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HAFC > SEC Filings for HAFC > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for HANMI FINANCIAL CORP

Form 10-Q for HANMI FINANCIAL CORP


9-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 and six months ended June 30, 2013. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012 (the "2012 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, 2013 (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;

significant government regulations, legislation and potential changes thereto, including as a result of the Dodd-Frank Act; and

other risks described herein and in the other reports we file with the Securities and Exchange Commission;

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 2012 Annual Report on Form 10-K, as well as other factors we identify from time to time in our periodic reports, including our Quarterly Reports on Form 10-Q, 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.


Table of Contents

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 2012 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 2012 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.


Table of Contents

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,
                                            2013              2012              2013              2012
                                                 (In thousands, except share and per share data)
Average balances:
Average gross loans, net of deferred
loan fees (1)                           $  2,165,741      $  2,003,475      $  2,119,881      $  1,994,273
Average investment securities                423,562           417,202           433,263           420,735
Average interest-earning assets            2,657,629         2,642,428         2,675,425         2,659,085
Average total assets                       2,793,505         2,723,432         2,811,614         2,732,485
Average deposits                           2,365,887         2,308,193         2,357,389         2,322,733
Average borrowings                            19,154            86,509            48,937            86,087
Average interest-bearing liabilities       1,663,951         1,720,781         1,695,406         1,748,995
Average stockholders' equity                 393,741           300,578           388,402           294,092
Per share data:
Earnings per share - basic              $       0.30      $       1.77      $       0.62      $       2.01
Earnings per share - diluted            $       0.30      $       1.77      $       0.62      $       2.00
Common shares outstanding                 31,604,837        31,489,201        31,604,837        31,489,201
Book value per share (2)                $      12.51      $      11.07      $      12.51      $      11.07
Performance ratios:
Return on average assets (3) (4)                1.37 %            8.24 %            1.41 %            4.65 %
Return on average stockholders'
equity (3) (5)                                  9.70 %           74.63 %           10.19 %           43.16 %
Efficiency ratio (6)                           56.55 %           61.07 %           56.49 %           63.62 %
Net interest spread (7)                         3.81 %            3.45 %            3.68 %            3.36 %
Net interest margin (8)                         4.10 %            3.84 %            3.98 %            3.77 %
Average stockholders' equity to
average total assets                           14.09 %           11.04 %           13.81 %           10.76 %
Selected capital ratios: (9)
Total risk-based capital ratio:
Hanmi Financial                                16.50 %           20.02 %           16.50 %           20.02 %
Hanmi Bank                                     16.53 %           19.06 %           16.53 %           19.06 %
Tier 1 risk-based capital ratio:
Hanmi Financial                                15.23 %           18.74 %           15.23 %           18.74 %
Hanmi Bank                                     15.26 %           17.79 %           15.26 %           17.79 %
Tier 1 leverage ratio:
Hanmi Financial                                12.90 %           14.70 %           12.90 %           14.70 %
Hanmi Bank                                     12.88 %           13.95 %           12.88 %           13.95 %
Asset quality ratios:
Non-performing loans to gross
loans(10)                                       1.28 %            2.32 %            1.28 %            2.32 %
Non-performing assets to total
assets(11)                                      1.04 %            1.62 %            1.04 %            1.62 %
Net loan charge-offs to average gross
loans(12)                                       0.30 %            2.67 %            0.37 %            2.47 %
Allowance for loan losses to gross
loans                                           2.74 %            3.69 %            2.74 %            3.69 %
Allowance for loan losses to total
non-performing loans                          214.03 %          159.26 %          214.03 %          159.26 %

(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


Table of Contents

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 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 as of the dates indicated:

                                                                   As of June 30,
                                                        2013                            2012
                                                  (In thousands, except share and per share data)
Hanmi Financial Corporation
Total assets                                   $            2,773,414          $            2,846,652
Less other intangible assets                                   (1,253 )                        (1,417 )

Tangible assets                                $            2,772,161          $            2,845,235

Total stockholders' equity                     $              395,396          $              348,456
Less other intangible assets                                   (1,253 )                        (1,417 )

Tangible stockholders' equity                  $              394,143          $              347,039

Total stockholders' equity to total assets                      14.26 %                         12.24 %
Tangible common equity to tangible assets                       14.22 %                         12.20 %
Common shares outstanding                                  31,604,837                      31,489,201
Tangible common equity per common share        $                12.47          $                11.02

                                                                   As of June 30,
                                                        2013                            2012
                                                                   (In thousands)
Hanmi Bank
Total assets                                   $            2,768,581          $            2,841,441
Less other intangible assets                                       -                               -

Tangible assets                                $            2,768,581          $            2,841,441

Total stockholders' equity                     $              378,116          $              407,407
Less other intangible assets                                       -                               -

Tangible stockholders' equity                  $              378,116          $              407,407

Total stockholders' equity to total assets                      13.66 %                         14.34 %
Tangible common equity to tangible assets                       13.66 %                         14.34 %


Table of Contents

Executive Overview

For the second quarter ended June 30, 2013, we recognized consolidated net income of $9.5 million, or $0.30 per diluted share, compared to consolidated net income of $55.8 million, or $1.77 per diluted share, for the second quarter ended June 30, 2012.

Net interest margin increased to 4.10 percent in the second quarter of 2013, up 24 basis points from 3.86 percent in the first quarter of 2013 and up 26 basis points from 3.84 percent in the second quarter of 2012. Yields on earning assets improved 16 basis points to 4.59 percent, while the cost of interest-bearing liabilities continued to improve by 11 basis points to 0.78 percent during the second quarter of 2013.

New loan production during the second quarter of 2013 totaled $163.8 million, consisting of $119.5 million of commercial real estate loans including $43.9 million of owner-occupied property loans, $31.2 million of Small Business Administration ("SBA") loans, $11.9 million of commercial term and lines of credit loans, and $1.2 million of consumer loans.

Asset quality improved during the second quarter of 2013, with non-performing assets declining to 1.04 percent of total assets. Net charge offs also continued to improve, totaling $1.6 million, or 0.30 percent of average gross loans on an annualized basis.

The redemption of the remaining $50 million in trust preferred securities ("TPS") in April 2013 resulted in an interest cost reduction of $510,000 in the second quarter of 2013.

Results of Operations

Net Interest Income

Our primary source of revenue is net interest income, which is the difference between interest and fees derived from earning assets, and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes in the level and mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. Net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on our loans are affected principally by changes to interest rates, the demand for such loans, the supply of money available for lending purposes, and other competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve Board.


Table of Contents

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, 2013                                 June 30, 2012
                                                        Interest       Average                        Interest       Average
                                         Average        Income /       Yield /         Average        Income /       Yield /
                                         Balance         Expense        Rate           Balance         Expense        Rate
                                                                           (In thousands)
Assets
Interest-earning assets:
Gross loans, net of deferred loan
fees (1)                               $ 2,165,741      $  27,839          5.16 %    $ 2,003,475      $  27,241          5.47 %
Municipal securities-taxable                46,102            454          3.94 %         44,867            442          3.94 %
Municipal securities-tax exempt (2)         10,707            112          4.20 %         13,011            152          4.68 %
Obligations of other U.S. government
agencies                                    93,432            432          1.85 %         77,390            380          1.96 %
Other debt securities                      273,321          1,214          1.78 %        281,934          1,368          1.94 %
Equity securities                           28,729            343          4.78 %         31,107            176          2.26 %
Federal funds sold                             341             -           0.00 %         29,844             31          0.42 %
Term federal funds sold                         -              -           0.00 %         70,384            168          0.95 %
Interest-bearing deposits in other
banks                                       39,256             24          0.25 %         90,416             59          0.26 %

Total interest-earning assets            2,657,629         30,418          4.59 %      2,642,428         30,017          4.57 %

Noninterest-earning assets:
Cash and cash equivalents                   66,643                                        71,162
Allowance for loan losses                  (61,026 )                                     (79,089 )
Other assets                               130,259                                        88,931

Total noninterest-earning assets           135,876                                        81,004

Total assets                           $ 2,793,505                                   $ 2,723,432

Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits:
Savings                                $   115,685      $     466          1.62 %    $   111,685      $     586          2.11 %
Money market checking and NOW
accounts                                   591,317            769          0.52 %        514,662            769          0.60 %
Time deposits of $100,000 or more          565,927          1,057          0.75 %        659,176          1,763          1.08 %
Other time deposits                        371,868            808          0.87 %        348,749            835          0.96 %
FHLB advances                                9,188             41          1.79 %          4,103             43          4.22 %
Junior subordinated debentures               9,966             84          3.38 %         82,406            797          3.89 %

Total interest-bearing liabilities       1,663,951          3,225          0.78 %      1,720,781          4,793          1.12 %

Noninterest-bearing liabilities:
Demand deposits                            721,090                                       673,921
Other liabilities                           14,723                                        28,152

Total noninterest-bearing
liabilities                                735,813                                       702,073

Total liabilities                        2,399,764                                     2,422,854
Stockholders' equity                       393,741                                       300,578

Total liabilities and stockholders'
equity                                 $ 2,793,505                                   $ 2,723,432

Net interest income                                     $  27,193                                     $  25,224

Cost of deposits                                                           0.53 %                                        0.69 %

Net interest spread (3)                                                    3.81 %                                        3.45 %

Net interest margin (4)                                                    4.10 %                                        3.84 %

(1) Loans are net of deferred fees and related direct costs, but exclude the allowance for loan losses. Non-accrual loans are included in the average loan balance. Loan fees have been included in the calculation of interest income. Loan fees were $205,000 and $433,000 for the three months ended June 30, 2013 and 2012, respectively.

(2) Computed on a tax-equivalent basis using an effective marginal rate of 35 percent.

(3) Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(4) Represents annualized net interest income as a percentage of average interest-earning assets.


Table of Contents

The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.

                                                           Three Months Ended June 30, 2013 vs.
                                                             Three Months Ended June 30, 2012
                                                          Increases (Decreases) Due to Change In
                                                     Volume                  Rate                Total
                                                                        (In thousands)
Interest and dividend income:
Gross loans, net of deferred loan fees            $      2,184         $         (1,586 )       $    598
Municipal securities-taxable                                12                       (0 )             12
Municipal securities-tax exempt                            (25 )                    (15 )            (40 )
Obligations of other U.S. government agencies               74                      (22 )             52
Other debt securities                                      (41 )                   (113 )           (154 )
Equity securities                                          (14 )                    181              167
Federal funds sold                                         (15 )                    (16 )            (31 )
Term federal funds sold                                    (84 )                    (84 )           (168 )
Interest-bearing deposits in other banks                   (32 )                     (3 )            (35 )

Total interest and dividend income                $      2,059         $         (1,658 )       $    401

Interest expense:
Savings                                           $         21         $           (141 )       $   (120 )
Money market checking and NOW accounts                     108                     (108 )             -
Time deposits of $100,000 or more                         (225 )                   (481 )           (706 )
Other time deposits                                         54                      (81 )            (27 )
FHLB advances                                               32                      (34 )             (2 )
Junior subordinated debentures                            (621 )                    (92 )           (713 )

Total interest expense                            $       (631 )       $           (937 )       $ (1,568 )

Change in net interest income                     $      2,690         $           (721 )       $  1,969
. . .
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