Hanmi Financial Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods unless noted. Dollar amounts are in millions unless stated otherwise. Hanmi Financial is a bank holding company whose principal subsidiary, Hanmi Bank, serves customers primarily in Southern California.
Financial performance
| Metric | Q2 2011 | First half 2011 | Comparable 2010 |
|---|---|---|---|
| Interest and dividend income | $32.6 | $66.5 | $36.2 Q2; $74.2 first half |
| Net interest income before credit-loss provision | $25.5 | $51.6 | $26.3 Q2; $53.6 first half |
| Provision for credit losses | $0 | $0 | $37.5 Q2; $95.5 first half |
| Noninterest income | $6.0 | $11.5 | $6.7 Q2; $13.7 first half |
| Noninterest expense | $22.9 | $43.9 | $24.8 Q2; $51.0 first half |
| Net income (loss) | $8.0 | $18.4 | $(29.3) Q2; $(78.7) first half |
| Diluted EPS | $0.05 | $0.12 | $(0.57) Q2; $(1.54) first half |
Net interest margin was 3.65% in Q2 and 3.66% for the first half, up from 3.56% and 3.62%, respectively. The net interest spread was 3.26% for both 2011 periods. Average funding cost fell to 1.41% in Q2 and 1.45% in the first half. The efficiency ratio improved to 72.67% in Q2 and 69.64% for the first half.
For the first half, operating cash flow was $5.0 million, investing cash flow was $163.2 million, and financing cash flow was negative $219.1 million. Cash and cash equivalents declined $50.8 million to $198.9 million. Total assets were $2.71 billion and stockholders’ equity was $198.4 million at June 30.
Financial position, credit and material changes
- Gross loans declined 6.8% from year-end 2010 to $2.11 billion; net loans receivable were $1.96 billion. Management cited loan paydowns, charge-offs, problem-loan sales and a deliberate balance-sheet deleveraging strategy.
- Total deposits fell 2.8% to $2.40 billion, while core deposits increased 12.7% to $1.52 billion. Noninterest-bearing deposits were 25.1% of deposits, up from 22.2% at year-end. The Bank had no brokered deposits.
- FHLB advances fell to $3.5 million from $153.7 million at year-end. The Bank reported $387.7 million of remaining FHLB borrowing capacity at June 30 and $150.5 million available through the Federal Reserve Discount Window, with no Discount Window borrowings.
- The allowance for loan losses declined to $109.0 million from $146.1 million at year-end; the allowance was 5.16% of gross loans. First-half net charge-offs were $38.1 million, down from $65.3 million.
- Credit measures improved year over year, but remained elevated: nonperforming loans were reported at $167.1 million, or 7.91% of gross loans, versus $242.1 million, or 9.67%, at June 30, 2010. Compared with year-end 2010, the reported nonperforming-loan ratio rose from 7.45%. Nonperforming assets were reported at $168.4 million, or 6.21% of assets.
- Bank capital strengthened: total risk-based capital was 14.02%, Tier 1 risk-based capital 12.72%, and Tier 1 leverage 9.70%. Tangible equity to tangible assets was 10.33%, above the 9.5% threshold in the Bank’s regulatory Final Order and the reported well-capitalized benchmarks.
Outlook, risks and unusual items
- Management’s priorities for the rest of 2011 were to reassess capital adequacy, continue improving credit quality, and comply fully with regulatory orders. It planned continued problem-loan sales and targeted efforts to grow quality loans and core deposits. No specific earnings or revenue guidance was provided.
- The Bank and holding company remain subject to a 2009 California DFI Final Order and Federal Reserve Written Agreement. They require plans and actions addressing governance, credit risk, problem assets, reserves, capital and liquidity. Noncompliance could lead to further enforcement, including conservatorship or receivership. Lending, dividends, debt and other actions are subject to restrictions or prior approval.
- Hanmi Financial suspended common dividends and has deferred interest payments on $82.4 million of junior subordinated debentures since January 2009; accrued interest payable on those debentures was $8.3 million at June 30. The parent reported $6.3 million in liquid assets and believed it could meet operating cash needs through December 31, 2011.
- Results benefited substantially from the absence of the large credit-loss provision recorded in 2010. Management said future provisions may still be required. Net interest income before provision declined as loan balances contracted and loan demand remained weak, partly offset by lower deposit costs.
- Q2 expenses included $2.2 million for unsuccessful capital-raising efforts related to a proposed transaction and planned equity offering. First-half loan-sale results included $2.9 million of valuation adjustments, partly offset by $2.5 million of gains on loan sales. A full deferred-tax-asset valuation allowance remained in place, primarily due to the company’s three-year cumulative loss position.
- Management identified ongoing risks from credit quality and real-estate collateral values, interest-rate and funding conditions, regulatory restrictions, and the potential effect of U.S. sovereign-credit or debt-ceiling disruption on funding markets and securities valuations.
Key facts for investors to verify
- Reconcile nonperforming-loan figures by definition: the filing reports $167.1 million including loans held for sale, while a note reports $144.5 million excluding $22.6 million of nonperforming loans held for sale. The filing also corrects the July 21 earnings release, increasing its reported total by $8.6 million to $167.0 million; it says the correction did not affect earnings or EPS.
- Track whether the allowance and zero provision remain adequate as charge-offs continue and problem assets persist; the allowance-to-nonperforming-loan ratio was 65.25%.
- Monitor compliance with the Final Order and Written Agreement, capital buffers, parent-company liquidity, and restrictions on dividends and debenture interest payments.
- Assess whether core-deposit gains can offset total deposit contraction, and whether available secured borrowing capacity remains accessible under changing collateral and market conditions.
- Evaluate the sustainability of earnings given the absence of credit-loss provisions in 2011, declining loan balances, lower noninterest income, and the continued full valuation allowance on deferred tax assets.