operations for the three and nine months then ended. Certain reclassifications have been made to prior period amounts to conform to the current year presentation. The results of operations for the interim periods are not necessarily indicative of results to be anticipated for the full year.
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 that are susceptible to change in the near term relate to the determination of the allowance and provision for loan losses, the evaluation of other than temporary impairment of investment securities, accounting for derivatives and hedging activities, the determination of the carrying value for cash surrender value of life insurance, the determination of the carrying value of goodwill and other intangible assets, accounting for deferred tax assets and related valuation allowances, the determination of the fair values of investment securities and other financial instruments, accounting for lease arrangements, accounting for incentive compensation, profit sharing and bonus payments, and the valuation of servicing assets.
These unaudited condensed consolidated financial statements should be read along with the audited consolidated financial statements and accompanying notes included in the Company's 2013 Annual Report on Form 10-K.
Recent Accounting Pronouncements:
FASB ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The provisions of ASU No. 2013-11 require an entity to present an unrecognized tax benefit, or portion thereof, in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, with certain exceptions related to availability. ASU No. 2013-11 is effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of ASU No. 2013-11 did not have a material impact on the Company's consolidated financial statements.
FASB ASU No. 2014-01, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. These amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Disclosures for a change in accounting principle are required upon transition. ASU 2014-01 is effective for for interim and annual periods beginning after December 15, 2014 and is not expected to have a significant impact on the Company's financial statements.
FASB ASU No. 2014-04, Receivables—Troubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. The amendment intends to clarify the terms defining when an in substance foreclosure occurs, which determines when the receivable should be derecognized and the

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real estate property recognized. ASU No. 2014-04 will be effective for interim and annual periods beginning after December 31, 2014. ASU No. 2014-04 is not expected to have a material impact on the Company's consolidated financial statements.
FASB ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. ASU 2014-12 is effective for interim and annual periods beginning after December 31, 2014 and is not expected to have a significant impact on the Company's financial statements.
FASB ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The amendments in ASU 2014-15 defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and provide related disclosures. Currently, GAAP does not provide guidance to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern. Guidance is provided to an organization’s management, with principles and definitions to reduce diversity in the timing and content of disclosures commonly provided by organizations today in the financial statements footnotes. ASU 2014-15 is effective for interim and annual periods ending after December 15, 2016 and is not expected to have an impact on the Company's financial statements.


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3.
Business Combinations
The Company applies the acquisition method of accounting for business combinations under ASC 805 - Business Combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed as incurred as merger and integration expense.
Acquisition of Foster Bankshares, Inc.     
On August 13, 2013, the Company completed the acquisition of Foster Bankshares, Inc. ("Foster"), the holding company of Foster Bank. The Company acquired Foster in order to expand its market in Illinois and into Virginia. Foster's primary subsidiary, Foster Bank, operated eight branches in Illinois and one branch in Virginia.
Under the terms of the acquisition agreement, Foster shareholders can elect to receive a cash price of $34.6703 per share or, for shareholders who qualified as accredited investors, 2.62771 shares of Company common stock for each share of Foster common stock. As of September 30, 2014, the Company had issued 183,269 shares of Company common stock in exchange for 69,749 shares of Foster common stock and paid $2.0 million for 58,906 shares of Foster common stock. As of September 30, 2014, there were 3,345 shares of Foster common stock that had not been redeemed, and the accrued liability for the unredeemed shares of Foster common stock was $116 thousand.
The consideration paid, the assets acquired, and the liabilities assumed are summarized in the following table:
 
(In thousands)

Consideration paid:
 
BBCN common stock issued in exchange for Foster common stock
$
2,609

Cash paid for the redemption of Foster common stock
2,042

Liability for unredeemed Foster common stock
116

     Total consideration paid
$
4,767

 
 
Assets Acquired:
 
Cash and cash equivalents
$
42,883

Investment securities available for sale
4,844

Loans receivable
255,297

FRB and FHLB stock
1,714

OREO
14,251

Premises and equipment
4,733

Core deposit intangibles
2,763

Deferred tax assets, net
21,211

Other assets
2,353

Liabilities Assumed:
 
Deposits
(321,596
)
Borrowings
(18,045
)
Subordinated debentures
(15,309
)
Other liabilities
(5,857
)
Total identifiable net assets
$
(10,758
)
Excess of consideration paid over fair value of net assets acquired (goodwill)
$
15,525




12

Table of Contents

The $15.5 million of goodwill recognized in the Foster acquisition represents the future economic benefit arising from the acquisition including the creation of a platform that can support future operations and strengthening the Company's existing presence in the Chicago metropolitan area and expansion into the Washington, D.C. market. Goodwill is not amortized for book purposes and is not deductible for tax purposes.
Acquisition of Pacific International Bancorp, Inc.     
On February 15, 2013, the Company completed the acquisition of Pacific International Bancorp, Inc. ("PIB"), a Seattle based company, pursuant to an Agreement and Plan of Merger, dated October 22, 2012. The Company acquired PIB in order to increase its presence in the Seattle market. PIB's primary subsidiary, Pacific International Bank, a Washington state-chartered bank, operated four bank branches in the Seattle metropolitan area.
In connection with the acquisition, the consideration paid, the assets acquired, and the liabilities assumed are summarized in the following table:
 
(In thousands)

Consideration paid:
BBCN common stock issued
$
8,437

Cash in lieu of fractional shares paid to PIB stockholders
1

Redemption of Preferred Stock
7,475

     Total consideration paid
$
15,913

 
 
Assets Acquired:
Cash and cash equivalents
$
25,968

Investment securities available for sale
7,810

Loans receivable
131,589

FRB and FHLB stock
1,829

OREO
3,418

Deferred tax assets, net
9,886

Core deposit intangibles
604

Other assets
2,514

Liabilities Assumed:
Deposits
(143,665
)
Borrowings
(14,698
)
Subordinated debentures
(4,108
)
Other liabilities
(5,116
)
Total identifiable net assets
$
16,031

Bargain purchase gain
$
118


The bargain purchase gain of $118 thousand from the PIB acquisition was recorded in other income in the Consolidated Statements of Income.

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Table of Contents

Acquired Loans
The Company estimated the fair value for most loans acquired by utilizing a methodology wherein loans with comparable characteristics were aggregated by type of collateral, remaining maturity and repricing terms. Cash flows for each pool were determined by estimating future credit losses and prepayment rates. Projected monthly cash flows were then discounted using a risk-adjusted market rate for similar loans to determine the fair value of each pool. To estimate the fair value of the remaining loans, management analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral. The value of the collateral was based on recently completed appraisals adjusted to the valuation date based on recognized industry indices. The Company discounted those values using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of the allowance for loan losses associated with the loans the Company acquired as the loans were initially recorded at fair value. The following table presents loans acquired with deteriorated credit quality as of the date of acquisition:
 
Foster
 
PIB
 
(In thousands)
Contractually required principal and interest at acquisition
$
150,430

 
$
54,462

Contractual cash flows not expected to be collected (nonaccretable discount)
37,447

 
9,687

Expected cash flows at acquisition
112,983

 
44,775

Interest component of expected cash flows (accretable discount)
14,928

 
4,945

Fair value of acquired impaired loans
$
98,055

 
$
39,830


The outstanding principal balances and the related carrying amounts of the acquired loans included in the statement of financial condition are $197.6 million and $167.2 million, respectively, for Foster and $78.3 million and $71.0 million, respectively, for PIB, as of September 30, 2014.
Pro Forma Information
The operating results of Foster and PIB from the dates of acquisitions through September 30, 2014 are included in the Condensed Consolidated Statement of Income for 2014 and 2013.
The following unaudited combined pro forma information presents the operating results for the three and nine months ended September 30, 2014 and 2013, as if the Foster and PIB acquisitions had occurred on January 1, 2013:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except share data)
Net interest income
$
67,907

 
$
66,353

 
$
200,363

 
$
196,861

Net income
$
21,420

 
$
22,960

 
$
65,928

 
$
60,084

Pro forma earnings per share:
 
 
 
 
 
 
 
     Basic
$
0.27

 
$
0.29

 
$
0.83

 
$
0.76

     Diluted
$
0.27

 
$
0.29

 
$
0.83

 
$
0.75

The above pro forma results are presented for illustrative purposes only and are not intended to represent or be indicative of the actual results of operations of the merged companies that would have been achieved had the acquisitions occurred at January 1, 2013, nor are they intended to represent or be indicative of future results of operations. The pro forma results do not include expected operating cost savings as a result of the acquisitions. These pro forma results require significant estimates and judgments particularly as it relates to the valuation and accretion of income associated with acquired loans.


14

Table of Contents

Acquisition-Related Expenses
The following table presents acquisition-related expenses associated with the Foster and PIB acquisitions which were reflected in the Condensed Consolidated Statements of Income in merger and integration expense. These expenses are comprised primarily of salaries and benefits, occupancy expenses, professional services and other noninterest expense.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
PIB
$

 
$
(275
)
 
$
31

 
$
1,057

Foster
$
66

 
$
1,206

 
$
259

 
$
1,564

Total
$
66

 
$
931

 
$
290

 
$
2,621


    
4.
Stock-Based Compensation
The Company has a stock-based incentive plan, the 2007 BBCN Bancorp Equity Incentive Plan (the “2007 Plan”). The 2007 Plan, approved by our stockholders on May 31, 2007, was amended and restated on July 25, 2007 and again on December 1, 2011. The 2007 Plan provides for grants of stock options, stock appreciation rights (“SARs”), restricted stock, performance shares and performance units (sometimes referred to individually or collectively as “awards”) to non-employee directors, officers, employees and consultants of the Company. Stock options may be either incentive stock options (“ISOs”), as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or nonqualified stock options (“NQSOs”).
The 2007 Plan gives the Company flexibility to (i) attract and retain qualified non-employee directors, executives and other key employees and consultants with appropriate equity-based awards; (ii) motivate high levels of performance; (iii) recognize employee contributions to the Company’s success; and (iv) align the interests of the 2007 Plan participants with those of the Company’s stockholders. The exercise price for shares under an ISO may not be less than 100% of fair market value on the date the award is granted under Code Section 422. Similarly, under the terms of the 2007 Plan the exercise price for SARs and NQSOs may not be less than 100% of fair market value on the date of grant. Performance units are awarded to a participant at the market price of the Company’s common stock on the date of award (after the lapse of the restriction period and the attainment of the performance criteria). No minimum exercise price is prescribed for performance shares and restricted stock awarded under the 2007 Plan.
ISOs, SARs and NQSOs have vesting periods of three to five years and have 10-year contractual terms. Restricted stock, performance shares, and performance units will be granted with a restriction period of not less than one year from the grant date for performance-based awards and not more than three years from the grant date for time-based vesting of grants. Compensation expense for awards is recognized over the vesting period. 
The Company has another stock-based incentive plan, the 2006 Stock Incentive Plan, adopted April 12, 2006, as amended and restated June 13, 2007 (the "2006 Plan"). The 2006 Plan provides for the granting of incentive stock options to officers and employees and non-qualified stock options and restricted stock awards to employees (including officers) and non-employee directors. The option prices of all options granted under the 2006 Plan must be not less than 100% of the fair market value at the date of grant. All options granted generally vest at the rate of 20% per year except that the options granted to the non-employee directors vest at the rate of 33% per year. All options not exercised generally expire ten years after the date of grant.
Under the 2007 Plan and 2006 Plan, 2,504,022 shares were available for future grants as of September 30, 2014.
The total shares reserved for issuance will serve as the underlying value for all equity awards under the 2007 Plan and 2006 Plan. With the exception of the shares underlying stock options and restricted stock awards, the board of directors may choose to settle the awards by paying the equivalent cash value or by delivering the appropriate number of shares.


15

Table of Contents

The following is a summary of stock option activity under the 2007 Plan and 2006 Plan for the nine months ended September 30, 2014:
 
 
Number of
Shares
 
Weighted-
Average
Exercise
Price Per
Share
 
Weighted-
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
Outstanding - January 1, 2014
420,594

 
$
20.44

 
 
 
 
Granted
210,000

 
15.91

 
 
 
 
Exercised

 

 
 
 
 
Expired
(38,942
)
 
17.94

 
 
 
 
Forfeited

 

 
 
 
 
Outstanding - September 30, 2014
591,652

 
$
19.00

 
2.2
 
$

Options exercisable - September 30, 2014
381,652

 
$
20.70

 
2.2
 
$


The following is a summary of restricted and performance unit activity under the 2007 Plan and 2006 Plan for the nine months ended September 30, 2014:
 
 
Number of
Shares
 
Weighted-
Average Grant Date
Fair Value
Outstanding - January 1, 2014
200,165

 
$
11.57

Granted
66,000

 
16.20

Vested
(59,326
)
 
10.56

Forfeited
(22,963
)
 
12.05

Outstanding - September 30, 2014
183,876

 
$
13.55


The total fair value of restricted performance units vested for the nine months ended September 30, 2014 and 2013 was $877 thousand and $3.9 million, respectively.
The amount charged against income related to stock-based payment arrangements was $206 thousand and $119 thousand for the three months ended September 30, 2014 and 2013, respectively. For the nine months ended September 30, 2014 and 2013, $494 thousand and $1.1 million, respectively, were charged against income related to stock-based payment arrangements.
The income tax benefit recognized was $82 thousand and $50 thousand for the three months ended September 30, 2014 and 2013, respectively, and the amount recognized was $197 thousand and $474 thousand for the nine months ended September 30, 2014 and 2013, respectively.
At September 30, 2014, total unrecognized compensation expense related to non-vested stock option grants and restricted and performance units aggregated $2.0 million, which is expected to be recognized over a weighted average vesting period of 3.36 years.


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Table of Contents

5.
Earnings Per Share (“EPS”)
Basic EPS does not reflect the possibility of dilution that could result from the issuance of additional shares of common stock upon exercise or conversion of outstanding securities, and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted to common stock that would then share in our earnings. For the three months ended September 30, 2014 and 2013, stock options and restricted shares awards for 111,256 shares and 126,116 shares of common stock, respectively, were excluded in computing diluted earnings per common share because they were antidilutive. For the nine months ended September 30, 2014 and 2013, stock options and restricted shares awards for 90,821 shares and 171,350 shares of common stock, respectively, were excluded in computing diluted earnings per common share because they were antidilutive. Additionally, warrants, issued pursuant to the Company's participation in the U.S. Treasury's TARP Capital Purchase Plan, to purchase 18,607 shares and 18,208 shares of common stock were antidilutive and excluded for the three and nine months ended September 30, 2014 and 2013, respectively.
The following tables show the computation of basic and diluted EPS for the three and nine months ended September 30, 2014 and 2013.
 
 
Three Months Ended September 30,
 
2014

2013
 
Net income
(Numerator)
 
Weighted-Average Shares
(Denominator)
 
Per
Share
(Amount)
 
Net income
(Numerator)
 
Weighted-Average Shares
(Denominator)
 
Per
Share
(Amount)
 
(In thousands, except share and per share data)
Basic EPS - common stock
$
21,420

 
79,493,917

 
$
0.27

 
$
23,552

 
79,223,636

 
$
0.30

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options and performance units
 
 
36,044

 
 
 
 
 
60,188

 
 
Common stock warrants
 
 
71,114

 
 
 
 
 
51,041

 
 
Diluted EPS - common stock
$
21,420

 
79,601,075

 
$
0.27

 
$
23,552

 
79,334,865

 
$
0.30


 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2014
 
2013
 
Net income
available to
common
stockholders
(Numerator)
 
Weighted-Average Shares
(Denominator)
 
Per
Share
(Amount)
 
Net income
available to
common
stockholders
(Numerator)
 
Weighted-Average Shares
(Denominator)
 
Per
Share
(Amount)
 
(In thousands, except share and per share data)
Basic EPS - common stock
$
65,928

 
79,486,958

 
$
0.83

 
$
63,684

 
78,914,360

 
$
0.81

Effect of Dilutive Securities:
 
 
 
 
 
 
 
 
 
 
 
Stock Options and Performance Units
 
 
46,749

 
 
 
 
 
179,206

 
 
Common stock warrants
 
 
83,610

 
 
 
 
 
28,494

 
 
Diluted EPS - common stock
$
65,928

 
79,617,317

 
$
0.83

 
$
63,684

 
79,122,060

 
$
0.80




17

Table of Contents


6.    Securities Available for Sale
The following is a summary of securities available for sale as of the dates indicated:
 
 
At September 30, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
Debt securities:
 
 
 
 
 
 
 
U.S. Government agency and U.S. Government sponsored enterprises
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
277,954

 
$
1,230

 
$
(5,767
)
 
$
273,417

Mortgage-backed securities
407,902

 
5,024

 
(3,117
)
 
409,809

Trust preferred securities
4,527

 

 
(477
)
 
4,050

Municipal bonds
5,669

 
467

 
(18
)
 
6,118

Total debt securities
696,052

 
6,721

 
(9,379
)
 
693,394

Mutual funds
17,425

 

 
(194
)
 
17,231

 
$
713,477

 
$
6,721

 
$
(9,573
)
 
$
710,625

 
 
 
 
 
 
 
 
 
At December 31, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
Debt securities:
 
 
 
 
 
 
 
U.S. Government agency and U.S. Government sponsored enterprises
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
286,608

 
$
1,104

 
$
(13,611
)
 
$
274,101

Mortgage-backed securities
409,165

 
3,620

 
(7,789
)
 
404,996

Trust preferred securities
4,516

 

 
(819
)
 
3,697

Municipal bonds
5,687

 
319

 
(70
)
 
5,936

Total debt securities
705,976

 
5,043

 
(22,289
)
 
688,730

Mutual funds
17,425

 

 
(404
)
 
17,021

 
$
723,401

 
$
5,043

 
$
(22,693
)
 
$
705,751

 
As of September 30, 2014 and December 31, 2013, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders' equity.
For the three months ended September 30, 2014 and 2013, $3.0 million of unrealized losses and $2.0 million of unrealized gains, respectively, were included in accumulated other comprehensive income during the periods. For the nine months ended September 30, 2014 and 2013, $14.8 million of unrealized gains and $21.4 million of unrealized losses, respectively, were included in accumulated other comprehensive income during the periods. A total of $0 and $54 thousand of net gains on sales of securities were reclassified out of accumulated other comprehensive loss into earnings for the nine months ended September 30, 2014 and 2013, respectively. There were no securities sold during the three months ended September 30, 2014 and 2013.
The proceeds from sales of securities and the associated gross gains and losses recorded in earnings are listed below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Proceeds
$

 
$

 
$

 
$
6,636

Gross gains

 

 

 
54

Gross losses

 

 

 


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Table of Contents


The amortized cost and estimated fair value of debt securities at September 30, 2014, by contractual maturity, are shown below. 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. Securities not due at a single maturity date are shown separately.
 
 
Amortized
Cost
 
Estimated
Fair Value
 
(In thousands)
Available for sale:
 
 
 
Due within one year
$
340

 
$
346

Due after one year through five years
755

 
847

Due after five years through ten years
3,410

 
3,778

Due after ten years
5,691

 
5,197

U.S. Government agency and U.S. Government sponsored enterprises
 
 
 
Collateralized mortgage obligations
277,954

 
273,417

Mortgage-backed securities
407,902

 
409,809

Mutual funds
17,425

 
17,231

 
$
713,477

 
$
710,625


Securities with carrying values of approximately $364.7 million and $362.3 million at September 30, 2014 and December 31, 2013, respectively, were pledged to secure public deposits, various borrowings and for other purposes as required or permitted by law.
The following table shows our investments’ gross unrealized losses and estimated fair value, aggregated by investment category and the length of time that the individual securities have been in a continuous unrealized loss position as of the dates indicated.
 
As of September 30, 2014
 
Less than 12 months
 
12 months or longer
 
Total
Description of
Securities
Number of
Securities
 
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Securities
 
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Securities
 
Fair Value
 
Gross
Unrealized
Losses
 
 (In thousands)
Collateralized mortgage obligations*
8

 
$
75,980

 
$
(876
)
 
13

 
$
135,497

 
$
(4,891
)
 
21

 
$
211,477

 
$
(5,767
)
Mortgage-backed securities*
20

 
87,021

 
(434
)
 
6

 
61,916

 
(2,683
)
 
26

 
148,937

 
(3,117
)
Trust preferred securities

 

 

 
1

 
4,050

 
(477
)
 
1

 
4,050

 
(477
)
Municipal bonds

 

 

 
1

 
1,146

 
(18
)
 
1

 
1,146

 
(18
)
Mutual funds

 

 

 
1

 
13,232

 
(194
)
 
1

 
13,232

 
(194
)
 
28

 
$
163,001

 
$
(1,310
)
 
22

 
$
215,841

 
$
(8,263
)
 
50

 
$
378,842

 
$
(9,573
)
* Investments in U.S. Government agency and U.S. Government sponsored enterprises


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Table of Contents

 
As of December 31, 2013
 
Less than 12 months
 
12 months or longer
 
Total
Description of
Securities
Number of
Securities
 
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Securities
 
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Securities
 
Fair Value
 
Gross
Unrealized
Losses
 
 (In thousands)
Collateralized mortgage obligations*
21

 
$
198,713

 
$
(12,460
)
 
3

 
$
13,381

 
$
(1,151
)
 
24

 
$
212,094

 
$
(13,611
)
Mortgage-backed securities*
29

 
203,276

 
(7,293
)
 
7

 
14,793

 
(496
)
 
36

 
218,069

 
(7,789
)
Trust Preferred securities

 

 

 
1

 
3,697

 
(819
)
 
1

 
3,697

 
(819
)
Municipal bonds
1

 
1,112

 
(70
)
 

 

 

 
1

 
1,112

 
(70
)
Mutual funds
1

 
13,021

 
(404
)
 

 

 

 
1

 
13,021

 
(404
)
 
52

 
$
416,122

 
$
(20,227
)
 
11

 
$
31,871

 
$
(2,466
)
 
63

 
$
447,993

 
$
(22,693
)
* Investments in U.S. Government agency and U.S. Government sponsored enterprises
The Company evaluates securities for other-than-temporary-impairment ("OTTI") on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and the extent to which the fair values of the securities have been less than the cost of the securities, and management's intention to sell, or whether it is more likely than not that management will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. In analyzing an issuer’s financial condition, the Company considers, among other considerations, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
The Company has certain collateralized mortgage obligations, mortgage-backed securities and trust preferred securities that were in a continuous unrealized loss position for twelve months or longer as of September 30, 2014. The trust preferred securities at September 30, 2014 had an amortized cost of $4.5 million and an unrealized loss of $477 thousand at September 30, 2014. The trust preferred securities are scheduled to mature in May 2047. These securities are rated investment grade and there are no credit quality concerns with the obligor. Certain of the collateralized mortgage obligations and mortgage-backed securities were also in an unrealized loss position for twelve months or longer as of September 30, 2014. These securities were issued by U.S. Government agency and U.S. Government sponsored enterprises and have high credit ratings of "AA" grade or better. Interest on the trust preferred securities and the U.S. Government agency and U.S. Government sponsored enterprise investments have been paid as agreed, and management believes this will continue in the future and that the securities will be repaid in full as scheduled. The market value declines for these securities are deemed to be due to the current market volatility and are not reflective of management’s expectations of its ability to fully recover these investments, which may be at maturity. For these reasons, no OTTI was recognized on the trust preferred securities and the U.S. Government agency and U.S. Government sponsored collateralized mortgage obligations and mortgage-backed securities that are in an unrealized loss position at September 30, 2014.
The Company considers the losses on the investments in unrealized loss positions at September 30, 2014 to be temporary based on: 1) the likelihood of recovery; 2) the information relative to the extent and duration of the decline in market value; and 3) the Company’s intention not to sell, and management's determination that it is more likely than not that management will not be required to sell a security in an unrealized loss position before recovery of its amortized cost basis.



20

Table of Contents

7.
Loans Receivable and Allowance for Loan Losses
The following is a summary of loans receivable by major category:
 
September 30, 2014
 
December 31, 2013
 
(In thousands)
Loan portfolio composition
 
 
 
Real estate loans:
 
 
 
Residential
$
19,203

 
$
10,039

Commercial & industrial
4,211,977

 
3,821,163

Construction
86,780

 
72,856

Total real estate loans
4,317,960

 
3,904,058

Commercial business
875,808

 
949,093

Trade finance
148,116

 
124,685

Consumer and other
92,362

 
98,507

Total loans outstanding
5,434,246

 
5,076,343

Less: deferred loan fees
(1,402
)
 
(2,167
)
Loans receivable
5,432,844

 
5,074,176

Less: allowance for loan losses
(68,232
)
 
(67,320
)
Loans receivable, net of allowance for loan losses
$
5,364,612

 
$
5,006,856


The loan portfolio is made up of four segments: real estate loans, commercial business, trade finance and consumer and other. These segments are further segregated between loans accounted for under the amortized cost method ("Legacy Loans") and acquired loans that were originally recorded at fair value with no carryover of the related pre-acquisition allowance for loan losses ("Acquired Loans"). Acquired Loans are further segregated between Acquired Credit Impaired Loans (loans with credit deterioration on the acquisition date and accounted for under ASC 310-30, or "ACILs") and Acquired Performing Loans (loans that were pass graded on the acquisition date and the fair value adjustment is amortized over the contractual life under ASC 310-20, or "APLs").

The following table presents changes in the accretable discount on the ACILs for the three and nine months ended September 30, 2014 and 2013:
 
Three Months Ended September 30,

Nine Months Ended September 30,

2014

2013

2014

2013

(In thousands)
Balance at beginning of period
$
28,284


$
37,090


$
47,398


$
18,651

Additions due to acquisitions during the period


14,928




19,873

Accretion
(3,790
)

(4,250
)

(12,854
)

(11,281
)
Changes in expected cash flows
2,191


5,689


(7,859
)

26,214

Balance at end of period
$
26,685


$
53,457


$
26,685


$
53,457


On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the ACILs is the “accretable yield.” The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans. The accretable yield will change from period to period due to the following: 1) estimates of the remaining life of acquired loans will affect the amount of future interest income; 2) indices for variable rates of interest on ACILs may change; and 3) estimates of the amount of the contractual principal and interest that will not be collected (nonaccretable difference) may change.

21

Table of Contents

The following tables detail the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2014 and 2013:
 
 
 
 
Legacy
 
Acquired
 
Total
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
 
(In thousands)
Three Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
39,058

 
$
14,659

 
$
4,568

 
$
591

 
$
7,289

 
$
639

 
$

 
$
66

 
$
66,870

Provision (credit) for loan losses
3,553

 
191

 
793

 
(112
)
 
53

 
(214
)
 

 
(8
)
 
4,256

Loans charged off
(1,265
)
 
(1,580
)
 
(710
)
 
(1
)
 
10

 
(120
)
 

 

 
(3,666
)
Recoveries of charge offs
24

 
287

 

 
10

 
131

 
320

 

 

 
772

Balance, end of period
$
41,370

 
$
13,557

 
$
4,651

 
$
488

 
$
7,483

 
$
625

 
$

 
$
58

 
$
68,232

Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
40,068

 
$
16,796

 
$
2,653

 
$
461

 
$
6,482

 
$
796

 
$

 
$
64

 
$
67,320

Provision (credit) for loan losses
3,206

 
2,402

 
2,765

 
(174
)
 
1,126

 
884

 

 
69

 
10,278

Loans charged off
(2,078
)
 
(7,099
)
 
(767
)
 
(20
)
 
(273
)
 
(1,385
)
 

 
(78
)
 
(11,700
)
Recoveries of charge offs
174

 
1,458

 

 
221

 
148

 
330

 

 
3

 
2,334

Balance, end of period
$
41,370

 
$
13,557

 
$
4,651

 
$
488

 
$
7,483

 
$
625

 
$

 
$
58

 
$
68,232


 
 
 
 
Legacy
 
Acquired
 
Total
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
 
(In thousands)
Three Months Ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
41,932

 
$
16,520

 
$
2,335

 
$
528

 
$
9,632

 
$
654

 
$

 
$
74

 
$
71,675

Provision (credit) for loan losses
545

 
(2,085
)
 
178

 
52

 
1,221

 
830

 

 
3

 
744

Loans charged off
(528
)
 
(774
)
 

 

 
(5,668
)
 
(813
)
 

 
(7
)
 
(7,790
)
Recoveries of charge offs
62

 
958

 

 
50

 
5

 
10

 

 
1

 
1,086

Balance, end of period
$
42,011

 
$
14,619

 
$
2,513

 
$
630

 
$
5,190

 
$
681

 
$

 
$
71

 
$
65,715

Nine Months Ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
41,505

 
$
16,490

 
$
2,349

 
$
658

 
$
4,718

 
$
1,115

 
$
3

 
$
103

 
$
66,941

Provision (credit) for loan losses
2,557

 
(1,004
)
 
190

 
(96
)
 
6,308

 
1,126

 
(3
)
 
(28
)
 
9,050

Loans charged off
(2,209
)
 
(2,370
)
 
(26
)
 
(9
)
 
(5,843
)
 
(1,621
)
 

 
(41
)
 
(12,119
)
Recoveries of charge offs
158

 
1,503

 

 
77

 
7

 
61

 

 
37

 
1,843

Balance, end of period
$
42,011

 
$
14,619

 
$
2,513

 
$
630

 
$
5,190

 
$
681

 
$

 
$
71

 
$
65,715



22

Table of Contents

The following tables disaggregate the allowance for loan losses and the loans outstanding by impairment methodology at September 30, 2014 and December 31, 2013:
 
September 30, 2014
 
Legacy
 
Acquired
 
Total
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
 
(In thousands)
Allowance for loan losses:
Individually evaluated for impairment
$
3,181

 
$
4,089

 
$
2,624

 
$

 
$
445

 
$
357

 
$

 
$

 
$
10,696

Collectively evaluated for impairment
38,189

 
9,468

 
2,027

 
488

 
852

 
268

 

 
58

 
51,350

ACILs

 

 

 

 
6,186

 

 

 

 
6,186

Total
$
41,370

 
$
13,557

 
$
4,651

 
$
488

 
$
7,483

 
$
625

 
$

 
$
58

 
$
68,232

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
58,331

 
$
40,429

 
$
9,976

 
$
508

 
$
18,810

 
$
2,042

 
$

 
$
604

 
$
130,700

Collectively evaluated for impairment
3,687,642

 
747,506

 
138,140

 
37,065

 
442,451

 
48,587

 

 
27,207

 
5,128,598

ACILs

 

 

 

 
110,726

 
37,244

 

 
26,978

 
174,948

Total
$
3,745,973

 
$
787,935

 
$
148,116

 
$
37,573

 
$
571,987

 
$
87,873

 
$

 
$
54,789

 
$
5,434,246


 
December 31, 2013
 
Legacy
 
Acquired
 
Total
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
 
(In thousands)
Allowance for loan losses:
Individually evaluated for impairment
$
5,578

 
$
5,183

 
$
159

 
$
32

 
$
1,092

 
$
622

 
$

 
$

 
$
12,666

Collectively evaluated for impairment
34,490

 
11,613

 
2,494

 
429

 
612

 
174

 

 
64

 
49,876

ACILs

 

 

 

 
4,778

 

 

 

 
4,778

Total
$
40,068

 
$
16,796

 
$
2,653

 
$
461

 
$
6,482

 
$
796

 
$

 
$
64

 
$
67,320

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
49,177

 
$
37,314

 
$
5,692

 
$
535

 
$
19,992

 
$
2,792

 
$

 
$
767

 
$
116,269

Collectively evaluated for impairment
3,076,924

 
778,350

 
117,249

 
32,421

 
613,696

 
84,325

 

 
31,802

 
4,734,767

ACILs

 

 

 

 
144,269

 
46,312

 
1,744

 
32,982

 
225,307

Total
$
3,126,101

 
$
815,664

 
$
122,941

 
$
32,956

 
$
777,957

 
$
133,429

 
$
1,744

 
$
65,551

 
$
5,076,343

As of September 30, 2014 and December 31, 2013, the liability for unfunded commitments was $1.6 million and $885 thousand, respectively. For the three months ended September 30, 2014 and 2013, the recognized provision for credit losses related to unfunded commitments was $100 thousand and $0, respectively. For the nine months ended September 30, 2014 and 2013, the recognized provision for credit losses related to unfunded commitments was $688 thousand and $0, respectively.

23

Table of Contents

The recorded investment in individually impaired loans was as follows:
 
September 30, 2014
 
December 31, 2013
 
(In thousands)
With allocated allowance
 
 
 
Without charge off
$
79,016

 
$
85,920

With charge off
1,932

 
851

With no allocated allowance
 
 
 
Without charge off
41,510

 
23,160

With charge off
8,242

 
6,338

Allowance on impaired loans
(10,696
)
 
(12,666
)
Impaired loans, net of allowance
$
120,004

 
$
103,603



24

Table of Contents

The following tables detail impaired loans (Legacy and APLs that became impaired subsequent to being acquired) as of September 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013 and for the year ended December 31, 2013. Loans with no related allowance for loan losses are believed by management to have adequate collateral securing their carrying value.
 
 
 
As of September 30, 2014
 
For the Nine Months Ended September 30, 2014
 
For the Three Months Ended September 30, 2014
Total Impaired Loans
 
Recorded Investment*
 
Unpaid Contractual Principal Balance
 
Related
Allowance
 
Average Recorded Investment*
 
Interest Income Recognized during Impairment
 
Average Recorded Investment*
 
Interest Income Recognized during Impairment
 
 
(In thousands)
With related allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—residential
 
$

 
$

 
$

 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 

 

 

 

Retail
 
5,406

 
6,707

 
526

 
5,280

 
116

 
4,735

 
37

Hotel & motel
 
11,552

 
11,552

 
1,623

 
11,716

 
400

 
11,601

 
134

Gas station & car wash
 
1,973

 
3,517

 
391

 
2,574

 
45

 
2,037

 
15

Mixed use
 
484

 
498

 
13

 
908

 

 
884

 

Industrial & warehouse
 
7,123

 
7,138

 
135

 
8,608

 
219

 
7,029

 
73

Other
 
10,708

 
10,802

 
938

 
9,691

 
353

 
9,246

 
118

Real estate—construction
 

 

 

 

 

 

 

Commercial business
 
34,065

 
34,405

 
4,446

 
31,672

 
1,138

 
32,076

 
368

Trade finance
 
9,601

 
16,831

 
2,624

 
7,295

 

 
9,100

 

Consumer and other
 
36

 
36

 

 
143

 
2

 
18

 

 
 
$
80,948

 
$
91,486

 
$
10,696

 
$
77,887

 
$
2,273

 
$
76,726

 
$
745

With no related allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—residential
 
$

 
$

 
$

 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 

 

 

 

Retail
 
9,976

 
12,103

 

 
7,650

 
277

 
9,167

 
93

Hotel & motel
 
7,843

 
13,344

 

 
6,821

 

 
7,141

 

Gas station & car wash
 
3,541

 
5,542

 

 
4,500

 
33

 
4,251

 
11

Mixed use
 
2,058

 
2,166

 

 
1,372

 
30

 
1,672

 
10

Industrial & warehouse
 
9,597

 
13,203

 

 
8,045

 
248

 
9,466

 
73

Other
 
5,304

 
7,917

 

 
4,627

 
24

 
6,411

 
8

Real estate—construction
 
1,576

 
1,576

 

 
1,599

 

 
1,582

 

Commercial business
 
8,406

 
11,232

 

 
9,110

 
204

 
9,366

 
65

Trade finance
 
375

 
468

 

 
434

 

 
380

 

Consumer and other
 
1,076

 
1,126

 

 
1,195

 
21

 
1,267

 
7

 
 
$
49,752

 
$
68,677

 
$

 
$
45,353

 
$
837

 
$
50,703

 
$
267

Total
 
$
130,700

 
$
160,163

 
$
10,696

 
$
123,240

 
$
3,110

 
$
127,429

 
$
1,012


*
Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.

25

Table of Contents

 
 
For the Nine Months Ended September 30, 2013
 
For the Three Months Ended September 30, 2013
Total Impaired Loans
 
Average Recorded Investment*
 
Interest Income Recognized during Impairment
 
Average Recorded Investment*
 
Interest Income Recognized during Impairment
 
 
 
With related allowance:
 
 
 
 
 
 
 
 
Real estate—residential
 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
Retail
 
7,900

 
172

 
9,221

 
76

Hotel & motel
 
11,310

 
413

 
12,056

 
138

Gas station & car wash
 
1,826

 
46

 
2,017

 
15

Mixed use
 
1,152

 
33

 
1,378

 
10

Industrial & warehouse
 
8,770

 
171

 
10,940

 
44

Other
 
9,717

 
165

 
5,765

 
55

Real estate—construction
 

 

 

 

Commercial business
 
25,096

 
947

 
25,881

 
306

Trade finance
 
5,241

 
228

 
3,939

 
80

Consumer and other
 
302

 
17

 
548

 
6

 
 
$
71,314

 
$
2,192

 
$
71,745

 
$
730

With no related allowance:
 
 
 
 
 
 
 
 
Real estate—residential
 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
Retail
 
3,279

 
30

 
4,645

 
10

Hotel & motel
 
6,254

 

 
6,340

 

Gas station & car wash
 
3,543

 
104

 
4,105

 
35

Mixed use
 
660

 

 
430

 

Industrial & warehouse
 
3,996

 
8

 
3,374

 
3

Other
 
3,417

 
32

 
2,621

 
11

Real estate—construction
 
1,682

 
67

 
1,667

 
22

Commercial business
 
2,102

 
20

 
2,748

 
4

Trade finance
 

 

 

 

Consumer and other
 
1,142

 

 
1,012

 

 
 
$
26,075

 
$
261

 
$
26,942

 
$
85

Total
 
$
97,389

 
$
2,453

 
$
98,687

 
$
815

*
Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.


26

Table of Contents

 
 
As of September 30, 2014
 
For the Nine Months Ended September 30, 2014
 
For the Three Months Ended September 30, 2014
Impaired APLs
 
Recorded Investment*
 
Unpaid
Contractual Principal
Balance
 
Related
Allowance
 
Average
Recorded Investment*
 
Interest Income Recognized during Impairment
 
Average Recorded Investment*
 
Interest Income Recognized during Impairment
 
 
(In thousands)
With related allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—residential
 
$

 
$

 
$

 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
1,744

 
2,743

 
46

 
634

 
71

 
1,020

 
24

Hotel & motel
 

 

 

 

 

 

 

Gas station & car wash
 
1,781

 
1,963

 
387

 
1,788

 
45

 
1,791

 
15

Mixed use
 
352

 
348

 
2

 
177

 

 
353

 

Industrial & warehouse
 

 

 

 
1,282

 

 

 

Other
 
748

 
836

 
10

 
977

 
7

 
568

 
2

Real estate—construction
 

 

 

 

 

 

 

Commercial business
 
961

 
1,115

 
357

 
1,170

 
10

 
873

 
3

Trade finance
 

 

 

 

 

 

 

Consumer and other
 

 

 

 

 

 

 

 
 
$
5,586

 
$
7,005

 
$
802

 
$
6,028

 
$
133

 
$
4,605

 
$
44

With no related allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—residential
 
$

 
$

 
$

 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
1,538

 
2,298

 

 
1,546

 
22

 
1,554

 
7

Hotel & motel
 
5,606

 
7,375

 

 
6,185

 

 
5,961

 

Gas station & car wash
 
9

 
297

 

 
774

 

 
472

 

Mixed use
 
455

 
465

 

 
344

 

 
455

 

Industrial & warehouse
 
1,784

 
1,989

 

 
2,907

 
29

 
1,601

 
10

Other
 
4,793

 
5,719

 

 
3,745

 
24

 
5,311

 
8

Real estate—construction
 

 

 

 

 

 

 

Commercial business
 
1,081

 
1,601

 

 
1,399

 
5

 
1,582

 
2

Trade finance
 

 

 

 

 

 

 

Consumer and other
 
604

 
655

 

 
816

 
6

 
773

 
2

 
 
$
15,870

 
$
20,399

 
$

 
$
17,716

 
$
86

 
$
17,709

 
$
29

Total
 
$
21,456

 
$
27,404

 
$
802

 
$
23,744

 
$
219

 
$
22,314

 
$
73


*
Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.




27

Table of Contents

 
 
For the Nine Months Ended September 30, 2013
 
For the Three Months Ended September 30, 2013
Impaired APLs
 
Average
Recorded Investment*
 
Interest Income Recognized during Impairment
 
Average Recorded Investment*
 
Interest Income Recognized during Impairment
 
 
With related allowance:
 
 
 
 
 
 
 
 
Real estate—residential
 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
Retail
 
1,247

 
10

 
831

 
4

Hotel & motel
 

 

 

 

Gas station & car wash
 
544

 

 
816

 

Mixed use
 

 

 

 

Industrial & warehouse
 
8,551

 

 
7,690

 

Other
 
1,154

 
8

 
158

 
2

Real estate—construction
 

 

 

 

Commercial business
 
3,058

 
5

 
3,011

 
2

Trade finance
 

 

 

 

Consumer and other
 

 

 

 

 
 
$
14,554

 
$
23

 
$
12,506

 
$
8

With no related allowance:
 
 
 
 
 
 
 
 
Real estate—residential
 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
Retail
 
907

 
30

 
1,330

 
10

Hotel & motel
 
6,138

 

 
6,243

 

Gas station & car wash
 
1,481

 
46

 
1,293

 
16

Mixed use
 

 

 

 

Industrial & warehouse
 
2,445

 
8

 
1,968

 
3

Other
 
2,020

 
32

 
2,157

 
11

Real estate—construction
 

 

 

 

Commercial business
 
99

 

 
50

 

Trade finance
 

 

 

 

Consumer and other
 
776

 

 
772

 

 
 
$
13,866

 
$
116

 
$
13,813

 
$
40

Total
 
$
28,420

 
$
139

 
$
26,319

 
$
48


*
Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.







28

Table of Contents

 
 
As of December 31, 2013
 
For the Year Ended
December 31, 2013
Total Impaired Loans
 
Recorded Investment*
 
Unpaid
Contractual Principal
Balance
 
Related
Allowance
 
Average
Recorded Investment*
 
Interest Income Recognized during Impairment
 
 
(In thousands)
With related allowance:
 
 
 
 
 
 
 
 
 
 
Real estate—residential
 
$

 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
 
 
Retail
 
7,318

 
7,451

 
827

 
7,783

 
181

Hotel & motel
 
11,920

 
12,744

 
2,841

 
11,432

 
550

Gas station & car wash
 
3,145

 
3,236

 
519

 
2,090

 
117

Mixed use
 
930

 
953

 
212

 
1,108

 
43

Industrial & warehouse
 
12,398

 
12,470

 
810

 
9,496

 
323

Other
 
10,262

 
10,351

 
1,461

 
9,826

 
405

Real estate—construction
 

 

 

 

 

Commercial business
 
34,663

 
36,472

 
5,805

 
27,010

 
1,572

Trade finance
 
5,600

 
5,628

 
159

 
5,313

 
41

Consumer and other
 
535

 
535

 
32

 
348

 
23

 
 
$
86,771

 
$
89,840

 
$
12,666

 
$
74,406

 
$
3,255

With no related allowance:
 
 
 
 
 
 
 
 
 
 
Real estate—residential
 
$

 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
 
 
Retail
 
4,025

 
6,591

 

 
3,428

 
45

Hotel & motel
 
6,502

 
10,498

 

 
6,304

 

Gas station & car wash
 
4,845

 
8,273

 

 
3,803

 
139

Mixed use
 
845

 
912

 

 
697

 

Industrial & warehouse
 
3,806

 
7,204

 

 
3,958

 
10

Other
 
1,548

 
3,647

 

 
3,043

 

Real estate—construction
 
1,625

 
1,625

 

 
1,670

 
89

Commercial business
 
5,443

 
8,437

 

 
2,770

 
25

Trade finance
 
92

 
7,279

 

 
18

 

Consumer and other
 
767

 
831

 

 
1,067

 

 
 
$
29,498

 
$
55,297

 
$

 
$
26,758

 
$
308

Total
 
$
116,269

 
$
145,137

 
$
12,666

 
$
101,164

 
$
3,563


*
Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.





29

Table of Contents

 
 
As of December 31, 2013
 
For the Year Ended
December 31, 2013
Impaired APLs
 
Recorded Investment*
 
Unpaid Contractual Principal Balance
 
Related Allowance
 
Average Recorded Investment*
 
Interest Income Recognized during Impairment
 
 
(In thousands)
With related allowance:
 
 
 
 
 
 
 
 
 
 
Real estate—residential
 
$

 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
 
 
Retail
 
391

 
397

 
15

 
1,084

 
14

Hotel & motel
 

 

 

 

 

Gas station & car wash
 
794

 
885

 
341

 
485

 

Mixed use
 

 

 

 

 

Industrial & warehouse
 
5,128

 
5,200

 
612

 
6,323

 

Other
 
1,362

 
1,412

 
124

 
1,819

 
43

Real estate—construction
 

 

 

 

 

Commercial business
 
1,984

 
3,354

 
622

 
2,827

 
5

Trade finance
 

 

 

 

 

Consumer and other
 

 

 

 

 

 
 
$
9,659

 
$
11,248

 
$
1,714

 
$
12,538

 
$
62

With no related allowance:
 
 
 
 
 
 
 
 
 
 
Real estate—residential
 
$

 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 

 
 
 
 
 
 
Retail
 
1,244

 
2,216

 

 
953

 
14

Hotel & motel
 
6,441

 
8,676

 

 
6,169

 

Gas station & car wash
 
1,614

 
2,109

 

 
1,366

 
62

Mixed use
 

 

 

 

 

Industrial & warehouse
 
1,883

 
3,446

 

 
2,482

 
10

Other
 
1,135

 
1,547

 

 
1,600

 

Real estate—construction
 

 

 

 

 

Commercial business
 
808

 
948

 

 
291

 

Trade finance
 

 

 

 

 

Consumer and other
 
767

 
831

 

 
779

 

 
 
$
13,892

 
$
19,773

 
$

 
$
13,640

 
$
86

Total
 
$
23,551

 
$
31,021

 
$
1,714

 
$
26,178

 
$
148

*
Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.


Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due and/or management deems the collectibility of the principal and/or interest to be in question, as well as when required by regulatory requirements. Loans to a customer whose financial condition has deteriorated are considered for nonaccrual status whether or not the loan is 90 days or more past due. Generally, payments received on nonaccrual loans are recorded as principal reductions. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

30

Table of Contents

The following tables present the aging of past due loans as of September 30, 2014 and December 31, 2013 by class of loans:
 
As of September 30, 2014
 
Past Due and Accruing
 
 
 
 
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 or More Days Past Due
 
Total
 
Nonaccrual Loans (2)
 
Total Delinquent Loans
 
(In thousands)
Legacy Loans:
 
Real estate—residential
$

 
$

 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
 
 
 
Retail
128

 
721

 

 
849

 
4,224

 
5,073

Hotel & motel
755

 

 

 
755

 
2,237

 
2,992

Gas station & car wash

 

 

 

 
2,998

 
2,998

Mixed use
441

 

 

 
441

 
943

 
1,384

Industrial & warehouse
208

 

 

 
208

 
2,419

 
2,627

Other
130

 
385

 

 
515

 
519

 
1,034

Real estate—construction

 

 

 

 
1,576

 
1,576

Commercial business
2,043

 
178

 

 
2,221

 
5,575

 
7,796

Trade finance

 

 

 

 
2,217

 
2,217

Consumer and other
231

 

 

 
231

 
21

 
252

     Subtotal
$
3,936

 
$
1,284

 
$

 
$
5,220

 
$
22,729

 
$
27,949

Acquired Loans: (1)
 
 
 
 
 
 
 
 
 
 
 
Real estate—residential
$

 
$

 

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
 
 
 
Retail
137

 
170

 

 
307

 
1,244

 
1,551

Hotel & motel

 

 

 

 
5,606

 
5,606

Gas station & car wash
351

 

 

 
351

 
751

 
1,102

Mixed use
5,639

 

 

 
5,639

 
806

 
6,445

Industrial & warehouse

 

 

 

 
1,228

 
1,228

Other

 

 

 

 
4,450

 
4,450

Real estate—construction

 

 

 

 

 

Commercial business
771

 
113

 

 
884

 
1,694

 
2,578

Trade finance

 

 

 

 

 

Consumer and other
13

 

 

 
13

 
1,056

 
1,069

     Subtotal
$
6,911

 
$
283

 
$

 
$
7,194

 
$
16,835

 
$
24,029

TOTAL
$
10,847

 
$
1,567

 
$

 
$
12,414

 
$
39,564

 
$
51,978

(1) 
The Acquired Loans exclude ACILs.
(2) 
Nonaccrual loans exclude the guaranteed portion of delinquent SBA loans that are in liquidation totaling $28.1 million.


31

Table of Contents

 
As of December 31, 2013
 
Past Due and Accruing
 
 
 
 
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 or More Days Past Due
 
Total
 
Nonaccrual Loans (2)
 
Total Delinquent Loans
 
(In Thousands)
Legacy Loans:
 
Real estate—residential
$

 
$

 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
 
 
 
Retail
122

 

 

 
122

 
4,363

 
4,485

Hotel & motel

 

 

 

 
121

 
121

Gas station & car wash
1,038

 

 

 
1,038

 
2,228

 
3,266

Mixed use

 

 

 

 
974

 
974

Industrial & warehouse
215

 

 

 
215

 
1,923

 
2,138

Other

 

 

 

 
1,398

 
1,398

Real estate—construction

 

 

 

 

 

Commercial business
780

 
244

 

 
1,024

 
6,402

 
7,426

Trade finance

 

 

 

 
1,031

 
1,031

Consumer and other
54

 
22

 

 
76

 

 
76

     Subtotal
$
2,209

 
$
266

 
$

 
$
2,475

 
$
18,440

 
$
20,915

Acquired Loans: (1)
 
 
 
 
 
 
 
 
 
 
 
Real estate—residential
$

 
$

 
$

 
$

 
$

 
$

Real estate—commercial
 
 
 
 
 
 
 
 
 
 
 
Retail
2,024

 

 

 
2,024

 
1,030

 
3,054

Hotel & motel

 

 

 

 
6,441

 
6,441

Gas station & car wash
1,068

 

 

 
1,068

 
1,339

 
2,407

Mixed use
576

 

 

 
576

 

 
576

Industrial & warehouse
121

 

 

 
121

 
6,890

 
7,011

Other
516

 
1,729

 

 
2,245

 
1,376

 
3,621

Real estate—construction

 

 

 

 

 

Commercial business
524

 
703

 
5

 
1,232

 
2,708

 
3,940

Trade finance

 

 

 

 

 

Consumer and other
284

 
74

 

 
358

 
930

 
1,288

     Subtotal
$
5,113

 
$
2,506

 
$
5

 
$
7,624

 
$
20,714

 
$
28,338

TOTAL
$
7,322

 
$
2,772

 
$
5

 
$
10,099

 
$
39,154

 
$
49,253

(1) 
The Acquired Loans exclude ACILs.
(2) Nonaccrual loans exclude guaranteed portion of delinquent SBA loans that are in liquidation totaling $27.5 million.

Loans accounted for under ASC 310-30 are generally considered accruing and performing loans and the accretable discount is accreted to interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, ACILs that are contractually past due are still considered to be accruing and performing loans. The loans may be classified as nonaccrual if the timing and amount of future cash flows is not reasonably estimable.
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans. This analysis is performed at least on a quarterly basis. The definitions for risk ratings are as follows:
Pass: Loans that meet a preponderance or more of the Company's underwriting criteria and evidence an acceptable level of risk.
Special Mention: Loans that have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

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Table of Contents

Substandard: Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful/Loss: Loans that have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
The following tables present the risk rating for Legacy Loans and Acquired Loans as of September 30, 2014 and December 31, 2013 by class of loans:
 
As of September 30, 2014
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful/Loss
 
Total
 
(In thousands)
Legacy Loans:
 
 
 
Real estate—residential
$
18,109

 
$

 
$

 
$

 
$
18,109

Real estate—commercial
 
 
 
 
 
 
 
 
 
Retail
984,921

 
20,455

 
14,536

 

 
1,019,912

Hotel & motel
741,380

 
283

 
7,686

 

 
749,349

Gas station & car wash
532,287

 

 
9,806

 

 
542,093

Mixed use
303,465

 
4,118

 
2,215

 

 
309,798

Industrial & warehouse
330,297

 
6,461

 
12,458

 

 
349,216

Other
646,929

 
10,716

 
13,071

 

 
670,716

Real estate—construction
85,204

 

 
1,576

 

 
86,780

Commercial business
726,547

 
20,691

 
40,227

 
470

 
787,935

Trade finance
110,774

 
25,580

 
11,762

 

 
148,116

Consumer and other
37,035

 
10

 
528

 

 
37,573

Subtotal
$
4,516,948

 
$
88,314

 
$
113,865

 
$
470

 
$
4,719,597

Acquired Loans:
 
 
 
 
 
 
 
 
 
Real estate—residential
$
801

 
$
293

 
$

 
$

 
$
1,094

Real estate—commercial
 
 
 
 
 
 
 
 
 
Retail
173,999

 
6,753

 
25,067

 

 
205,819

Hotel & motel
74,263

 
2,346

 
12,125

 

 
88,734

Gas station & car wash
28,520

 
353

 
8,899

 
256

 
38,028

Mixed use
31,731

 
1,472

 
3,624

 

 
36,827

Industrial & warehouse
78,613

 
1,069

 
14,521

 

 
94,203

Other
88,114

 
3,044

 
16,088

 
36

 
107,282

Real estate—construction

 

 

 

 

Commercial business
54,348

 
7,727

 
24,474

 
1,324

 
87,873

Trade finance

 

 

 

 

Consumer and other
41,746

 
2,024

 
9,549

 
1,470

 
54,789

Subtotal
$
572,135

 
$
25,081

 
$
114,347

 
$
3,086

 
$
714,649

Total
$
5,089,083

 
$
113,395

 
$
228,212

 
$
3,556

 
$
5,434,246


 

33

Table of Contents

 
As of December 31, 2013
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful/Loss
 
Total
 
(In thousands)
Legacy Loans:
 
 
 
Real estate—residential
$
8,070

 
$

 
$

 
$

 
$
8,070

Real estate—commercial
 
 
 
 
 
 
 
 
 
Retail
842,815

 
858

 
14,365

 

 
858,038

Hotel & motel
568,263

 
1,841

 
13,661

 

 
583,765

Gas station & car wash
455,205

 

 
10,854

 

 
466,059

Mixed use
259,788

 
360

 
3,324

 

 
263,472

Industrial & warehouse
251,993

 
4,116

 
12,056

 

 
268,165

Other
589,895

 
3,928

 
11,493

 
359

 
605,675

Real estate—construction
71,231

 

 
1,626

 

 
72,857

Commercial business
759,956

 
12,756

 
42,952

 

 
815,664

Trade finance
91,055

 
22,589

 
9,297

 

 
122,941

Consumer and other
32,389

 
32

 
535

 

 
32,956

Subtotal
$
3,930,660

 
$
46,480

 
$
120,163

 
$
359

 
$
4,097,662

Acquired Loans:
 
 
 
Real estate—residential
$
1,066

 
$
284

 
$
619

 
$

 
$
1,969

Real estate—commercial
 
 
 
 
 
 
 
 
 
Retail
237,325

 
9,319

 
28,128

 
94

 
274,866

Hotel & motel
109,138

 
7,134

 
14,836

 
179

 
131,287

Gas station & car wash
35,356

 
1,621

 
14,440

 
245

 
51,662

Mixed use
32,992

 
1,467

 
5,316

 

 
39,775

Industrial & warehouse
92,570

 
3,525

 
19,720

 

 
115,815

Other
133,752

 
6,698

 
21,573

 
560

 
162,583

Real estate—construction

 

 

 

 

Commercial business
94,854

 
10,266

 
26,245

 
2,064

 
133,429

Trade finance
1,744

 

 

 

 
1,744

Consumer and other
51,036

 
2,695

 
7,460

 
4,360

 
65,551

Subtotal
$
789,833

 
$
43,009

 
$
138,337

 
$
7,502

 
$
978,681

Total
$
4,720,493

 
$
89,489

 
$
258,500

 
$
7,861

 
$
5,076,343

 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Reclassification to held for sale
(In thousands)
Real estate - Commercial
$
2,320

 
$

 
$
2,353

 
$

Real estate - Construction

 

 

 

Commercial Business
258

 

 
258

 

     Total
$
2,578

 
$

 
$
2,611

 
$



The adequacy of the allowance for loan losses is determined by management based upon an evaluation and review of the credit quality of the loan portfolio, consideration of historical loan loss experience, relevant internal and external factors that affect the collection of a loan, and other pertinent factors.
Migration analysis is a formula methodology derived from the Bank's actual historical net charge off experience for each loan class (type) pool and risk grade. The migration analysis ("Migration Analysis") is centered on the Bank's internal credit risk rating system. Management's internal loan review and external contracted credit review examinations are used to determine and validate loan risk grades. This credit review system takes into consideration factors such as: borrower's background and experience; historical and current financial condition; credit history and payment performance; economic conditions and their impact on various industries; type, fair value and volatility of the fair value of collateral; lien position; and the financial strength of any guarantors.

34

Table of Contents

A general loan loss allowance is provided on loans not specifically identified as impaired (“non-impaired loans”). The Bank's general loan loss allowance has two components: quantitative and qualitative risk factors. The quantitative risk factors are based on a migration analysis methodology described above. The loans are classified by class and risk grade and the historical loss migration is tracked for the various classes. Loss experience is quantified for a specified period and then weighted to place more significance on the most recent loss history. That loss experience is then applied to the stratified portfolio at each quarter end. For ACILs, a general loan loss allowance is provided to the extent that there has been credit deterioration since the date of acquisition. 
Additionally, in order to systematically quantify the credit risk impact of other trends and changes within the loan portfolio, the Bank utilizes qualitative adjustments to the Migration Analysis within established parameters. The parameters for making adjustments are established under a Credit Risk Matrix that provides seven possible scenarios for each of the factors below. The matrix allows for up to three positive (Major, Moderate, and Minor), three negative (Major, Moderate, and Minor), and one neutral credit risk scenarios within each factor for each loan type pool. However, if information exists to warrant adjustment to the Migration Analysis, changes are made in accordance with the established parameters supported by narrative and/or statistical analysis. The Credit Risk Matrix and the nine possible scenarios enable the Bank to qualitatively adjust the Loss Migration Ratio by as much as 50 basis points in either direction (positive or negative) for each loan type pool. This matrix considers the following nine factors, which are patterned after the guidelines provided under the FFIEC Interagency Policy Statement on the Allowance for Loan and Lease Losses:
Changes in lending policies and procedures, including underwriting standards and collection, charge off, and recovery practices;
Changes in national and local economic and business conditions and developments, including the condition of various market segments;
Changes in the nature and volume of the loan portfolio;
Changes in the experience, ability and depth of lending management and staff;
Changes in the trends of the volume and severity of past due loans, Classified Loans, nonaccrual loans, troubled debt restructurings and other loan modifications;
Changes in the quality of our loan review system and the degree of oversight by the Directors;
Changes in the value of underlying collateral for collateral-dependent loans;
The existence and effect of any concentrations of credit and changes in the level of such concentrations; and
The effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated losses in our loan portfolio.
The Company also establishes specific loss allowances for loans that have identified potential credit risk conditions or circumstances related to a specific individual credit. The specific allowance amounts are determined by a method prescribed by FASB ASC 310-10-35-22, Measurement of Impairment. The loans identified as impaired will be accounted for in accordance with one of the three acceptable valuation methods: 1) the present value of 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. For the collateral dependent impaired loans, management obtains a new appraisal to determine the amount of impairment as of the date that the loan became impaired. The appraisals are based on an “as is” valuation. To ensure that appraised values remain current, management either obtains updated appraisals every twelve months from a qualified independent appraiser or an internal evaluation of the collateral is performed by qualified personnel. If the third party market data indicates that the value of the collateral property has declined since the most recent valuation date, management adjusts the value of the property downward to reflect current market conditions. If the fair value of the collateral is less than the recorded amount of the loan, management recognizes impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses. If an impaired loan is expected to be collected through liquidation of the underlying collateral, the loan is deemed to be collateral dependent and the amount of impairment is charged off against the allowance for loan losses.
The Company considers a loan to be impaired when it is probable that not all amounts due (principal and interest) will be collectible in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The significance of payment delays and payment shortfalls is determined on a case-by-case basis by taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed.
For commercial business loans, real estate loans and certain consumer loans, management bases the measurement of loan impairment on the present value of the expected future cash flows, discounted at the loan's effective interest rate or on the fair

35

Table of Contents

value of the loan's collateral if the loan is collateral dependent. Management evaluates most consumer loans for impairment on a collective basis because these loans generally have smaller balances and are homogeneous in the underwriting of terms and conditions and in the type of collateral.
For ACILs, the allowance for loan losses is based upon expected cash flows for these loans. To the extent that a deterioration in borrower credit quality results in a decrease in expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on an estimate of future credit losses over the remaining life of the loans.
The following table presents loans by portfolio segment and impairment method at September 30, 2014 and December 31, 2013:
 
 
As of September 30, 2014
 
Real Estate—
Residential
 
Real Estate—
Commercial
 
Real Estate—
Construction
 
Commercial
Business
 
Trade
Finance
 
Consumer
and Other
 
Total
 
(In thousands)
Impaired loans (gross carrying value)
$

 
$
75,565

 
$
1,576

 
$
42,471

 
$
9,976

 
$
1,112

 
$
130,700

Specific allowance
$

 
$
3,626

 
$

 
$
4,446

 
$
2,624

 
$

 
$
10,696

Loss coverage ratio
0.0
%
 
4.8
%
 
0.0
%
 
10.5
%
 
26.3
%
 
0.0
%
 
8.2
%
Non-impaired loans
$
19,203

 
$
4,136,412

 
$
85,204

 
$
833,337

 
$
138,140

 
$
91,250

 
$
5,303,546

General allowance
$
131

 
$
44,650

 
$
446

 
$
9,736

 
$
2,027

 
$
546

 
$
57,536

Loss coverage ratio
0.7
%
 
1.1
%
 
0.5
%
 
1.2
%
 
1.5
%
 
0.6
%
 
1.1
%
Total loans
$
19,203

 
$
4,211,977

 
$
86,780

 
$
875,808

 
$
148,116

 
$
92,362

 
$
5,434,246

Total allowance for loan losses
$
131

 
$
48,276

 
$
446

 
$
14,182

 
$
4,651

 
$
546

 
$
68,232

Loss coverage ratio
0.7
%
 
1.1
%
 
0.5
%
 
1.6
%
 
3.1
%
 
0.6
%
 
1.3
%

 
As of December 31, 2013
 
Real Estate—
Residential
 
Real Estate—
Commercial
 
Real Estate—
Construction
 
Commercial
Business
 
Trade
Finance
 
Consumer
and Other
 
Total
 
(In thousands)
Impaired loans (gross carrying value)
$

 
$
67,544

 
$
1,625

 
$
40,106

 
$
5,692

 
$
1,302

 
$
116,269

Specific allowance
$

 
$
6,670

 
$

 
$
5,805

 
$
159

 
$
32

 
$
12,666

Loss coverage ratio
0.0
%
 
9.9
%
 
0.0
%
 
14.5
%
 
2.8
%
 
2.5
%
 
10.9
%
Non-impaired loans
$
10,039

 
$
3,753,619

 
$
71,231

 
$
908,987

 
$
118,993

 
$
97,205

 
$
4,960,074

General allowance
$
25

 
$
39,227

 
$
628

 
$
11,787

 
$
2,494

 
$
493

 
$
54,654

Loss coverage ratio
0.2
%
 
1.0
%
 
0.9
%
 
1.3
%
 
2.1
%
 
0.5
%
 
1.1
%
Total loans
$
10,039

 
$
3,821,163

 
$
72,856

 
$
949,093

 
$
124,685

 
$
98,507

 
$
5,076,343

Total allowance for loan losses
$
25

 
$
45,897

 
$
628

 
$
17,592

 
$
2,653

 
$
525

 
$
67,320

Loss coverage ratio
0.2
%
 
1.2
%
 
0.9
%
 
1.9
%
 
2.1
%
 
0.5
%
 
1.3
%
Under certain circumstances, the Company provides borrowers relief through loan modifications. These modifications are either temporary in nature (“temporary modifications”) or are more substantive. At September 30, 2014, total modified loans

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were $77.7 million, compared to $58.9 million at December 31, 2013. The temporary modifications generally consist of interest only payments for a three to six month period, whereby principal payments are deferred. At the end of the modification period, the remaining principal balance is re-amortized based on the original maturity date. Loans subject to temporary modifications are generally downgraded to Special Mention or Substandard. At the end of the modification period, the loan either 1) returns to the original contractual terms; 2) is further modified and accounted for as a troubled debt restructuring in accordance with ASC 310-10-35; or 3) is disposed of through foreclosure or liquidation.
 
Troubled Debt Restructurings (“TDRs”) of loans are defined by ASC 310-40, “Troubled Debt Restructurings by Creditors” and ASC 470-60, “Troubled Debt Restructurings by Debtors” and evaluated for impairment in accordance with ASC 310-10-35. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the amount of principal amortization, forgiveness of a portion of a loan balance or accrued interest, or extension of the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed on the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank's internal underwriting policy.
A summary of TDRs on accrual and nonaccrual status by type of concession as of September 30, 2014 and December 31, 2013 is presented below:
 
As of September 30, 2014
 
TDRs on Accrual
 
TDRs on Nonaccrual
 
Total
 
Real Estate—
Commercial
 
Commercial
Business
 
Other
 
Total
 
Real Estate—
Commercial
 
Commercial
Business
 
Other
 
Total
 
 
(In thousands)
Payment concession
$
12,345

 
$
601

 
$

 
$
12,946

 
$
3,986

 
$
660

 
$

 
$
4,646

 
$
17,592

Maturity / Amortization concession
1,788

 
22,016

 
690

 
24,494

 
1,471

 
5,265

 
243

 
6,979

 
31,473

Rate concession
13,480

 
5,141

 

 
18,621

 
9,714

 
45

 
179

 
9,938

 
28,559

Principal forgiveness

 

 

 

 

 
118

 

 
118

 
118

 
$
27,613

 
$
27,758

 
$
690

 
$
56,061

 
$
15,171

 
$
6,088

 
$
422

 
$
21,681

 
$
77,742


 
As of December 31, 2013
 
TDRs on Accrual
 
TDRs on Nonaccrual
 
Total
 
Real Estate—
Commercial
 
Commercial
Business
 
Other
 
Total
 
Real Estate—
Commercial
 
Commercial
Business
 
Other
 
Total
 
 
(In thousands)
Payment concession
$
7,437

 
$
1,057

 
$

 
$
8,494

 
$
9,489

 
$
1,279

 
$
767

 
$
11,535

 
$
20,029

Maturity / Amortization concession
765

 
6,565

 
535

 
7,865

 
1,653

 
3,656

 

 
5,309

 
13,174

Rate concession
13,055

 
4,490

 

 
17,545

 
8,107

 

 

 
8,107

 
25,652

Principal forgiveness

 

 

 

 

 
49

 

 
49

 
49

 
$
21,257

 
$
12,112

 
$
535

 
$
33,904

 
$
19,249

 
$
4,984

 
$
767

 
$
25,000

 
$
58,904

TDRs on accrual status are comprised of loans that were accruing at the time of restructuring and for which the Bank anticipates full repayment of both principal and interest under the restructured terms. TDRs that are on nonaccrual status can be returned to accrual status after a period of sustained performance, generally determined to be six months of timely payments as modified.  Sustained performance includes the periods prior to the modification if the prior performance met or exceeded the modified terms.  TDRs on accrual status at September 30, 2014 were comprised of 21 commercial real estate loans totaling $27.6 million, 28 commercial business loans totaling $27.8 million, and 3 consumer loans totaling $690 thousand. TDRs on accrual status at December 31, 2013 were comprised of 15 commercial real estate loans totaling $21.3 million, 28 commercial business loans totaling $12.1 million and 2 consumer loans totaling $535 thousand.  The Company expects that the TDRs on accrual status as of September 30, 2014, which were all performing in accordance with their restructured terms, to continue to comply with the restructured terms because of the reduced principal or interest payments on these loans.  TDRs that were restructured at market interest rates and had sustained performance as agreed under the modified loan terms may be reclassified as non-TDRs after each year end but are reserved for under ASC 310-10.
 
The Company has allocated $6.1 million and $6.6 million of specific reserves to TDRs as of September 30, 2014 and December 31, 2013, respectively. 

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The following table presents loans by class modified as TDRs that occurred during the three and nine months ended September 30, 2014:
 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
 
Number of
Loans 
 
Pre-
Modification
 
Post-
Modification 
 
Number of
Loans 
 
Pre-
Modification
 
Post-
Modification 
 
(Dollars in thousand)
Legacy Loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate—commercial
 
 
 

 
 

 
 
 
 
 
 
Retail

 
$

 
$

 
1

 
$
523

 
$
514

Hotel & motel

 

 

 

 

 

Gas station & car wash

 

 

 

 

 

Mixed use

 

 

 

 

 

Industrial & warehouse
1

 
27

 
26

 
2

 
783

 
835

Other
1

 
87

 
116

 
2

 
327

 
355

Real estate - construction

 

 

 

 

 

Commercial business
7

 
11,866

 
11,060

 
14

 
17,759

 
16,935

Trade finance
1

 
2,629

 
2,759

 
2

 
2,721

 
3,559

Consumer and other

 

 

 

 

 

Subtotal
10

 
$
14,609

 
$
13,961

 
21

 
$
22,113

 
$
22,198

Acquired Loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate—commercial
 
 
 

 
 

 
 
 
 
 
 
Retail

 
$

 
$

 
2

 
$
1,075

 
$
1,062

Hotel & motel

 

 

 

 

 

Gas station & car wash

 

 

 
1

 
794

 
756

Mixed use

 

 

 

 

 

Industrial & warehouse
1

 
75

 
74

 
1

 
75

 
74

Other

 

 

 
1

 
1,023

 
1,001

Real estate—construction

 

 

 

 

 

Commercial business
2

 
111

 
91

 
7

 
457

 
215

Trade finance

 

 

 

 

 

Consumer and other

 
$

 
$

 
1

 
$
195

 
$
187

Subtotal
3

 
$
186

 
$
165

 
13

 
$
3,619

 
$
3,295

 
13

 
$
14,795

 
$
14,126

 
34

 
$
25,732

 
$
25,493

The specific reserves for the TDRs that occurred during the three and nine months ended September 30, 2014 totaled $233 thousand and $2.7 million, respectively, and there were $691 thousand and $709 thousand in charge offs for the three and nine months ended September 30, 2014, respectively.

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Table of Contents

The following table presents loans by class for TDRs that have been modified within the previous twelve months and have subsequently had a payment default during the three and nine months ended September 30, 2014:

 
Three Months Ended
September 30, 2014
 
Nine Months Ended
September 30, 2014
 
Number of Loans
 
Balance
 
Number of
Loans
 
 
Balance
 
 
(Dollars In thousands)
Legacy Loans:
 
 
 
 
 
 
 
Real estate—commercial
 
 
 
 
 
 
 
Retail
1

 
$
707

 
1

 
$
707

Gas station & car wash

 

 

 

Industrial & warehouse

 

 

 

Other

 

 

 

Commercial business
3

 
313

 
4

 
313

Subtotal
4

 
$
1,020

 
5

 
$
1,020

Acquired Loans:
 
 
 
 
 
 
 
Real estate—commercial
 

 
 

 
 
 
 
Retail
2

 
$
333

 
2

 
$
333

Gas station & car wash

 

 

 

Hotel & motel

 

 

 

Industrial & warehouse

 

 

 

Other

 

 

 

Commercial business
3

 
174

 
3

 
174

Subtotal
5

 
$
507

 
5

 
$
507

 
9

 
$
1,527

 
10

 
$
1,527

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. As of September 30, 2014, the specific reserves totaled $352 thousand and $352 thousand for the TDRs that had payment defaults during the three and nine months ended September 30, 2014, respectively. The total charge offs for the TDRs that had payment defaults during the three and nine months ended September 30, 2014 were $0 thousand and $45 thousand.
There were four Legacy Loans that subsequently defaulted during the three months ended September 30, 2014. Three of the loans were Commercial Business loans that were modified as follows: one loan totaling $106 thousand was modified through payment concession, one loan totaling $107 thousand was modified through maturity concession, and one loan totaling $100 was modified through principal forgiveness. There was one Real Estate Commercial loan totaling $707 thousand that defaulted and was modified through rate concession.
There were five Acquired Loans that defaulted during the three months ended September 30, 2014 that were modified as follows: two Commercial Business loans totaling $154 thousand were modified through payment concessions, one Commercial Business loans totaling $20 thousand was modified through maturity concession, one Real Estate Commercial loan totaling $211 thousand was modified through payment concession and one Real Estate Commercial loan totaling $122 thousand was modified through rate concession.
There were five Legacy loan that defaulted during the nine months ended September 30, 2014, that were modified as follows: one Real Estate Commercial loan totaling $707 thousand was modified through rate concession, one Commercial Business loan totaling $106 thousand was modified through payment concession, one Commercial Business loan totaling $107 thousand was modified through maturity concession, one Commercial Business loan totaling $100 thousand was modified through debt forgiveness, and one Commercial Business loan was charged off during the nine-month period.
There were five Acquired Loans that defaulted during the nine months ended September 30, 2014 that were modified as follows: one Real Estate Commercial loan totaling $211 thousand was modified through payment concession, one Real Estate Commercial loan totaling $122 thousand was modified through rate concession, two Commercial Business loans totaling $154 thousand were modified through payment concessions, and one Commercial Business loan totaling $20 thousand was modified through maturity concession.


39

Table of Contents

Covered Assets
On April 16, 2010, the Department of Financial Institutions closed Innovative Bank, California, and appointed the FDIC as its receiver. On the same date, the Bank assumed the banking operations of Innovative Bank from the FDIC under a purchase and assumption agreement and two related loss sharing agreements with the FDIC.
Covered nonperforming assets totaled $2.2 million and $826 thousand at September 30, 2014 and December 31, 2013, respectively. These covered nonperforming assets are subject to the loss sharing agreements with the FDIC. The covered nonperforming assets at September 30, 2014 and December 31, 2013 were as follows:
 
September 30, 2014
 
December 31, 2013
 
(In thousands)
Covered loans on nonaccrual status
$
1,873

 
$
236

Covered OREO
348

 
590

     Total covered nonperforming assets
$
2,221

 
$
826

 
 
 
 
Acquired covered loans
$
41,732

 
$
55,088

Related Party Loans
In the ordinary course of business, the Company enters into loan transactions with certain of its directors or associates of such directors (“Related Parties”). The loans to Related Parties are on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated parties. In management’s opinion, these transactions did not involve more than normal credit risk or present other unfavorable features. All loans to Related Parties were current as of September 30, 2014 and December 31, 2013, and the outstanding principal balance as of September 30, 2014 and December 31, 2013 was $3.3 million and $3.9 million, respectively.


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Table of Contents

8.
Borrowings
The Company maintains a secured credit facility with the FHLB against which the Bank may take advances. The borrowing capacity is limited to the lower of 30% of the Bank’s total assets or the Bank’s collateral capacity, which was $1.96 billion at September 30, 2014 and $1.78 billion at December 31, 2013. The terms of this credit facility require the Company to pledge eligible collateral with the FHLB equal to at least 100% of outstanding advances.
At September 30, 2014 and December 31, 2013, real estate secured loans with a carrying amount of approximately $2.60 billion and $2.33 billion, respectively, were pledged as collateral for borrowings from the FHLB. At September 30, 2014, other than FHLB stock, no securities are pledged as collateral for borrowings from the FHLB. At December 31, 2013, other than FHLB stock, securities with a carrying value of $13.2 million were pledged as collateral for borrowings from the FHLB.
At September 30, 2014 and December 31, 2013, FHLB advances were $467.1 million and $421.4 million, respectively, had a weighted average interest rate of 1.14% and 1.16%, respectively, and had various maturities through September 2019. At September 30, 2014 and December 31, 2013, $37.1 million and $51.4 million, respectively, of the advances were putable advances with various putable dates and strike prices. The cost of FHLB advances as of September 30, 2014 ranged between 0.47% and 3.51%. At September 30, 2014, the Company had a remaining borrowing capacity of $1.49 billion.
At September 30, 2014, the contractual maturities for FHLB advances were as follows:

Contractual
Maturities

Maturity/
Put Date
 
(In thousands)
Due within one year
$
66,000

 
$
87,071

Due after one year through five years
401,071

 
380,000


$
467,071

 
$
467,071


In addition, as a member of the FRB system, the Bank may also borrow from the FRB of San Francisco. The maximum amount that the Bank may borrow from the FRB’s discount window is up to 95% of the outstanding principal balance of the qualifying loans and the fair value of the securities that are pledged. At September 30, 2014, the outstanding principal balance of the qualifying loans was $599.0 million, and the collateral value of investment securities was $1.6 million. There were no borrowings outstanding against this line as of September 30, 2014 and December 31, 2013.

9.
Subordinated Debentures
At September 30, 2014, four wholly-owned subsidiary grantor trusts established by former Nara Bancorp had issued $28 million of pooled Trust Preferred Securities (“trust preferred securities”) and one wholly-owned subsidiary grantor trust established by former Center Financial Corporation had issued $18 million of trust preferred securities. Upon the acquisition of PIB, the Company assumed one grantor trust established by former PIB which issued $4 million of trust preferred securities, which the Company redeemed on June 17, 2013. Upon the acquisition of Foster, the Company assumed one grantor trust established by former Foster Bank which issued $15 million of trust preferred securities, which the Company redeemed on March 14, 2014. Trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in the indentures. The trusts used the net proceeds from the offering to purchase a like amount of subordinated debentures (the “Debentures”) of BBCN Bancorp. The Debentures are the sole assets of the trusts. The Company’s obligations under the subordinated debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date. The Company also has a right to defer consecutive payments of interest on the debentures for up to five years.

41

Table of Contents

The following table is a summary of trust preferred securities and Debentures at September 30, 2014:
Issuance Trust

Issuance
Date

Trust
Preferred
Security
Amount

Carrying Value of Subordinated
Debentures


Rate
Type

Initial
Rate

Coupon Rate at
September 30, 2014

Maturity
Date
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Nara Capital Trust III

6/5/2003

$
5,000


$
5,155


Variable

4.44
%

3.38
%

6/15/2033
Nara Statutory Trust IV

12/22/2003

5,000


5,155


Variable

4.02
%

3.08
%

1/7/2034
Nara Statutory Trust V

12/17/2003

10,000


10,310


Variable

4.12
%

3.19
%

12/17/2033
Nara Statutory Trust VI

3/22/2007

8,000


8,248


Variable

7.00
%

1.88
%

6/15/2037
Center Capital Trust I

12/30/2003

18,000


13,249


Variable

4.01
%

3.08
%
(1) 
1/7/2034
TOTAL ISSUANCE



$
46,000


$
42,117









(1) The Center Capital Trust I trust preferred security was assumed in the merger with Center Financial Corporation. The remaining discount
was $5.3 million at September 30, 2014 and the effective rate of the security, including the effect of the discount accretion, was 5.54% at
September 30, 2014.

The Company’s investment in the common trust securities of the issuer trusts of $1.6 million and $1.9 million at September 30, 2014 and December 31, 2013, respectively, is included in other assets. Although the subordinated debt issued by the trusts are not included as a component of stockholders' equity in the consolidated balance sheets, the debt is treated as capital for regulatory purposes. The trust preferred security debt issuances are includable in Tier I capital up to a maximum of 25% of capital on an aggregate basis. Any amount that exceeds 25% qualifies as Tier 2 capital. At September 30, 2014, $40.7 million of the trusts’ securities qualified as Tier 1 capital. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law which, among other things, limits the ability of bank holding companies with total assets of more than $15 billion to treat trust preferred security debt issuances as Tier 1 capital. Since the Company had less than $15 billion in assets at September 30, 2014, we will be able to continue to include existing trust preferred securities in Tier 1 capital under the Dodd-Frank Act.


42

Table of Contents

10.
Intangible Assets
The carrying amount of the Company's goodwill as of September 30, 2014 and December 31, 2013 was $105.4 million. There was no impairment of goodwill during the three and nine month periods ended September 30, 2014 and 2013.
Core deposit intangible assets are amortized over their estimated lives, which range from seven to ten years. The Company acquired, through the acquisitions of PIB and Foster during the first and third quarters of 2013, respectively, core deposit intangible assets, which totaled $603 thousand and $2.8 million, respectively. Amortization expense related to core deposit intangible assets totaled $324 thousand and $316 thousand for the three months ended September 30, 2014 and 2013, respectively. The amortization expense related to core deposit intangible assets totaled $972 thousand and $813 thousand for the nine months ended September 30, 2014 and 2013, respectively. The following table provides information regarding the core deposit intangibles at September 30, 2014:
 
 
 
As of September 30, 2014
 
Amortization period
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
 
 
 
 
 
Core deposit—Center Financial Corporation acquisition
7 years
 
$
4,100

 
$
(2,504
)
Core deposit—PIB acquisition
7 years
 
603

 
(237
)
Core deposit—Foster acquisition
10 years
 
2,763

 
(514
)
Total
 
 
$
7,466

 
$
(3,255
)

 
 
 
 
 
 
 
 
 
 
Servicing assets are recognized when SBA loans are sold with servicing retained with the income statement effect recorded in gains on sales of SBA loans. Servicing assets are initially recorded at fair value based on the present value of the contractually specified servicing fee, net of servicing costs, over the estimated life of the loan, using a discount rate based on the related note rate. The Company's servicing costs approximates the industry average servicing costs of 40 basis points. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Management periodically evaluates servicing assets for impairment based upon the fair value of the rights as compared to the carrying amount. Impairment is determined by stratifying rights into groupings based on loan type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount.
The changes in servicing assets for the three and nine months ended September 30, 2014 and 2013 were as follows:

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands)
Balance at beginning of period
 
$
9,024

 
$
8,078

 
$
8,915

 
$
6,260

Additions through originations of servicing assets
 
1,270

 
977

 
2,943

 
2,535

Additions through acquisition of PIB
 

 

 

 
1,102

Additions through acquisition of Foster
 

 
162

 

 
162

Amortization
 
(771
)
 
(555
)
 
(2,335
)
 
(1,397
)
Balance at end of period
 
$
9,523

 
$
8,662

 
$
9,523

 
$
8,662


The Company utilizes the discounted cash flow method to calculate the initial excess servicing assets. The inputs used in determining the fair value of the servicing assets at September 30, 2014 and December 31, 2013 are presented below.
 
 
September 30, 2014
 
December 31, 2013
 
 
Range
 
Range
Weighted-average discount rate
 
5.46% ~ 5.75%
 
5.49% ~ 5.73%
Constant prepayment rate
 
8.90% ~ 12.40%
 
9.20% ~13.00%

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Table of Contents

11.
Income Taxes
The Company and its subsidiaries are subject to U.S. federal income tax, as well as state income taxes.  The Company had total unrecognized tax benefits of $1.3 million and $1.3 million at September 30, 2014 and December 31, 2013, respectively, that relate primarily to uncertainties related to California enterprise zone loan interest deductions.
Management does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.
The statute of limitations related to the consolidated Federal income tax returns is closed for all tax years up to and including 2010. The expiration of the statute of limitations related to the various state income and franchise tax returns varies by state. The Company is currently under examination by the Internal Revenue Service (IRS) for the 2011 tax year and by the California Franchise Tax Board (FTB) for the 2009 and 2010 tax years. While the outcome of the examinations is unknown, the Company expects no material adjustments. The Company recognizes interest and penalties related to income tax matters in income tax expense.  The Company recorded approximately $79 thousand and $58 thousand for accrued interest and penalties at September 30, 2014 and December 31, 2013, respectively.
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on the analysis, the Company has determined that a valuation allowance for deferred tax assets was not required as of September 30, 2014.


44

Table of Contents

12.
Fair Value Measurements
FASB ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
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; or other inputs that are observable or can be corroborated by observable market data.
Level 3:
Significant unobservable inputs that reflect estimates of assumptions that market participants would use in pricing the asset or liability.
Securities Available for Sale
The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a technique widely used 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 (Level 2 inputs).
The fair values of the Company's Level 3 securities available for sale were measured using an income approach valuation technique. The primary inputs and assumptions used in the fair value measurement were derived from the securities' underlying collateral, which included discount rates, prepayment speeds, payment delays, and an assessment of the risk of default of the underlying collateral, among other factors. Significant increases or decreases in any of the inputs or assumptions would result in a significant increase or decrease in the fair value measurement.
Impaired Loans
The fair values of impaired loans are generally measured for impairment using the practical expedients permitted by FASB ASC 310-10-35 including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation and result in a Level 2.
OREO
OREO is fair valued at the time the loan is foreclosed upon and the asset is transferred to OREO. The value 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. OREO is reviewed and evaluated on at least an annual basis for additional impairment and adjusted to lower of cost or market accordingly, based on the same factors identified above.
Loans held for sale
Loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments from investors, or based on recent comparable sales (Level 2 inputs), if available, and if not available, are based on discounted cash flows using current market rates applied to the estimated life and credit risk (Level 3 inputs) or may be assessed based upon the fair value of the collateral, which is obtained from recent real estate appraisals (Level 3 inputs). These appraisals may utilize a single valuation approach or a combination of approaches including the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in Level 3 classification of the inputs for determining fair value.


45

Table of Contents

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 
 

Fair Value Measurements at the End of the Reporting Period Using
 
September 30, 2014

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
 
(In thousands)
Assets:







Securities available for sale:







GSE collateralized mortgage obligations
$
273,417


$


$
273,417


$

GSE mortgage-backed securities
409,809




409,809



Trust preferred securities
4,050




4,050



Municipal bonds
6,118




4,972


1,146

Mutual funds
17,231


17,231





 
 
 
 
 
 
 
 


 
 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
December 31, 2013
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
GSE collateralized mortgage obligations
$
274,101

 
$

 
$
274,101

 
$

GSE mortgage-backed securities
404,996

 

 
404,996

 

Trust preferred securities
3,697

 

 
3,697

 

Municipal bonds
5,936

 

 
4,824

 
1,112

Mutual funds
17,021

 
17,021

 

 


There were no transfers between Level 1, 2 and 3 during the period ended September 30, 2014 and 2013. There were no gains or losses recognized in earnings
The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2014:
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
 
(In thousands)
Beginning Balance, January 1
 
$
1,112

 
$

Purchases, issuances and settlements
 

 
1,202

Amortization
 

 
(15
)
Total gains or (losses) included in earnings
 

 

Total gains or (losses) included in other comprehensive income
 
34

 
(45
)
Ending Balance, September 30
 
$
1,146

 
$
1,142




46

Table of Contents

Assets measured at fair value on a non-recurring basis are summarized below:
 
 
 

Fair Value Measurements at the End of the Reporting Period Using
 
September 30, 2014

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
 
(In thousands)
Assets:







Impaired loans at fair value:







Real estate loans
$
40,082


$


$
40,082


$

Commercial business
2,678




2,678



Trade finance
768

 

 
768

 

Consumer
604

 

 
604

 

Loans held for sale, net
2,578




2,578



OREO
11,163




11,163




 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
December 31, 2013
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Impaired loans at fair value:
 
 
 
 
 
 
 
Real estate loans
$
18,746

 
$

 
$
18,746

 
$

Commercial business
2,383

 

 
2,383

 

Loans held for sale, net
6,900

 

 
6,900

 

OREO
4,003

 

 
4,003

 


For assets measured at fair value on a non-recurring basis, the total net gains (losses), which include charge offs, recoveries, specific reserves, and gains and losses on sales recognized are summarized below:

 
For the Three Months ended September 30,
 
For the Nine Months ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Impaired loans at fair value:
 
 
 
 
 
 
 
Real estate loans
$
(901
)
 
$
(1,759
)
 
$
1,015

 
$
(9,700
)
Commercial business
(1,921
)
 
(509
)
 
(5,337
)
 
(1,703
)
Trade Finance
(1,036
)
 

 
(3,232
)
 

Consumer
9

 

 
158

 

Loans held for sale, net
(224
)
 
(530
)
 
(224
)
 
(530
)
OREO
(600
)
 
(570
)
 
(931
)
 
(956
)


47

Table of Contents

Fair Value of Financial Instruments
Carrying amounts and estimated fair values of financial instruments, not previously presented, at September 30, 2014 and December 31, 2013 were as follows:
 
 
September 30, 2014
 
Carrying
Amount

Estimated
Fair Value
 
Fair Value Measurement Using
 
(In thousands)
Financial Assets:



 

Cash and cash equivalents
$
443,320


$
443,320

 
Level 1
Loans held for sale
45,695


47,851

 
Level 2
Loans receivable—net
5,364,612


5,724,155

 
Level 3
FDIC loss share receivable



 
Level 3
Customers’ liabilities on acceptances
3,822


3,822

 
Level 2
Financial Liabilities:



 

Noninterest bearing deposits
$
1,503,275


$
1,503,275

 
Level 2
Saving and other interest bearing demand deposits
1,737,420


1,737,420

 
Level 2
Time deposits
2,269,059


2,273,024

 
Level 2
FHLB advances
467,071


466,106

 
Level 2
Subordinated debentures
42,117


44,010

 
Level 2
Bank’s liabilities on acceptances outstanding
3,822


3,822

 
Level 2
 
December 31, 2013
 
Carrying
Amount

Estimated
Fair Value
 
Fair Value Measurement Using
 
(In thousands)
Financial Assets:



 
 
Cash and cash equivalents
$
316,705


$
316,705

 
Level 1
Loans held for sale
44,115


45,975

 
Level 2
Loans receivable—net
5,006,856


5,450,008

 
Level 3
FDIC loss share receivable
1,110


1,110

 
Level 3
Customers’ liabilities on acceptances
5,602


5,602

 
Level 2
Financial Liabilities:
 
 
 
 
 
Noninterest bearing deposits
$
1,399,454


$
1,399,454

 
Level 2
Saving and other interest bearing demand deposits
1,598,514


1,598,514

 
Level 2
Time deposits
2,150,089


2,156,514

 
Level 2
FHLB advances
421,352


421,258

 
Level 2
Subordinated debentures
57,410


56,544

 
Level 2
Bank’s liabilities on acceptances outstanding
5,602


5,602

 
Level 2

The methods and assumptions used to estimate fair value are described as follows:

The carrying amount is the estimated fair value for cash and cash equivalents, savings and other interest bearing demand deposits, accrued interest receivable and payable, customer’s and Bank’s liabilities on acceptances, noninterest bearing deposits, short-term debt, secured borrowings and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. Fair value of SBA loans held for sale is based on market quotes. For fair value of non-SBA loans held for sale, see the measurement method discussed previously. Fair value of time deposits and debt is based on current rates for similar financing. It was not practicable to determine the fair value of FRB stock or FHLB stock due to restrictions placed on their transferability. The fair value of commitments to fund loans represents

48

Table of Contents

fees currently charged to enter into similar agreements with similar remaining maturities and is not presented herein. The fair value of these financial instruments is not material to the consolidated financial statements.

13.
Stockholders’ Equity
In June 2012, the Company redeemed all of the Fixed Rate Cumulative Perpetual Preferred Stock issued under the U.S. Treasury Department's TARP Capital Purchase Program. As of September 30, 2014, a warrant held by the U.S. Treasury Department for the purchase of 345,334 shares of the Company's common stock remains outstanding.
In conjunction with the acquisition of PIB, the Company assumed a warrant (related to the TARP Capital Purchase Plan) to purchase shares of its common stock. At the acquisition date, the warrants were canceled and converted into a warrant to purchase BBCN Bancorp common stock which expires on December 12, 2018. As of September 30, 2014, the U.S. Treasury Department held the warrant for the purchase of 18,607 shares of the Company's common stock.
The Company's Board of Directors declared quarterly dividends of $0.10 per common share for the third quarter of 2014 and $0.05 per common share for the third quarter of 2013.
The following table presents the components of accumulated other comprehensive loss at September 30, 2014 and December 31, 2013:
 
September 30, 2014
 
December 31, 2013
 
(In thousands)
Net unrealized loss on securities available for sale
$
(1,573
)
 
$
(10,264
)
Net unrealized gain on interest-only strips
72

 
79

Total accumulated other comprehensive loss
$
(1,501
)
 
$
(10,185
)


49

Table of Contents

14.
Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material and adverse effect on the Company’s and the Bank’s financial statements, such as restrictions on growth or the payment of dividends or other capital distributions or management fees. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes that, as of September 30, 2014 and December 31, 2013, the Company and the Bank met all capital adequacy requirements to which they are subject.
As of September 30, 2014 and December 31, 2013, the most recent regulatory notification categorized the Bank as "well-capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well-capitalized", the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since the notification that management believes have changed the Bank’s category.

50

Table of Contents

The Company’s and the Bank’s actual capital amounts and ratios are presented in the table below:
 
Actual
 
Required
For Capital
Adequacy Purposes
 
Required
To Be Well
Capitalized under
Prompt Corrective
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
As of September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Company
$
866,918

 
14.93
%
 
$
464,628

 
8.00
%
 
N/A

 
N/A

Bank
$
853,691

 
14.71
%
 
$
464,264

 
8.00
%
 
$
580,330

 
10.00
%
Tier I capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Company
$
797,112

 
13.72
%
 
$
232,314

 
4.00
%
 
N/A

 
N/A

Bank
$
783,886

 
13.51
%
 
$
232,132

 
4.00
%
 
$
348,198

 
6.00
%
Tier I capital (to average assets):
 
 
 
 
 
 
 
 
 
 
 
Company
$
797,112

 
11.80
%
 
$
270,303

 
4.00
%
 
N/A

 
N/A

Bank
$
783,886

 
11.60
%
 
$
270,247

 
4.00
%
 
$
337,809

 
5.00
%
 
Actual
 
Required
For Capital
Adequacy Purposes
 
Required
To Be Well
Capitalized under
Prompt Corrective
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Company
$
819,408

 
14.90
%
 
$
439,687

 
8.00
%
 
N/A

 
N/A

Bank
$
807,620

 
14.70
%
 
$
439,437

 
8.00
%
 
$
549,471

 
10.00
%
Tier I capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Company
$
751,204

 
13.66
%
 
$
219,844

 
4.00
%
 
N/A

 
N/A

Bank
$
739,416

 
13.46
%
 
$
219,798

 
4.00
%
 
$
329,683

 
6.00
%
Tier I capital (to average assets):
 
 
 
 
 
 
 
 
 
 
 
Company
$
751,204

 
11.97
%
 
$
251,049

 
4.00
%
 
N/A

 
N/A

Bank
$
739,416

 
11.79
%
 
$
250,954

 
4.00
%
 
$
313,687

 
5.00
%


51

Table of Contents

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2013 and the unaudited consolidated financial statements and notes set forth elsewhere in this report.


GENERAL
Selected Financial Data
The following table sets forth certain selected financial data concerning the periods indicated:
 
 
At or for the Three Months Ended September 30,
 
At or for the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands, except
share and per share data)
Income Statement Data:
 
 
 
 
 
 
 
Interest income
$
77,084

 
$
72,035

 
$
226,890

 
$
208,157

Interest expense
9,177

 
7,675

 
26,527

 
21,978

Net interest income
67,907

 
64,360

 
200,363

 
186,179

Provision for loan losses
4,256

 
744

 
10,278

 
9,050

Net interest income after provision for loan losses
63,651

 
63,616

 
190,085

 
177,129

Noninterest income
11,369

 
10,799

 
32,957

 
31,357

Noninterest expense
39,420

 
35,746

 
113,434

 
103,450

Income before income tax provision
35,600

 
38,669

 
109,608

 
105,036

Income tax provision
14,180

 
15,117

 
43,680

 
41,352

Net income
$
21,420

 
$
23,552

 
$
65,928

 
$
63,684

Per Share Data:
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.27

 
$
0.30

 
$
0.83

 
$
0.81

Earnings per common share - diluted
$
0.27

 
$
0.30

 
$
0.83

 
$
0.80

Book value per common share (period end, excluding warrants) (8)
$
10.87

 
$
10.11

 
$
10.87

 
$
10.11

Cash dividends declared per common share
$
0.10

 
$
0.05

 
$
0.25

 
$
0.175

Tangible book value per common share (period end, excluding warrants) (8) (10)
$
9.49

 
$
8.52

 
$
9.49

 
$
8.52

Number of common shares outstanding (period end)
79,497,331

 
79,247,719

 
79,497,331

 
79,247,719

Weighted average shares - basic
79,493,917

 
79,223,636

 
79,486,958

 
78,914,360

Weighted average shares - diluted
79,601,075

 
79,334,865

 
79,617,317

 
79,122,060

Tangible common equity ratio (8)
11.07
%
 
10.87
%
 
11.07
%
 
10.87
%
Statement of Financial Condition Data - at Period End:
 
 
 
 
 
 
 
Assets
$
6,927,806

 
$
6,340,987

 
$
6,927,806

 
$
6,340,987

Securities available for sale
710,625

 
708,566

 
710,625

 
708,566

Loans receivable
5,432,844

 
4,898,939

 
5,432,844

 
4,898,939

Deposits
5,509,754

 
5,021,102

 
5,509,754

 
5,021,102

FHLB advances
467,071

 
421,446

 
467,071

 
421,446

Subordinated debentures
42,117

 
57,303

 
42,117

 
57,303

Stockholders’ equity
864,648

 
801,230

 
864,648

 
801,230

          

52

Table of Contents

 
At or for the Three Months Ended September 30,
 
At or for the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
Average Balance Sheet Data:
 
 
 
 
 
 
 
Assets
$
6,867,468

 
$
6,160,132

 
$
6,739,534

 
$
5,924,397

Securities available for sale
734,282

 
714,660

 
718,291

 
704,124

Loans receivable and loans held for sale
5,434,815

 
4,771,022

 
5,303,478

 
4,588,464

Deposits
5,457,836

 
4,845,403

 
5,366,717

 
4,629,925

Stockholders’ equity
859,606

 
794,737

 
840,743

 
781,159

Selected Performance Ratios:
 
 
 
 
 
 
 
Return on average assets (1)
1.25
%
 
1.53
%
 
1.30
%
 
1.43
%
Return on average stockholders’ equity (1)
9.97
%
 
11.85
%
 
10.46
%
 
10.87
%
Average stockholders' equity to average assets
12.52
%
 
12.90
%
 
12.47
%
 
13.19
%
Return on average tangible equity (1) (9)
11.43
%
 
13.90
%
 
12.03
%
 
12.52
%
Dividend payout ratio (dividends per share / earnings per share)
37.04
%
 
25.00
%
 
30.12
%
 
21.60
%
Pre-Tax Pre-Provision income to average assets (1)
2.32
%
 
2.56
%
 
2.37
%
 
2.96
%
Efficiency ratio (2)
49.73
%
 
47.56
%
 
48.62
%
 
47.56
%
Net interest spread
3.89
%
 
4.19
%
 
3.96
%
 
4.23
%
Net interest margin (3)
4.15
%
 
4.42
%
 
4.21
%
 
4.46
%
Regulatory Capital Ratios (4)
 
 
 
 
 
 
 
Leverage capital ratio (5)
11.80
%
 
12.06
%
 
11.80
%
 
12.06
%
Tier 1 risk-based capital ratio
13.72
%
 
13.64
%
 
13.72
%
 
13.64
%
Total risk-based capital ratio
14.93
%
 
14.89
%
 
14.93
%
 
14.89
%
Tier 1 common risk-based capital ratio (11)
13.02
%
 
12.60
%
 
13.02
%
 
12.60
%
Asset Quality Ratios:
 
 
 
 
 
 
 
Allowance for loan losses to loans receivable
1.26
%
 
1.34
%
 
1.26
%
 
1.34
%
Allowance for loan losses to nonaccrual loans
172.46
%
 
181.89
%
 
172.46
%
 
181.89
%
Allowance for loan losses to nonperforming loans(6)
71.35
%
 
91.08
%
 
71.35
%
 
91.08
%
Allowance for loan losses to nonperforming assets(7)
57.44
%
 
47.18
%
 
57.44
%
 
47.18
%
Nonaccrual loans to loans receivable
0.73
%
 
0.74
%
 
0.73
%
 
0.74
%
Nonperforming loans to loans receivable (6)
1.76
%
 
2.28
%
 
1.76
%
 
2.28
%
Nonperforming assets to loans receivable and OREO (7)
2.18
%
 
2.83
%
 
2.18
%
 
2.83
%
Nonperforming assets to total assets (7)
1.71
%
 
2.20
%
 
1.71
%
 
2.20
%
 
 
 
 
 
 
 
 
(1) 
Annualized.
(2) 
Efficiency ratio is defined as noninterest expense divided by the sum of net interest income before provision for loan losses and noninterest income.
(3) 
Net interest margin is calculated by dividing annualized net interest income by average total interest earning assets.
(4) 
The ratios generally required to meet the definition of a “well-capitalized” institution under certain banking regulations are 5% leverage capital, 6% tier I risk-based capital and 10% total risk-based capital.
(5) 
Calculations are based on average quarterly asset balances.
(6) 
Nonperforming loans include nonaccrual loans, Legacy Loans and APLs past due 90 days or more and still accruing interest, and accruing restructured loans.
(7) 
Nonperforming assets consist of nonperforming loans and OREO.
(8) 
Excludes TARP preferred stock related stock warrants of $378 thousand and $378 thousand at September 30, 2014 and 2013, respectively.
(9) 
Average tangible equity is calculated by subtracting average goodwill and average core deposit intangibles assets from average stockholders' equity. This is a non-GAAP measure that we believe provides investors with information that is useful in understanding our financial performance and position.

53

Table of Contents

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(Dollars in thousands)
Net income
 
$
21,420

 
$
23,552

 
$
65,928

 
$
63,684

 
 
 
 
 
 
 
 
 
Average stockholders' equity
 
$
859,606

 
$
794,737

 
$
840,743

 
$
781,159

Less: Average goodwill and core deposit intangible assets, net
 
(109,815
)
 
(116,885
)
 
(110,136
)
 
(102,935
)
Average tangible equity
 
$
749,791

 
$
677,852

 
$
730,607

 
$
678,224

 
 
 
 
 
 
 
 
 
Net income (annualized) to average tangible equity
 
11.43
%
 
13.90
%
 
12.03
%
 
12.52
%

(10) 
Tangible book value per common share is calculated by subtracting goodwill and core deposit intangible assets from total stockholders' equity and dividing the difference by the number of shares of common stock outstanding. This is a non-GAAP measure that we believe provides investors with information that is useful in understanding our financial performance and position.
 
 
September 30, 2014
 
September 30, 2013
 
 
(Dollars in thousands)
Total stockholders' equity
 
$
864,648

 
$
801,230

Less: Common stock warrant
 
(378
)
 
(378
)
Goodwill and core deposit intangible assets, net
 
(109,612
)
 
(125,444
)
Tangible common equity
 
$
754,658

 
$
675,408

 
 
 
 
 
Common shares outstanding
 
79,497,331

 
79,247,719

 
 
 
 
 
Tangible book value per common share
 
$
9.49

 
$
8.52


(11) 
The Tier 1 common risk-based capital ratio is calculated by dividing Tier 1 capital less non-common elements, including perpetual preferred stock and related surplus, minority interest in subsidiaries, trust preferred securities and mandatory convertible preferred securities by total risk-weighted assets less the disallowed allowance for loan losses.
 
 
September 30, 2014
 
September 30, 2013
 
 
(Dollars in thousands)
Tier 1 capital
 
$
797,112

 
$
727,053

Less: Trust preferred securities less unamortized acquisition discount
 
(40,692
)
 
(55,414
)
Tier 1 common risk-based capital
 
$
756,420

 
$
671,639

 
 
 
 
 
Total risk weighted assets less disallowed allowance for loan losses
 
5,807,854

 
5,330,009

 
 
 
 
 
Tier 1 common risk-based capital ratio
 
13.02
%
 
12.60
%




54

Table of Contents


Results of Operations
Overview
Total assets increased $452.6 million from $6.48 billion at December 31, 2013 to $6.93 billion at September 30, 2014. The increase in total assets was primarily due to a $357.8 million increase in loans receivable, net of allowance for loan losses, from $5.01 billion at December 31, 2013 to $5.36 billion at September 30, 2014 and a $126.6 million increase in cash and cash equivalents, from $316.7 million at December 31, 2013 to $443.3 million at September 30, 2014. The increase in total assets was funded by a $361.7 million increase in deposits from $5.15 billion at December 31, 2013 to $5.51 billion at September 30, 2014 and net income of $65.9 million for the nine months ended September 30, 2014.
Net income for the third quarter of 2014 was $21.4 million, or $0.27 per diluted common share, compared to $23.6 million, or $0.30 per diluted common share, for the same period of 2013, a decrease of $2.2 million, or 9.05%. Net income for the nine months ended September 30, 2014 was $65.9 million, or $0.83 per diluted common share, compared to $63.7 million, or $0.80 per diluted common share, for the same period of 2013, an increase of $2.2 million, or 3.52%. Acquisitions impact the comparability of the operating results for the three and nine months ended September 30, 2014 and 2013, because the acquired assets and liabilities were recorded at fair value and certain acquisition premiums and discounts are being amortized or accreted into income or expense as adjustments to the yield/cost of the related asset or liability. In addition, the acquisitions of Pacific International Bancorp, Inc. ("PIB") and Foster Bankshares, Inc. ("Foster") resulted in increases in interest earning assets, interest bearing liabilities, employees and branch locations in 2013. The operating results for the three and nine months ended September 30, 2014 and 2013 include the following pre-tax acquisition accounting adjustments and expenses related to acquisitions.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(Dollars in thousands)
Accretion of discounts on acquired performing loans
 
$
4,157

 
$
4,074

 
$
11,935

 
$
14,787

Accretion of discounts on acquired credit impaired loans
 
1,863

 
2,806

 
6,604

 
5,360

Amortization of premiums on assumed FHLB advances
 
95

 
94

 
281

 
277

Accretion of discounts on assumed subordinated debt
 
(41
)
 
(81
)
 
(171
)
 
(172
)
Amortization of premiums on assumed time deposits
 
125

 
308

 
670

 
993

Amortization of core deposit intangible assets
 
(324
)
 
(316
)
 
(972
)
 
(813
)
Increase to pre-tax income
 
$
5,875

 
$
6,885

 
$
18,347

 
$
20,432


The annualized return on average assets was 1.25% for the third quarter of 2014, compared to 1.53% for the same period of 2013. The annualized return on average stockholders' equity was 9.97% for the third quarter of 2014, compared to 11.85% for the same period of 2013. The efficiency ratio was 49.73% for the third quarter of 2014, compared to 47.56% for the same period of 2013.
The annualized return on average assets was 1.30% for the nine months ended September 30, 2014, compared to 1.43% for the same period of 2013. The annualized return on average stockholders' equity was 10.46% for the nine months ended September 30, 2014, compared to 10.87% for the same period of 2013. The efficiency ratio was 48.62% for the nine months ended September 30, 2014, compared to 47.56% for the same period of 2013.

Net Interest Income and Net Interest Margin
Net Interest Income
A principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and borrowed funds. Net interest income expressed as a percentage of average interest earning assets is referred to as the net interest margin. The net interest spread is the yield on average interest earning assets less the cost of average interest bearing liabilities. Net interest income is affected by changes in the balances of interest earning assets and interest bearing liabilities and changes in the yields earned on interest earning assets and the rates paid on interest bearing liabilities.


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Comparison of Three Months Ended September 30, 2014 with the Same Period of 2013
Net interest income before provision for loan losses was $67.9 million for the third quarter of 2014, an increase of $3.5 million, or 5.4%, compared to $64.4 million for the same period of 2013. The increase was principally attributable to the increase in interest earning assets. The increase was partially offset by the decline in yields and an increase in the cost of deposits.
Interest income for the third quarter of 2014 was $77.1 million, an increase of $5.1 million, or 7.1%, compared to $72.0 million for the same period of 2013. The increase resulted from a $10.5 million increase in interest income due to an increase in average interest earning assets, which was partially offset by a $5.4 million decrease in interest income due to a decrease in the yield on average interest earnings assets.

Comparison of Nine Months Ended September 30, 2014 with the Same Period of 2013
Net interest income before provision for loan losses was $200.4 million for the nine months ended September 30, 2014, an increase of $14.2 million, or 7.6%, compared to $186.2 million for the same period of 2013. The increase was principally attributable to the increase in interest earnings assets, which was partially offset by the decline in the net interest margin.
Interest income for the nine months ended September 30, 2014 was $226.9 million, an increase of $18.7 million, or 9.0%, compared to $208.2 million for the same period of 2013. The increase resulted from an $29.8 million increase in interest income due to an increase in average interest earning assets, which was partially offset by a $11.1 million decrease in interest income due to a decrease in the yield on average interest earnings assets.

Net Interest Margin

Our reported net interest margin is impacted by the weighted average rates we earn on interest earning assets and pay on interest bearing liabilities and the effect of acquisition accounting adjustments. The net interest margin for the third quarter of 2014 was 4.15%, a decrease of 27 basis points from 4.42% for the same period of 2013. Net interest margin for the nine months ended September 30, 2014 was 4.21%, a decrease of 25 basis points from 4.46% for the same period of 2013. The change in the our reported net interest margin for the three and nine months ended September 30, 2014 and 2013 is summarized in the table below.

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net interest margin, excluding the effect of acquisition accounting adjustments
 
3.73
%
 
3.86
%
 
3.75
%
 
3.90
%
Acquisition accounting adjustments(1)
 
0.42

 
0.56

 
0.46

 
0.56

Reported net interest margin
 
4.15
%
 
4.42
%
 
4.21
%
 
4.46
%
(1) Acquisition accounting adjustments are calculated by subtracting net interest margin, excluding the effect of acquisition accounting adjustments, from reported net interest margin.

As noted in the table above, excluding the effect of the acquisition accounting adjustments, the net interest margin for the third quarter of 2014 decreased 13 basis points to 3.73% from 3.86% for the same period of 2013. Excluding the effect of acquisition accounting adjustments, the net interest margin for the nine months ended September 30, 2014 decreased 15 basis points to 3.75% from 3.90% for the same period of 2013.

The decrease in the net interest margin was primarily due to a decline in the effect of acquisition accounting adjustments and a decline in the weighted average yield on the loan portfolio. The decrease in net interest margin was also caused by an increase in the cost of deposits. These decreases to the net interest margin were partially offset by an increase in yields from our investment securities.
 
The acquisition related adjustments that impact the net interest margin declined by $1.0 million, totaling $6.2 million during the third quarter of 2014, compared to $7.2 million for the same period of 2013. The adjustments declined by $1.9 million when comparing the total adjustments of $19.3 million during the nine months ended September 30, 2014 to a total of $21.2 million in adjustments for the same period in 2013.

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The weighted average yield on loans decreased to 5.29% for the third quarter of 2014 from 5.63% for the third quarter of 2013 and decreased to 5.37% for the nine months ended September 30, 2014 from 5.72% for the same period in 2013. The change in the yield was due to continued pricing pressure on loan interest rates and a 16 basis point and 13 basis point decline in the effects of acquisition accounting adjustments for the respective periods, as summarized in the following table.

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
The weighted average yield on loans, excluding the effect of acquisition accounting adjustments
 
4.78
%
 
4.96
%
 
4.82
%
 
5.04
%
Acquisition accounting adjustments(1)
 
0.51

 
0.67

 
0.55

 
0.68

Reported weighted average yield on loans
 
5.29
%
 
5.63
%
 
5.37
%
 
5.72
%
(1)     Acquisition accounting adjustments are calculated by subtracting the weighted average yield on loans, excluding the effect of acquisition accounting adjustments, from the reported weighted average yield on loans.

Excluding the effects of acquisition accounting adjustments, the weighted average yield on loans for the third quarter of 2014 decreased 18 basis points to 4.78% from 4.96% for the same period of 2013. Excluding the effects of acquisition accounting adjustments, the weighted average yield on loans for the nine months ended September 30, 2014 decreased 22 basis points to 4.82% from 5.04% for the same period of 2013. In addition to the continued pricing pressures, the declining loan yields were caused by a higher mix of lower yielding fixed rate loans particularly from the acquired loan portfolios and the high demand for fixed rate loans in the market. At September 30, 2014, fixed rate loans accounted for 51% of the loan portfolio, compared to 45% at September 30, 2013. The weighted average yield on the variable rate and fixed rate loan portfolios (excluding loan discount accretion) at September 30, 2014 was 4.25% and 4.79%, respectively, compared with 4.43% and 5.16% at September 30, 2013.

The weighted average yield on securities available for sale for the third quarter of 2014 was 2.18%, compared to 2.13% for the same period of 2013. The weighted average yield on securities available for sale for the nine months ended September 30, 2014 was 2.26%, compared to 2.04% for the same period of 2013. The increase was primarily attributable to the reduction in the amortization of premiums on collateralized mortgage obligations and mortgage-backed securities as a result of slowing prepayment speeds.

The weighted average cost of deposits for the third quarter of 2014 was 0.54%, an increase of 5 basis points from 0.49% for the same period of 2013. The weighted average cost of deposits for the nine months ended September 30, 2014 was 0.53%, an increase of 4 basis points from 0.49% for the same period of 2013. The amortization of the premium on time deposits assumed in the acquisitions positively affected the weighted average cost of deposits, as summarized in the following table.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
The weighted average cost of deposits, excluding effect of acquisition accounting adjustments
 
0.55
 %
 
0.51
 %
 
0.55
 %
 
0.52
 %
Acquisition accounting adjustments(1)
 
(0.01
)
 
(0.02
)
 
(0.02
)
 
(0.03
)
Reported weighted average cost of deposits
 
0.54
 %
 
0.49
 %
 
0.53
 %
 
0.49
 %
(1)     Acquisition accounting adjustments are calculated by subtracting the weighted average cost of deposits, excluding the effect of acquisition accounting adjustments, from the reported weighted average cost of deposits.

Excluding the amortization of premiums on time deposits assumed in acquisitions, the weighted average cost of deposits was 0.55% for the third quarter of 2014, compared to 0.51% for the same period of 2013 and 0.55% for the nine months ended September 30, 2014, compared to 0.52% for the same period of 2013. The increase was due to an increase in retail deposits such as money market and time deposits assumed in acquisitions and increased deposit campaigns and promotions. The retail deposits had a yield of 0.83% at September 30, 2014 compared to 0.78% at September 30, 2013.

The weighted average cost of FHLB advances for the third quarter of 2014 and 2013 was 1.18%. For the nine months ended September 30, 2014 and 2013, the weighted average cost of FHLB advances was 1.17%.

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Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
The weighted average cost of FHLB advances, excluding effect of acquisition accounting adjustments
 
1.26
 %
 
1.27
 %
 
1.26
 %
 
1.23
 %
Acquisition accounting adjustments
 
(0.08
)
 
(0.09
)
 
(0.09
)
 
(0.06
)
Reported weighted average cost of FHLB advances
 
1.18
 %
 
1.18
 %
 
1.17
 %
 
1.17
 %
(1)     Acquisition accounting adjustments are calculated by subtracting the weighted average cost on FHLB advances, excluding the effect of acquisition accounting adjustments, from reported weighted average cost on FHLB advances.

Excluding amortization of premiums on FHLB advances assumed in acquisitions, the weighted average cost of FHLB advances decreased to 1.26% for the third quarter of 2014 from 1.27% for the same period of 2013 and 1.26% for the nine months ended September 30, 2014, compared to 1.23% for the same period of 2013, reflecting the addition of $100.0 million in new borrowings over the past twelve months at an average rate of 1.68%. The weighted average original maturity of the new borrowings was 4.60 years. In addition, a total of $54.0 million of FHLB advances, with weighted average rates of 2.38%, matured over the past twelve months.




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The following table presents our condensed consolidated average balance sheet information, together with interest rates earned and paid on the various sources and uses of funds for the periods indicated:

 
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield/
Rate *
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield/
Rate *
 
(Dollars in thousands)
INTEREST EARNINGS ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Loans(1) (2)
$
5,434,815

 
$
72,437

 
5.29
%
 
$
4,771,022

 
$
67,747

 
5.63
%
Securities available for sale(3)
734,282

 
3,999

 
2.18
%
 
714,660

 
3,802

 
2.13
%
FRB and FHLB stock and other investments
332,643

 
648

 
0.76
%
 
291,672

 
486

 
0.65
%
Federal funds sold

 

 
%
 

 

 
N/A

Total interest earning assets
$
6,501,740

 
$
77,084

 
4.71
%
 
$
5,777,354

 
$
72,035

 
4.95
%
INTEREST BEARING LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand, interest bearing
$
1,492,175

 
$
2,558

 
0.68
%
 
$
1,276,732

 
$
1,927

 
0.60
%
Savings
202,785

 
496

 
0.97
%
 
204,049

 
668

 
1.30
%
Time deposits:
 
 
 
 
 
 
 
 
 
 
 
$100,000 or more
1,601,436

 
3,094

 
0.77
%
 
1,380,962

 
2,361

 
0.68
%
Other
677,474

 
1,270

 
0.74
%
 
677,352

 
1,003

 
0.59
%
Total time deposits
2,278,910

 
4,365

 
0.76
%
 
2,058,314

 
3,364

 
0.65
%
Total interest bearing deposits
3,973,870

 
7,419

 
0.74
%
 
3,539,095

 
5,959

 
0.67
%
FHLB advances
462,434

 
1,373

 
1.18
%
 
422,084

 
1,251

 
1.18
%
Other borrowings
40,533

 
385

 
3.72
%
 
48,273

 
465

 
3.77
%
Total interest bearing liabilities
4,476,837

 
$
9,177

 
0.81
%
 
4,009,452

 
$
7,675

 
0.76
%
Noninterest bearing demand deposits
1,483,966

 
 
 
 
 
1,306,308

 
 
 
 
Total funding liabilities/cost of funds
$
5,960,803

 
 
 
0.61
%
 
$
5,315,760

 
 
 
0.57
%
Net interest income/net interest spread
 
 
$
67,907

 
3.89
%
 
 
 
$
64,360

 
4.19
%
Net interest margin
 
 
 
 
4.15
%
 
 
 
 
 
4.42
%
Net interest margin, excluding the effect of nonaccrual loan income (expense)(4)
 
 
 
 
4.14
%
 
 
 
 
 
4.42
%
Net interest margin, excluding the effect of nonaccrual loan income (expense) and prepayment fee income(4) (5)
 
 
 
 
4.10
%
 
 
 
 
 
4.37
%
Cost of deposits:
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing demand deposits
$
1,483,966

 
$

 
 
 
$
1,306,308

 
$

 
 
Interest bearing deposits
3,973,870

 
7,419

 
0.74
%
 
3,539,095

 
5,959

 
0.67
%
Total deposits
$
5,457,836

 
$
7,419

 
0.54
%
 
$
4,845,403

 
$
5,959

 
0.49
%
 
 
 
 
 
 
 
 
 
 
 
 
*
Annualized
(1) 
Interest income on loans includes loan fees.
(2) 
Average balances of loans consist of loans receivable and loans held for sale.
(3) 
Interest income and yields are not presented on a tax-equivalent basis.
(4) 
Nonaccrual interest income recognized (reversed) was $63 thousand and $(153) thousand for the three months ended September 30, 2014 and 2013, respectively.

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(5) 
Loan prepayment fee income excluded was $608 thousand and $580 thousand for the three months ended September 30, 2014 and 2013, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield/
Rate *
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield/
Rate *
 
(Dollars in thousands)
INTEREST EARNINGS ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Loans(1) (2)
$
5,303,478

 
$
212,818

 
5.37
%
 
$
4,588,464

 
$
196,249

 
5.72
%
Securities available for sale(3)
718,291

 
12,171

 
2.26
%
 
704,124

 
10,755

 
2.04
%
FRB and FHLB stock and other investments
339,828

 
1,881

 
0.73
%
 
282,120

 
1,153

 
0.54
%
Federal funds sold
4,469

 
20

 
0.60
%
 

 

 
N/A

Total interest earning assets
$
6,366,066

 
$
226,890

 
4.76
%
 
$
5,574,708

 
$
208,157

 
4.99
%
INTEREST BEARING LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand, interest bearing
$
1,456,348

 
$
7,335

 
0.67
%
 
$
1,276,195

 
$
5,736

 
0.60
%
Savings
209,121

 
1,635

 
1.05
%
 
192,006

 
2,144

 
1.49
%
Time deposits:
 
 
 
 
 
 
 
 
 
 
 
$100,000 or more
1,596,416

 
8,757

 
0.73
%
 
1,265,877

 
6,066

 
0.64
%
Other
679,114

 
3,654

 
0.72
%
 
675,239

 
3,068

 
0.61
%
Total time deposits
2,275,530

 
12,411

 
0.73
%
 
1,941,116

 
9,134

 
0.63
%
Total interest bearing deposits
3,940,999

 
21,381

 
0.73
%
 
3,409,317

 
17,014

 
0.67
%
FHLB advances
443,346

 
3,894

 
1.17
%
 
422,205

 
3,693

 
1.17
%
Other borrowings
44,431

 
1,252

 
3.71
%
 
44,721

 
1,271

 
3.75
%
Total interest bearing liabilities
4,428,776

 
$
26,527

 
0.80
%
 
3,876,243

 
$
21,978

 
0.76
%
Noninterest bearing demand deposits
1,425,718

 
 
 
 
 
1,220,608

 
 
 
 
Total funding liabilities/cost of funds
$
5,854,494

 
 
 
0.61
%
 
$
5,096,851

 
 
 
0.58
%
Net interest income/net interest spread
 
 
$
200,363

 
3.96
%
 
 
 
$
186,179

 
4.23
%
Net interest margin
 
 
 
 
4.21
%
 
 
 
 
 
4.46
%
Net interest margin, excluding the effect of nonaccrual loan income (expense)(4)
 
 
 
 
4.20
%
 
 
 
 
 
4.46
%
Net interest margin, excluding the effect of nonaccrual loan income (expense) and prepayment fee income(4) (5)
 
 
 
 
4.17
%
 
 
 
 
 
4.44
%
Cost of deposits:
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing demand deposits
$
1,425,718

 
$

 
 
 
$
1,220,608

 
$

 
 
Interest bearing deposits
3,940,999

 
21,381

 
0.73
%
 
3,409,317

 
17,014

 
0.67
%
Total deposits
$
5,366,717

 
$
21,381

 
0.53
%
 
$
4,629,925

 
$
17,014

 
0.49
%
*
Annualized
(1) 
Interest income on loans includes loan fees.
(2) 
Average balances of loans consist of loans receivable and loans held for sale.
(3) 
Interest income and yields are not presented on a tax-equivalent basis.
(4) 
Nonaccrual interest income recognized (reversed) was $138 thousand and $6 thousand for the nine months ended September 30, 2014 and 2013, respectively.

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(5) 
Loan prepayment fee income excluded was $1.5 million and $948 thousand for the nine months ended September 30, 2014 and 2013, respectively.

Changes in net interest income are a function of changes in interest rates and volumes of interest earning assets and interest bearing liabilities. The following table sets forth information regarding the changes in interest income and interest expense for the periods indicated. The total change for each category of interest earning assets and interest bearing liabilities is segmented into the change attributable to variations in volume (changes in volume multiplied by the old rate) and the change attributable to variations in interest rates (changes in rates multiplied by the old volume). Nonaccrual loans are included in average loans used to compute this table.
 
 
 
 
 
 
 
Three Months Ended
September 30, 2014 over September 30, 2013
 
Net
Increase
(Decrease)
 
 
 
 
 
Change due to
 
Rate
 
Volume
 
(Dollars in thousands)
INTEREST INCOME:
 
 
 
 
 
Interest and fees on loans
$
4,690

 
$
(5,925
)
 
$
10,615

Interest on securities
197

 
324

 
(127
)
Interest on FRB and FHLB stock and other investments
162

 
205

 
(43
)
Interest on federal funds sold

 

 

Total interest income
$
5,049

 
$
(5,396
)
 
$
10,445

INTEREST EXPENSE:
 
 
 
 
 
Interest on demand, interest bearing
$
631

 
$
277

 
$
354

Interest on savings
(173
)
 
(294
)
 
121

Interest on time deposits
1,002

 
681

 
321

Interest on FHLB advances
122

 
19

 
103

Interest on other borrowings
(80
)
 
(2
)
 
(78
)
Total interest expense
$
1,502

 
$
681

 
$
821

NET INTEREST INCOME
$
3,547

 
$
(6,077
)
 
$
9,624

 
 
 
 
 
 
 
Nine Months Ended
September 30, 2014 over September 30, 2013
 
Net
Increase
(Decrease)
 
 
 
 
 
Change due to
 
Rate
 
Volume
 
(Dollars in thousands)
INTEREST INCOME:
 
 
 
 
 
Interest and fees on loans
$
16,569

 
$
(12,694
)
 
$
29,263

Interest on securities
1,416

 
1,195

 
221

Interest on FRB and FHLB stock and other investments
728

 
456

 
272

Interest on federal funds sold
20

 

 
20

Total interest income
$
18,733

 
$
(11,043
)
 
$
29,776

INTEREST EXPENSE:
 
 
 
 
 
Interest on demand, interest bearing
$
1,599

 
$
738

 
$
861

Interest on savings
(509
)
 
(689
)
 
180

Interest on time deposits
3,277

 
1,578

 
1,699

Interest on FHLB advances
201

 
15

 
186

Interest on other borrowings
(19
)
 
(11
)
 
(8
)
Total interest expense
$
4,549

 
$
1,631

 
$
2,918

NET INTEREST INCOME
$
14,184

 
$
(12,674
)
 
$
26,858



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Provision for Loan Losses
The provision for loan losses reflects our judgment of the current period cost associated with credit risk inherent in our loan portfolio. The loan loss provision for each period is dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, assessments by management, third parties’ and regulators’ examination of the loan portfolio, the value of the underlying collateral for problem loans and the general economic conditions in our market areas. Specifically, the provision for loan losses represents the amount charged against current period earnings to achieve an allowance for loan losses that, in our judgment, is adequate to absorb probable incurred losses inherent in our loan portfolio. Periodic fluctuations in the provision for loan losses result from management’s assessment of the adequacy of the allowance for loan losses; however, actual loan losses may vary in material respects from current estimates. If the allowance for loan losses is inadequate, it may have a material adverse effect on our financial condition.
The provision for loan losses for the third quarter of 2014 was $4.3 million, an increase of $3.5 million, or 472.0%, from $744 thousand for the same period last year. The increase was primarily due to an increase in quantitative reserves due to loan growth compared to the third quarter of 2013, which was partially offset by decreases due to declining historical loss rates.
The provision for loan losses for the nine months ended September 30, 2014 was $10.3 million, an increase of $1.2 million, or 13.6%, from $9.1 million for the same period last year. The increase is primarily due an increase quantitative reserves due to loan growth, which was partially offset by decreases due to declining historical loss rates and decreased specific reserves on impaired loans.
See Note 7 of the Notes to Condensed Consolidated Financial Statements (Unaudited) and Financial Condition - Loans Receivable and Allowance for Loan Losses for further discussion.

Noninterest Income
Noninterest income is primarily comprised of service fees on deposit accounts, fees received on trade finance letters of credit and net gains on sales of loans.
Noninterest income for the third quarter of 2014 was $11.4 million, compared to $10.8 million for the same quarter of 2013, an increase of $570 thousand, or 5.3%. The increase was principally due to a $751 thousand increase in net gains on sales of SBA loans and a $135 thousand increase from service fees on deposit accounts, which were offset by a $238 thousand decrease in international service fees and a $206 thousand decrease in loan servicing fees, net.
Noninterest income for the nine months ended September 30, 2014 was $33.0 million, compared to $31.4 million for the same period of 2013, an increase of $1.6 million, or 5.1 %. The increase was principally due to a $1.2 million increase in service fees on deposit accounts, a $905 thousand increase from other income and fees, and a $523 thousand increase in net gains on sales of OREO. During the nine months ended September 30, 2014, thirteen OREO properties with an aggregate carrying value of $8.1 million were sold, compared to the sale of $3.7 million during the same period of 2013. The increases were partially offset by a $626 thousand decrease in international service fees and a $633 thousand decrease in loan servicing fees.
Noninterest income by category is summarized below:
 
Three Months Ended September 30,
 
Increase (Decrease)
 
2014
 
2013
 
Amount
 
%
 
(Dollars in thousands)
Service fees on deposit accounts
$
3,456

 
$
3,321

 
$
135

 
4.1
 %
International service fees
958

 
1,196

 
(238
)
 
(19.9
)%
Loan servicing fees, net
798

 
1,004

 
(206
)
 
(20.5
)%
Wire transfer fees
876

 
916

 
(40
)
 
(4.4
)%
Other income and fees
1,674

 
1,583

 
91

 
5.7
 %
Net gains on sales of SBA loans
3,578

 
2,827

 
751

 
26.6
 %
Net gains (losses) on sales of OREO
29

 
(48
)
 
77

 
160.4
 %
Total noninterest income
$
11,369

 
$
10,799

 
$
570

 
5.3
 %
 
 
 
 
 
 
 
 


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Nine Months Ended September 30,
 
Increase (Decrease)
 
2014
 
2013
 
Amount
 
Percent (%)
 
(Dollars in thousands)
Service fees on deposit accounts
$
10,288

 
$
9,118

 
$
1,170

 
12.8
%
International service fees
3,074

 
3,700

 
(626
)
 
(16.9
%)
Loan servicing fees, net
2,376

 
3,009

 
(633
)
 
(21.0
%)
Wire transfer fees
2,700

 
2,619

 
81

 
3.1
%
Other income and fees
4,941

 
4,036

 
905

 
22.4
%
Net gains on sales of SBA loans
9,112

 
8,816

 
296

 
3.4
%
Net gains on sales of other loans

 
62

 
(62
)
 
(100.0
%)
Net gains on sales of securities available for sale

 
54

 
(54
)
 
(100.0
%)
Net gains (losses) on sales of OREO
466

 
(57
)
 
523

 
917.5
%
Total noninterest income
$
32,957

 
$
31,357

 
$
1,600

 
5.1
%

Noninterest Expense
Noninterest expense for the third quarter of 2014 was $39.4 million, an increase of $3.7 million, or 10.3%, from $35.7 million for the same period of 2013. Salaries and employee benefits expense increased $2.8 million due to an increase in the number of full-time equivalent employees, which increased to 911 at September 30, 2014 from 831 at September 30, 2013. Credit related expenses increased $885 thousand principally due to increased increased property tax and insurance payments to protect our interest in loan collateral and OREO. Occupancy and FDIC expenses also increased by $362 thousand and $317 thousand, respectively, compared to the same quarter in 2013. These increases were offset by a decrease of $865 thousand in merger and integration expenses, as we incurred the majority of the merger and integrations expenses related to the PIB acquisition in the first quarter of 2013.
Noninterest expense for the nine months ended September 30, 2014 was $113.4 million, an increase of $9.9 million, or 9.7%, from $103.5 million for the same period of 2013. Salaries and employee benefits expense increased $7.3 million due to an increase in the number of full-time equivalent employees. This is partially due to the PIB and Foster acquisitions that were completed in 2013. Data processing fees and furniture and equipment expenses also increased by $1.1 million and $1.0 million, respectively, compared to the same period in 2013. The FDIC assessment increased by $868 thousand compared to the same period in 2013. Credit related expenses increased by $1.4 million primarily due to increased property tax and insurance payments to protect our interest in loan collateral and OREO, which was partially offset by a decrease in provision for uncollectible SBA receivables. These increases were offset by a decrease of $2.3 million in merger and integration expenses.
The breakdown of changes in noninterest expense by category is shown below:
 
Three Months Ended September 30,
 
Increase (Decrease)
 
2014
 
2013
 
Amount
 
%
 
(Dollars in thousands)
Salaries and employee benefits
$
19,346

 
$
16,535

 
$
2,811

 
17.0
 %
Occupancy
4,722

 
4,360

 
362

 
8.3
 %
Furniture and equipment
1,916

 
1,728

 
188

 
10.9
 %
Advertising and marketing
1,535

 
1,393

 
142

 
10.2
 %
Data processing and communications
2,206

 
1,983

 
223

 
11.2
 %
Professional fees
1,567

 
1,440

 
127

 
8.8
 %
FDIC assessment
1,135

 
818

 
317

 
38.8
 %
Credit related expenses
3,531

 
2,646

 
885

 
33.4
 %
Merger and integration expenses
66

 
931

 
(865
)
 
(92.9
)%
Other
3,396

 
3,912

 
(516
)
 
(13.2
)%
Total noninterest expense
$
39,420

 
$
35,746

 
$
3,674

 
10.3
 %
 
 
 
 
 
 
 
 


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Nine Months Ended September 30,
 
Increase (Decrease)
 
2014
 
2013
 
Amount
 
Percent (%)
 
(Dollars in thousands)
Salaries and employee benefits
$
56,428

 
$
49,086

 
$
7,342

 
15.0
 %
Occupancy
14,060

 
13,206

 
854

 
6.5
 %
Furniture and equipment
5,942

 
4,914

 
1,028

 
20.9
 %
Advertising and marketing
4,131

 
3,856

 
275

 
7.1
 %
Data processing and communications
6,626

 
5,488

 
1,138

 
20.7
 %
Professional fees
4,195

 
4,184

 
11

 
0.3
 %
FDIC assessment
3,238

 
2,370

 
868

 
36.6
 %
Credit related expenses
7,969

 
6,564

 
1,405

 
21.4
 %
Merger and integration expenses
290

 
2,621

 
(2,331
)
 
(88.9
)%
Other
10,555

 
11,161

 
(606
)
 
(5.4
)%
Total noninterest expense
$
113,434

 
$
103,450

 
$
9,984

 
9.7
 %

Provision for Income Taxes
Income tax expense was $14.2 million and $15.1 million for the quarters ended September 30, 2014 and 2013, respectively. The effective income tax rates were 39.8% and 39.1% for the quarters ended September 30, 2014 and 2013, respectively. Income tax expense was $43.7 million and $41.4 million for the nine months ended September 30, 2014 and 2013, respectively. The effective income tax rates for the nine months ended September 30, 2014 and 2013 were 39.9% and 39.4%, respectively.

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Financial Condition
At September 30, 2014, our total assets were $6.93 billion, an increase of $452.6 million from $6.48 billion at December 31, 2013. The increase was principally due to a $357.8 million increase in loans receivable, net of allowance for loan losses and a $126.6 million increase in cash and cash equivalents. The increases were offset by decreases in deferred tax assets and other assets totaling $21.6 million and $12.8 million, respectively. The increase in total assets was funded primarily by a $361.7 million increase in deposits and net income of $65.9 million.
Investment Securities Portfolio
As of September 30, 2014, we had $710.6 million in available for sale securities, compared to $705.8 million at December 31, 2013. The net unrealized loss on the available for sale securities at September 30, 2014 was $2.9 million, compared to a net unrealized loss on such securities of $17.7 million at December 31, 2013. During the nine months ended September 30, 2014, $82.6 million in securities were purchased, $89.7 million in mortgage related securities were paid down and no securities were sold. During the same period last year, $169.9 million in securities were purchased, $143.6 in mortgage related securities were paid down and $6.6 million in securities were sold. The weighted average duration (the weighted average of the times of the present values of all the cash flows) of the available for sale securities was 4.24 years and 4.42 years at September 30, 2014 and December 31, 2013, respectively. The weighted average life (the weighted average of the times of the principal repayments) of the available for sale securities was 4.78 years and 5.08 years at September 30, 2014 and December 31, 2013, respectively.
Loan Portfolio
As of September 30, 2014, loans receivable totaled $5.43 billion, an increase of $358.7 million from $5.07 billion at December 31, 2013. Total loan originations during the three months ended September 30, 2014 were $382.3 million, including SBA loan originations of $69.7 million, of which $40.0 million was included as additions to loans held for sale during the period.
The following table summarizes our loan portfolio by amount and percentage of total loans outstanding in each major loan category at the dates indicated:
 
 
September 30, 2014
 
December 31, 2013
 
Amount
 
%
 
Amount
 
%
 
 
 
(Dollars in thousands)
 
 
Loan portfolio composition
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Residential
$
19,203

 
0
%
 
$
10,039

 
1
%
Commercial & industrial
4,211,977

 
77
%
 
3,821,163

 
75
%
Construction
86,780

 
2
%
 
72,856

 
1
%
Total real estate loans
4,317,960

 
79
%
 
3,904,058

 
77
%
Commercial business
875,808

 
16
%
 
949,093

 
19
%
Trade finance
148,116

 
3
%
 
124,685

 
2
%
Consumer and other
92,362

 
2
%
 
98,507

 
2
%
Total loans outstanding
5,434,246

 
100
%
 
5,076,343

 
100
%
Less: deferred loan fees
(1,402
)
 
 
 
(2,167
)
 
 
Loans receivable
5,432,844

 
 
 
5,074,176

 
 
Less: allowance for loan losses
(68,232
)
 
 
 
(67,320
)
 
 
Loans receivable, net of allowance for loan losses
$
5,364,612

 
 
 
$
5,006,856

 
 

SBA loans are included in commercial business loans and commercial and industrial real estate loans. SBA loans included in commercial business loans were $54.5 million at September 30, 2014 and $66.7 million at December 31, 2013. SBA loans included in commercial and industrial real estate loans were $186.2 million at September 30, 2014 and $181.8 million at December 31, 2013.
We normally do not extend lines of credit or make loan commitments to business customers for periods in excess of one year. We use the same credit policies in making commitments and conditional obligations as we do for providing loan facilities to our customers. We perform annual reviews of such commitments prior to renewal.

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The following table shows our loan commitments and letters of credit outstanding at the dates indicated:
 
 
September 30, 2014
 
December 31, 2013
 
(Dollars in thousands)
Loan commitments
$
594,985

 
$
668,306

Standby letters of credit
41,889

 
44,190

Other commercial letters of credit
44,904

 
56,380

 
$
681,778

 
$
768,876


Nonperforming Assets
Nonperforming assets, which consist of nonaccrual loans, loans 90 days or more past due and on accrual status, accruing restructured loans and OREO, were $118.8 million at September 30, 2014, compared to $97.4 million at December 31, 2013. The ratio of nonperforming assets to loans receivable and OREO was 2.18% and 1.91% at September 30, 2014 and December 31, 2013, respectively.
The following table summarizes the composition of our nonperforming assets as of the dates indicated.
 
 
September 30, 2014
 
December 31, 2013
 
(Dollars in thousands)
Nonaccrual loans (1)
$
39,564

 
$
39,154

Loans 90 days or more days past due on accrual status

 
5

Accruing restructured loans
56,061

 
33,904

Total nonperforming loans
95,625

 
73,063

OREO
23,162

 
24,288

Total nonperforming assets
$
118,787

 
$
97,351

Nonperforming loans to loans receivable
1.76
%
 
1.44
%
Nonperforming assets to loans receivable and OREO
2.18
%
 
1.91
%
Nonperforming assets to total assets
1.71
%
 
1.50
%
Allowance for loan losses to nonperforming loans
71.35
%
 
92.14
%
Allowance for loan losses to nonperforming assets
57.44
%
 
69.15
%
 
 
 
 
(1) 
Nonaccrual loans exclude the guaranteed portion of delinquent SBA loans that are in liquidation totaling $28.1 million and $27.5 million as of September 30, 2014 and December 31, 2013, respectively.

Allowance for Loan Losses
The allowance for loan losses was $68.2 million at September 30, 2014, compared to $67.3 million at December 31, 2013. The allowance for loan losses was 1.26% of loans receivable at September 30, 2014 and 1.33% of loans receivable at December 31, 2013. Impaired loans as defined by FASB ASC 310-10-35, “Accounting by Creditors for Impairment of a Loan,” totaled $130.7 million and $116.3 million as of September 30, 2014 and December 31, 2013, respectively, with specific allowances of $10.7 million and $12.7 million, respectively.

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The following table reflects our allocation of the allowance for loan and lease losses ("ALLL") by loan type and the ratio of each loan category to total loans as of the dates indicated:
 
 
Allocation of Allowance for Loan Losses
 
September 30, 2014
 
December 31, 2013
 
Amount of Allowance for Loan Losses
 
Percent of ALLL to Total ALLL
 
Amount of Allowance for Loan Losses
 
Percent of ALLL to Total ALLL
 
(Dollars in thousands)
Loan Type
 
 
 
 
 
 
 
Real estate - residential
$
131

 
0.19
%
 
$
25

 
0.04
%
Real estate - commercial
48,276

 
70.76
%
 
45,897

 
68.18
%
Real estate - construction
446

 
0.65
%
 
628

 
0.93
%
Commercial business
14,182

 
20.78
%
 
17,592

 
26.13
%
Trade finance
4,651

 
6.82
%
 
2,653

 
3.94
%
Consumer and other
546

 
0.80
%
 
525

 
0.78
%
Total
$
68,232

 
100
%
 
$
67,320

 
NaN


For a better understanding of the changes in the ALLL, the loan portfolio has been segmented for disclosures purposes between loans which are accounted for under the amortized cost method (Legacy Loans) and loans acquired from acquisitions (Acquired Loans). Acquired Loans have been further segregated between Acquired Credit Impaired Loans (loans with credit deterioration at the time they were acquired and accounted for under ASC 310-30, or "ACILs") and performing loans (loans that were pass graded at the time they were acquired, or "APLs"). The activity in the ALLL for the three and nine months ended September 30, 2014 is as follows:


 
 
 
 
Acquired Loans(2)
 
 
Three Months Ended September 30, 2014
 
Legacy Loans(1)
 
ACILs
 
APLs
 
Total
 
 
(Dollars in thousands)
Balance, beginning of period
 
$
58,876

 
$
5,880

 
$
2,114

 
$
66,870

Provision for loan losses
 
4,425

 
306

 
(475
)
 
4,256

Loans charged off
 
(3,556
)
 

 
(110
)
 
(3,666
)
Recoveries of loan charge offs
 
321

 

 
451

 
772

Balance, end of period
 
$
60,066

 
$
6,186

 
$
1,980

 
$
68,232

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired Loans (2)
 
 
Nine Months Ended September 30, 2014
 
Legacy Loans (1)
 
ACILs
 
APLs
 
Total
 
 
(Dollars in thousands)
Balance, beginning of period
 
$
59,978

 
$
4,778

 
$
2,564

 
$
67,320

Provision for loan losses
 
8,199

 
1,408

 
671

 
10,278

Loans charged off
 
(9,964
)
 

 
(1,736
)
 
(11,700
)
Recoveries of loan charge offs
 
1,853

 

 
481

 
2,334

Balance, end of period
 
$
60,066

 
$
6,186

 
$
1,980

 
$
68,232

 
 
 
 
 
 
 
 
 
Total loans outstanding
 
$
4,719,597


$
174,948


$
539,701


$
5,434,246

Loss coverage ratio
 
1.27
%

3.54
%

0.37
%

1.26
%
 
 
 
 
 
 
 
 
 
(1)  Legacy Loans includes Acquired Loans that have been renewed or refinanced subsequent to the acquisition date.
(2)  Acquired Loans were marked to fair value at the acquisition date and provisions for loan losses reflect credit deterioration subsequent to the acquisition date.

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The following table shows the provisions made for loan losses, the amount of loans charged off and the recoveries on loans previously charged off, together with the balance in the allowance for loan losses at the beginning and end of each period, the amount of average and loans receivable outstanding, and certain other ratios as of the dates and for the periods indicated:
 
 
At or for the Nine Months Ended September 30,
 
2014
 
2013
 
(Dollars in thousands)
LOANS
 
 
 
Average loans receivable, including loans held for sale
$
5,303,478

 
$
4,588,464

Loans receivable
$
5,432,844

 
$
4,898,939

ALLOWANCE:
 
 
 
Balance, beginning of period
$
67,320

 
$
66,941

Less loan charge offs:
 
 
 
Commercial & industrial real estate
(2,351
)
 
(8,052
)
Commercial business loans
(8,484
)
 
(3,991
)
Trade finance
(767
)
 
(26
)
Consumer and other loans
(98
)
 
(50
)
Total loan charge offs
(11,700
)
 
(12,119
)
Plus loan recoveries:
 
 
 
Commercial & industrial real estate
322

 
165

Commercial business loans
1,788

 
1,564

Trade Finance

 

Consumer and other loans
224

 
114

Total loans recoveries
2,334

 
1,843

Net loan charge offs
(9,366
)
 
(10,276
)
Provision for loan losses
10,278

 
9,050

Balance, end of period
$
68,232

 
$
65,715

Net loan charge offs to average loans receivable, including loans held for sale*
0.24
%
 
0.30
%
Allowance for loan losses to loans receivable at end of period
1.26
%
 
1.34
%
Net loan charge offs to beginning allowance *
18.55
%
 
20.47
%
Net loan charge offs to provision for loan losses
91.13
%
 
113.55
%
* Annualized
 
 
 

We believe the allowance for loan losses as of September 30, 2014 is adequate to absorb probable incurred losses in the loan portfolio. However, no assurance can be given that actual losses will not exceed the estimated amounts.
Deposits and Other Borrowings
Deposits. Deposits are our primary source of funds used in our lending and investment activities. At September 30, 2014, deposits increased $361.7 million, or 7.0%, to $5.51 billion from $5.15 billion at December 31, 2013. The net increase in deposits is primarily due to increases in retail deposits due to the impact of recent deposit campaigns and promotions. In addition, wholesale deposits were increased to help fund loan growth. Interest bearing demand deposits, including money market and Super Now accounts, totaled $1.74 billion at September 30, 2014 and $1.60 billion at December 31, 2013.
At September 30, 2014, 27% of total deposits were noninterest bearing demand deposits, 41% were time deposits and 32% were interest bearing demand and savings deposits. At December 31, 2013, 27% of total deposits were noninterest bearing demand deposits, 43% were time deposits, and 30% were interest bearing demand and savings deposits.
At September 30, 2014, we had $227.0 million in brokered deposits and $300.0 million in California State Treasurer deposits, compared to $243.9 million and $300.0 million of such deposits at December 31, 2013, respectively. The California State Treasurer deposits had seven-month maturities with a weighted average interest rate of 0.08% at September 30, 2014 and

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were collateralized with securities with a carrying value of $350.1 million. The weighted average interest rate for wholesale deposits was 0.31% at September 30, 2014.
The following is a schedule of certificates of deposit maturities as of September 30, 2014:
 
 
 
 
 
Balance
 
%
 
(Dollars in thousands)
Three months or less
659,248

 
29.05
%
Over three months through six months
538,823

 
23.75
%
Over six months through nine months
507,802

 
22.38
%
Over nine months through twelve months
384,143

 
16.93
%
Over twelve months
179,043

 
7.89
%
Total time deposits
2,269,059

 
100.00
%

Other Borrowings. Advances may be obtained from the FHLB as an alternative source of funds. FHLB advances are typically secured by a pledge of commercial real estate loans and/or securities with a market value at least equal to the outstanding advances plus our investment in FHLB stock.
At September 30, 2014, we had $467.1 million of FHLB advances with average remaining maturities of 2.6 years, compared to $421.4 million with average remaining maturities of 3.1 years at December 31, 2013. The weighted average rate was 1.14% and 1.16% at September 30, 2014 and December 31, 2013, respectively.
Subordinated debentures decreased $15.3 million to $42.1 million at September 30, 2014 from $57.4 million at December 31, 2013. The decrease is due to the redemption of $15.0 million of trust preferred securities in March 2014, which were assumed upon the acquisition of Foster Bankshares. The Trust Preferred Securities accrue and pay distributions periodically at specified annual rates as provided in the related indentures for the securities. The Trusts used the net proceeds from their respective offerings to purchase a like amount of subordinated debentures (the “Debentures”) issued by us. The Debentures are the sole assets of the trusts. Our obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by us of the obligations of the trusts. The Trust Preferred Securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. We have the right to redeem the Debentures in whole (but not in part) on or after specific dates, at redemption prices specified in the indentures plus any accrued but unpaid interest to the redemption date.
Off-Balance-Sheet Activities and Contractual Obligations
We routinely engage in activities that involve, to varying degrees, elements of risk that are not reflected, in whole or in part, in the consolidated financial statements. These activities are part of our normal course of business and include traditional off-balance-sheet credit-related financial instruments, interest rate swap contracts, operating leases and long-term debt.
Traditional off-balance-sheet credit-related financial instruments are primarily commitments to extend credit and standby letters of credit. These activities could require us to make cash payments to third parties if certain specified future events occur. The contractual amounts represent the extent of our exposure in these off-balance-sheet activities. However, since certain off-balance-sheet commitments, particularly standby letters of credit, are expected to expire or be only partially used, the total amount of commitments does not necessarily represent future cash requirements. These activities are necessary to meet the financing needs of our customers.
We enter into interest rate swap contracts under which we are required to either receive cash from or pay cash to counterparties depending on changes in interest rates. We also purchase interest rate caps to protect against increases in market interest rates. We utilize interest rate swap contracts and interest rate caps to help manage the risk of changing interest rates.
We do not anticipate that our current off-balance-sheet activities will have a material impact on our future results of operations or our financial condition. Further information regarding our financial instruments with off-balance-sheet risk can be found in Item 3 “Quantitative and Qualitative Disclosures about Market Risk.”
Our leased banking facilities and equipment are leased under non-cancelable operating leases under which we must make monthly payments over periods up to 15 years.
Stockholders’ Equity and Regulatory Capital
Historically, our primary source of capital has been the retention of earnings, net of dividend payments to shareholders. We seek to maintain capital at a level sufficient to assure our stockholders, our customers and our regulators that our Company

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and our bank subsidiary are financially sound. For this purpose, we perform ongoing assessments of our components of capital, as well as projected sources and uses of capital in conjunction with projected increases in assets and levels of risks.
Total stockholders’ equity was $864.6 million at September 30, 2014, compared to $809.4 million at December 31, 2013.
The federal banking agencies generally require a minimum ratio of qualifying total capital to risk-weighted assets of 8% and a minimum ratio of Tier I capital to risk-weighted assets of 4%. In addition to the risk-based guidelines, federal banking agencies require banking organizations to maintain a minimum amount of Tier I capital to average total assets, referred to as the leverage ratio, of 4%, referred to as the leverage ratio. Capital requirements apply to the Company and the Bank separately. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.
At September 30, 2014, our Tier I capital, defined as stockholders’ equity less intangible assets was $797.1 million, compared to $751.2 million at December 31, 2013, representing an increase of $45.9 million, or 6.1%. The increase was primarily due to the increase in retained earnings from net income during the nine months ended September 30, 2014 of $65.9 million, which was partially offset by the declaration of $19.9 million of cash dividends. At September 30, 2014, the total capital to risk-weighted assets ratio was 14.93% and the Tier I capital to risk-weighted assets ratio was 13.72%. The Tier I leverage capital ratio was 11.80%.
As of September 30, 2014 and December 31, 2013, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be generally categorized as "well-capitalized", the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage capital ratios as set forth in the table below.
 
 
As of September 30, 2014 (Dollars in thousands)
 
Actual
 
To Be Well-Capitalized
 
Excess
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
BBCN Bancorp, Inc
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
$
866,918

 
14.93
%
 
N/A

 
N/A

 
 
 
 
Tier 1 risk-based capital ratio
$
797,112

 
13.72
%
 
N/A

 
N/A

 
 
 
 
Tier 1 capital to total assets
$
797,112

 
11.80
%
 
N/A

 
N/A

 


 


BBCN Bank
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
$
853,691

 
14.71
%
 
$
580,330

 
10.00
%
 
$
273,361

 
4.71
%
Tier 1 risk-based capital ratio
$
783,886

 
13.51
%
 
$
348,198

 
6.00
%
 
$
435,688

 
7.51
%
Tier I capital to total assets
$
783,886

 
11.60
%
 
$
337,809

 
5.00
%
 
$
446,077

 
6.60
%
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013 (Dollars in thousands)
 
Actual
 
To Be Well-Capitalized
 
Excess
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
BBCN Bancorp, Inc
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
$
819,408

 
14.90
%
 
N/A

 
N/A

 
 
 
 
Tier 1 risk-based capital ratio
$
751,204

 
13.66
%
 
N/A

 
N/A

 
 
 
 
Tier 1 capital to total assets
$
751,204

 
11.97
%
 
N/A

 
N/A

 


 


BBCN Bank
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
$
807,620

 
14.70
%
 
$
549,471

 
10.00
%
 
$
258,149

 
4.70
%
Tier 1 risk-based capital ratio
$
739,416

 
13.46
%
 
$
329,683

 
6.00
%
 
$
409,733

 
7.46
%
Tier I capital to total assets
$
739,416

 
11.79
%
 
$
313,687

 
5.00
%
 
$
425,729

 
6.79
%

Liquidity Management
Liquidity risk is the risk of reduction in our earnings or capital that would result if we were not able to meet our obligations when they come due without incurring unacceptable losses.  Liquidity risk includes the risk of unplanned decreases or changes in funding sources and changes in market conditions that affect our ability to liquidate assets quickly and with minimum loss of value.  Factors considered in liquidity risk management are the stability of the deposit base; the marketability, maturity, and pledging of our investments; the availability of alternative sources of funds; and our demand for credit. The objective of our liquidity management is to have funds available to meet cash flow requirements arising from fluctuations in deposit levels and

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the demands of daily operations, which include funding of securities purchases, providing for customers' credit needs, and ongoing repayment of borrowings.
Our primary sources of liquidity are derived from financing activities, which include customer and broker deposits, federal funds facilities, and borrowings from the FHLB and the FRB Discount Window.  These funding sources are augmented by payments of principal and interest on loans and securities, proceeds from sale of loans and the liquidation or sale of securities from our available for sale portfolio.  Primary uses of funds include withdrawal of and interest payments on deposits, originations of loans, purchases of investment securities, and payment of operating expenses.
At September 30, 2014, our total borrowing capacity from the FHLB was $1.96 billion, of which $1.49 billion was unused and available to borrow. At September 30, 2014, our total borrowing capacity from the FRB was $456.0 million, of which $456.0 million was unused and available to borrow. In addition to these lines, our liquid assets, consisting of cash and cash equivalents, interest bearing cash deposits with other banks, overnight federal funds sold to other banks, liquid investment securities available for sale, and loan repayments within 30 days, were $742.1 million at September 30, 2014, compared to $647.4 million at December 31, 2013. Cash and cash equivalents, including federal funds sold, were $443.3 million at September 30, 2014, compared to $316.7 million at December 31, 2013. We believe our liquidity sources to be stable and adequate to meet our day-to-day cash flow requirements.


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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The objective of our asset and liability management activities is to maximize our earnings by adjusting the type and mix of assets and liabilities to effectively address changing conditions and risks. Through overall management of our balance sheet and by controlling various risks, we seek to optimize our financial returns within safe and sound parameters. Our operating strategies for attaining this objective include managing net interest margin through appropriate risk/return pricing of assets and liabilities and emphasizing growth in retail deposits, as a percentage of interest bearing liabilities, to reduce our cost of funds. We also seek to improve earnings by controlling noninterest expense, and enhancing noninterest income. We also use risk management instruments to modify interest rate characteristics of certain assets and liabilities to hedge against our exposure to interest rate fluctuations with the objective of, reducing the effects these fluctuations might have on associated cash flows or values. Finally, we perform internal analysis to measure, evaluate and monitor risk.
Interest Rate Risk
Interest rate risk is the most significant market risk impacting us. Interest rate risk occurs when interest rate sensitive assets and liabilities do not reprice simultaneously and in equal volume. A key objective of asset and liability management is to manage interest rate risk associated with changing asset and liability cash flows and values of our assets and liabilities and market interest rate movements. The management of interest rate risk is governed by policies reviewed and approved annually by the Board of Directors. Our Board delegates responsibility for interest rate risk management to the Asset Liability Committee of the Board ("ALCO") and to the Asset and Liability Management Committee (“ALM”), which is composed of the Bank’s senior executives and other designated officers.
Market risk is the risk of adverse impacts on our future earnings, the fair values of our assets and liabilities, or our future cash flows that may result from changes in the price of a financial instrument. The fundamental objective of our ALM is to manage our exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. Our ALM meets regularly to monitor interest rate risk, the sensitivity of our assets and liabilities to interest rate changes, the book and market values of our assets and liabilities, and our investment activities. It also directs changes in the composition of our assets and liabilities. Our strategy has been to reduce the sensitivity of our earnings to interest rate fluctuations by more closely matching the effective maturities or repricing characteristics of our assets and liabilities. Certain assets and liabilities, however, may react in different degrees to changes in market interest rates. Furthermore, interest rates on certain types of assets and liabilities may fluctuate prior to changes in market interest rates, while interest rates on other types may lag behind. We consider the anticipated effects of these factors when implementing our interest rate risk management objectives.
Interest Rate Sensitivity
We monitor interest rate risk through the use of a simulation model that provides us with the ability to simulate our net interest income. In order to measure, at September 30, 2014, the sensitivity of our forecasted net interest income to changing interest rates, both rising and falling interest rate scenarios were projected and compared to base market interest rate forecasts. One application of our simulation model measures the impact of market interest rate changes on the net present value of estimated cash flows from our assets and liabilities, defined as our market value of equity. This analysis assesses the changes in market values of interest rate sensitive financial instruments that would occur in response to immediate and parallel changes in market interest rates.
The impacts on our net interest income and market value of equity exposed to immediate and parallel hypothetical changes in market interest rates as projected by the model we use for this purpose are illustrated in the following table.
 
 
September 30, 2014
 
December 31, 2013
Simulated
Estimated Net
Interest Income
Sensitivity
 
Market Value
Of Equity
Volatility
 
Estimated Net
Interest Income
Sensitivity
 
Market Value
Of Equity
Volatility
Rate Changes
 
 
 
 + 200 basis points
5.48
 %
 
(2.29
)%
 
6.95
 %
 
(3.89
)%
 + 100 basis points
2.32
 %
 
(0.97
)%
 
3.04
 %
 
(1.62
)%
 - 100 basis points
(0.45
)%
 
0.16
 %
 
(1.31
)%
 
1.24
 %
 - 200 basis points
(0.67
)%
 
(1.83
)%
 
(1.99
)%
 
1.20
 %

The results obtained from using the simulation model are somewhat uncertain as the model does not take into account other impacts or changes and the effect they could have on the Company’s business or changes in business strategy the Company might make in reaction to changes in the interest rate environment.
 

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Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company’s management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II
OTHER INFORMATION

Item 1.
Legal Proceedings
    
We are involved in routine litigation incidental to our business, none of which is expected to have a material adverse effect on us. There were no material developments in legal proceedings which were previously disclosed in our 2013 Annual Report on Form 10-K.
Item 1A.
Risk Factors
Management is not aware of any material changes to the risk factors discussed in Part 1, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2013. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2013, which could materially and adversely affect the Company’s business, financial condition and results of operations. The risks described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not presently known to management or that management presently believes not to be material
may also result in material and adverse effects on our business, financial condition and results of operations.


Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None
 
Item 3.
Defaults Upon Senior Securities
None
 
Item 4.
Mine Safety Disclosures
 
None

Item 5.
Other Information

(a)           Additional Disclosures. None.
 
(b)           Stockholder Nominations. There have been no material changes in the procedures by which shareholders may recommend nominees to the Board of Directors during the three months ended September 30, 2014. Please see the discussion of these procedures in the most recent proxy statement on Schedule 14A filed with the SEC.

Item 6.
Exhibits
See “Index to Exhibits.”


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
BBCN BANCORP, INC.
 
 
 
 
 
Date:
November 6, 2014
/s/ Kevin S. Kim
 
 
 
Kevin S. Kim
 
 
 
Chairman, President and Chief Executive Officer
 
 
 
 
 
Date:
November 6, 2014
 
 
 
 
 
 
 
 
/s/ Douglas J. Goddard
 
 
 
Douglas J. Goddard
 
 
 
Executive Vice President and Chief Financial Officer
 

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INDEX TO EXHIBITS
 
Exhibit Number
 
Description
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002*
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002*
 
 
 
101.INS
 
XBRL Instance Document**
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document**
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document**
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document**
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document**
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document**
__________________________________
*
Filed herewith
**
Furnished herewith


76