UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the Quarterly Period Ended March 31, 2013
or
For the Transition Period From To
Commission File Number: 000-30421
HANMI FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
3660 Wilshire Boulevard, Penthouse Suite A
Los Angeles, California
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 x No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of April 30, 2013, there were 31,588,767 outstanding shares of the Registrant’s Common Stock.
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
THREE MONTHS ENDED MARCH 31, 2013
TABLE OF CONTENTS
ITEM 1.
Consolidated Balance Sheets (Unaudited)
Consolidated Statements of Operations (Unaudited)
Consolidated Statements of Comprehensive Income (Unaudited)
Consolidated Statements of Changes in Stockholders’ Equity(Unaudited)
Consolidated Statements of Cash Flows (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 1A.
ITEM 5.
ITEM 6.
SIGNATURES
2
PART I — FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands, Except Share Data)
ASSETS
Cash and Due From Banks
Interest-Bearing Deposits in Other Banks
Cash and Cash Equivalents
Restricted Cash
Securities Available-for-Sale, at Fair Value (Amortized Cost of $413,132 as of March 31, 2013 and $443,712 as of December 31, 2012)
Loans Held for Sale, at the Lower of Cost or Fair Value
Loans Receivable, Net of Allowance for Loan Losses of $61,191 as of March 31, 2013 and $63,305 as of December 31, 2012
Accrued Interest Receivable
Premises and Equipment, Net
Other Real Estate Owned, Net
Customers’ Liability on Acceptances
Servicing Assets
Other Intangible Assets, Net
Investment in Federal Home Loan Bank Stock, at Cost
Investment in Federal Reserve Bank Stock, at Cost
Income Tax Assets
Bank-Owned Life Insurance
Prepaid Expenses
Other Assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-Bearing
Interest-Bearing
Total Deposits
Accrued Interest Payable
Bank’s Liability on Acceptances
Federal Home Loan Bank Advances
Junior Subordinated Debentures
Accrued Expenses and Other Liabilities
TOTAL LIABILITIES
STOCKHOLDERS’ EQUITY:
Common Stock, $0.001 Par Value; Authorized 62,500,000 Shares; Issued 32,166,661 Shares (31,588,767 Shares Outstanding) and 32,074,434 shares (31,496,540 Shares Outstanding) as of March 31, 2013 and December 31, 2012
Additional Paid-In Capital
Unearned Compensation
Accumulated Other Comprehensive Income-Unrealized Gain on Securities Available-for-Sale and Interest-Only Strip, Net of Income Taxes of $1,695 as of March 31, 2013 and $1,946 as of December 31, 2012
Accumulated Deficit
Less Treasury Stock, at Cost; 577,894 Shares as of March 31, 2013 and December 31, 2012
TOTAL STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See Accompanying Notes to Consolidated Financial Statements (Unaudited)
3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands, Except Per Share Data)
INTEREST AND DIVIDEND INCOME:
Interest and Fees on Loans
Taxable Interest on Investment Securities
Tax-Exempt Interest on Investment Securities
Interest on Term Federal Funds Sold
Interest on Federal Funds Sold
Interest on Interest-Bearing Deposits in Other Banks
Dividends on Federal Reserve Bank Stock
Dividends on Federal Home Loan Bank Stock
Total Interest and Dividend Income
INTEREST EXPENSE:
Interest on Deposits
Interest on Federal Home Loan Bank Advances
Interest on Junior Subordinated Debentures
Total Interest Expense
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
Provision for Credit Losses
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
NON-INTEREST INCOME:
Service Charges on Deposit Accounts
Insurance Commissions
Remittance Fees
Trade Finance Fees
Other Service Charges and Fees
Bank-Owned Life Insurance Income
Gain on Sales of SBA Loans Guaranteed Portion
Net Loss on Sales of Other Loans
Net Gain on Sales of Investment Securities
Other Operating Income
Total Non-Interest Income
NON-INTEREST EXPENSE:
Salaries and Employee Benefits
Occupancy and Equipment
Deposit Insurance Premiums and Regulatory Assessments
Data Processing
Other Real Estate Owned Expense
Professional Fees
Directors and Officers Liability Insurance
Supplies and Communications
Advertising and Promotion
Loan-Related Expense
Amortization of Other Intangible Assets
Other Operating Expenses
Total Non-Interest Expense
INCOME BEFORE PROVISION FOR INCOME TAXES
Provision for Income Taxes
NET INCOME
EARNINGS PER SHARE:
Basic
Diluted
WEIGHTED-AVERAGE SHARES OUTSTANDING:
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized (Loss) Gain on Securities
Unrealized Holding (Loss) Gain Arising During Period
Less: Reclassification Adjustment for Gain Included in Net Income
Unrealized Gain on Interest Rate Swap
Unrealized Gain on Interest-only Strip of Servicing Assets
Income Tax Benefit Related to Items of Other Comprehensive Income
Other Comprehensive (Loss) Income
COMPREHENSIVE INCOME
5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(UNAUDITED)
(In Thousands, Except Number of Shares)
BALANCE AT JANUARY 1, 2012
Share-Based Compensation Expense
Comprehensive Income:
Net Income
Change in Unrealized Gain on Securities
Available-for-Sale and Interest-Only Strips, Net of Income Taxes
Total Comprehensive Income
BALANCE AT MARCH 31, 2012
BALANCE AT JANUARY 1, 2013
Exercises of Stock Options
Exercises of Stock Warrants
BALANCE AT MARCH 31, 2013
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:
Depreciation and Amortization of Premises and Equipment
Amortization of Premiums and Accretion of Discounts on Investment Securities, Net
Amortization of Servicing Assets
Net (Gain) Loss on Sales of Loans
Loss on Investment in Affordable Housing Partnership
Gain on Sales of Other Real Estate Owned
Gain on Bank-Owned Life Insurance Settlement
Valuation Impairment on Other Real Estate Owned
Lower of Cost or Fair Value Adjustment for Loans Held for Sale
Origination of Loans Held for Sale
Proceeds from Life Insurance
Proceeds from Sales of SBA Loans Guaranteed Portion
Changes in Fair Value of Stock Warrants
Decrease in Restricted Cash
Decrease (Increase) in Accrued Interest Receivable
Increase in Servicing Assets
Decrease (Increase) in Income Tax Assets
Increase in Cash Surrender Value of Bank-Owned Life Insurance
Increase in Prepaid Expenses
Increase in Other Assets
Decrease in Accrued Interest Payable
Increase in Other Liabilities
Net Cash Provided (Used In) By Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Redemption of Federal Home Loan Bank and Federal Reserve Bank Stock
Proceeds from Matured or Called Securities Available-for-Sale
Proceeds from Sales of Securities Available-for-sale
Proceeds from Matured or Called Securities Held to Maturity
Proceeds from Sales of Other Real Estate Owned
Proceeds from Sales of Loans Held for Sale
Net Increase in Loans Receivable
Purchase of Loans Receivable
Purchases of Term Federal Fund
Purchases of Securities Available-for-Sale
Purchases of Premises and Equipment
Net Cash Used In Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) Increase in Deposits
Proceeds from Exercise of Stock Options
Proceeds from Exercise of Stock Warrant
Repayment of Long-Term Federal Home Loan Bank Advances
Redemption of Junior Subordinated Debenture
Net Cash (Used In) Provided By Financing Activities
NET DECREASE IN CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Year
CASH AND CASH EQUIVALENTS AT END OF PERIOD
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Interest Paid
Income Taxes Paid
Non-Cash Activities:
Transfer of Loans Receivable to Other Real Estate Owned
Transfer of Loans Receivable to Loans Held for Sale
Conversion of Stock Warrant into Common Stock
Change in Unrealized Gain or Loss in Accumulated Other Comprehensive Income
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2013 AND 2012
NOTE 1 — BASIS OF PRESENTATION
Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we” or “us”) is a Delaware corporation and is subject to the Bank Holding Company Act of 1956, as amended. Our primary subsidiary is Hanmi Bank (the “Bank”), a California state chartered bank. Our other subsidiaries are Chun-Ha Insurance Services, Inc., a California corporation (“Chun-Ha”), and All World Insurance Services, Inc., a California corporation (“All World”).
In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial Corporation and Subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended March 31, 2013, but are not necessarily indicative of the results that will be reported for the entire year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The aforementioned unaudited consolidated financial statements are in conformity with GAAP. Such interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “2012 Annual Report on Form 10-K”).
The preparation of interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Descriptions of our significant accounting policies are included in“Note 2 — Summary of Significant Accounting Policies” in our 2012 Annual Report on Form 10-K.
NOTE 2 — INVESTMENT SECURITIES
The following is a summary of investment securities available-for-sale:
March 31, 2013:
Mortgage-Backed Securities (1)
Collateralized Mortgage Obligations (1)
U.S. Government Agency Securities
Municipal Bonds-Tax Exempt
Municipal Bonds-Taxable
Corporate Bonds
SBA Loan Pool Securities
Other Securities
Equity Securities
Total Securities Available-for-Sale
December 31, 2012:
8
The amortized cost and estimated fair value of investment securities at March 31, 2013, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2042, expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Within One Year
Over One Year Through Five Years
Over Five Years Through Ten Years
Over Ten Years
Mortgage-Backed Securities
Collateralized Mortgage Obligations
Total
In accordance with FASB ASC 320, “Investments – Debt and Equity Securities,” which amended current other-than-temporary impairment (“OTTI”) guidance, we periodically evaluate our investments for OTTI. There was no OTTI charged during the first quarter of 2013.
Gross unrealized losses on investment securities available-for-sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of March 31, 2013 and December 31, 2012:
Investment Securities Available-for-Sale
All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of March 31, 2013 and December 31, 2012 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status as of March 31, 2013. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.
FASB ASC 320 requires other-than-temporarily impaired investment securities to be written down when fair value is below amortized cost in circumstances where: (1) an entity has the intent to sell a security; (2) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income.
9
The Company does not intend to sell these securities and it is not more likely than not that we will be required to sell the investments before the recovery of its amortized cost bases. In addition, the unrealized losses on municipal and corporate bonds are not considered other-than-temporarily impaired as the bonds are rated investment grade and there are no credit quality concerns with the issuers. Interest payments have been made as scheduled, and management believes this will continue in the future and that the bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of March 31, 2013 and December 31, 2012 are not other-than-temporarily impaired, and therefore, no impairment charges as of March 31, 2013 and December 31, 2012 are warranted.
Realized gains and losses on sales of investment securities, proceeds from sales of investment securities and the tax expense on sales of investment securities were as follows for the periods indicated:
Gross Realized Gains on Sales of Investment Securities
Gross Realized Losses on Sales of Investment Securities
Net Realized Gains on Sales of Investment Securities
Proceeds from Sales of Investment Securities
Tax Expense on Sales of Investment Securities
For the three months ended March 31, 2013, $577,000 of net unrealized loss arose during the period and was included in comprehensive income, and there was a $9,000 gain in earnings resulting from the redemption of investment securities that had previously been recorded as net unrealized gains of $34,000 in comprehensive income. For the three months ended March 31, 2012, $674,000 of net unrealized gains arose during the period and was included in comprehensive income, and there was a $1,000 gain in earnings resulting from the redemption of investment securities that had previously been recorded as net unrealized gains of $4,000.
Investment securities available-for-sale with carrying values of $16.5 million and $18.2 million as of March 31, 2013 and December 31, 2012, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.
10
NOTE 3 — LOANS
The Board of Directors and management review and approve the Bank’s loan policy and procedures on a regular basis to reflect issues such as regulatory and organizational structure changes, strategic planning revisions, concentrations of credit, loan delinquencies and non-performing loans, problem loans, and policy adjustments.
Real estate loans are subject to loans secured by liens or interest in real estate, to provide purchase, construction, and refinance on real estate properties. Commercial and industrial loans consist of commercial term loans, commercial lines of credit, and SBA loans. Consumer loans consist of auto loans, credit cards, personal loans, and home equity lines of credit. We maintain management loan review and monitoring departments that review and monitor pass graded loans as well as problem loans to prevent further deterioration.
Concentrations of Credit: The majority of the Bank’s loan portfolio consists of commercial real estate loans and commercial and industrial loans. The Bank has been diversifying and monitoring commercial real estate loans based on property types, tightening underwriting standards, and portfolio liquidity and management, and has not exceeded certain specified limits set forth in the Bank’s loan policy. Most of the Bank’s lending activity occurs within Southern California.
Loans Receivable
Loans receivable consisted of the following as of the dates indicated:
Real Estate Loans:
Commercial Property
Residential Property
Total Real Estate Loans
Commercial and Industrial Loans:
Commercial Term (1)
Commercial Lines of Credit (2)
SBA Loans (3)
International Loans
Total Commercial and Industrial Loans
Consumer Loans
Total Gross Loans
Allowance for Loans Losses
Deferred Loan Fees
Loans Receivable, Net
Accrued interest on loans receivable was $5.5 million and $5.4 million at March 31, 2013 and December 31, 2012, respectively. At March 31, 2013 and December 31, 2012, loans receivable totaling $614.8 million and $524.0 million, respectively, were pledged to secure advances from the FHLB and the FRB’s federal discount window.
11
The following table details the information on the sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the three months ended March 31, 2013 and 2012:
March 31, 2013
Balance at Beginning of Period
Origination of Loans Held For Sale
Reclassification from Loans Receivable to Loans Held for Sale
Sales of Loans Held for Sale
Principal Payoffs and Amortization
Balance at End of Period
March 31, 2012
Reclassification from Loans Receivable to Other Real Estate Owned
Valuation Adjustments
For the three months ended March 31, 2013, a loan receivable of $3.4 million was reclassified as loans held for sale, and loans held for sale of $28.8 million were sold. For the three months ended March 31, 2012, loans receivable of $37.5 million were reclassified as loans held for sale, and loans held for sale of $28.7 million were sold.
Allowance for Loan Losses and Allowance for Off-Balance Sheet Items
Activity in the allowance for loan losses and allowance for off-balance sheet items was as follows for the periods indicated:
Allowance for Loan Losses:
Actual Charge-Offs
Recoveries on Loans Previously Charged Off
Net Loan Charge-Offs
Provision Charged to Operating Expense
Allowance for Off-Balance Sheet Items:
12
The following table details the information on the allowance for loan losses by portfolio segment for the three months ended March 31, 2013 and 2012:
Beginning Balance
Charge-Offs
Provision
Ending Balance
Ending Balance: Individually Evaluated for Impairment
Ending Balance: Collectively Evaluated for Impairment
Loans Receivable:
Credit Quality Indicators
As part of the on-going monitoring of the credit quality of our loan portfolio, we utilize an internal loan grading system to identify credit risk and assign an appropriate grade (from (0) to (8)) for each and every loan in our loan portfolio. All loans are reviewed by a third-party loan reviewer on a semi-annual basis. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:
Pass: Pass loans, grades (0) to (4), are in compliance in all respects with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or defined weaknesses as defined under “Special Mention (5),” “Substandard (6)” or “Doubtful (7).” This category is the strongest level of the Bank’s loan grading system. It incorporates all performing loans with no credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans. Following are sub categories within the Pass category, or grades (0) to (4):
13
Special Mention: A Special Mention credit, grade (5), has potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses may result in deterioration of the repayment of the debt and result in a Substandard classification. Loans that have significant actual, not potential, weaknesses are considered more severely classified.
Substandard: A Substandard credit, grade (6), has a well-defined weakness that jeopardizes the liquidation of the debt. A credit graded Substandard is not protected by the sound worth and paying capacity of the borrower, or of the value and type of collateral pledged. With a Substandard loan, there is a distinct possibility that the Bank will sustain some loss if the weaknesses or deficiencies are not corrected.
Doubtful: A Doubtful credit, grade (7), is one that has critical weaknesses that would make the collection or liquidation of the full amount due improbable. However, there may be pending events which may work to strengthen the credit, and therefore the amount or timing of a possible loss cannot be determined at the current time.
Loss: A loan classified as Loss, grade (8), is considered uncollectible and of such little value that their continuance as active bank assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans classified Loss will be charged off in a timely manner.
14
Retail
Land
Other
Commercial Term
Unsecured
Secured By Real Estate
Commercial Lines of Credit
SBA Loans
December 31, 2012
15
The following is an aging analysis of past due loans, disaggregated by loan class, as of March 31, 2013 and December 31, 2012:
Construction
Impaired Loans
Loans are considered impaired when non-accrual and principal or interest payments have been contractually past due for 90 days or more, unless the loan is both well-collateralized and in the process of collection; or they are classified as Troubled Debt Restructuring (“TDR”) loans to offer terms not typically granted by the Bank; or when current information or events make it unlikely to collect in full according to the contractual terms of the loan agreements; or there is a deterioration in the borrower’s financial condition that raises uncertainty as to timely collection of either principal or interest; or full payment of both interest and principal is in doubt according to the original contractual terms.
We evaluate loan impairment in accordance with applicable GAAP. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific allocation will be established. Additionally, loans that are considered impaired are specifically excluded from the quarterly migration analysis when determining the amount of the allowance for loan losses required for the period.
The allowance for collateral-dependent loans is determined by calculating the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage, using recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.
16
The following table provides information on impaired loans, disaggregated by loan class, as of the dates indicated:
The following is a summary of interest foregone on impaired loans for the periods indicated:
Interest Income That Would Have Been Recognized Had Impaired Loans
Performed in Accordance With Their Original Terms
Less: Interest Income Recognized on Impaired Loans
Interest Foregone on Impaired Loans
There were no commitments to lend additional funds to borrowers whose loans are included above.
Non-Accrual Loans
Loans are placed on non-accrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on non-accrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Non-accrual loans may be restored to accrual status when principal and interest payments become current and full repayment is expected.
17
The following table details non-accrual loans, disaggregated by loan class, for the periods indicated:
Total Non-Accrual Loans
The following table details non-performing assets as of the dates indicated:
Loans 90 Days or More Past Due and Still Accruing
Total Non-Performing Loans
Other Real Estate Owned
Total Non-Performing Assets
Loans on non-accrual status, excluding loans held for sale, totaled $32.9 million as of March 31, 2013, compared to $37.3 million as of December 31, 2012, representing an 11.8 percent decrease. Delinquent loans (defined as 30 days or more past due), excluding loans held for sale, were $18.4 million as of March 31, 2013, compared to $16.5 million as of December 31, 2012, representing an 11.7 percent increase.
As of March 31, 2013, other real estate owned (“OREO”) consisted of two properties in Virginia and California. For the three months ended March 31, 2013, one property was transferred from loans receivable to other real estate owned at fair value less aggregate selling costs of $513,000, and a valuation adjustment of $126,000 was recorded. As of December 31, 2012, there were two properties located in Illinois and Virginia with a combined carrying value of $774,000 and no valuation adjustment.
Troubled Debt Restructuring
In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,” which clarifies the guidance for evaluating whether a restructuring constitutes a TDR. This guidance is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For the purposes of measuring impairment of loans that are newly considered impaired, the guidance should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011.
As a result of the amendments in ASU 2011-02, we reassessed all restructurings that occurred on or after the beginning of the annual period and identified certain receivables as TDRs. Upon identifying those receivables as TDRs, we considered them impaired and applied the impairment measurement guidance prospectively for those receivables newly identified as impaired.
During the three months ended March 31, 2013, we restructured monthly payments on 4 loans, with a net carrying value of $1.6 million as of March 31, 2013, through temporary payment structure modifications or re-amortization. For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms are probable.
18
The following table details troubled debt restructurings, disaggregated by concession type and by loan type, as of March 31, 2013 and December 31, 2012:
19
The following table details troubled debt restructuring, disaggregated by loan class, for the three months ended March 31, 2013 and 2012:
Retail (1)
Other(2)
Unsecured (3)
Secured By Real Estate (4)
SBA Loans (5)
International Loans (6)
As of March 31, 2013 and December 31, 2012, total TDRs, excluding loans held for sale, were $31.7 million and $35.7 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered to the borrower, for economic or legal reasons related to the borrower’s financial difficulties. Loans are considered to be TDRs if they were restructured through payment structure modifications such as reducing the amount of principal and interest due monthly and/or allowing for interest only monthly payments for six months or less. All TDRs are impaired and are individually evaluated for specific impairment using one of these three criteria: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent.
At March 31, 2013 and December 31, 2012, TDRs, excluding loans held for sale, were subjected to specific impairment analysis, and $3.7 million and $3.6 million, respectively, of reserves relating to these loans were included in the allowance for loan losses.
20
The following table details troubled debt restructurings that defaulted subsequent to the modifications occurring within the previous twelve months, disaggregated by loan class, for the three months ended March 31, 2013 and 2012:
The changes in servicing assets were as follows for the three months ended March 31, 2013 and 2012:
Additions
Amortization
At March 31, 2013 and 2012, we serviced loans sold to unaffiliated parties in the amounts of $316.2 million and $211.1 million, respectively. These represented loans that have been sold for which the Bank continues to provide servicing. These loans are maintained off balance sheet and are not included in the loans receivable balance. All of the loans being serviced were SBA loans.
NOTE 4 — INCOME TAXES
The Company’s effective tax rate was 31.66% and 1.07% with income tax expenses of $4.7 million and $79,000 for the three months ended March 31, 2013 and 2012, respectively. Income tax expense of $4.7 million for the first quarter of 2013 includes favorable discrete items of $779,000, related mainly to adjustments of stock options and state tax attributes. Due to a full valuation allowance against the Company’s entire net deferred tax asset, 1.07% of its effective tax rate for the three months ended March 31, 2012 resulted from 2012 state income taxes. Management concluded that deferred tax assets were more-likely-than-not to be realized, and therefore, maintaining a valuation allowance was no longer required as of March 31, 2013.
As of March 31, 2013, the Company was subject to examination by various federal and state tax authorities for the years ended December 31, 2004 through 2011. The Company was subjected to audits by the Internal Revenue Service for the 2009 tax year, by the California FTB for the 2008 and 2009 tax years, and by the Texas Comptroller of Public Accounts for the 2008 tax year. Management does not anticipate any material changes in our financial statements due to the results of those audits.
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NOTE 5 — STOCKHOLDERS’ EQUITY
Stock Warrants
As part of the agreement dated as of July 27, 2010 with Cappello Capital Corp., the placement agent in connection with our best efforts offering and the financial advisor in connection with our completed rights offering, we issued warrants to purchase 250,000 shares of our common stock for services performed. The warrants have an exercise price of $9.60 per share. According to the agreement, the warrants vested on October 14, 2010 and are exercisable until its expiration on October 14, 2015. The Company followed the guidance of FASB ASC Topic 815- 40, “Derivatives and Hedging—Contracts in Entity’s Own Stock” (“ASC 815- 40”), which establishes a framework for determining whether certain freestanding and embedded instruments are indexed to a company’s own stock for purposes of evaluation of the accounting for such instruments under existing accounting literature. Under GAAP, the issuer is required to measure the fair value of the equity instruments in the transaction as of earlier of (i) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty’s performance is complete. The fair value of the warrants at the date of issuance totaling $2.0 million was recorded as a liability and a cost of equity, which was determined by the Black-Scholes option pricing model. The expected stock volatility was based on historical volatility of our common stock over the expected term of the warrants. We used a weighted average expected stock volatility of 111.46 percent. The expected life assumption was based on the contract term of five years. The dividend yield of zero was based on the fact that we had no intention to pay cash dividends for the term at the grant date. The risk free rate of 2.07 percent used for the warrant was equal to the zero coupon rate in effect at the time of the grant.
Upon re-measuring the fair value of the stock warrants at March 31, 2013, the fair value decreased by $51,000, which we have included in other operating expenses for the three months ended March 31, 2013. We used a weighted average expected stock volatility of 36.99 percent and a remaining contractual life of 2.3 years based on the contract terms. We also used a dividend yield of zero as we have no present intention to pay cash dividends. The risk free rate of 0.47 percent used for the warrant is equal to the zero coupon rate in effect at the end of the measurement period.
NOTE 6 — REGULATORY MATTERS
Risk-Based Capital
Federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 4.0 percent.
In order for banks to be considered “well capitalized,” federal bank regulatory agencies require them to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 10.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require depository institutions to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 5.0 percent.
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The capital ratios of Hanmi Financial and the Bank were as follows as of March 31, 2013 and 2012:
Total Capital (to Risk-Weighted Assets):
Hanmi Financial
Hanmi Bank
Tier 1 Capital (to Risk-Weighted Assets):
Tier 1 Capital (to Average Assets):
Federal Reserve Notices of Proposed Rulemaking
On June 7, 2012, the Board of Governors of the Federal Reserve System approved for publication in the Federal Register three related notices of proposed rulemaking (collectively, the “Notices”) relating to the implementation of revised capital rules to reflect the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as well as the Basel III international capital standards. Among other things, if adopted as proposed, the Notices would establish a new capital standard consisting of common equity Tier 1 capital; increase the capital ratios required for certain existing capital categories and add a requirement for a capital conservation buffer (failure to meet these standards would result in limitations on capital distributions as well as executive bonuses); and add more conservative standards for including securities in regulatory capital, which would phase-out trust preferred securities as a component of Tier 1 capital. In addition, the Notices contemplate the deduction of certain assets from regulatory capital and revisions to the methodologies for determining risk weighted assets, including applying a more risk-sensitive treatment to residential mortgage exposures and to past due or non-accrual loans. The Notices provide for various phase-in periods over the next several years. Hanmi Financial and the Bank will be subject to many provisions in the Notices, but until final regulations are issued pursuant to the Notices, Hanmi Financial cannot predict the actual effect of the Notices.
NOTE 7 — FAIR VALUE MEASUREMENTS
Fair Value Measurements
FASB ASC 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:
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Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.
We record investment securities available-for-sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, impaired loans, other real estate owned, and other intangible assets, are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument below:
Investment Securities Available-for-Sale– The fair values of investment securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve, prepayment speeds, and default rates. Level 1 investment securities include U.S. government and agency debentures and equity securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 investment securities primarily include mortgage-backed securities, municipal bonds, collateralized mortgage obligations, and SBA loan pool securities. In determining the fair value of the securities categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security held as of each reporting date. The broker-dealers use prices obtained from nationally recognized pricing services to value our fixed income securities. The fair value of the municipal bonds is determined based on a proprietary model maintained by the broker-dealers. We review the prices obtained for reasonableness based on our understanding of the marketplace, and also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. Level 3 investment securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available, which necessitates the use of significant unobservable inputs.
As of March 31, 2013, we had a zero coupon tax credit municipal bond of $774,000 compared to $779,000 as of December 31, 2012. This bond was recorded at estimated fair value using a discounted cash flow method, and was measured on a recurring basis with Level 3 inputs. Key assumptions used in measuring the fair value of the tax credit bond as of March 31, 2013 were discount rate and cash flows. The discount rate was derived from the term structure of Bank Qualified (“BQ”) “A-” rated municipal bonds, as the tax credit bond’s guarantee had the similar credit strength. The contractual future cash flows were the tax credits to be received for a remaining life of two years. If the discount rate is adjusted down to the term structure of BQ “BBB-” rating municipal bonds, the tax credit bond’s value would decline by 1.6 percent. We do not anticipate a significant deterioration of the tax credit bond’s credit quality. Management reviews the discount rate on an ongoing basis based on current market rates.
SBA Loans Held for Sale – Small Business Administration (“SBA”) loans held for sale are carried at the lower of cost or fair value. As of March 31, 2013 and December 31, 2012, we had $3.7 million and $7.8 million of SBA loans held for sale, respectively. Management obtains quotes, bids or pricing indication sheets on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At March 31, 2013 and December 31, 2012, the entire balance of SBA loans held for sale was recorded at its cost. We record SBA loans held for sale on a nonrecurring basis with Level 2 inputs.
Non-Performing Loans Held for Sale – We reclassify certain non-performing loans as held for sale when we decide to sell those loans. The fair value of non-performing loans held for sale is generally based upon the quotes, bids or sales contract prices which approximate their fair value. Non-performing loans held for sale are recorded at estimated fair value less anticipated liquidation cost. As of March 31, 2013 and December 31, 2012, we had $2.3 million and $484,000 of non-performing loans held for sale, respectively, which are measured on a nonrecurring basis with Level 2 inputs.
Stock Warrants – The Company followed the guidance of FASB ASC Topic 815- 40, “Derivatives and Hedging—Contracts in Entity’s Own Stock” (“ASC 815- 40”), which establishes a framework for determining whether certain freestanding and embedded instruments are indexed to a company’s own stock for purposes of evaluation of the accounting for such instruments under existing accounting literature. Under GAAP, the issuer is required to measure the fair value of the equity instruments in the transaction as of earlier of (i) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty’s performance is complete. The fair value of the warrants was recorded as a liability and a cost of equity, which was determined by the Black-Scholes option pricing modeling and was measured on a recurring basis with Level 3 inputs.
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
There were no transfers of assets between Level 1 and Level 2 of the fair value hierarchy for the three months ended March 31, 2013. As of March 31, 2013 and December 31, 2012, assets and liabilities measured at fair value on a recurring basis are as follows:
As of March 31, 2013
ASSETS:
Debt Securities Available-for-Sale:
U.S. government Agency Securities
SBA Loan Pools Securities
Total Debt Securities Available-for-Sale
Equity Securities Available-for-Sale:
Financial Services Industry
Total Equity Securities Available-for-Sale
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The table below presents a reconciliation and income statement classification of gains and losses for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2013:
Municipal Bonds-Tax Exempt (1)
Stock Warrants (2)
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
As of March 31, 2013 and December 31, 2012, assets and liabilities measured at fair value on a non-recurring basis are as follows:
Non-Performing Loans Held for Sale (1)
Impaired Loans (2)
Other Real Estate Owned (3)
As of December 31, 2012:
Non-Performing Loans Held for Sale (4)
Impaired Loans (5)
Other Real Estate Owned (6)
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FASB ASC 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring basis or non-recurring basis are discussed above.
The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The estimated fair values of financial instruments were as follows:
Financial Assets:
Loans Receivable, Net of Allowance for Loan Losses
Loans Held for Sale
Investment in Federal Home Loan Bank Stock
Investment in Federal Reserve Bank
Financial Liabilities:
Noninterest-Bearing Deposits
Interest-Bearing Deposits
Borrowings
Off-Balance Sheet Items:
Commitments to Extend Credit
Standby Letters of Credit
The methods and assumptions used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value are explained below:
Cash and Cash Equivalents – The carrying amounts of cash and cash equivalents approximate fair value due to the short-term nature of these instruments (Level 1).
Restricted Cash – The carrying amount of restricted cash approximates its fair value (Level 1).
Investment Securities – The fair value of investment securities, consisting of investment securities available-for-sale, is generally obtained from market bids for similar or identical securities, from independent securities brokers or dealers, or from other model-based valuation techniques described above (Level 1, 2 and 3).
Loans Receivable, Net of Allowance for Loan Losses – The fair value for loans receivable is estimated based on the discounted cash flow approach. The discount rate was derived from the associated yield curve plus spreads and reflects the offering rates offered by the Bank for loans with similar financial characteristics. Yield curves are constructed by product type using the Bank’s loan pricing model for like-quality credits. The discount rates used in the Bank’s model represent the rates the Bank would offer to current borrowers for like-quality credits. These rates could be different from what other financial institutions could offer for these loans. No adjustments have been made for changes in credit within the loan portfolio. It is our opinion that the allowance for loan losses relating to performing and nonperforming loans results in a fair valuation of such loans. Additionally, the fair value of our loans may differ significantly from the values that would have been used had a ready market existed for such loans and may differ materially from the values that we may ultimately realize (Level 3).
Loans Held for Sale – Loans held for sale are carried at the lower of aggregate cost or fair market value, as determined based upon quotes, bids or sales contract prices, or as may be assessed based upon the fair value of the collateral which is obtained from recent real estate appraisals (Level 2). Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustment is typically significant and results in Level 3 classification of the inputs for determining fair value.
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Accrued Interest Receivable – The carrying amount of accrued interest receivable approximates its fair value (Level 1).
Investment in Federal Home Loan Bank and Federal Reserve Bank Stock – The carrying amounts of investment in Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock approximate fair value as such stock may be resold to the issuer at carrying value (Level 1).
Non-Interest-Bearing Deposits – The fair value of non-interest-bearing deposits is the amount payable on demand at the reporting date (Level 2).
Interest-Bearing Deposits – The fair value of interest-bearing deposits, such as savings accounts, money market checking, and certificates of deposit, is estimated based on discounted cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).
Borrowings – Borrowings consist of FHLB advances, junior subordinated debentures and other borrowings. Discounted cash flows based on current market rates for borrowings with similar remaining maturities are used to estimate the fair value of borrowings (Level 3).
Accrued Interest Payable – The carrying amount of accrued interest payable approximates its fair value (Level 1).
Stock Warrants – The fair value of stock warrants is determined by the Black-Scholes option pricing model. The expected stock volatility is based on historical volatility of our common stock over expected term of the warrants. The expected life assumption is based on the contract term. The dividend yield of zero is based on the fact that we have no present intention to pay cash dividends. The risk free rate used for the warrant is equal to the zero coupon rate in effect at the time of the grant (Level 3).
Commitments to Extend Credit and Standby Letters of Credit – The fair values of commitments to extend credit and standby letters of credit are based upon the difference between the current value of similar loans and the price at which the Bank has committed to make the loans (Level 3).
NOTE 8 — SHARE-BASED COMPENSATION
For the three months ended March 31, 2013 and 2012, share-based compensation expense was $98,000 and $51,000, respectively, and the related tax benefits on non-qualified stock options were $12,000 and $4,000, respectively.
Unrecognized Share-Based Compensation Expense
As of March 31, 2013, unrecognized share-based compensation expense was as follows:
Stock Option Awards
Restricted Stock Awards
Total Unrecognized Share-Based Compensation Expense
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The table below provides stock option information for the three months ended March 31, 2013:
Options Outstanding at Beginning of Period
Options Exercised
Options Forfeited
Options Expired
Options Outstanding at End of Period
Options Exercisable at End of Period
There were 1,679 stock options exercised during the three months ended March 31, 2013 compared to none during the three months ended March 31, 2012.
Restricted stock awards under the 2007 Plan generally become fully vested after three to five years of continued employment from the date of grant. Hanmi Financial becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted stock awards when the restrictions are released and the shares are issued. Restricted stock awards are forfeited if officers and employees terminate prior to the lapsing of restrictions. Forfeitures of restricted stock awards are treated as cancelled shares.
The table below provides information for restricted stock awards for the three months ended March 31, 2013:
Restricted Stock at Beginning of Period
Restricted Stock Vested
Restricted Stock at End of Period
NOTE 9 — EARNINGS PER SHARE
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. Unvested restricted stock is excluded from the calculation of weighted-average common shares for basic EPS. For diluted EPS, weighted-average common shares include the impact of restricted stock under the treasury method.
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The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
Three Months Ended March 31:
Basic EPS
Effect of Dilutive Securities - Options, Warrants and Unvested Restricted Stock
Diluted EPS
For the three months ended March 31, 2013 and 2012, there were 76,625 and 373,650 options, warrants and shares of unvested restricted stock outstanding, respectively, that were not included in the computation of diluted EPS because their effect would be anti-dilutive.
NOTE 10 — OFF-BALANCE SHEET COMMITMENTS
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to the risk involved with on-balance sheet items recognized in the Consolidated Balance Sheets.
The Bank’s exposure to credit losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, was based on management’s credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-producing or borrower-occupied properties. The following table shows the distribution of undisbursed loan commitments as of the dates indicated:
Commercial Letters of Credit
Unused Credit Card Lines
Total Undisbursed Loan Commitments
NOTE 11 — LIQUIDITY
Management believes that Hanmi Financial, on a stand-alone basis, has adequate liquid assets to meet its operating cash needs through March 31, 2014. Hanmi Financial redeemed $30.9 million of trust preferred securities (“TPS”) on March 15, 2013, and fully paid off the remaining $51.5 million of TPS by the end of April 2013.
The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash flow requirements of our customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances and brokered deposits. As of March 31, 2013, the Bank had no brokered deposits, and had FHLB advances of $2.8 million compared to $2.9 million as of December 31, 2012.
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We monitor the sources and uses of funds on a regular basis to maintain an acceptable liquidity position. The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 15 percent of its total assets. As of March 31, 2013, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $367.4 million and $364.5 million, respectively, compared to $275.1 million and $272.2 million, respectively, as of December 31, 2012. The Bank’s FHLB borrowings as of March 31, 2013 and December 31, 2012 totaled $2.8 million and $2.9 million, respectively, which represented 0.10 percent of total assets as of both dates.
The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged by the Bank, and the advance rates for qualifying collateral may be adjusted upwards or downwards by the FHLB from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans and investment securities and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.
As a means of augmenting its liquidity, the Bank had an available borrowing source of $104.4 million from the Federal Reserve Discount Window (the “Fed Discount Window”), to which the Bank pledged loans with a carrying value of $147.4 million, and had no borrowings as of March 31, 2013. In December 2012, the Bank established a line of credit with Raymond James & Associates, Inc. for reverse repurchase agreements up to a maximum of $100.0 million.
The Bank has Contingency Funding Plans (“CFPs”) designed to ensure that liquidity sources are sufficient to meet its ongoing obligations and commitments, particularly in the event of a liquidity contraction. The CFPs are designed to examine and quantify its liquidity under various “stress” scenarios. Furthermore, the CFPs provide a framework for management and other critical personnel to follow in the event of a liquidity contraction or in anticipation of such an event. The CFPs address authority for activation and decision making, liquidity options and the responsibilities of key departments in the event of a liquidity contraction.
NOTE 12 — SEGMENT REPORTING
Through our branch network and lending units, we provide a broad range of financial services to individuals and companies located primarily in Southern California. These services include demand, time and savings deposits; and commercial and industrial, real estate and consumer lending. While our chief decision makers monitor the revenue streams of our various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, we consider all of our operations to be aggregated in one reportable operating segment.
NOTE 13 — ACCUMULATED OTHER COMPREHENSIVE INCOME
Activity in accumulated other comprehensive income (loss) for the three months periods ended March 31, 2013 and 2012 was as follows:
For the Three Months Ended March 31, 2013
Other Comprehensive Income before Reclassification
Reclassification from Accumulated Other Comprehensive Income
Period Change
For the Three Months Ended March 31, 2012
For the three months ended March 31, 2013, there was a $9,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the redemption of the available-for-sale securities. The $9,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under non-interest income. The securities were previously recorded as unrealized gains of $34,000 in accumulated other comprehensive income. For the three months ended March 31, 2012, there was a $1,000 reclassification from accumulated other comprehensive income to gain in earnings, which resulted from the redemption of an available-for-sale security. The $1,000 reclassification adjustment out of accumulated other comprehensive income was included in gain on sale of investment securities under non-interest income. The securitiy was previously recorded as an unrealized gain of $4,000 in accumulated other comprehensive income.
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NOTE 14 — SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date of issuance of the financial data included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, or would be required to be recognized in the Consolidated Financial Statements (Unaudited) as of March 31, 2013.
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The following is management’s discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three months ended March 31, 2013. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Annual Report on Form 10-K”) and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013 (this “Report”).
FORWARD-LOOKING STATEMENTS
Some of the statements under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report 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 (the “Exchange Act”). All statements in this Report other than statements of historical fact are “forward –looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial position and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs, plan and availability, plans and objectives of management for future operations, and other similar forecasts and statements of expectation and statements of assumption underlying any of the foregoing. 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. These factors include the following:
failure to maintain adequate levels of capital to support our operations;
a significant number of customers failing to perform under their loans or other extensions of credit;
fluctuations in interest rates and a decline in the level of our interest rate spread;
failure to attract or retain deposits and restrictions on taking brokered deposits;
sources of liquidity available to us and to Hanmi Bank becoming limited or our potential inability to access sufficient sources of liquidity when needed or the requirement that we obtain government waivers to do so;
adverse changes in domestic or global financial markets, economic conditions or business conditions;
regulatory restrictions on Hanmi Bank’s ability to pay dividends to us and on our ability to make payments on our obligations;
significant reliance on loans secured by real estate and the associated vulnerability to downturns in the local real estate market, natural disasters and other variables impacting the value of real estate;
our use of appraisals in deciding whether to make loans secured by real property, which does not ensure that the value of the real property collateral will be sufficient to pay our loans;
failure to attract or retain our key employees;
credit quality and the effect of credit quality on our provision for credit losses and allowance for loan losses;
volatility and disruption in financial, credit and securities markets, and the price of our common stock;
deterioration in financial markets that may result in impairment charges relating to our securities portfolio;
competition and demographic changes in our primary market areas;
global hostilities, acts of war or terrorism, including but not limited to, conflict between North Korea and South Korea;
the effects of litigation against us;
significant government regulations, legislation and potential changes thereto, including as a result of the Dodd-Frank Act; and
other risks described herein and in the other reports we file with the Securities and Exchange Commission;
For a discussion of some of the other factors that might cause such a difference, see the discussion contained in this Report under the heading “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Also see “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Interest Rate Risk Management” and “Capital Resources and Liquidity” in our 2012 Annual Report on Form 10-K, as well as other factors we identify from time to time in our periodic reports, including our Quarterly Reports on Form 10-Q, filed pursuant to the Exchange Act. 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, except as required by law.
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CRITICAL ACCOUNTING POLICIES
We have established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Our significant accounting policies are described in the “Notes to Consolidated Financial Statements” in our 2012 Annual Report on Form 10-K. 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. For a description of these critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our 2012 Annual Report on Form 10-K. 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.
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SELECTED FINANCIAL DATA
The following tables set forth certain selected financial data for the periods indicated.
AVERAGE BALANCES:
Average Gross Loans, Net (1)
Average Investment Securities
Average Interest-Earning Assets
Average Total Assets
Average Deposits
Average Borrowings
Average Interest-Bearing Liabilities
Average Stockholders’ Equity
PER SHARE DATA:
Earnings Per Share—Basic
Earnings Per Share—Diluted
Common Shares Outstanding
Book Value Per Share (2)
PERFORMANCE RATIOS:
Return on Average Assets (3) (4)
Return on Average Stockholders’ Equity (3) (5)
Efficiency Ratio (6)
Net Interest Spread (7)
Net Interest Margin (8)
Average Stockholder’s Equity to Average Total Assets
SELECTED CAPITAL RATIOS: (9)
Total Risk-Based Capital Ratio:
Tier 1 Risk-Based Capital Ratio:
Tier 1 Leverage Ratio:
ASSET QUALITY RATIOS:
Non-Performing Loans to Gross Loans (10)
Non-Performing Assets to Total Assets (11)
Net Loan Charge-Offs to Average Gross Loans (12)
Allowance for Loan Losses to Gross Loans
Allowance for Loan Losses to Total Non-Performing Loans
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Non-GAAP Financial Measures
Tangible Stockholders’ Equity to Tangible Assets Ratio
The ratio of tangible stockholders’ equity to tangible assets 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 Bank’s capital strength. Tangible equity is calculated by subtracting goodwill and other intangible assets from total stockholders’ equity. Banking and financial institution regulators also exclude goodwill and other intangible assets from total stockholders’ 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 capital strength of Hanmi Financial and the Bank. 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:
Total Assets
Less Other Intangible Assets
Tangible Assets
Total Stockholders’ Equity
Tangible Stockholders’ Equity
Total Stockholders’ Equity to Total Assets Ratio
Tangible Common Equity to Tangible Assets Ratio
Tangible Common Equity Per Common Share
HANMI BANK
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EXECUTIVE OVERVIEW
For the first quarter ended March 31, 2013, we recognized consolidated net income of $10.1 million, or $0.32 per diluted share, compared to consolidated net income of $7.3 million, or $0.23 per diluted share, for the first quarter ended March 31, 2012.
Net interest margin was 3.86% in the first quarter of 2013, compared to 3.69% in the first quarter of 2012. Yields on earning assets fell 13 basis points, while cost of deposits continued to improve by 30 basis points.
New loan production in the first quarter of 2013 totaled $178.6 million.
Asset quality improved during the first quarter of 2013, with lower levels of non-performing assets, which were 1.21% of total assets, and with continuing improvements in net charge-offs, which totaled $2.3 million, or 0.45% of average gross loans.
Operating efficiency improved to 56.44% during the first quarter of 2013, down from 57.66% during the fourth quarter of 2012, and 66.56% during the first quarter of 2012, reflecting higher revenues and lower overall operating costs.
The redemption of $30.9 million of TPS was completed on March 15, 2013 and the remaining $51.5 million of TPS was fully paid by the end of April 2013.
Outlook for fiscal 2013
With strong asset quality and the lifting of bank regulatory enforcement requirements, we believe that we are well positioned to take on the following strategic goals in 2013.
First, our primary focus is to strengthen our operating efficiency through strategic cost management and active cross-selling, while deploying our surplus cash through quality loan production. This will be our platform for organic growth and profitability in this new banking era.
Second, we want to increase our marketing and sales competitiveness by retaining, attracting and rewarding talented employees, with a strong focus on relationship-based banking, further enabling us to offer value-added services and products to our customers.
Third, given that our market will continue to evolve and be highly competitive, we want to patiently explore various strategic options to select the right direction that will create the highest stockholders’ value.
RESULTS OF OPERATIONS
Net Interest Income
Our primary source of revenue is net interest income, which is the difference between interest and fees derived from earning assets, and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes 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 our loans are affected principally by changes to interest rates, the demand for such loans, the supply of money available for lending purposes, and other 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, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve Board.
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The following table shows the average balances of assets, liabilities and stockholders’ equity; the amount of interest income and 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.
Interest-Earning Assets:
Gross Loans, Net of Deferred Loan Fees (1)
Municipal Securities—Taxable
Municipal Securities—Tax Exempt (2)
Obligations of Other U.S. Government Agencies
Other Debt Securities
Federal Funds Sold
Term Federal Funds Sold
Total Interest-Earning Assets
Noninterest-Earning Assets:
Allowance for Loan Losses
Total Noninterest-Earning Assets
Interest-Bearing Liabilities:
Savings
Money Market Checking and NOW Accounts
Time Deposits of $100,000 or More
Other Time Deposits
FHLB Advances
Total Interest-Bearing Liabilities
Noninterest-Bearing Liabilities:
Demand Deposits
Other Liabilities
Total Noninterest-Bearing Liabilities
Total Liabilities
Stockholders’ Equity
NET INTEREST INCOME
COST OF DEPOSITS
NET INTEREST SPREAD (3)
NET INTEREST MARGIN (4)
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The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.
Interest and Dividend Income:
Gross Loans, Net of Deferred Loan Fees
Municipal Securities—Tax Exempt
Interest Expense:
Change in Net Interest Income
For the three months ended March 31, 2013 and 2012, net interest income before credit losses on a tax-equivalent basis was $25.7 million and $24.6 million, respectively. Interest income decreased 3.0 percent to $29.4 million for the three months ended March 31, 2013 from $30.3 million for the same period in 2012. Interest expense decreased $2.0 million, or 34.2 percent, to $3.8 million for the three months ended March 31, 2013 compared to $5.8 million for the same period in 2012. The increase in net interest income was primarily attributable to lower deposit costs resulting from the replacement of high-cost time deposits with low-cost deposit products. The net interest spread and net interest margin for the three months ended March 31, 2013 were 3.54 percent and 3.86 percent, respectively, compared to 3.26 percent and 3.69 percent, respectively, for the three months ended March 31, 2012.
Average gross loans increased by $88.4 million, or 4.5 percent, to $2.07 billion for the three months ended March 31, 2013 from $1.99 billion for the same period in 2012. Average investment securities increased by $16.7 million, or 3.9 percent, to $443.1 million for the three months ended March 31, 2013 from $426.4 million for the same period in 2012. Average interest-earning assets increased by $16.8 million, or 0.6 percent, to $2.69 billion for the three months ended March 31, 2013 from $2.68 billion for the same period in 2012. The increase in average interest-earning assets was mainly due to an increase in new loan production. The average balance of our interest bearing liabilities decreased $49.9 million to $1.73 billion for the three months ended March 31, 2013, compared to $1.78 billion for the same period in 2012. The decrease is attributable to the Company’s strategy of lowering overall cost of funds by allowing higher cost deposits to run off (i.e., not renew) when they mature. Total cost of interest bearing liabilities decreased to 0.89 percent for the three months ended March 31, 2013 from 1.30 percent for the same period in 2012. The decline in cost of funds resulted from an improved deposits mix and reduced interest rates on deposits during the first three months of 2013, and the reduction of higher cost time and money market deposits in 2012.
The average yield on interest-earning assets decreased by 13 basis points to 4.43 percent for the three months ended March 31, 2013, from 4.56 percent for the same period in 2012, due primarily to lower yields on loans and interest-earning cash. Yield on average total investment securities and other earning assets increased to 1.71 percent for the three months ended March 31, 2013 from 1.62 percent for the same period in 2012. The increase was due mainly to the increase in dividends from Federal Home Loan Bank stock. The average yield on loans decreased to 5.24 percent for the three months ended March 31, 2013 from 5.58 percent for the same period in 2012. The decrease in loan yields was attributable to new loans originated at lower yields due to low loan rates and high competition in the market. The average cost on interest-bearing liabilities decreased by 41 basis points to 0.89 percent for the three months ended March 31, 2013 from 1.30 percent for the same period in 2012. This decrease was due primarily to a continued shift in funding sources toward lower-cost funds through disciplined deposit pricing while reducing wholesale funds and rate sensitive deposits. There were no brokered deposits for the three months ended March 31, 2013 and 2012.
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For the three months ended March 31, 2013 and 2012, the provisions for credit losses were zero and $2.0 million, respectively. Net charge-offs decreased by $9.0 million, or 79.5 percent, to $2.3 million for the three months ended March 31, 2013 from $11.3 million for the same period in 2012. Non-performing loans decreased to $32.9 million at March 31, 2013 from $50.2 million at March 31, 2012, representing 1.55 percent and 2.54 percent of gross loans, respectively. See “—Financial Condition—Non-Performing Assets” and “—Financial Condition—Allowance for Loan Losses and Allowance for Off-Balance Sheet Items” for further details.
Non-Interest Income
The following table sets forth the various components of non-interest income for the periods indicated:
Non-interest income increased to $8.4 million for the three months ended March 31, 2013, compared to $3.6 million for the same period in 2012. Non-interest income as a percentage of average assets was 1.18 percent for the three months ended March 31, 2013, up from 0.53 percent of average assets for the same period in 2012.
One of our largest sources of non-interest income for the three months ended March 31, 2013 was a net gain from selling the guaranteed portions of SBA loans, which totaled $2.7 million, or 32.2 percent of total non-interest income, compared to none for the same period in 2012. The Company sold $27.2 million of the guaranteed portions of SBA loans during the three months ended March 31, 2013 realizing a gain of $2.7 million.
Net loss on sales of other loans, which includes the valuation adjustment to loans held for sale, decreased to $97,000 for the three months ended March 31, 2013 from $2.4 million for the same period in 2012. The sale of other loans decreased significantly to $1.6 million for the three months ended March 31, 2013 from $28.7 million for the three months ended March 31, 2012. The decrease in net loss on sales of other loans was a direct result of our management’s effort to reduce problem and non-performing assets.
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Non-Interest Expense
The following table sets forth the breakdown of non-interest expense for the periods indicated:
Non-interest expense increased to $19.2 million for the three months ended March 31, 2013, compared to $18.7 million for the same period in 2012. Non-interest expense as a percentage of average assets was 2.71 percent for the three months ended March 31, 2013, down from 2.73 percent of average assets for the same period in 2012.
Salaries and employee benefits increased by $241,000, or 2.7 percent, to $9.4 million for the three months ended March 31, 2013, compared to $9.1 million for the same period in 2012, due mainly to increased bonus provisions and incentive rewards.
Professional fees increased by $1.4 million, or 187.9 percent, to $2.2 million for the three months ended March 31, 2013, compared to $749,000 for the same period in 2012, due mainly to costs associated with the strategic options considered in the beginning of the year as well as legal fees incurred in defending lawsuits in the ordinary course of business.
Reflecting improvement in risk rating after the termination of the bank regulatory enforcement actions, deposit insurance premiums and regulatory assessments decreased by $1.2 million, or 83.3 percent, to $234,000 for the three months ended March 31, 2013 compared to $1.4 million for the same period in 2012.
For the three months ended March 31, 2013, income tax expenses of $4.7 million were recognized on pre-tax income of $14.8 million, representing an effective tax rate of 31.7 percent, compared to income tax expenses of $79,000 on pre-tax income of $7.4 million, representing an effective tax rate of 1.07 percent, for the same period in 2012.
FINANCIAL CONDITION
Investment Portfolio
Investment securities are classified as held-to-maturity or available-for-sale in accordance with GAAP. Those securities that we have the ability and the intent to hold to maturity are classified as “held-to-maturity.” All other securities are classified as “available-for-sale.” There were no trading securities or held-to-maturity securities as of March 31, 2013 and December 31, 2012. Securities classified as held-to-maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts, and available-for-sale securities are stated at fair value. The composition of our investment portfolio reflects our investment strategy of providing a relatively stable source of interest income while maintaining an appropriate level of liquidity. The investment portfolio also provides a source of liquidity by pledging as collateral or through repurchase agreement and collateral for certain public funds deposits.
As of March 31, 2013, the investment portfolio was composed primarily of mortgage-backed securities, U.S. government agency securities, and collateralized mortgage obligations. Investment securities available-for-sale were 100.00 percent of the investment portfolio as of March 31, 2013 and December 31, 2012. Most of the securities carried fixed interest rates. Other than holdings of U.S. government agency securities, there were no investments in securities of any one issuer exceeding 10 percent of stockholders’ equity as of March 31, 2013 and December 31, 2012.
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As of March 31, 2013, securities available-for-sale were $419.9 million, or 15.0 percent of assets, compared to $451.1 million, or 15.6 percent of assets, as of December 31, 2012. For the three months ended March 31, 2013, our securities available-for-sale decreased by $31.2 million, or 6.9 percent, from $451.1 million as of December 31, 2012, in the form of sales, calls, prepayments and scheduled amortization.
The following table summarizes the amortized cost, estimated fair value and unrealized gain (loss) on investment securities as of the dates indicated:
Securities Available-for-Sale:
Total Securities Available-for-Sale:
The amortized cost and estimated fair value of investment securities as of March 31, 2013, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2042, expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
We perform periodic reviews for impairment in accordance with FASB ASC 320. Gross unrealized losses on investment securities available-for-sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of March 31, 2013 and December 31, 2012:
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The Company does not intend to sell these securities and it is not more likely than not that we will be required to sell the investments before the recovery of its amortized cost bases. In addition, the unrealized losses on municipal and corporate bonds are not considered other-than-temporarily impaired as the bonds are rated investment grade and there are no credit quality concerns with the issuers. Interest payments have been made as scheduled, and management believes this will continue in the future and that the bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of March 31, 2013 and December 31, 2012 were not other-than-temporarily impaired, and therefore, no impairment charges as of March 31, 2013 and December 31, 2012 were warranted.
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Loan Portfolio
The following table shows the loan composition by type, excluding loans held for sale, as of the dates indicated.
Consumer Loans (1)
As of March 31, 2013 and December 31, 2012, loans receivable (excluding loans held for sale), net of deferred loan costs and allowance for loan losses, totaled $2.06 billion and $1.99 billion, respectively, representing an increase of $75.1 million, or 3.8 percent. Gross loans increased by $73.1 million, or 3.6 percent, to $2.12 billion as of March 31, 2013, from $2.05 billion as of December 31, 2012. The increase was attributable to increases in commercial real estate loans by 5.6 percent, commercial term loans by 4.1 percent, and SBA loans by 7.0 percent from the year ended December 31, 2012. The increase was partially offset by declines in residential property loans by 6.9 percent and commercial lines of credit by 11.6 percent.
During the three months ended March 31, 2013, total loan disbursement consisted of $138.0 million in commercial real estate loans and $40.3 million in commercial and industrial loans. During the three months ended March 31, 2013, we experienced decreases in loans from $26.5 million of transfers to loans held for sale, $3.0 million of gross charge-offs, $75.5 million of pay-offs and other net amortizations.
As of March 31, 2013, our loan portfolio included the following concentrations of loans to one type of industry that were greater than 10 percent of gross loans outstanding:
Industry
Lessor of Non-Residential Buildings
Accommodation/Hospitality
Gasoline Stations
There was no other concentration of loans to any one type of industry exceeding ten percent of gross loans outstanding.
Non-Performing Assets
Non-performing loans consist of loans on non-accrual status and loans 90 days or more past due and still accruing interest. Non-performing assets consist of non-performing loans and OREO. Loans are placed on non-accrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on non-accrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When an asset is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Non-accrual assets may be restored to accrual status when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans not meeting the criteria for non-accrual. OREO consists of properties acquired by foreclosure or similar means that management intends to offer for sale.
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Except for non-performing loans set forth below, management is not aware of any loans as of March 31, 2013 and December 31, 2012 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan repayment terms, or any known events that would result in the loan being designated as non-performing at some future date. Management cannot, however, predict the extent to which a deterioration in general economic conditions, real estate values, increases in general rates of interest, or changes in the financial condition or business of borrower may adversely affect a borrower’s ability to pay.
The following table provides information with respect to the components of non-performing assets as of the dates indicated:
Non-Performing Loans:
Loans 90 Days or More Past Due and Still Accruing (as to Principal of Interest)
Total Non-Performing Loans (1) (2)
Non-Performing Loans as a Percentage of Total Gross Loans
Non-Performing Assets as a Percentage of Total Assets
Total Debt Restructured Performing Loans
Non-accrual loans totaled $32.9 million as of March 31, 2013, compared to $37.3 million as of December 31, 2012, representing an 11.8 percent decrease. Delinquent loans (defined as 30 days or more past due) were $18.4 million as of March 31, 2013, compared to $16.5 million as of December 31, 2012, representing an 11.7 percent increase. As of March 31, 2013, delinquent loans of $11.9 million were included in non-performing loans. The $14.1 million of delinquent loans as of December 31, 2012 was included in non-performing loans. During the three months ended March 31, 2013, loans totaling $4.3 million were placed on non-accrual status. The additions to non-accrual loans were offset by $3.4 million transferred to loans held for sale, $3.0 million in charge-offs, $1.6 million in principal paydowns and payoffs, and $611,000 in SBA guaranteed portions received.
The ratio of non-performing loans to gross loans also decreased to 1.55 percent at March 31, 2013 from 1.82 percent at December 31, 2012. During the same period, our allowance for loan losses decreased by $2.1 million, or 3.3 percent, to $61.2 million from $63.3 million. Of the $32.9 million non-performing loans, approximately $28.0 million were impaired based on the definition contained in FASB ASC 310, “Receivables,” which resulted in aggregate impairment reserve of $3.8 million as of March 31, 2013. We calculate our allowance for the collateral-dependent loans as the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals less estimated costs to sell. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage, based on recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.
As of March 31, 2013, other real estate owned consisted of two properties with a combined carrying value of $1.0 million and a valuation adjustment of $126,000. For the three months ended March 31, 2013, one property was transferred from loans receivable to other real estate owned at fair value less selling costs of $513,000. As of December 31, 2012, there were properties located in Illinois and Virginia with a combined carrying value of $774,000 and no valuation adjustment.
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We evaluate loan impairment in accordance with applicable GAAP. Loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as an expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific allocation will be established. Additionally, impaired loans are specifically excluded from the quarterly migration analysis when determining the amount of the allowance for loan losses required for the period.
The following table provides information on impaired loans as of the dates indicated:
For the three months ended March 31, 2013, we restructured monthly payments for 4 loans, with a net carrying value of $1.6 million at the time of modification, which we subsequently classified as troubled debt restructured loans. Temporary payment structure modifications included, but were not limited to, extending the maturity date, reducing the amount of principal and/or interest due monthly, and/or allowing for interest only monthly payments for six months or less. As of March 31, 2013, troubled debt restructurings on accrual status totaled $14.7 million, all of which were temporary interest rate and payment reductions and extensions of maturity, and a $928,000 reserve relating to these loans is included in the allowance for loan losses. For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the
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borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms is probable. As of March 31, 2013, troubled debt restructuring on non-accrual status totaled $17.0 million, and a $2.8 million reserve relating to these loans is included in the allowance for loan losses.
As of December 31, 2012, troubled debt restructurings on accrual status totaled $17.0 million, all of which were temporary interest rate and payment reductions, and a $1.5 million reserve relating to these loans is included in the allowance for loan losses. As of December 31, 2012, troubled debt restructuring on non-accrual status totaled $18.8 million, and a $2.1 million reserve relating to these loans is included in the allowance for loan losses.
Provisions to the allowance for loan losses are made quarterly to recognize probable loan losses. The quarterly provision is based on the allowance need, which is determined through analysis involving quantitative calculations based on historic loss rates for general reserves and individual impairment calculations for specific allocations to impaired loans as well as qualitative adjustments. Risk factor calculations are based on eight-quarters of historic loss analysis with 1.5 to 1 weighting given to the most recent four quarters. As homogenous loans are bulk graded, the risk grade is not factored into the historical loss analysis.
To determine general reserve requirements, existing loans are divided into 11 general loan pools of risk-rated loans as well as 3 homogenous loan pools. For risk-rated loans, migration analysis allocates historical losses by loan pool and risk grade to determine risk factors for potential loss inherent in the current outstanding loan portfolio.
Specific reserves are allocated for loans deemed “impaired.” A loan is “impaired” when it is probable that a creditor will be unable to collect all amounts due, including principal and interest, according to the contractual terms and schedules of the loan agreement. The loans identified as impaired are measured using one of the three methods of valuations: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate, (2) the fair market value of the collateral if the loan is collateral dependent, or (3) the loan’s observable market price.
When determining the appropriate level for allowance for loan losses, management considers qualitative adjustments for any factors that are likely to cause estimated credit losses associated with the Bank’s current portfolio to differ from historical loss experience, including, but not limited to, national and local economic and business conditions, volume and geographic concentrations, and problem loan trends.
To systematically quantify the credit risk impact of trends and changes within the loan portfolio, a credit risk matrix is utilized. The qualitative factors are considered on a loan pool by loan pool basis subsequent to, and in conjunction with, a loss migration analysis. The credit risk matrix provides various scenarios with positive or negative impact on the portfolio along with corresponding basis points for qualitative adjustments.
The following table reflects our allocation of allowance for loan and lease losses by loan category as well as the loans receivable for each loan type:
Commercial and Industrial Loans
Unallocated
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The following table sets forth certain information regarding our allowance for loan losses and allowance for off-balance sheet items for the periods presented. Allowance for off-balance sheet items is determined by applying reserve factors according to loan pool and grade as well as actual current commitment usage figures by loan type to existing contingent liabilities.
Ratios:
Net Loan Charge-Offs to Average Gross Loans (1)
Net Loan Charge-Offs to Gross Loans (1)
Allowance for Loan Losses to Average Gross Loans
Net Loan Charge-Offs to Allowance for Loan Losses (1)
Net Loan Charge-Offs to Provision Charged to Operating Expenses
Allowance for Loan Losses to Non-Performing Loans
Balance:
Average Gross Loans During Period
Gross Loans at End of Period
Non-Performing Loans at End of Period
The allowance for loan losses decreased by $2.1 million, or 3.3 percent, to $61.2 million as of March 31, 2013, compared to $63.3 million as of December 31, 2012. The allowance for loan losses as a percentage of gross loans decreased to 2.88 percent as of March 31, 2013 from 3.09 percent as of December 31, 2012. The provision for credit losses decreased by $2.0 million to $0 for the three months ended March 31, 2013 from $2.0 million for the three months ended March 31, 2012. The $196,000 provision for credit losses was offset by the reversal in provision for off-balance items, resulting in a zero provision for credit losses for the three months ended March 31, 2013. The $2.4 million provision for credit losses was offset by the $400,000 reversal in provision for off-balance items, resulting in a $2.0 million provision for credit losses for the three months ended March 31, 2012.
The decrease in the allowance for loan losses as of March 31, 2013 was due primarily to decreases in historical loss rates, and classified assets. Due to these factors, general reserves decreased by $4.5 million, or 15.47 percent, to $24.6 million as of March 31, 2013 as compared to $29.1 million at December 31, 2012. However, total qualitative reserves increased by $2.7 million, or 9.9 percent, to $29.7 million as of March 31, 2013, as compared to $27.0 million as of December 31, 2012, due mainly to an additional qualitative factor related to continued uncertainty in economic conditions.
Total impaired loans, excluding loans held for sale, decreased by $5.1 million, or 9.3 percent, to $49.7 million as of March 31, 2013 as compared to $54.7 million at December 31, 2012. Accordingly, specific reserve allocations associated with impaired loans decreased by $1.3 million, or 21.6 percent, to $4.9 million as of March 31, 2013 as compared to $6.2 million as of December 31, 2012.
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The following table presents a summary of net charge-offs by the loan portfolio.
Charge-offs:
Real Estate Loans
Total Charge-offs
Recoveries:
Total Recoveries
Net Charge-offs
For the three months ended March 31, 2013, total charge-offs were $3.0 million, a decrease of $9.3 million, or 75.5 percent, from $12.3 million for the three months ended March 31, 2012. The decreases in the three months ended March 31, 2013 from the three months ended March 31, 2012 were mainly due to decreases in charge-offs of commercial term loans by $6.4 million and real estate loans by $2.6 million.
The Bank recorded, in other liabilities, an allowance for off-balance sheet exposure, primarily unfunded loan commitments, of $1.6 million and $1.8 million as of March 31, 2013 and December 31, 2012, respectively. The decrease was primarily due to lower reserve factors based on historical loss rates. The Bank closely monitors the borrower’s repayment capabilities while funding existing commitments to ensure losses are minimized. Based on management’s evaluation and analysis of portfolio credit quality and prevailing economic conditions, we believe these reserves are adequate for losses inherent in the loan portfolio and off-balance sheet exposure as of March 31, 2013 and December 31, 2012.
Deposits
The following table shows the composition of deposits by type as of the dates indicated.
Demand – Noninterest-Bearing
Interest-Bearing:
Total deposits decreased by $63.0 million, or 2.6 percent, to $2.33 billion as of March 31, 2013 from $2.40 billion as of December 31, 2012. The decrease in total deposits was attributable mainly to a decrease of $59.0 million in time deposits of $100,000 or more, including $28.5 million of CDs raised from Internet listing services.
Core deposits (defined as demand, savings, money market, NOW accounts and other time deposits) slightly decreased by $3.9 million, or 0.2 percent, to $1,776 million at March 31, 2013 from $1,780 million at December 31, 2012. Time deposits of $250,000 or more also decreased by $18.4 million, or 7.7 percent, to $219.8 million from $238.2 million at December 31, 2012. However, noninterest-bearing demand deposits as a percent of deposits grew to 30.4 percent at March 31, 2013 from 30.1 percent at December 31, 2012. We had no brokered deposits as of March 31, 2013 and December 31, 2012.
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Federal Home Loan Bank Advances and Other Borrowings
FHLB advances and other borrowings mostly take the form of advances from the FHLB of San Francisco and overnight federal funds. At March 31, 2013, advances from the FHLB were $2.8 million, a decrease of $95,000 from $2.9 million at December 31, 2012, with a remaining maturity of 1.13 years at 5.27 percent.
During the second half of 2004, we issued two junior subordinated notes bearing interest at the three-month London Interbank Offered Rate (“LIBOR”) plus 2.90 percent totaling $61.8 million and one junior subordinated note bearing interest at the three-month LIBOR plus 2.63 percent totaling $20.6 million. The outstanding subordinated debentures related to these offerings, the proceeds of which were used to finance the purchase of Pacific Union Bank, totaled $51.5 million and $82.4 million at March 31, 2013 and December 31, 2012, respectively. In March 2013, Hanmi Financial redeemed its TPS II for $30.9 million and fully paid its remaining TPS I and III in the aggregate amount of $51.5 million by the end of April 2013.
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INTEREST RATE RISK MANAGEMENT
Interest rate risk indicates our exposure to market interest rate fluctuations. The movement of interest rates directly and inversely affects the economic value of fixed-income assets, which is the present value of future cash flow discounted by the current interest rate; under the same conditions, the higher the current interest rate, the higher the denominator of discounting. Interest rate risk management is intended to decrease or increase the level of our exposure to market interest rates. The level of interest rate risk can be managed through such means as the changing of gap positions and the volume of fixed-income assets. For successful management of interest rate risk, we use various methods to measure existing and future interest rate risk exposures, giving effect to historical attrition rates of core deposits. In addition to regular reports used in business operations, repricing gap analysis, stress testing and simulation modeling are the main measurement techniques used to quantify interest rate risk exposure.
The following table shows the status of our gap position as of March 31, 2013:
Cash and Due from Bank
Investment Securities:
Fixed Rate
Floating Rate
Loans:
Non-Accrual (1)
Deferred Loan Fees, Discount, and Allowance for Loan Losses
Federal Home Loan Bank and Federal Reserve Bank Stock
Liabilities:
Time Deposits
Repricing Gap
Cumulative Repricing Gap
Cumulative Repricing Gap as a Percentage of Total Assets
Cumulative Repricing Gap as a Percentage of Interest-Earning Assets
The repricing gap analysis measures the static timing of repricing risk of assets and liabilities (i.e., a point-in-time analysis measuring the difference between assets maturing or repricing in a period and liabilities maturing or repricing within the same period). Assets are assigned to maturity and repricing categories based on their expected repayment or repricing dates, and liabilities are assigned based on their repricing or maturity dates. Core deposits that have no maturity dates (demand deposits, savings, money market checking and NOW accounts) are assigned to categories based on expected decay rates.
As of March 31, 2013, the cumulative repricing gap for the three-month period was at an asset-sensitive position and 33.18 percent of interest-earning assets, which decreased from 34.96 percent as of December 31, 2012. The decrease was due mainly to a $100.0 million decrease in interest-bearing deposits in other banks, a $14.6 million decrease in floating rate loans, partially offset by $32.5 million and $31.0 million decreases in fixed rate time deposits and junior subordinated debentures, respectively.
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The cumulative repricing gap for the twelve-month period was at an asset-sensitive position and was 18.87 percent of interest-earning assets, which decreased from 22.32 percent as of December 31, 2012. The decrease was due mainly to a $100.0 million decrease in interest-bearing deposits in other banks, a $9.9 million decrease in fixed rate investment securities and a $10.5 million increase in fixed rate time deposits, partially offset by a $31.0 million decrease in junior subordinated debentures.
The following table summarizes the status of the cumulative gap position as of the dates indicated.
Percentage of Total Assets
Percentage of Interest-Earning Assets
The spread between interest income on interest-earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and interest rate changes substantially affect our financial performance. We emphasize capital protection through stable earnings rather than maximizing yield. In order to achieve stable earnings, we prudently manage our assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits established within our guidelines.
To supplement traditional gap analysis, we perform simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the market value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated). This sensitivity analysis is compared to policy limits, which specify the maximum tolerance level for net interest income exposure over a one-year horizon, given the basis point adjustment in interest rates reflected below.
Rate Shock Table
Rate
200%
100%
-100%
-200%
The estimated sensitivity does not necessarily represent our forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions, including how customer preferences or competitor influences might change.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
Historically, our primary source of capital has been the retention of operating earnings. In order to ensure adequate levels of capital, the Board continually assesses projected sources and uses of capital in conjunction with projected increases in assets and levels of risk. Management considers, among other things, earnings generated from operations, and access to capital from financial markets through the issuance of additional securities, including common stock or notes, to meet our capital needs.
The primary measure of capital adequacy is based on the ratio of risk-based capital to risk-weighted assets. At March 31, 2013, the Bank’s Tier 1 risk-based capital ratio of 17.42 percent, total risk-based capital ratio of 18.69 percent, and Tier 1 leverage capital ratio of 14.07 percent, placed the Bank in the “well capitalized” category, which is defined as institutions with Tier 1 risk-based capital ratio equal to or greater than 6.00%, total risk-based capital ratio equal to or greater than 10.00%, and Tier 1 leverage capital ratio equal to or greater than 5.00%.
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Liquidity – Hanmi Financial
Currently, management believes that Hanmi Financial, on a stand-alone basis, has adequate liquid assets to meet its operating cash needs through March 31, 2014. Hanmi Financial redeemed $30.9 million of its TPS on March 15, 2013, and fully paid the remaining $51.5 million of TPS by the end of April 2013.
Liquidity – Hanmi Bank
Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances and brokered deposits. As of March 31, 2013, the Bank had FHLB advances of $2.8 million compared to $2.9 million as of December 31, 2012. The Bank had no brokered deposits at March 31, 2013 and December 31, 2012.
The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 15 percent of its total assets. As of March 31, 2013, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $367.4 million and $364.5 million, respectively. The Bank’s FHLB borrowings as of March 31, 2013 totaled $2.8 million, representing 0.10 percent of total assets.
As a means of augmenting its liquidity, the Bank had an available borrowing source of $104.4 million from the Federal Reserve Discount Window (the “Fed Discount Window”), to which the Bank pledged loans with a carrying value of $147.4 million, and had no borrowings as of March 31, 2013. Additionally, the Bank is currently in the primary credit program of the Fed Discount Window. The primary credit is available to depository institutions in sound overall condition to meet short-term (typically overnight), backup funding needs. Generally, the primary credit will be granted on a “no-questions-asked,” minimal administered basis with no restrictions. Furthermore, in December 31, 2012, the Bank established a line of credit with Raymond James & Associates, Inc. for reserve repurchase agreements up to a maximum of $100.00 million.
OFF-BALANCE SHEET ARRANGEMENTS
For a discussion of off-balance sheet arrangements, see “Note 10 — Off-Balance Sheet Commitments” of Notes to Consolidated Financial Statements (Unaudited) in this Quarterly Report on Form 10-Q and “Item 1. Business — Off-Balance Sheet Commitments” in our 2012 Annual Report on Form 10-K.
CONTRACTUAL OBLIGATIONS
There have been no material changes to the contractual obligations described in our 2012 Annual Report on Form 10-K.
RECENTLY ISSUED ACCOUNTING STANDARDS
FASB ASU 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (Topic 220)” was issued to address concerns raised in the initial issuance of ASU 2011-05, “Presentation of Comprehensive Income.” For items reclassified out of accumulated other comprehensive income into net income in their entirety, entities must disclose the effect of the reclassification on each affected net income line item. For accumulated other comprehensive income reclassification items that are not reclassified in their entirety into net income, entities must provide a cross reference to other required U.S. GAAP disclosures. This information may be provided either in the notes or parenthetically on the face of the statement that reports net income as long as all the information is disclosed in a single location. However, an entity is prohibited from providing this information parenthetically on the face of the statement that reports net income if it has items that are not reclassified in their entirety into net income. The amendments are effective for annual reporting periods beginning after December 15, 2012 and interim periods within those years. The adoption of FASB ASU 2013-02 did not have a significant impact on our financial condition or result of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures regarding market risks in Hanmi Bank’s portfolio, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Risk Management” and “— Capital Resources and Liquidity.”
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of March 31, 2013, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective as of March 31, 2013.
Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Internal Controls
During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, Hanmi Financial and its subsidiaries are parties to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of Hanmi Financial and its subsidiaries. In the opinion of management, the resolution of any such issues would not have a material adverse impact on the financial condition, results of operations, or liquidity of Hanmi Financial or its subsidiaries.
ITEM 1A. RISK FACTORS
The followings are two additional risk factors and changes to risk factors previously disclosed in our 2012 Annual Report on Form 10-K. Events or circumstances arising from one or more of these risks could adversely affect our business, financial condition, operating results, prospects and the common stock’s price. These risks are not intended to be a comprehensive list of all risks we face and additional risks that we may currently view as not material may also adversely impact our financial condition, business operations and results of operations.
Increases in the level of non-performing loans could adversely affect our business, profitability, and financial condition. Increase in non-performing loans could have an adverse effect on our earnings as a result of related increases in our provisions for loan losses, charge-offs, and other losses related to non-performing loans. An increase in non-performing loans could potentially lead to a decline in earnings and could deplete our capital, leaving the Company undercapitalized. Non-performing loans as of March 31, 2013 were $32.9 million, compared to $37.3 million as of December 31, 2012.
The Bank is subject to federal and state and fair lending laws, and failure to comply with these laws could lead to material penalties. Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, the Consumer Financial Protection Bureau and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to the Bank’s performance under the fair lending laws and regulations could adversely impact the Bank’s rating under the Community Reinvestment Act and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact the Bank’s reputation, business, financial condition and results of operations.
We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects. Our success depends in large part on our ability to attract key people who are qualified and have knowledge and experience in the banking industry in our markets and to retain those people to successfully implement our business objectives. Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, our banking space. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. In addition, legislation and regulations which impose restrictions on executive compensation may make it more difficult for us to retain and recruit key personnel. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel. Furthermore, the employment agreement of Jay S. Yoo, our President and Chief Executive Officer, is set to expire on June 23, 2013, and we have not engaged in any discussions with him to renew that agreement. The unexpected loss of services of one or more of our key personnel of failure to attract or retain such employees could have a material adverse effect on our financial condition and results of operations.
Our board of directors is exploring and evaluating strategic alternatives. Our board of directors is exploring and evaluating potential strategic alternatives that may be available to us. We currently have no agreements or commitments to engage in any specific strategic transactions, and we cannot assure you that our exploration of strategic alternatives will result in any specific action or transaction. We do not intend to provide updates or make further comments regarding the evaluation of strategic alternatives, unless otherwise required by law. Given that our market will continue to evolve and be highly competitive, if we do not select the right strategic option to pursue, we could be experience material adverse effects on our financial condition and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit
Number
Document
56
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 10, 2013
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