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| HAFC > SEC Filings for HAFC > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
• a significant number of our customers failing to perform under their loans and other terms of credit agreements;
• the effect of regulatory orders we have entered into and potential future supervisory action against us or the Bank;
• fluctuations in interest rates and a decline in the level of our interest rate spread;
• failure to attract or retain deposits;
• sources of liquidity available to us and to the Bank becoming limited or our potential inability to access sufficient sources of liquidity when needed or the requirement that we obtain government waivers to do so;
• adverse changes in domestic or global financial markets, economic conditions or business conditions or the effects of pandemic flu;
• regulatory restrictions on the Bank's ability to pay dividends to us and on our ability to make payments on Hanmi Financial obligations;
• significant reliance on loans secured by real estate and the associated vulnerability to downturns in the local real estate market, natural disasters and other variables impacting the value of real estate;
• failure to retain our key employees;
• failure to maintain our status as a financial holding company;
• adequacy of our allowance for loan losses;
• credit quality and the effect of credit quality on our provision for credit losses and allowance for loan losses;
• failure to manage our future growth or successfully integrate acquisitions;
• volatility and disruption in financial, credit and securities markets, and the price of our common stock;
• deterioration in the financial markets that may result in other-than-temporary impairment charges relating to our securities portfolio;
• competition in our primary market areas;
• demographic changes in our primary market areas; and
• significant government regulations, legislation and potential changes thereto.
For a discussion of some of the other factors that might cause such a
difference, see the discussion contained in this Form 10-Q under the heading
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Item 1A. Risk Factors." Also see "Item 1A. Risk Factors" and
"Item 7. 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,
2008 as well as other factors we identify from time to time in our periodic
reports filed pursuant to the Exchange Act. We undertake no obligation to update
these forward-looking statements to reflect events or circumstances that occur
after the date on which such statements were made, except as required by law.
CRITICAL ACCOUNTING POLICIES
We have established various accounting policies that govern the application
of GAAP in the preparation of our financial statements. Our significant
accounting policies are described in the "Notes to Consolidated Financial
Statements" in our Annual Report on Form 10-K for the year ended December 31,
2008. Certain accounting policies require us to make significant estimates and
assumptions that have a material impact on the carrying value of certain assets
and liabilities, and we consider these critical accounting policies. For a
description of these critical accounting policies, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies" in our Annual Report on Form 10-K for the year
ended December 31, 2008. We use estimates and assumptions based on historical
experience and other factors that we believe to be reasonable under the
circumstances. Actual results could differ significantly from these estimates
and assumptions, which could have a material impact on the carrying value of
assets and liabilities at the balance sheet dates and our results of operations
for the reporting periods. Management has discussed the development and
selection of these critical accounting policies with the Audit Committee of
Hanmi Financial's Board of Directors.
SELECTED FINANCIAL DATA
The following tables set forth certain selected financial data for the
periods indicated.
As of and for the
Three Months Ended
March 31,
2009 2008
(Dollars in Thousands, Except Per Share Data)
AVERAGE BALANCES:
Average Gross Loans, Net (1) $ 3,349,085 $ 3,303,141
Average Investment Securities $ 182,284 $ 342,123
Average Interest-Earning Assets $ 3,806,186 $ 3,689,650
Average Total Assets $ 3,946,860 $ 3,965,425
Average Deposits $ 3,202,032 $ 2,995,315
Average Borrowings $ 440,053 $ 553,138
Average Interest-Bearing Liabilities $ 3,115,332 $ 2,897,209
Average Stockholders' Equity $ 263,686 $ 377,411
Average Tangible Equity (2) $ 258,908 $ 263,624
PER SHARE DATA:
Earnings (Loss) Per Share - Basic $ (0.11 ) $ 0.06
Earnings (Loss) Per Share - Diluted $ (0.11 ) $ 0.06
Common Shares Outstanding 45,940,967 45,905,549
Book Value Per Share (3) $ 5.66 $ 8.07
Tangible Book Value Per Share (4) $ 5.57 $ 5.59
Cash Dividends Per Share $ - $ 0.06
SELECTED PERFORMANCE RATIOS:
Return on Average Assets (5) (6) (0.53 %) 0.30 %
Return on Average Stockholders' Equity (5) (7) (7.99 %) 3.11 %
Return on Average Tangible Equity (5) (8) (8.14 %) 4.46 %
Efficiency Ratio (9) 57.92 % 49.11 %
Net Interest Spread (10) 1.88 % 2.81 %
Net Interest Margin (11) 2.46 % 3.73 %
Dividend Payout Ratio (12) - 94.28 %
Average Stockholders' Equity to Average Total Assets 6.68 % 9.52 %
SELECTED CAPITAL RATIOS: (13)
Total Risk-Based Capital Ratio:
Hanmi Financial 10.88 % 10.74 %
Hanmi Bank 10.81 % 10.79 %
Tier 1 Risk-Based Capital Ratio:
Hanmi Financial 9.61 % 9.48 %
Hanmi Bank 9.54 % 9.54 %
Tier 1 Leverage Ratio:
Hanmi Financial 8.46 % 8.69 %
Hanmi Bank 8.40 % 8.74 %
SELECTED ASSET QUALITY RATIOS:
Non-Performing Loans to Total Gross Loans (14) 4.71 % 2.68 %
Non-Performing Assets to Total Assets (15) 4.05 % 2.25 %
Net Loan Charge-Offs to Average Total Gross Loans (16) 1.43 % 0.89 %
Allowance for Loan Losses to Total Gross Loans 2.53 % 1.60 %
Allowance for Loan Losses to Non-Performing Loans 53.70 % 59.72 %
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(1) Loans are net of deferred fees and related direct costs.
(2) Average tangible equity is calculated by subtracting average goodwill and average other intangible assets from average stockholders' equity. See "Non-GAAP Financial Measures."
(3) Total stockholders' equity divided by common shares outstanding.
(4) Tangible equity divided by common shares outstanding. See "Non-GAAP Financial Measures."
(5) Calculation based upon annualized net income.
(6) Net income divided by average total assets.
(7) Net income divided by average stockholders' equity.
(8) Net income divided
by average
tangible equity.
See "Non-GAAP
Financial
Measures."
(9) Total non-interest expenses divided by the sum of net interest income before provision for credit losses and total non-interest income.
(10) Average yield earned on interest-earning assets less average rate paid on interest-bearing liabilities.
(11) Net interest income before provision for credit losses divided by average interest-earning assets.
(12) Cash dividends per share times common shares outstanding divided by net income.
(13) The required ratios for a "well-capitalized" institution, as defined by regulations of the Board of Governors of the Federal Reserve System, are 10 percent for the Total Risk-Based Capital Ratio (total capital divided by total risk-weighted assets); 6 percent for the Tier 1 Risk-Based Capital Ratio (Tier 1 capital divided by total risk-weighted assets); and 5 percent for the Tier 1 Leverage Ratio (Tier 1 capital divided by average total assets).
(14) Non-performing loans consist of non-accrual loans and loans past due 90 days or more and still accruing interest.
(15) Non-performing assets consist of non-performing loans (see footnote (14) above) and other real estate owned.
(16) Calculation based upon annualized net loan charge-offs.
Non-GAAP Financial Measures
Return on Average Tangible Equity
Return on average tangible equity is supplemental financial information
determined by a method other than in accordance with GAAP. This non-GAAP measure
is used by management in the analysis of Hanmi Financial's performance. Average
tangible equity is calculated by subtracting average goodwill and average other
intangible assets from average stockholders' equity. Banking and financial
institution regulators also exclude goodwill and other intangible assets from
stockholders' equity when assessing the capital adequacy of a financial
institution. Management believes the presentation of this financial measure
excluding the impact of these items provides useful supplemental information
that is essential to a proper understanding of the financial results of Hanmi
Financial, as it provides a method to assess management's success in utilizing
tangible capital. This disclosure should not be viewed as a substitute for
results determined in accordance with GAAP, nor is it necessarily comparable to
non-GAAP performance measures that may be presented by other companies.
The following table reconciles the GAAP performance measure to this non-GAAP
performance measure for the periods indicated:
Three Months Ended
March 31,
2009 2008
(Dollars in Thousands)
Average Stockholders' Equity $ 263,686 $ 377,411
Less Average Goodwill and Average Other Intangible Assets (4,778 ) (113,787 )
Average Tangible Equity $ 258,908 $ 263,624
Return on Average Stockholders' Equity (7.99 %) 3.11 %
Effect of Average Goodwill and Average Other Intangible Assets (0.15 %) 1.35 %
Return on Average Tangible Equity (8.14 %) 4.46 %
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Tangible Book Value Per Share
Tangible book value per share is supplemental financial information
determined by a method other than in accordance with GAAP. This non-GAAP measure
is used by management in the analysis of Hanmi Financial's performance. Tangible
book value per share is calculated by subtracting goodwill and other intangible
assets from total stockholders' equity and dividing the difference by the number
of shares of common stock outstanding. Management believes the presentation of
this financial measure excluding the impact of these items provides useful
supplemental information that is essential to a proper understanding of the
financial results of Hanmi Financial, as it provides a method to assess
management's success in utilizing tangible capital. This disclosure should not
be viewed as a substitute for results determined in accordance with GAAP, nor is
it necessarily comparable to non-GAAP performance measures that may be presented
by other companies.
The following table reconciles the GAAP performance measure to this non-GAAP
performance measure for the periods indicated:
March 31,
2009 2008
(Dollars in Thousands,
Except Per Share Data)
Total Stockholders' Equity $ 260,243 $ 370,364
Less Goodwill and Other Intangible Assets (4,521 ) (113,777 )
Tangible Equity $ 255,722 $ 256,587
Book Value Per Share $ 5.66 $ 8.07
Effect of Goodwill and Other Intangible Assets (0.09 ) (2.48 )
Tangible Book Value Per Share $ 5.57 $ 5.59
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EXECUTIVE OVERVIEW
The focus of our business has been on commercial and real estate lending. As
of March 31, 2009, we maintained a branch network of 27 full-service branch
offices in California and 2 loan production offices in Virginia and Washington.
In February 2009, we opened a new full-service branch in Diamond Bar, California
and suspended operations at our loan production offices in Colorado, Georgia,
Illinois and Texas.
Since the second half of 2007, the economic conditions in the markets in
which our borrowers operate have continued to deteriorate and the levels of loan
delinquency and defaults that we experienced have been substantially higher than
historical levels. As a result, we have had to make substantial provisions for
loan losses in 2007, 2008 and the first quarter of 2009, which have adversely
affected our earnings. We believe that our results of operations will continue
to be adversely affected if economic conditions, particularly in California,
continue to deteriorate.
A continuing concern in the banking industry is liquidity. Our utilization of
wholesale funds during the fourth quarter of 2008 improved our liquidity, and
our strategic priority in 2009 is to replace such wholesale funds with customer
deposits. As part of this strategy, our December 2008 deposit campaign with a
promotional time deposit product was successful as we were able to replace some
of our wholesale funds with customer deposits. As of March 31, 2009, total
deposits increased sequentially by $126.0 million, or 4.1 percent, to
$3.2 billion, while broker deposits and FHLB advances declined to $577.8 million
and $311.1 million, respectively, compared to $874.2 million and $422.2 million,
respectively, as of December 31, 2008.
As a result of our new strategy of focusing on asset quality over growth,
total assets were $3.89 billion as of March 31, 2009, compared to $3.88 billion
as of December 31, 2008, and total gross loans were $3.32 billion as of
March 31, 2009, compared to $3.36 billion as of December 31, 2008.
We have taken certain actions that we expect will improve our performance:
• The use of third-parties to assist the Bank in quarterly stress testing the
entire loan portfolio, reviewing loans within the portfolio, and
re-appraising properties where appropriate.
• A further streamlining of the Bank's operations. In February, we reduced headcount by 16, including some senior officers. We also suspended operations at four of our out-of-state loan production offices and combined three branch districts into two.
• The recent enhancement of the Board of Directors with the addition of three new members. Together, they bring extensive experience in the banking industry, notably their experience in meeting the expectations and requirements of bank regulators.
RESULTS OF OPERATIONS
Net Interest Income Before Provision for Credit Losses
Our earnings depend largely upon the difference between the interest income
received from our loan portfolio and other interest-earning assets and the
interest paid on deposits and borrowings. The difference is "net interest
income." The difference between the yield earned on interest-earning assets and
the cost of interest-bearing liabilities is "net interest spread." Net interest
income, when expressed as a percentage of average total interest-earning assets,
is referred to as the "net interest margin."
Net interest income is affected by the change in the level and mix of
interest-earning assets and interest-bearing liabilities, referred to as "volume
changes." Our net interest income also is affected by changes in the yields
earned on interest-earning assets and rates paid on interest-bearing
liabilities, referred to as "rate changes." Interest rates charged on loans are
affected principally by the demand for such loans, the supply of money available
for lending purposes and competitive factors. Those factors are affected by
general economic conditions and other factors beyond our control, such as
Federal economic policies, the general supply of money in the economy, income
tax policies, governmental budgetary matters and the actions of the FRB.
The following table shows the average balances of assets, liabilities and stockholders' equity; the amount of interest income and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. All average balances are daily average balances.
Three Months Ended
March 31, 2009 March 31, 2008
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
(Dollars in Thousands)
ASSETS
Interest-Earning Assets:
Gross Loans, Net (1) $ 3,349,085 $ 45,085 5.46 % $ 3,303,141 $ 60,598 7.38 %
Municipal Securities (2) 58,886 643 4.37 % 71,879 759 4.22 %
Obligations of Other U.S. Government
Agencies 9,578 96 4.01 % 109,860 1,245 4.53 %
Other Debt Securities 113,820 1,254 4.41 % 160,384 1,871 4.67 %
Equity Securities 41,727 153 1.47 % 33,490 414 4.94 %
Federal Funds Sold and Securities
Purchased Under Agreements to Resell 94,585 82 0.35 % 10,896 83 3.05 %
Term Federal Funds Sold 138,344 700 2.02 % - - -
Interest-Earning Deposits 161 2 4.97 % - - -
Total Interest-Earning Assets 3,806,186 48,015 5.12 % 3,689,650 64,970 7.08 %
Noninterest-Earning Assets:
Cash and Cash Equivalents 84,054 93,793
Allowance for Loan Losses (72,350 ) (42,545 )
Other Assets 128,970 224,527
Total Noninterest-Earning Assets 140,674 275,775
TOTAL ASSETS $ 3,946,860 $ 3,965,425
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