Hanmi Financial - 10-Q quarterly report FY

 

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes þ            No o

     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Exchange Act Rule 12b-2.

Large Accelerated Filer o            Accelerated Filer þ            Non-Accelerated Filer o

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).       Yes o            No þ

     As of May 1, 2006, there were 48,872,578 outstanding shares of the issuer’s Common Stock.

 

 

See Accompanying Notes to Consolidated Financial Statements.

See Accompanying Notes to Consolidated Financial Statements.

See Accompanying Notes to Consolidated Financial Statements.

See Accompanying Notes to Consolidated Financial Statements.

     Basis of Presentation

     Hanmi Financial Corporation (“Hanmi Financial”, “we” or “us”) is a Delaware corporation that is the holding company for Hanmi Bank (the “Bank”) and is subject to the Bank Holding Company Act of 1956, as amended.

     Hanmi Bank, our primary subsidiary, is a commercial bank licensed by the California Department of Financial Institutions. The Bank’s deposit accounts are insured under the Federal Deposit Insurance Act up to applicable limits thereof. The Bank is a member of the Federal Reserve System.

     Our primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money through operation of the Bank. The Bank is a community bank conducting general business banking with its primary market encompassing the multi-ethnic populations of Los Angeles, Orange, San Diego, San Francisco and Santa Clara counties of the State of California. The Bank’s full-service offices are located in business areas where many of the businesses are run by immigrants and other minority groups. The Bank’s client base reflects the multi-ethnic composition of these communities. As of March 31, 2006, the Bank maintained a branch network of 22 locations, serving individuals and small- to medium-sized businesses in its primary market. The Bank also has five loan production offices in California, Georgia, Illinois, Virginia and Washington.

     In the opinion of management, the consolidated financial statements of Hanmi Financial Corporation and subsidiary reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim period ended March 31, 2006, but are not necessarily indicative of the results that will be reported for the entire year. In the opinion of management, the aforementioned consolidated financial statements are in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The interim information should be read in conjunction with our 2005 Annual Report on Form 10-K.

     Descriptions of our significant accounting policies are included in “Note 1 — Summary of Significant Accounting Policies” in our 2005 Annual Report on Form 10-K. Certain reclassifications were made to the prior period’s presentation to conform to the current period’s presentation.

     On January 20, 2005, our Board of Directors declared a two-for-one stock split, to be effected in the form of a 100 percent common stock dividend. The new shares were distributed on February 15, 2005 to shareholders of record on the close of business on January 31, 2005.

     Stock-Based Compensation

     We adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), on January 1, 2006 using the “modified prospective” method. Under this method, awards that are granted, modified or settled after December 31, 2005 are measured and accounted for in accordance with SFAS No. 123(R). Also under this method, expense is recognized for services attributed to the current period for unvested awards that were granted prior to January 1, 2006, based upon the fair value determined at the grant date under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Prior to the adoption of SFAS No. 123(R), we accounted for stock compensation under the intrinsic value method permitted by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”) and related interpretations. Accordingly, we previously recognized no compensation cost for employee stock options that were granted with an exercise price equal to the market value of the underlying common stock on the date of grant.

HANMI FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)

     The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 in 2005.

     SFAS No. 123(R) requires that cash flows resulting from the realization of tax deductions in excess of the compensation cost recognized (excess tax benefits) are to be classified as financing cash flows. Before the adoption of SFAS No. 123(R), we presented all tax benefits realized from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows. For the three months ended March 31, 2006 and 2005, excess tax benefits of $329,000 and $333,000, respectively, are shown as financing cash inflows and operating cash inflows, respectively, in the Consolidated Statements of Cash Flows.

     In November 2005, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. FAS 123R-3, “Transition Election Related to Accounting for the Tax Effects of the Share-Based Payment Awards.” We have adopted the alternative transition method prescribed by Staff Position No. FAS 123R-3.

     In addition, SFAS No. 123(R) requires that any unearned compensation related to awards granted prior to the adoption of SFAS No. 123(R) must be eliminated against the appropriate equity accounts. As a result, the presentation of Shareholders’ Equity was revised to reflect the transfer of the balance previously reported in Unearned Compensation to Additional Paid-In Capital.

HANMI FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)

     At March 31, 2006, we had two stock incentive plans, the Year 2000 Stock Option Plan and the 2004 CEO Stock Option Plan (collectively, the “Plans”), which provide for the granting of non-qualified and incentive stock options and restricted stock awards to employees (including officers and directors).

     Year 2000 Stock Option Plan

     Under the Year 2000 Stock Option Plan, we may grant options for up to 5,430,742 shares of common stock. As of March 31, 2006, 3,071,027 shares were still available for issuance.

     All stock options granted under the Year 2000 Stock Option Plan have an exercise price equal to the fair market value of the underlying common stock on the date of grant. Stock options granted under the Year 2000 Stock Option Plan generally vest based on five years of continuous service and expire ten years from the date of grant. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plans). New shares of common stock may be issued or treasury shares may be utilized upon the exercise of stock options.

     For the three months ended March 31, 2006 and 2005, the estimated weighted-average fair value of options granted under the Year 2000 Stock Option Plan was $5.54 per share and $5.49 per share, respectively. The weighted-average fair value of options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 1.35 percent and 1.07 percent in 2006 and 2005, respectively; expected volatility of 31.9 percent and 33.0 percent in 2006 and 2005, respectively; expected term of 4.9 years and 4.1 years in 2006 and 2005, respectively; and risk-free interest rates of 4.61 percent and 4.11 percent in 2006 and 2005, respectively.

     Expected volatility is determined based on the historical daily volatility of our stock price over a period equal to the expected term of the options granted. The expected term of the options represents the period of time that options granted are expected to be outstanding based primarily on the historical exercise behavior attributable to previous option grants. The risk-free interest rate is based on the U.S. Treasury yield curve at the time of grant for a period equal to the expected term of the options granted.

     The grant date fair value of options granted under the Year 2000 Stock Option Plan during the three months ended March 31, 2006 and 2005 was $50,000 and $250,000, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2006 and 2005 was $1.5 million and $3.4 million, respectively. Cash received from options exercised totaled $426,000 and $1.3 million for the three months ended March 31, 2006 and 2005, respectively. The actual tax benefit realized from tax deductions on options exercised during the three months ended March 31, 2006 and 2005 was $329,000 and $333,000, respectively.

HANMI FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)

     The following is a summary of the transactions under the Year 2000 Stock Option Plan for the three months ended March 31, 2006:

     The following is a summary of the transactions for non-vested stock options under the Year 2000 Stock Option Plan for the three months ended March 31, 2006:

     As of March 31, 2006, the total compensation cost not yet recognized under the Year 2000 Stock Option Plan was $1.3 million with a weighted-average recognition period of 2.8 years.

     As of March 31, 2006, stock options outstanding under the Year 2000 Stock Option Plan were as follows:

HANMI FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)

     2004 CEO Stock Option Plan

     Under the 2004 CEO Stock Option Plan, a total of 350,000 stock options were granted to our Chief Executive Officer. As of March 31, 2006, there were no additional shares available for issuance.

     All stock options granted under the 2004 CEO Stock Option Plan have an exercise price equal to the fair market value of the underlying common stock on the date of grant. Stock options granted under the 2004 CEO Stock Option Plan vest based on six years of continuous service and expire ten years from the date of grant. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plans). New shares of common stock may be issued or treasury shares may be utilized upon the exercise of stock options.

     There were no stock options granted under the 2004 CEO Stock Option Plan during the three months ended March 31, 2006 and 2005.

     The following is a summary of the transactions under the 2004 CEO Stock Option Plan for the three months ended March 31, 2006:

     The following is a summary of the transactions for non-vested stock options under the 2004 CEO Stock Option Plan for the three months ended March 31, 2006:

     As of March 31, 2006, the total compensation cost not yet recognized under the 2004 CEO Stock Option Plan was $1.1 million with a recognition period of 3.8 years.

     As of March 31, 2006, stock options outstanding under the 2004 CEO Stock Option Plan were as follows:

HANMI FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)

     Earnings per share (“EPS”) is calculated on both a basic and a diluted basis. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that then shared in earnings, excluding common shares in treasury.

     The following table presents a reconciliation of the components used to derive basic and diluted EPS for the periods indicated.

     As of March 31, 2006 and 2005, there were 49,554 and 125,554 options, respectively, outstanding that were not included in the computation of diluted EPS because their exercise price was greater than the quarterly average market price of the common shares and, therefore, the effect would be anti-dilutive.

     As part of the service to our small- and medium-sized business customers, Hanmi Bank issues formal loan commitments and lines of credit. These commitments can be either secured or unsecured. They may be in the form of revolving lines of credit for seasonal working capital needs or may take the form of commercial letters of credit and standby letters of credit. Commercial letters of credit facilitate import trade. Standby letters of credit are conditional commitments issued by Hanmi Bank to guarantee the performance of a customer to a third party.

     The following table shows the distribution of the Hanmi Bank’s undisbursed loan commitments as of the dates indicated.

HANMI FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)

     In February 2006, the FASB issued SFAS No. 155,“Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and SFAS No. 140” (“SFAS No. 155”). This Statement:

     SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Early adoption of this statement is allowed. We have not determined the financial impact of the adoption of SFAS No. 155 or whether we will adopt SFAS No. 155 in 2006.

     In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,”which amends the guidance in SFAS No. 140. SFAS No. 156 requires that an entity separately recognize a servicing asset or a servicing liability when it undertakes an obligation to service a financial asset under a servicing contract in certain situations. Such servicing assets or servicing liabilities are required to be measured initially at fair value, if practicable. SFAS No. 156 also allows an entity to measure its servicing assets and servicing liabilities subsequently using either the amortization method, which existed under SFAS No. 140, or the fair value measurement method. SFAS No. 156 will be effective in the fiscal year beginning January 1, 2007. We do not expect the adoption of SFAS No. 156 to have a material impact on our financial condition or results of operations.

     The following is management’s discussion and analysis of the major factors that influenced our financial condition and results of operations for the three months ended March 31, 2006. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2005 and with the unaudited consolidated financial statements and notes thereto set forth in this Report.

     We have established various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in the “Notes to Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2005. 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. 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.

     We believe the allowance for loan losses and allowance for off-balance sheet items are critical accounting policies that require significant estimates and assumptions that are particularly susceptible to significant change in the preparation of our financial statements. See “Financial Condition — Allowance for Loan Losses and Allowance for Off-Balance Sheet Items” and “Results of Operations — Provision for Credit Losses” for a description of the methodology used to determine the allowance for loan losses and allowance for off-balance sheet items.

     The following table sets forth certain selected financial data for the periods indicated.

     Return on Average Tangible Equity – Return on average tangible equity is supplemental financial information determined by a method other than in accordance with GAAP. This non-GAAP measure is used by management in the analysis of Hanmi Financial’s performance. Average tangible equity is calculated by subtracting average goodwill and average core deposit intangible assets from average shareholders’ equity. Banking and financial institution regulators also exclude goodwill and intangibles from shareholders’ 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 financial results of Hanmi Financial, as it provides a method to assess management’s success in utilizing tangible capital. 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 for the periods indicated:

     Tangible Book Value Per Share — Tangible book value per share is supplemental financial information determined by a method other than in accordance with GAAP. This non-GAAP measure is used by management in the analysis of Hanmi Financial’s performance. Tangible book value per share is calculated by subtracting goodwill and core deposit intangible assets from total shareholders’ equity and dividing the difference by the number of shares of common stock outstanding. 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 financial results of Hanmi Financial, as it provides a method to assess management’s success in utilizing tangible capital. 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 for the periods indicated:

     Some of the statements under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-Q 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. 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 additional information concerning these factors, see our Form 10-K filed with the Securities and Exchange Commission on March 16, 2006 under “Risk Factors,” “Interest Rate Risk Management” and “Liquidity and Capital Resources.” 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.

     For the three months ended March 31, 2006, net income was $14.8 million, or $0.30 per diluted share, compared to $13.3 million, or $0.27 per diluted share, for the three months ended March 31, 2005. The 11.0 percent increase in net income for 2006 as compared to 2005 was attributable to increases in net interest margin and average interest-earning assets. Net interest income before provision for credit losses increased $4.5 million, or 14.1 percent, due to ongoing growth in the loan portfolio. The net interest margin was 4.85 percent for the three months ended March 31, 2006, compared to 4.72 percent for the same period of 2005.

     Our results of operations are significantly affected by the provision for credit losses. The provision for credit losses was $3.0 million and $136,000 for the three months ended March 31, 2006 and 2005, respectively, reflecting changes in the classification of certain credits as well as growth in the loan portfolio in the respective quarters.

     Non-interest income increased by $897,000, or 12.2 percent, mainly due to an increase in service charges on deposit accounts and higher gain on sales of loans. Non-interest expenses increased by $34,000, or 0.2 percent, due to effective expense control and a comparatively lower decrease in fair value of embedded options. The efficiency ratio (non-interest expenses divided by the sum of net interest income before provision for credit losses and non-interest income) for the first quarter of 2006 was 39.10 percent, compared to 44.38 percent for the same quarter in 2005.

     The annualized return on average assets was 1.75 percent for the three months ended March 31, 2006, compared to 1.74 percent for the same period of 2005. The annualized return on average shareholders’ equity was 13.83 percent for the three months ended March 31, 2006, and return on average tangible equity was 27.70 percent, compared to 13.32 percent and 29.19 percent, respectively, for the same period in 2005.

     Our earnings depend largely upon the difference between the interest income received from the loan portfolio and other interest-earning assets and the interest paid on deposits and borrowings. The difference is “net interest income.” Net interest income, when expressed as a percentage of average total interest-earning assets, is referred to as the net interest margin. Net interest income is affected by the change 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 loans are affected principally by the demand for such loans, the supply of money available for lending purposes and 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, income tax policies, governmental budgetary matters and the actions of the Federal Reserve Bank.

     For the three months ended March 31, 2006 and 2005, net interest income before provision for credit losses was $36.3 million and $31.9 million, respectively. The net interest spread and net interest margin for the three months ended March 31, 2006 were 3.78 percent and 4.85 percent, respectively, compared to 4.01 percent and 4.72 percent, respectively, for the three months ended March 31, 2005.

     Average interest-earning assets increased 10.9 percent to $3,036.3 million for the three months ended March 31, 2006 from $2,736.8 million for the same period in 2005. Average gross loans increased 13.8 percent to $2,547.4 million for the three months ended March 31, 2006 from $2,239.2 million for the same period in 2005, and average investment securities increased 4.0 percent to $437.7 million for the three months ended March 31, 2006 from $420.8 million for the same period in 2005. Total loan interest income increased by 37.7 percent for the three months ended March 31, 2006 due to the increase in average gross loans outstanding and the increase in the average yield on loans from 6.92 percent for the three months ended March 31, 2005 to 8.38 percent for the same period in 2006. The average interest rate charged on loans increased 146 basis points, reflecting the increase in the average Wall Street Journal Prime Rate of 199 basis points from 5.44 percent for the three months ended March 31, 2005 to 7.43 percent for the same period in 2006. The yield on average interest-earning assets increased by 135 basis points from 6.40 percent for the three months ended March 31, 2005 to 7.75 percent for the three months ended March 31, 2006, reflecting a shift in the mix of interest-earning assets from 81.8 percent loans, 15.4 percent securities and 2.8 percent other interest-earning assets for the three months ended March 31, 2005 to 83.9 percent loans, 14.4 percent securities and 1.7 percent other interest-earning assets for the same period in 2006.

     The majority of interest-earning assets growth was funded by a $291.1 million, or 11.6 percent, increase in average total deposits. Total average interest-bearing liabilities grew by 15.0 percent to $2,215.8 million for the three months ended March 31, 2006 compared to $1,926.4 million for the same period in 2005. The average interest rate paid for interest-bearing liabilities increased by 158 basis points from 2.39 percent for the three months ended March 31, 2005 to 3.97 percent for the three months ended March 31, 2006. In the second half of 2005, due to competitive pricing, the Bank increased its rates on certificates of deposit to maintain relationships with valued customers and to fund loan growth.

     The following table presents the average balances of assets, liabilities and shareholders’ equity; the amount of interest income or 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.