HANMI FINANCIAL CORP quarterly report, Q2 FY2012

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Hanmi Financial Corporation — Q2 2012 Form 10-Q

Business context and reporting period

Unaudited results cover the three and six months ended June 30, 2012. Hanmi Financial is a bank holding company whose primary subsidiary, Hanmi Bank, provides commercial banking and lending services, primarily in Southern California.

Financial performance and condition

  • Second-quarter earnings: Net income was $55.8 million ($1.77 per diluted share), compared with $8.0 million ($0.42) in Q2 2011. The increase was chiefly driven by a $47.2 million income tax benefit from releasing deferred-tax-asset valuation allowance, not by a comparable increase in recurring operating earnings.
  • Quarterly operations: Interest and dividend income was $30.0 million; net interest income before credit-loss provision was $25.2 million, versus $25.5 million a year earlier. The provision for credit losses was $4.0 million. Non-interest income was $7.2 million and non-interest expense was $19.8 million. Pre-tax income was $8.6 million, near the prior-year $8.6 million.
  • Six-month results: Net income was $63.1 million ($2.00 diluted EPS), versus $18.4 million ($0.98) in the first half of 2011. Net interest income before provision was $49.7 million, versus $51.6 million; provision for credit losses was $6.0 million; non-interest income was $10.8 million; and non-interest expense was $38.5 million. The $47.1 million net tax benefit substantially explains the earnings increase.
  • Margins and efficiency: Q2 net interest margin was 3.84%, up from 3.65%; net interest spread was 3.45%, up from 3.26%. The six-month margin was 3.77%, versus 3.66%. The Q2 efficiency ratio improved to 61.07% from 72.67%.
  • Balance sheet and funding, June 30: Total assets were $2.85 billion; net loans $1.88 billion; deposits $2.39 billion; total liabilities $2.50 billion; and stockholders’ equity $348.5 million. Cash and cash equivalents were $304.4 million. Borrowings included $3.1 million of FHLB advances and $82.4 million of junior subordinated debentures. Accrued interest on the subordinated debentures was $11.4 million.
  • Cash flow, first half: Operating activities provided $23.1 million, investing activities provided $39.6 million, and financing activities provided $40.0 million. Cash and cash equivalents rose $102.7 million to $304.4 million.
  • Credit quality: Non-performing assets were $46.2 million, or 1.62% of assets, versus $52.6 million, or 1.91%, at year-end 2011. Non-performing loans were $45.1 million, or 2.32% of gross loans. The allowance for loan losses was $71.9 million, 3.69% of gross loans and 159.26% of non-performing loans. Q2 net charge-offs were $13.4 million.

Material changes versus comparable periods

  • Core deposits grew $178.3 million from year-end 2011, while total deposits increased $40.2 million; the bank reported no brokered deposits. High-cost time deposits continued to run off as management shifted funding toward core deposits.
  • Average loans and interest-earning assets declined year over year, reflecting problem-asset dispositions and balance-sheet deleveraging. Lower funding costs partly offset lower interest income.
  • Non-performing loans fell 13.8% from December 2011 and delinquent loans fell 31.0%. Management said Q2 note sales of $44.3 million reduced non-performing assets but contributed to a $5.3 million loss on sales of other loans; first-half loan-sale losses were $7.7 million.
  • The loan-loss allowance declined $18.0 million from year-end. First-half net charge-offs were $24.7 million, down from $38.1 million in the prior-year period.
  • Compared with Q2 2011, non-interest expense fell 13.7%, partly because the prior-year period included $2.2 million of costs related to an unconsummated capital offering. Average shares outstanding rose substantially year over year following the 2011 equity offering; per-share comparisons also reflect the 1-for-8 reverse stock split.

Outlook, commentary, risks and unusual items

  • Management gave no numerical earnings guidance. Its 2012 priorities were strengthening capital, improving credit quality, complying with regulatory requirements, developing products and services, and generating quality new loans.
  • The $53.1 million valuation-allowance release was a major non-recurring earnings item. Management cited expected future taxable income; use of some tax carryforwards is limited by an ownership change, and it estimated about $5.3 million of California net-operating-loss deferred tax assets would be eliminated. The filing’s executive overview cites $53.4 million as the release’s contribution, while the tax note reports $53.1 million; investors should reconcile the figures.
  • The Bank’s 2009 California DFI Final Order was terminated in May 2012 and replaced by a less restrictive MOU. The separate Federal Reserve Written Agreement remained in effect. The MOU requires the Bank to maintain tangible equity to tangible assets of at least 9.5%; reported ratios were 14.34% for the Bank and 12.20% for Hanmi Financial. The agreements restrict dividends, and prior FRB approval is required for interest payments on junior subordinated debentures. Common dividends remained suspended.
  • Management said Hanmi Financial had adequate standalone liquidity through December 31, 2012 and the Bank had adequate liquidity for current obligations. Available sources included FHLB capacity, the Federal Reserve Discount Window and a reverse-repurchase line; access and borrowing capacity could be affected by collateral values, market conditions or lender decisions.
  • Credit risks include real-estate and commercial lending concentrations, borrower performance, collateral values and local economic conditions. Three industries each exceeded 10% of gross loans: lessors of non-residential buildings (16.08%), accommodation/hospitality (14.07%) and gasoline stations (13.36%). Proposed Basel III and other capital-rule changes could affect future regulatory capital, but their impact was not yet determinable.
  • The company reported $227.8 million of total undisbursed loan commitments, including $196.1 million of commitments to extend credit. Management said ordinary-course litigation was not expected to have a material adverse effect. No material subsequent events were reported, and management reported effective disclosure controls.

Important facts for investors to verify

  • How much future earnings depend on the one-time deferred-tax valuation-allowance release, and whether the related deferred tax assets can be realized given ownership-change limitations.
  • The status and terms of the Federal Reserve Written Agreement and DFI MOU, including restrictions on dividends and subordinated-debt interest payments.
  • Whether credit-quality improvements persist after loan sales, and the adequacy of the allowance relative to charge-offs, impaired loans and remaining classified assets.
  • The sustainability of margin and earnings as loan balances, loan yields, funding costs and core-deposit mix change.
  • The usability and terms of reported liquidity facilities, the collateral supporting them, and the effect of large credit commitments and concentrated loan exposures.
  • The tax-release figures differ within the filing ($53.1 million in the tax note versus $53.4 million in the executive overview); confirm the correct amount and presentation.