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| HAFC > SEC Filings for HAFC > Form 10-Q on 9-Aug-2012 | All Recent SEC Filings |
9-Aug-2012
Quarterly Report
The following is management's discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three months and six months ended June 30, 2012. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Annual Report on Form 10-K") and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012 (this "Report").
FORWARD-LOOKING STATEMENTS
Some of the statements under "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Report 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 (the "Exchange Act"). All statements in this Report other than statements of historical fact are "forward -looking statements" for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial position and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs, plan and availability, plans and objectives of management for future operations, and other similar forecasts and statements of expectation and statements of assumption underlying any of the foregoing. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential," or "continue," or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statement. These factors include the following:
• failure to maintain adequate levels of capital to support our operations;
• a significant number of customers failing to perform under their loans or other extensions of credit;
• fluctuations in interest rates and a decline in the level of our interest rate spread;
• failure to attract or retain deposits and restrictions on taking brokered deposits;
• sources of liquidity available to us and to Hanmi 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;
• regulatory restrictions on Hanmi Bank's ability to pay dividends to us and on our ability to make payments on our 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;
• our use of appraisals in deciding whether to make loans secured by real property, which does not ensure that the value of the real property collateral will be sufficient to pay our loans;
• failure to attract or retain our key employees;
• credit quality and the effect of credit quality on our provision for credit losses and allowance for loan losses;
• volatility and disruption in financial, credit and securities markets, and the price of our common stock;
• deterioration in financial markets that may result in impairment charges relating to our securities portfolio;
• competition and demographic changes in our primary market areas;
• global hostilities, acts of war or terrorism, including but not limited to, conflict between North Korea and South Korea;
• the effects of litigation against us;
• other risks described herein and in the other reports we file with the Securities and Exchange Commission; and
• our ability to recapture deferred tax assets.
For a discussion of some of the other factors that might cause such a
difference, see the discussion contained in this Report under the heading "Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations." Also, see "Item 1A. Risk Factors," "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations-Interest Rate Risk
Management" and "-Capital Resources and Liquidity" in our 2011 Annual Report on
Form 10-K, including our Quarterly Reports on Form 10-Q, 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 2011 Annual Report on Form 10-K. 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 2011 Annual Report on Form 10-K. 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 Six Months Ended
June 30, June 30,
2012 2011 2012 2011
(In Thousands, Except Per Share Data) (In Thousands, Except Per Share Data)
AVERAGE BALANCES:
Average Gross Loans, Net (1) $ 2,003,475 $ 2,136,976 $ 1,994,273 $ 2,185,274
Average Investment Securities $ 417,202 $ 497,052 $ 420,735 $ 485,148
Average Interest-Earning Assets $ 2,642,428 $ 2,804,709 $ 2,659,085 $ 2,848,313
Average Total Assets $ 2,723,432 $ 2,836,967 $ 2,732,485 $ 2,871,419
Average Deposits $ 2,308,193 $ 2,427,934 $ 2,322,733 $ 2,443,299
Average Borrowings $ 86,509 $ 190,447 $ 86,087 $ 213,820
Average Interest-Bearing Liabilities $ 1,720,781 $ 2,025,392 $ 1,748,995 $ 2,078,947
Average Stockholders' Equity $ 300,578 $ 189,528 $ 294,092 $ 183,906
PER SHARE DATA:
Earnings Per Share - Basic $ 1.77 $ 0.42 $ 2.01 $ 0.98
Earnings Per Share - Diluted $ 1.77 $ 0.42 $ 2.00 $ 0.98
Common Shares Outstanding 31,489,201 18,907,299 31,489,201 18,907,299
Book Value Per Share (2) $ 11.07 $ 15.11 $ 11.07 $ 15.11
SELECTED PERFORMANCE RATIOS:
Return on Average Assets (3) (4) 8.24 % 1.13 % 4.65 % 1.29 %
Return on Average Stockholders' Equity
(3) (5) 74.63 % 16.93 % 43.16 % 20.22 %
Efficiency Ratio (6) 61.07 % 72.67 % 63.62 % 69.64 %
Net Interest Spread (7) 3.45 % 3.26 % 3.36 % 3.26 %
Net Interest Margin (8) 3.84 % 3.65 % 3.77 % 3.66 %
Average Stockholders' Equity to Average
Total Assets 11.04 % 6.68 % 10.76 % 6.40 %
SELECTED CAPITAL RATIOS: (9)
Total Risk-Based Capital Ratio:
Hanmi Financial 20.02 % 13.92 %
Hanmi Bank 19.06 % 14.02 %
Tier 1 Risk-Based Capital Ratio:
Hanmi Financial 18.74 % 11.92 %
Hanmi Bank 17.79 % 12.72 %
Tier 1 Leverage Ratio:
Hanmi Financial 14.70 % 9.09 %
Hanmi Bank 13.95 % 9.70 %
SELECTED ASSET QUALITY RATIOS:
Non-Performing Loans to Total Gross
Loans (10) 2.32 % 6.99 % 2.32 % 6.99 %
Non-Performing Assets to Total Assets
(11) 1.62 % 5.38 % 1.62 % 5.38 %
Net Loan Charge-Offs to Average Total
Gross Loans (12) 2.67 % 3.09 % 2.47 % 3.48 %
Allowance for Loan Losses to Total
Gross Loans 3.69 % 5.27 % 3.69 % 5.27 %
Allowance for Loan Losses to
Non-Performing Loans 159.26 % 75.45 % 159.26 % 75.45 %
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(1) Loans are net of deferred fees and related direct costs.
(2) Total stockholders' equity divided by common shares outstanding.
(3) Calculation based on annualized net income.
(4) Net income divided by average total assets.
(5) Net income divided by average stockholders' equity.
(6) Total non-interest expenses divided by the sum of net interest income before provision for credit losses and total non-interest income.
(7) Average yield earned on interest-earning assets less average rate paid on interest-bearing liabilities. Computed on a tax-equivalent basis using an effective marginal rate of 35 percent.
(8) Net interest income before provision for credit losses divided by average interest-earning assets. Computed on a tax-equivalent basis using an effective marginal rate of 35 percent.
(9) 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).
(10) Non-performing loans consist of non-accrual loans and loans past due 90 days or more and still accruing interest.
(11) Non-performing assets consist of non-performing loans (see footnote
(10) above) and other real estate owned.
(12) Calculation based on annualized net loan charge-offs.
Non-GAAP Financial Measures
Tangible Stockholders' Equity to Tangible Assets Ratio
The ratio of tangible stockholders' equity to tangible assets is supplemental financial information determined by a method other than in accordance with U.S. generally accepted accounting principles ("GAAP"). This non-GAAP measure is used by management in the analysis of Hanmi Bank's capital strength. Tangible equity is calculated by subtracting goodwill and other intangible assets from total stockholders' equity. Banking and financial institution regulators also exclude goodwill and other intangible assets from total 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 capital strength of Hanmi Financial and the Bank. This disclosure should not be viewed as a substitution 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 this non-GAAP performance measure to the GAAP performance measure for the periods indicated:
Hanmi Financial Corporation
As of June 30,
2012 2011
(In Thousands)
Total Assets $ 2,846,652 $ 2,710,835
Less Other Intangible Assets (1,417 ) (1,825 )
Tangible Assets $ 2,845,235 $ 2,709,010
Total Stockholders' Equity $ 348,456 $ 198,365
Less Other Intangible Assets (1,417 ) (1,825 )
Tangible Stockholders' Equity $ 347,039 $ 196,540
Total Stockholders' Equity to Total Assets Ratio 12.24 % 7.32 %
Tangible Common Equity to Tangible Assets Ratio 12.20 % 7.26 %
Common Shares Outstanding 31,489,201 18,907,299
Tangible Common Equity Per Common Share $ 11.02 $ 10.39
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Hanmi Bank
As of June 30,
2012 2011
(In Thousands)
Total Assets $ 2,841,441 $ 2,705,997
Less Other Intangible Assets - (184 )
Tangible Assets $ 2,841,441 $ 2,705,813
Total Stockholders' Equity $ 407,407 $ 279,712
Less Other Intangible Assets - (184 )
Tangible Stockholders' Equity $ 407,407 $ 279,528
Total Stockholders' Equity to Total Assets Ratio 14.34 % 10.34 %
Tangible Common Equity to Tangible Assets Ratio 14.34 % 10.33 %
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EXECUTIVE OVERVIEW
For the second quarter ended June 30, 2012, we recognized net income of $55.8 million, or $1.77 per diluted share, compared to net income of $8.0 million, or $0.42 per diluted share, for the second quarter ended June 30, 2011. The increase in net income for the second quarter of 2012 was primarily due to tax benefits recognized from the reversal of the valuation allowance on deferred tax assets ("DTA"), improved net interest margin, improved asset quality and an increase in non-interest income. All per share results are adjusted to reflect the 1-for-8 reverse stock split of Hanmi Financial's common stock, which became effective on December 19, 2011.
Significant financial highlights include (as of and for the period ended June 30, 2012):
• Hanmi posted its seventh consecutive quarter of profitability.
• The reversal of the DTA valuation allowance contributed $53.4 million, or approximately $1.69 per diluted share, to second quarter net income.
• Net interest margin ("NIM") was 3.84 percent in the second quarter of 2012, up from 3.65 percent in the second quarter of 2011, reflecting a 29 basis points improvement in cost of funds from the second quarter of 2011. Effective management of the deposit mix contributed to this improvement in the second quarter of 2012. NIM in the first six months of 2012 improved to 3.77 percent from 3.66 percent in the first six months of 2011.
• Hanmi originated $54.0 million of SBA 504 and 7(a) loans and $113.3 million of other commercial loans for the second quarter of 2012. Year to date, SBA loan originations were $90.2 million and other commercial loan originations were $180.2 million. In addition, $67.4 million of one year adjustable rate single family residential mortgage loans and $15.2 million of commercial real estate loans were purchased in the first six months of 2012.
• Asset quality improved substantially, during the second quarter of 2012, with fewer non-performing assets ("NPAs"), lower levels of delinquent loans, and lower net charge-offs.
• The ratio of classified assets to the allowance for loan losses ("ALLL") plus Bank tier 1 capital dropped to 32.20 percent at June 30, 2012 from 66.14 percent at December 31, 2011. Classified assets at June 30, 2012 were $143.7 million compared to $282.6 million at December 31, 2011.
• NPAs declined to $46.2 million, or 1.62 percent of total assets, at June 30, 2012, from $52.6 million, or 1.91 percent of total assets, at December 31, 2011. During the second quarter, $44.3 million in note sales contributed to the reduction in NPAs, but generated a loss on sale of other loans of $5.3 million. Year-to-date, note sales totaled $73.0 million and generated a loss on sale of other loans of $7.7 million.
• Delinquent loans, which are 30 to 89 days past due and still accruing, were $4.7 million, or 0.24 percent of total gross loans, at June 30, 2012, down from $13.9 million, or 0.72 percent of total gross loans, at December 31, 2011.
• Total net charge-offs during the second quarter of 2012 totaled $13.4 million, up slightly from $11.3 million in the first quarter of 2012, and down from $16.5 million in the second quarter of 2011 . Charge-offs were predominantly generated by the note sales.
• Classified loan inflows totaled $7.5 million for the second quarter of 2012, down significantly from $31.6 million during the first quarter of 2012. Outflows of classified loans totaled $94.3 million during the second quarter of 2012 as compared to $84.5 million in the first quarter of 2012.
• Operating efficiency improved to 61.07 percent during the second quarter of 2012 from 72.67 percent during the second quarter of 2011.
• The Bank's tangible common equity to tangible assets ratio at June 30, 2012 was 14.34 percent, up from 12.48 percent at December 31, 2011.
• At the holding company level, the tangible common equity ratio was 12.20 percent and the tangible book value was $11.02 per share at June 30, 2012.
Outlook for 2012
As set forth in our 2011 Annual Report on Form 10-K, our strategic focuses for 2012 will be to enhance our capital position, continue to improve our credit quality and fully comply with all of the requirements of the Written Agreement and the MOU.
We believe that our proactive initiatives to manage credit risk exposure have resulted in improvement of our asset quality over the past several quarters. We are committed to refining our credit risk management systems to meet the challenges of our changing economic environment.
Based on our current liquidity position, we have begun to consider strategic changes. We are currently planning to develop innovative new products and services as well as generate quality new loans to expand our existing customer base with the goal of improving our profitability. In the event that the Written Agreement is lifted, we intend to pay interest in arrears on our outstanding junior subordinated debentures to bring them current.
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
June 30, 2012 June 30, 2011
Interest Average Interest Average
Average Income/ Rate/ Average Income/ Rate/
Balance Expense Yield Balance Expense Yield
(In Thousands)
ASSETS
Interest-Earning Assets:
Gross Loans, Net of Deferred Loan
Fees (1) $ 2,003,475 $ 27,241 5.47 % $ 2,136,976 $ 29,248 5.49 %
Municipal Securities - Taxable 44,867 442 3.94 % 13,603 140 4.12 %
Municipal Securities - Tax Exempt
(2) 13,011 152 4.68 % 4,125 57 5.53 %
Obligations of Other U.S. Government
Agencies 77,390 380 1.96 % 152,438 629 1.65 %
Other Debt Securities 281,934 1,368 1.94 % 326,886 2,326 2.85 %
Equity Securities 31,107 176 2.26 % 34,078 133 1.56 %
Federal Funds Sold and Securities
Purchased under Agreements to Resell 29,844 31 0.42 % 7,067 9 0.51 %
Term Federal Funds Sold 70,384 168 0.95 % 13,681 18 0.53 %
Interest-Bearing Deposits in Other
Banks 90,416 59 0.26 % 115,855 79 0.27 %
Total Interest-Earning Assets 2,642,428 30,017 4.57 % 2,804,709 32,639 4.67 %
Noninterest-Earning Assets:
Cash and Cash Equivalents 71,162 68,371
Allowance for Loan Losses (79,089 ) (125,152 )
Other Assets 88,931 89,039
Total Noninterest-Earning Assets 81,004 32,258
TOTAL ASSETS 2,723,432 2,836,967
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
Deposits:
Savings 111,685 586 2.11 % 111,723 734 2.64 %
Money Market Checking and NOW
Accounts 514,662 769 0.60 % 488,723 1,010 0.83 %
Time Deposits of $100,000 or More 659,176 1,763 1.08 % 926,024 3,477 1.51 %
Other Time Deposits 348,749 835 0.96 % 308,475 971 1.26 %
FHLB Advances 4,103 43 4.22 % 106,710 239 0.90 %
Other Borrowings - - 0.00 % 1,331 1 0.30 %
Junior Subordinated Debentures 82,406 797 3.89 % 82,406 711 3.46 %
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