HANMI FINANCIAL CORP annual report, FY2011

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Business context and reporting period

Hanmi Financial Corporation’s Form 10-K covers the fiscal year ended December 31, 2011; it is an annual filing, not a standalone fourth-quarter report. The company operates Hanmi Bank, a California community bank focused largely on small and mid-sized businesses, alongside two insurance agencies. Its principal markets and substantially all of its assets and revenues are in California.

Financial performance and condition

  • Profitability: Net income was $28.1 million ($1.38 per diluted share), versus a net loss of $88.0 million ($7.46 per share) in 2010. Fourth-quarter 2011 net income was $5.5 million, or $0.22 per diluted share, compared with $5.3 million, or $0.28 per share, in fourth-quarter 2010.
  • Revenue and net interest: Total revenue was $152.7 million, down from $169.9 million in 2010. GAAP net interest income before credit-loss provision was $101.2 million, versus $105.9 million. Net interest margin improved to 3.68% from 3.55%; net interest spread rose to 3.27% from 3.15%.
  • Credit costs and asset quality: Provision for credit losses fell to $12.1 million from $122.5 million. Net charge-offs were $68.7 million, down from $121.9 million. Non-performing loans were $52.4 million, or 2.70% of gross loans, versus $142.4 million, or 6.38%, at year-end 2010. The allowance was $89.9 million, equal to 171.71% of non-performing loans.
  • Expenses and margins: Non-interest expense declined 13.2% to $84.0 million; the efficiency ratio improved to 67.2% from 73.7%. Return on average assets was 1.01%, versus negative 2.94% in 2010.
  • Balance sheet and liquidity: Total assets were $2.745 billion, down from $2.907 billion; deposits were $2.345 billion, down from $2.467 billion. Gross loans fell 13.1% to $1.939 billion. Cash and cash equivalents were $201.7 million; management reported $700.4 million in cash and marketable securities. The bank also reported $398.9 million of remaining FHLB borrowing capacity and $124.7 million available at the Federal Reserve Discount Window, with no Discount Window borrowings.
  • Capital and debt: Total risk-based capital ratios were 18.66% for Hanmi Financial and 17.57% for the Bank. The Bank’s tangible common equity to tangible assets ratio was 12.48%, above the 9.5% regulatory-order minimum. Junior subordinated debentures totaled $82.4 million; interest payments have been deferred since January 2009, with $9.8 million of accrued interest at year-end. FHLB advances were $3.3 million, versus $153.7 million in 2010.
  • Cash flow: Operating activities provided $49.2 million and investing activities provided $99.3 million; financing activities used $196.6 million. Cash and cash equivalents decreased $48.0 million to $201.7 million.

Material changes versus 2010

  • The return to annual profitability was driven chiefly by the sharp decline in credit-loss provision, alongside lower charge-offs and non-performing loans; net interest income and total revenue nevertheless declined.
  • The company raised $77.1 million net in a November 2011 common-stock offering, following $116.8 million net proceeds from a 2010 offering. Capital ratios improved materially; the offerings also increased the share count.
  • The company continued balance-sheet deleveraging: loans, deposits and wholesale borrowings declined, while core deposits increased to $1.19 billion. Average funding cost fell to 1.41% from 1.70%, and average deposit cost to 1.00% from 1.33%.
  • Hanmi and Woori Finance Holdings terminated their contemplated private-placement agreement in June 2011 and entered a non-binding business-alliance memorandum. Woori later purchased approximately 4% of shares outstanding after the November offering.

Outlook, risks and unusual items

  • Management’s 2012 priorities were to strengthen capital, improve credit quality, comply fully with regulatory requirements, and pursue quality loan growth and new products. The filing gives no quantified earnings or revenue guidance.
  • The Bank remained subject to a 2009 California DFI Final Order and Federal Reserve Written Agreement. Management said the Bank had complied with substantially all requirements and met the specified capital threshold, but the agreements had not been reported as terminated. Dividend, debt and certain business actions remained subject to regulatory approval.
  • Common dividends remained suspended. The company also could not resume trust-preferred interest payments without regulatory consent; management intended to pay deferred interest after the regulatory actions ended.
  • Credit exposure remains concentrated: commercial property, construction and commercial/industrial loans secured by commercial real estate in Southern California represented a substantial share of lending. Large industry concentrations included non-residential building lessors (19.6% of gross loans), accommodation/hospitality (14.6%) and gas stations (13.4%). Economic weakness, collateral values and borrower performance could reverse asset-quality gains.
  • Other material risks include deposit and funding access, interest-rate sensitivity, regulatory changes and capital requirements, and possible limits on tax-loss carryforwards. Management said an ownership change may have occurred in the 2011 offering, potentially affecting use of net operating losses.
  • Unusual items included $2.2 million of expense related to an unconsummated capital offering and a $1.5 million net loss on loan sales in 2011. The company completed a 1-for-8 reverse stock split in December 2011; per-share comparisons were adjusted retroactively.

Most important facts for investors to verify

  • Whether the DFI Final Order and Federal Reserve Written Agreement have since been terminated, and what restrictions remain on dividends, debt and operations.
  • Whether the decline in non-performing loans and credit provisions is durable; review troubled debt restructurings, criticized/classified loans, charge-offs and collateral valuations.
  • Deposit stability and concentration, near-term time-deposit maturities, and the continued availability of secured borrowing facilities.
  • The status and cost of deferred interest on the $82.4 million junior subordinated debentures, and the conditions for resuming payments.
  • The effect of the 2011 equity issuance, reverse split and potential Section 382 ownership change on dilution and tax-loss carryforwards.
  • Reconcile reported year-end non-performing-loan figures and ratios with the detailed loan schedules and definitions; confirm any loans held for sale are treated consistently.