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HAFC > SEC Filings for HAFC > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for HANMI FINANCIAL CORP

Form 10-Q for HANMI FINANCIAL CORP


9-May-2014

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 months ended March 31, 2014. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 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 March 31, 2014 (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, 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.

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 2013 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.

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 2013 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 2013 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.


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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,
                                                             2014                            2013
                                                      (In thousands, except share and per share data)
Average balances:
Average gross loans, net of deferred loan costs
(1)                                               $                2,257,162         $          2,073,514
Average investment securities                                        535,356                      473,409
Average interest-earning assets                                    2,825,669                    2,693,424
Average assets                                                     2,979,094                    2,829,927
Average deposits                                                   2,500,300                    2,348,799
Average borrowings                                                    56,886                       79,110
Average interest-bearing liabilities                               1,757,159                    1,727,272
Average stockholders' equity                                         406,280                      383,003
Average tangible equity                                              405,123                      381,682
Per share data:
Earnings per share - basic                        $                     0.35         $               0.32
Earnings per share - diluted                      $                     0.35         $               0.32
Common shares outstanding                                         31,795,108                   31,588,767
Book value per share (2)                          $                    13.04         $              12.32
Performance ratios:
Return on average assets (3) (4)                                        1.50 %                       1.45 %
Return on average stockholders' equity (3) (5)                         11.02 %                      10.71 %
Efficiency ratio (6)                                                   56.27 %                      56.44 %
Net interest spread (7)                                                 3.74 %                       3.54 %
Net interest margin (8)                                                 4.02 %                       3.86 %
Average stockholders' equity to average assets                         13.64 %                      13.53 %
Selected capital ratios: (9)
Total risk-based capital ratio:
Hanmi Financial                                                        17.96 %                      19.45 %
Hanmi Bank                                                             17.23 %                      18.69 %
Tier 1 risk-based capital ratio:
Hanmi Financial                                                        16.70 %                      18.17 %
Hanmi Bank                                                             15.96 %                      17.42 %
Tier 1 leverage ratio:
Hanmi Financial                                                        13.77 %                      14.68 %
Hanmi Bank                                                             13.18 %                      14.07 %
Asset quality ratios:
Non-performing loans to gross loans (10)                                1.10 %                       1.55 %
Non-performing assets to assets (11)                                    0.81 %                       1.21 %
Net loan (recoveries) charge-offs to average
gross loans (12)                                                       -0.47 %                       0.45 %
Allowance for loan losses to gross loans                                2.49 %                       2.88 %
Allowance for loan losses to non-performing
loans                                                                 226.06 %                     186.03 %

(1) Loans are net of deferred fees and related direct costs

(2) Stockholders' equity divided by common shares outstanding

(3) Calculation based on annualized net income

(4) Net income divided by average assets

(5) Net income divided by average stockholders' equity

(6) Non-interest expenses divided by the sum of net interest income before provision for credit losses and 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


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(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 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 (recoveries) charge-offs

Non-GAAP Financial Measures

Tangible Stockholders' Equity to Tangible Assets Ratio

Tangible common equity to tangible assets ratio 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 analyzing Hanmi Financial's capital strength. Tangible equity is calculated by subtracting goodwill and other intangible assets from 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 capital strength of Hanmi Financial. 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 March 31,
                                                       2014                            2013
                                                 (In thousands, except share and per share data)

Assets                                        $            3,096,962          $            2,792,423
Less other intangible assets                                  (1,130 )                        (1,294 )

Tangible assets                               $            3,095,832          $            2,791,129


Stockholders' equity                          $              414,715          $              389,105
Less other intangible assets                                  (1,130 )                        (1,294 )

Tangible stockholders' equity                 $              413,585          $              387,811


Stockholders' equity to assets                                 13.39 %                         13.93 %
Tangible common equity to tangible assets                      13.36 %                         13.89 %

Common shares outstanding                                 31,795,108                      31,588,767
Tangible common equity per common share       $                13.01          $                12.28


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Executive Overview

For the first quarter ended March 31, 2014, we recognized net income of $11.0 million, or $0.35 per diluted share, compared to net income of $10.1 million, or $0.32 per diluted share, for the first quarter ended March 31, 2013. Financial highlights include:

Gross loans increased 7.3 percent to $2.28 billion at March 31, 2014 from $2.12 billion at March 31, 2013 and increased 1.9 percent from $2.23 billion at December 31, 2013.

Deposits grew 7.4 percent to $2.51 billion as of March 31, 2014 from $2.33 billion as of March 31, 2013, with non-interest bearing deposits up 16.6 percent and representing 33.0 percent of total deposits.

The mix of core deposits increased to 81.0 percent of total deposits at March 31, 2014, as compared to 76.1 percent of total deposits at March 31, 2013.

Higher recoveries generated a $3.3 million negative provision for credit losses in the first quarter of 2014.

Gain on sales of investment securities contributed $1.4 million to revenue in the first quarter of 2014.

Net interest margin was 4.02 percent for the first quarter of 2014, an improvement of 4 basis points from the fourth quarter of 2013 and 16 basis points from the first quarter of 2013.

A cash dividend of $0.07 per share, representing a 20 percent payout ratio for the quarter, was paid on or about April 18, 2014.

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.


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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, 2014                                March 31, 2013
                                                        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
costs (1)                              $ 2,257,162      $  28,190          5.07 %    $ 2,073,514      $  26,799          5.24 %
Municipal securities-taxable                31,220            328          4.20 %         46,111            454          3.94 %
Municipal securities-tax exempt (2)         13,202            117          3.54 %         12,803            146          4.57 %
Obligations of other U.S. government
agencies                                    83,565            405          1.94 %         88,982            422          1.90 %
Other debt securities                      382,113          1,804          1.89 %        295,177          1,240          1.68 %
Equity securities                           25,256            404          6.40 %         30,336            291          3.84 %
Federal funds sold                              11             -           0.00 %          5,963              6          0.41 %
Interest-bearing deposits in other
banks                                       33,140             21          0.26 %        140,538             88          0.25 %

Total interest-earning assets            2,825,669         31,269          4.49 %      2,693,424         29,446          4.43 %


Noninterest-earning assets:
Cash and cash equivalents                   77,397                                        66,166
Allowance for loan losses                  (58,655 )                                     (62,639 )
Other assets                               134,683                                       132,976

Total noninterest-earning assets           153,425                                       136,503


Total assets                           $ 2,979,094                                   $ 2,829,927


Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits:
Savings                                $   116,471      $     403          1.40 %    $   114,182      $     458          1.63 %
Money market checking and NOW
accounts                                   591,593            767          0.53 %        567,977            720          0.51 %
Time deposits of $100,000 or more          500,095            887          0.72 %        595,205          1,175          0.80 %
Other time deposits                        492,114          1,164          0.96 %        370,798            806          0.88 %
FHLB advances                               56,886             48          0.34 %          2,890             38          5.33 %
Junior subordinated debentures                  -              -           0.00 %         76,220            594          3.16 %

Total interest-bearing liabilities       1,757,159          3,269          0.75 %      1,727,272          3,791          0.89 %


Noninterest-bearing liabilities:
Demand deposits                            800,027                                       700,637
Other liabilities                           15,628                                        19,015

Total noninterest-bearing
liabilities                                815,655                                       719,652


Total liabilities                        2,572,814                                     2,446,924
Stockholders' equity                       406,280                                       383,003


Total liabilities and stockholders'
equity                                 $ 2,979,094                                   $ 2,829,927


Net interest income                                     $  28,000                                     $  25,655


Cost of deposits                                                           0.52 %                                        0.55 %


Net interest spread (3)                                                    3.74 %                                        3.54 %


Net interest margin (4)                                                    4.02 %                                        3.86 %

(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 $377,000 and $222,000 for the three months ended March 31, 2014 and 2013, respectively.


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(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.

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 March 31, 2014 vs.
                                                             Three Months Ended March 31, 2013
                                                           Increases (Decreases) Due to Change In
                                                     Volume                    Rate                 Total
                                                                          (In thousands)
Interest and dividend income:
Gross loans, net of deferred loan costs           $       2,309          $           (918 )        $ 1,391
Municipal securities-taxable                               (154 )                      28             (126 )
Municipal securities-tax exempt                               4                       (33 )            (29 )
Obligations of other U.S. government agencies               (25 )                       8              (17 )
Other debt securities                                       397                       167              564
Equity securities                                           (54 )                     167              113
Federal funds sold                                           (3 )                      (3 )             (6 )
Interest-bearing deposits in other banks                    (69 )                       2              (67 )

Total interest and dividend income                $       2,405          $           (582 )        $ 1,823


Interest expense:
Savings                                           $           9          $            (64 )        $   (55 )
Money market checking and NOW accounts                       27                        20               47
Time deposits of $100,000 or more                          (177 )                    (111 )           (288 )
Other time deposits                                         281                        77              358
FHLB advances                                                77                       (67 )             10
Junior subordinated debentures                             (297 )                    (297 )           (594 )

Total interest expense                            $         (80 )        $           (442 )        $  (522 )

Change in net interest income                     $       2,485          $           (140 )        $ 2,345

Interest income on a tax-equivalent basis increased $1.8 million, or 6.5 percent, to $31.3 million for the three months ended March 31, 2014 from $29.4 million for the same period in 2013. Interest expense decreased $522,000, or 13.2 percent, to $3.3 million for the three months ended March 31, 2014 compared to $3.8 million for the same period in 2013. For the three months ended March 31, 2014 and 2013, net interest income before provision for credit losses on a tax-equivalent basis was $28.0 million and $25.7 million, respectively. The increase in net interest income before provision for credit losses was primarily attributable to growth in average loan balances and the elimination of interest payments on trust preferred securities ("TPS"). The net interest spread and net interest margin for the three months ended March 31, 2014 were 3.74 percent and 4.02 percent, respectively, compared to 3.54 percent and 3.86 percent, respectively, for the same period in 2013.

Average gross loans increased $183.6 million, or 8.9 percent, to $2.26 billion for the three months ended March 31, 2014 from $2.07 billion for the same period in 2013. Average investment securities increased $61.9 million, or 13.1 percent, to $535.4 million for the three months ended March 31, 2014 from $473.4 million for the same period in 2013. Average interest-earning assets increased $132.2 million, or 4.9 percent, to $2.83 billion for the three months ended March 31, 2014 from $2.69 billion for the same period in 2013. The increase in average interest-earning assets was due mainly to an increase in new loan productions and investment security purchases, primarily offset by a decrease in low-yield interest-bearing deposits in other banks. Average interest-bearing liabilities increased $29.9 million to $1.76 billion for the three months ended March 31, 2014, compared to $1.73 billion for the same period in 2013. The increase in average interest-bearing liabilities resulted primarily from an increase in non-jumbo time deposits, offset by the full redemption of $80.0 million of TPS and the reduction of jumbo time deposits.

The average yield on loans decreased to 5.07 percent for the three months ended March 31, 2014 from 5.24 percent for the same period in 2013. The average yield on investment securities increased to 2.28 percent for the three months ended March 31, 2014 from 2.16 percent for the same period in 2013. The average yield on interest-earning assets increased 6 basis points to 4.49 percent for the three months ended March 31, 2014 from 4.43 percent for the same period in 2013, due primarily to on-going investment of funds


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to higher yielding loans. The average cost on interest-bearing liabilities decreased 14 basis points to 0.75 percent for the three months ended March 31, 2014 from 0.89 percent for the same period in 2013. This decrease was due primarily to the elimination of interest payments on TPS.

Provision for Credit Losses

For the three months ended March 31, 2014, a negative provision for credit losses of $3.3 million was recorded due to higher loan recoveries, compared to zero provision for the same period in 2013. For the three months ended March 31, 2014, recoveries on loans previously charged off increased by $3.5 million to $4.3 million from $714,000 for the same period in 2013. For the three months ended March 31, 2014, charge-offs were $1.6 million, compared to $3.0 million for the same period in 2013. See "Non-Performing Assets" and "Allowance for Loan Losses and Allowance for Off-Balance Sheet Items" for further details.

Non-Interest Income

The following table sets forth the various components of non-interest income for
the periods indicated:



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