Hanmi Financial Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The company operates primarily through Hanmi Bank, serving individuals and businesses mainly in Southern California. Financial figures below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2013 / June 30, 2013 | Comparable period / prior date |
|---|---|---|
| Net interest income | $27.2 | $25.2 in Q2 2012 |
| Noninterest income | $8.2 | $7.2 in Q2 2012 |
| Net income; diluted EPS | $9.5; $0.30 | $55.8; $1.77 in Q2 2012 |
| Six-month net income; diluted EPS | $19.6; $0.62 | $63.1; $2.00 in first half 2012 |
| Net interest margin; spread | 4.10%; 3.81% | 3.84%; 3.45% in Q2 2012 |
| Efficiency ratio | 56.55% | 61.07% in Q2 2012 |
| Total assets; shareholders’ equity | $2,773.4; $395.4 | $2,882.5; $378.4 at Dec. 31, 2012 |
| Deposits; gross loans | $2,361.9; $2,187.4 | $2,396.0; $2,048.6 at Dec. 31, 2012 |
| Cash and cash equivalents | $77.9 | $268.0 at Dec. 31, 2012 |
| Operating cash flow, first half | $29.9 | $23.1 in first half 2012 |
| Net investing and financing cash flow, first half | $(103.8) and $(116.3) | Cash declined $190.2 during first half 2013 |
- Q2 pretax income was $15.3, versus $8.6 in Q2 2012. The prior-year comparison is heavily affected by a $47.2 tax benefit in Q2 2012, primarily from reversing a $53.1 deferred-tax-asset valuation allowance. Q2 2013 recorded $5.8 of tax expense; management said a valuation allowance was no longer considered necessary.
- Net interest income improved as deposit costs fell and the company redeemed trust preferred securities. Q2 interest expense was $3.2, down from $4.8 a year earlier; the average cost of interest-bearing liabilities declined to 0.78% from 1.12%. Average loan yield fell to 5.16% from 5.47%, reflecting competitive pricing.
- Noninterest income rose year over year in Q2, but the mix shifted: SBA guaranteed-loan sale gains declined to $2.4 from $5.5, while losses on sales of other loans narrowed to $0.5 from $5.3. First-half noninterest income was $16.5 versus $10.8.
- Noninterest expense was $20.0 in Q2, up 1.0%. Professional fees increased $1.3 to $2.4, attributed mainly to litigation defense and professional/legal work reviewing potential strategic transactions. Deposit insurance and regulatory assessments fell to $0.5 from $1.5.
- Gross loans increased 6.8% from year-end, led by commercial property lending, up 12.8%, and commercial term loans, up 6.4%. New Q2 loan production totaled $163.8. Management identified concentrations in lessors of non-residential buildings (25.41% of gross loans), accommodation/hospitality (16.74%), and gasoline stations (13.71%).
- Credit measures improved: nonperforming loans were $28.0, down 25% from year-end; nonperforming assets were $28.9, or 1.04% of assets. Delinquent loans were $14.9. Net charge-offs were $1.6 in Q2 and $3.9 for the first half, versus $13.4 and $24.7, respectively, in 2012.
- The allowance for loan losses was $59.9, or 2.74% of gross loans, and equaled 214% of nonperforming loans. No provision for credit losses was reported in the income statement for Q2 or the first half; the allowance rollforward shows a $0.5 loan provision offset by a $0.5 reversal of the off-balance-sheet provision for the half year.
- Capital ratios remained above regulatory “well-capitalized” thresholds. The filing reports Hanmi Bank total risk-based capital of 16.53%, Tier 1 risk-based capital of 15.26%, and Tier 1 leverage of 12.88% in its regulatory table. Shareholders’ equity was $395.4; book value per share was $12.51.
Material changes, outlook, and risks
- Hanmi redeemed $30.9 of trust preferred securities in March and reported paying the remaining $51.5 in April, reducing interest expense. The balance sheet reports no junior subordinated debentures at June 30. However, another passage in the filing states $51.5 remained outstanding at June 30; this apparent inconsistency should be checked.
- Management restored a 12-quarter historical-loss look-back period for the loan-loss methodology in Q2, weighting the most recent four quarters at 50%, the next four at 33%, and the oldest four at 17%. Management said the change kept the allowance consistent with the prior quarter; the prior method would have produced a $5.9 negative provision, which management considered imprudent given economic uncertainty.
- Liquidity: management said the holding company had adequate liquid assets for operating needs through June 30, 2014, and the Bank had adequate liquidity for current obligations. The Bank reported no brokered deposits, $2.7 of FHLB advances, $426.5 of remaining FHLB borrowing capacity, and $99.5 available at the Federal Reserve Discount Window with no borrowings there.
- The filing gives no earnings or revenue guidance. Management said it expected the company and Bank to meet the Basel III capital requirements; rules were scheduled to begin taking effect in 2015, with some provisions phased in through 2019.
- Key risks include borrower defaults and credit quality, reliance on commercial real estate and local markets, interest-rate and spread changes, deposit retention and liquidity access, regulatory restrictions, securities valuation, competition, and retention of key personnel. Management described ordinary-course litigation and did not expect its resolution to materially affect financial condition, results, or liquidity. No material subsequent event was reported.
Important facts for investors to verify
- Normalize earnings comparisons for the unusual 2012 deferred-tax valuation-allowance reversal; assess ongoing earnings without that benefit and without securities or loan-sale gains and losses.
- Reconcile the filing’s conflicting statements on junior subordinated debt outstanding after the reported full redemption, and confirm the resulting interest-cost savings.
- Review the loan-loss methodology change, allowance adequacy, charge-off trends, criticized/classified loans, and the status of TDRs; total TDRs were $29.0, including $13.4 on nonaccrual status.
- Assess liquidity and funding after cash fell to $77.9, alongside loan growth and the securities portfolio’s decline; confirm the availability and terms of stated borrowing capacity.
- Track the size and recurrence of legal and strategic-transaction professional fees, as well as exposures from the disclosed industry and Southern California lending concentrations.
- Confirm capital-ratio disclosures against the detailed regulatory tables; the filing contains some differing reported ratio figures across sections.