UNITED STATES SECURITIES AND EXCHANGE COMMSSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ Quarterly report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2000 or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to ___________ HANMI FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 95-4788120 - -------------------------------------------------------------------------------- (State or other jurisdiction (IRS Employer Identification Number) of incorporation or organization) 3660 WILSHIRE BOULEVARD, SUITE PH-A, LOS ANGELES, CALIFORNIA 90010 - -------------------------------------------------------------------------------- (Address of Principal executive offices) (Zip Code) (213) 382-2200 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 / / No /X/ As of September 30, 2000, there were approximately 7,434,457 outstanding shares of the issuer's Common Stock, with par value at $.001. FORM 10-Q INDEX HANMI FINANCIAL CORPORATION
PAGE ---- PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Statements of Financial Condition - September 30, 2000 and December 31, 1999 2 Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2000 and 1999 3 Consolidated Statements of Changes in Shareholders' Equity Nine Months Ended September 30, 2000 and 1999 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 Item 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19 PART II OTHER INFORMATION Other Information 22 Signature 22
Item 1. FINANCIAL STATEMENTS HANMI FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(AMOUNTS IN THOUSANDS) SEPTEMBER 30, DECEMBER 31, 2000 1999 (UNAUDITED) ----------- ----------- ASSETS Cash and due from banks $ 63,528 $ 53,476 Federal funds sold and Securities purchased under agreement to resell 48,600 10,000 ----------- ----------- Cash and cash equivalents 112,128 63,476 Interest-bearing deposits in other financial institutions 100 Federal Reserve Bank stock 1,954 1,686 Investment securities held to maturity, at amortized cost 50,716 66,224 (fair value: September 30,2000-$50,373(unaudited); December 31, 1999-$66,096) Investment securities available for sale, at fair value 153,595 105,014 Interest only strip - at fair value 326 352 (amortized cost: September 30, 2000-$306(unaudited); December 31, 1999-$330) Loans receivable, net of allowance for loan losses of $11,577 (unaudited) and $10,624 at September 30, 2000 and December 31, 1999, repectively) 577,555 456,149 Loans held for sale, at lower of the cost or market 18,155 18,501 Customers liability on acceptances 2,254 1,829 Premises and equipment, net 9,482 8,939 Accrued interest receivable 6,651 4,961 Other real estate owned, net 291 Deferred income taxes, net 5,131 5,608 Servicing asset 1,819 1,500 Goodwill and intangible assets 2,494 2,680 Other assets 3,788 3,240 ----------- ----------- TOTAL $ 946,339 $ 740,259 =========== =========== LIABILITIES AND SHAREHOLDERS EQUITY LIABILITIES: Deposits : Noninterest-bearing $ 222,814 $ 193,165 Interest-bearing: Savings 64,629 54,416 Time deposits of $100,000 or more 191,366 123,488 Other time deposits 265,292 190,699 Money market checking 105,290 93,962 ----------- ----------- Total deposits 849,391 655,730 Accrued interest payable 5,220 3,157 Acceptance outstanding 2,254 1,829 Securities sold under repurchase agreement -- 5,892 Treasury, tax, and loan remittances 3,888 4,500 Other liabilities 5,279 1,321 ----------- ----------- Total liabilities 866,032 672,429 SHAREHOLDERS EQUITY: Common stock, $.001 par value; authorized, 10,000 shares; issued and outstanding, 7,434 shares,and 6,680 shares at September 30, 2000 and December 31,1999, respectively (Note 3) 7 6 Additional paid-in capital 65,415 Accumulated other comprehensive income - unrealized loss on securities available for sale, net of taxes of ($1,525) and ($2,002) at -- September 30, 2000 and December 31,1999, respectively (2,135) (3,079) Unrealized gain (loss) on interest-only strips, net of taxes of $8 and $9 in September 30, 2000 and December 31, 1999, respectively 11 13 Retained earnings 17,009 14,684 ----------- ----------- Total shareholders equity 80,307 67,830 ----------- ----------- TOTAL $ 946,339 $ 740,259 =========== ===========
The accompanying notes are an integral part of these financial statements. 2 HANMI FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
FOR THREE MONTHS ENDED, FOR NINE MONTHS ENDED, ----------------------------- ----------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, (AMOUNTS IN THOUSANDS, EXCEPT) 2000 1999 2000 1999 ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Interest Income: Interest and fees on loan 14,800 10,249 41,174 28,117 Interest on investment se 2,961 2,764 7,940 8,867 Interest on federal funds 1,028 435 2,220 1,095 ------------- ------------- ------------- ------------- Total interest income 18,789 13,448 51,334 38,079 Interest Expense 8,419 4,726 21,192 13,582 ------------- ------------- ------------- ------------- Net Interest Income before 10,370 8,722 30,142 24,497 Provision for Loan Losses 600 - 1,600 400 ------------- ------------- ------------- ------------- Net Interest Income after 9,770 8,722 28,542 24,097 Noninterest income: Service charges on depo 2,234 2,037 6,578 6,144 Gain on sale of loans 235 225 1,169 826 Gain on sale of securities - 24 51 178 Gain on sale of OREO 42 32 42 32 Other service charges an 1,116 838 2,615 2,160 Other income 85 56 226 192 ------------- ------------- ------------- ------------- Total noninterest In 3,712 3,212 10,681 9,532 Noninterest Expense: Salaries and employee b 3,607 3,153 10,114 8,861 Occupancy and equipment 862 637 2,366 1,991 Data processing 507 487 1,556 1,487 Deposit insurance premi 51 38 170 98 Professional fees 213 224 666 721 Advertising 100 122 278 257 Office supplies 157 128 567 430 Communications 157 131 453 396 Other operating 1,280 1,647 3,740 3,536 ------------- ------------- ------------- ------------- Total noninterest Ex 6,934 6,567 19,910 17,777 ------------- ------------- ------------- ------------- Income before Income Tax 6,548 5,367 19,313 15,852 Income Tax Provision 2,701 2,165 8,053 6,538 ------------- ------------- ------------- ------------- Net Income 3,847 3,202 $11,260 $ 9,314 ============= ============= ============= ============= Earning Per Share (Note 3) Basic $ 0.52 $ 0.48 $ 1.52 $ 1.40 Diluted $ 0.52 $ 0.48 $ 1.51 $ 1.39
The accompanying notes are an integral part of these financial statements. 3 HANMI FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Unaudited)
NINE MONTHS ENDED ----------------------------- SEPTEMBER 30, SEPTEMBER 30, (AMOUNTS IN THOUSANDS) 2000 1999 ------------- ------------- Common Stock Balance, beginning of period $ 6 $ 5 Stock Dividends (Note 3) 1 1 ------------- ------------- Balance, end of period $ 7 $ 6 Additional paid-in capital Balance, beginning of period $ 56,206 $ 47,034 Stock Options Exercised 271 Common Stock Issued-Employee Stock Bonus; 20,271 shares @ $ 13.75 278 Stock Dividends (Note 3) 8,931 8,901 ------------- ------------- Balance, end of period $ 65,415 $ 56,206 Retained Earnings Balance, beginning of period $ 14,684 $ 11,582 Net Income 11,260 9,314 Stock Dividends (8,935) (8,904) ------------- ------------- Balance, end of period $ 17,009 $ 11,992 Accumulated Other Comprehensive Income: Balance, beginning of period $ (3,066) $ 352 Change in unrealized gain (loss) on securities available for sale and interest-only strips, net of tax 942 (2,561) ------------- ------------- Balance, end of period $ (2,124) $ (2,209) Total Shareholers' Equity $ 80,307 $ 65,995 ============= ============
The accompanying notes are an integral part of these financial statements. 4 HANMI FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Unaudited)
NINE MONTHS ENDED --------------------------------- SEPTEMBER 30, SEPTEMBER 30 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 11,260 $ 9,314 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 563 513 Provision for loan losses 1,600 400 Proceeds from OREO 671 Stock compensation expense 278 Gain on sale of securities available for sale (51) (178) Gain on sale of loans (1,169) (826) Origination of loans held for sale (19,998) (24,496) Proceeds from sale of loans held for sale 21,513 15,025 Change in: Accrued interest receivable (1,690) 78 Other assets (949) 862 Accrued interest payable 2,063 (323) Other liabilities 3,958 561 ------------- ------------- Net cash provided by operating activities 17,378 2,226 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from interest-bearing deposits 100 2,081 Proceeds from matured or called investment securities avilable for sale 13,419 19,908 Proceeds from matured or called investment securities held to maturity 35,586 55,949 Net increase in loans receivable (123,297) (107,047) Purchase of securities available for sale (60,528) (11,677) Purchase of securities held to maturity (20,078) (17,722) Decrease in I/O strip 24 40 Purchases of premises and equipment (1,106) (362) ------------- ------------- Net cash used in investing activities (155,880) (58,830) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 193,661 61,489 Stock dividend paid in cash for fractional shares (3) (2) Payment made on other borrowing (5,892) - Payment made on treasury, tax and loan remittance (612) 4,280 ------------- ------------- Net cash provided by financing activities 187,154 65,767 ------------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 48,652 9,163 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 63,476 70,729 ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 112,128 $ 79,892 ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 17,099 $ 24,709 Income taxes paid 4,364 5,950 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING, OPERATING AND FINANCING ACTIVITIES - Transfer of retained earning to common stock for stock dividend $ 1 $ 1 Transfer of retained earning to additional paid-in capital for stock dividend 8,931 8,901 Transfer of loan to OREO 291 -
The accompanying notes are an integral part of these financial statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets at September 30, 2000 and December 31, 1999. Income Statements for the three and nine months ended September 30, 2000 and 1999. Statements of Stockholders' Equity for the nine months ended September 30, 2000 and 1999. Statements of Cash Flow for the nine months ended September 30, 2000 and 1999. NOTE 1. HANMI FINANCIAL CORPORATION As of March 14, 2000, Hanmi Financial Corporation ("Hanmi") was incorporated as a bank holding company, which owned Hanmi Bank (the "Bank"). The new corporate structure will permit Hanmi and the Bank greater flexibility in terms of operations, expansion and diversification. Shortly after the incorporation, Hanmi registered its common stock with the Securities and Exchange Commission (the "SEC") pursuant to the terms of a Plan and Agreement of Merger and Reorganization. The registration statement was declared effective on May 4, 2000. At the same time, Hanmi registered its common stock with the SEC pursuant to section 12(g) and the Security Exchange Act of 1934, as amended. The reorganization was consummated with the approval obtained at the shareholder's meeting on May 31, 2000. In the reorganization, the Bank continued its operations as presently conducted under its management. NOTE 2. BASIS OF PRESENTATION In the opinion of management, the consolidated financial statements of Hanmi Financial Corporation and its subsidiary (the "Company") reflect all the material adjustments necessary for a fair presentation of the results for the interim period ended September 30, 2000 but are not necessarily indicative of the results which will be reported for the entire year. In the opinion of management, the aforementioned consolidated financial statements are in conformity with generally accepted accounting principles. Certain reclassifications were made to the prior period's presentation to conform to the current period presentation. NOTE 3. CHANGE IN EQUITY On February 16, 2000, the Bank declared an 11% stock dividend payable on April 3, 2000 to shareholders of record at the close of business on March 1, 2000. The shares and per share data have been retroactively restated to reflect the 11% year 2000 stock dividend. On May 3, 1999, the Bank paid an 11% stock dividend to shareholders of record on April 26, 1999. The shares and per share data for the 1999 dividend have been retroactively restated to reflect the 11 % dividend. On August 16, 2000 the Company granted stock bonus to employee and on September 15, 2000. 20,271 shares were issued at $13.75. The number of outstanding shares and per share data as of September 30, 2000 reflect this transaction. 6 NOTE 4. RECENT ACCOUNTING PRONOUNCEMENT On June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". In June 2000, the FASB issued SFAS No. 138, which amends certain provisions of SFAS 133 to clarify four areas causing difficulties in implementation. The amendment included expanding the normal purchase and sale exemption for supply contracts, permitting the offsetting of certain intercompany foreign currency derivatives and thus reducing the number of third party derivatives, permitting hedge accounting for foreign-currency denominated assets and liabilities, and redefining interest rate risk to reduce sources of ineffectiveness. The Company will adopt SFAS 133 and the corresponding amendments under SFAS 138 on January 1, 2001. In management's opinion, implementation of SFAS 133, as amended by SFAS 138, is not expected to have a material impact to the overall financial position or results of operations of the Company. On December 3, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB" or the "Bulletin") 101, Revenue Recognition in Financial Statements. The Bulletin provided views in applying generally accepted accounting principles to selected revenue recognition issues. The Bulletin further emphasized that revenue should not be recognized until it is realized or realizable and earned. SAB 101, as amended by SAB 101A and 101B, is to be implemented by the Company no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. In management's opinion, implementation of SAB 101 will not have a material impact to the overall financial position or results of operations of the Company. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATION The following is management's discussion and analysis of the major factors that influenced the Company's results of operations and financial condition for the three and nine months ended September 30, 2000. The following table sets forth certain selected financial data concerning the Company for the periods indicated (dollars in thousands):
SEPTEMBER 30, SEPTEMBER 30, 2000 1999 ---------------------- --------------------- AVERAGE BALANCES: Average net loans $536,007 $374,040 Average investment securities 221,320 222,416 Average assets 831,868 714,751 Average deposits 729,997 603,646 Average equity 76,506 63,235 PERFORMANCE RATIOS: Return on average asset (1) 1.80% 1.74% Return on average common equity (1) 19.62% 19.64% Efficiency ratio (2) 48.77% 52.24% Net interest margin (3) 5.31% 5.48% CAPITAL RATIOS (4) Leverage capital ratio (5) 8.20% 9.04% Tier 1 risk-based capital ratio 11.25% 12.50% Total risk-based capital ratio 12.57% 13.75% ASSET QUALITY RATIOS Allowance for loan losses to total gross loans 1.90% 2.27% Allowance for loan losses to non-performing loans 151.04% 350.40% Total non-performing assets and other real estate owned to total assets 0.81% 0.42%
- ---------------------------------------- (1) Calculations are based upon annualized net income. (2) Efficiency ratio is defined as operating expenses divided by the sum of net interest income and other non-interest income. (3) Net interest margin is calculated by dividing annualized net interest income by total average interest-earning assets. (4) The required ratios for a "well-capitalized" institution are 5% leverage capital, 6% tier 1 risk-based capital and 10% total risk-based capital. (5) Calculations are based on average quarterly asset balances of Hanmi Bank. 8 FORWARD-LOOKING INFORMATION Certain matters discussed under this caption may constitute forward-looking statements under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. There can be no assurance that the results described or implied in such forward-looking statements will, in fact, be achieved and actual results, performance, and achievements could differ materially because the business of the Company involves inherent risks and uncertainties. Risks and uncertainties include possible future deteriorating economic conditions in the Company's areas of operation; interest rate risk associated with volatile interest rates and related asset-liability matching risk; liquidity risks; risk of significant non-earning assets, and net credit losses that could occur, particularly in times of weak economic conditions or times of rising interest rates; risks of available for sale securities declining significantly in value as interest rates rise; and regulatory risks associated with the variety of current and future regulations to which the Company is subject. For additional information concerning these factors, see "Risk Factors" contained in the Company's Registration Statement on Form S-4. RESULTS OF OPERATION For the third quarter of 2000, the Company reported net income of $3.8 million or $0.52 per diluted share compared to $3.2 million or $0.48 per diluted share for the same quarter of 1999, representing an increase of $.6 million or 20.14%. The increase in 2000 third quarter net income was primarily attributable to a $1.6 million increase in net interest income before provision for loan losses. The annualized return on average assets was 1.80% for the third quarter of 2000 compared to a return on average assets of 1.74% for the same quarter of 1999, an increase of 0.06%. The annualized return on average equity was 19.62% for the third quarter of 2000, compared to a return on average equity of 19.64% for the same quarter in 1999, a decrease of 0.02%. For the nine months ended September 30, 2000, the Company reported net income of $11.3 million or $1.52 per basic and $1.51 per diluted common share, compared with $9.3 million or $1.40 per basic and $1.39 per diluted common share for the same period of 1999. This represents an increase of $2.0 million or 20.9%. NET INTEREST INCOME The principal component of the Company's earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and other borrowed funds. When net interest income is expressed as a percentage of average interest-earning assets, the result is the net interest margin. The net interest spread is the yield on average interest-earning assets less the average cost of interest-bearing deposits and borrowed funds. For the third quarter of 2000, net interest income before provision for loan losses increased to $10.4 million. Comparing with $8.7 million for the corresponding quarter of 1999, this represented an increase of $1.7 million or 18.9%. For the nine months ended September 30, 2000, net interest income before provision for loan losses increased to $30.1 million, compared with $24.5 million a year ago. This represented 9 an increase of $5.6 million or 23.0%. The increase in net interest income before provision for loan losses was substantially attributable to an increase of $160.8 million in average interest-earning assets, from $596.5 million to $757.3 million, which represented an increase of 27.0%. The yield on average interest-earning assets increased to 9.04% for the nine months ended September 30, 2000, from a yield of 8.51% for the nine months ended September 30, 1999. This increase is primarily due to an increase in the Bank's loan portfolio, which has a higher yield than investment securities, and a result of three consecutive 25 basis point interest rate raise by the Feral Reserve Board in the last quarter of 1999 and first two quarters of year 2000. Approximately 70.8% of Company's interest earning assets were comprised of loans at September 30, 2000, compare to 62.7% at September 30, 1999. For the third quarter of 2000, net interest expenses increased to $8.4 million. Comparing with $4.7 million for the corresponding quarter of 1999, this represented an increase of $3.7 million or 78.1%. The Company's interest expense on deposits for the nine months ended September 30, 2000 increased by approximately $7.6 million or 56.0% to $21.2 million from $13.6 million for the nine months ended September 30, 1999. This increase reflected an increase in the average volume of interest-bearing liabilities and interest rates paid to depositors. Average interest-bearing liabilities were $521.5 million for the nine months ended September 30, 2000, which represented an increase of $109.2 million or 26.5% from average interest-bearing liabilities of $412.3 million for the nine months ended September 30, 1999. The cost of average interest-bearing liabilities increased to 5.42% for the nine months ended September 30, 2000, compared to a cost of 4.39% for the same period of 1999. Overall interest on deposits increased due to an increase in market rates and also due to an increase in competition among our peer banks. The table below presents the average yield on each category of interest-earning assets, average rate paid on each category of interest-bearing liabilities, and the resulting interest rate spread and net yield on interest-earning assets for periods indicated. All average balances are daily average balances.
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 ----------------------------------- ---------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE COST BALANCE EXPENSE COST ----------- ----------- ----------- ----------- ---------- ----------- (DOLLARS IN THOUSANDS) INTEREST EARNING ASSETS: Net loans....................... $536,007 $41,174 10.24% $374,040 $28,117 10.02% Municipal bonds................. 15,800 689 5.81% 12,303 540 5.85% Obligation of other U.S......... Government agencies............. 95,679 4,541 6.33% 103,350 4,758 6.14% Other debt securities........... 64,426 2,710 5.61% 76,451 3,522 6.14% Federal funds sold.............. 45,415 2,220 6.52% 29,115 1,095 5.01% Interest earning deposit........ 0 0 0 1,197 47 5.24% ----------- ----------- ----------- ---------- TOTAL INTEREST EARNING ASSETS $757,327 $51,334 9.04% $596,456 $38,079 8.51% =========== =========== =========== ==========
10 INTEREST BEARING LIABILITIES: Money market checking........... $98,000 $2,762 3.76% $92,007 2,054 2.98% Savings......................... 52,886 1,590 4.01% 54,188 1,656 4.07% Time certificates of deposits 149,082 6,547 5.86% 144,718 4,507 4.15% $100,000 or more................ Other time certificates of 217,712 10,115 6.19% 118,988 5,283 5.92% deposits...................... Other borrowing................. 3,794 178 6.26% 2,412 82 4.53% TOTAL INTEREST BEARING ----------- ----------- LIABILITIES $521,474 $21,192 5.42% $412,313 $13,582 4.39% =========== =========== =========== =========== Net interest income............... $30,142 $24,497 Net interest spread............... 3.62% 4.12% Net interest margin............... 5.31% 5.48%
The following table 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.
SEPTEMBER 30, 2000 OVER SEPTEMBER 30, 1999 ------------------------------------------------------------------ CHANGE DUE TO NET INCREASE ------------------------------------------ ----------------------- VOLUME RATE (DECREASE) ------------------- ---------------------- ----------------------- (DOLLARS IN THOUSANDS) INTEREST INCOME: Interest and fees on net loans............ $12,175 $882 $13,057 Municipal bonds........................... 153 (4) 149 Obligation of other U.S. Government (353) 136 (217) agencies.............................. Other debt securities..................... (554) (258) (812) Federal funds sold........................ 613 512 1,125 Interest earning deposit.................. (47) 0 (47) ------------------- ---------------------- ----------------------- TOTAL INTEREST INCOME: 11,987 1,268 13,255 INTEREST EXPENSE Money market checking..................... 134 574 708 Savings................................... (40) (26) (66) Time certificates of deposit 136 1,904 2,040 $100,000 or more...................... Other time certificates of deposits 4,383 449 4,832 Other borrowing........................... 47 49 96 ------------------- ---------------------- ----------------------- TOTAL INTEREST EXPENSE: 4,660 2,950 7,610 CHANGE IN NET INTEREST INCOME $7,327 $(1,682) $5,645 =================== ====================== =======================
11 NON-INTEREST INCOME Non-interest income includes revenues earned from sources other than interest income. It is primarily comprised of service charges and fees on deposit accounts, other service charges and fees, including fees received from issuing the letter of credit for international trade finance, and gain on sale of SBA loans and mortgage loans. For the third quarter of 2000, non-interest income increased approximately by $500,000 or 15.6% to $3.7 million over the same period in 1999. The increase was primarily attributable to increase in service charges and fees on deposit account due to increase in volume. Service charges and fees on deposit account increased by $197,000 or 9.7% during the quarter ended September 30, 2000 compared to the same period in 1999. Premiums received from the sale of SBA loans slightly increased over the same quarter of 1999 and these increased premiums are expected to extend through the year 2000 as interest rates continue in an upward trend. For the nine months ended September 30, 2000, non-interest income totaled $10.7 million compare with $9.5 million for the same period a year ago. The increase of $1.2 million was attributable to a combination of a $434,000 increase in service charges and fees on deposit accounts, $455,000 increase in other service charges and fees, and $343,000 increase in gain on sale of SBA loans. The fee income generated by trade financing transactions slightly increased over the same period a year ago due to growing activity in international trade as Asian countries recovered from the economic crisis. The breakdown of non-interest income by category is reflected below:
QUARTER ENDED QUARTER ENDED INCREASE (DECREASE) ------------------ ----------------- ------------- -------------- 9/30/00 9/30/99 AMOUNT PERCENT (%) ------------------ ----------------- ------------- -------------- (Dollars in thousands) NON-INTEREST INCOME Service charges on deposits....... $2,234 $2,037 $197 9.67 % Gain on sale of SBA loans......... 235 225 10 4.44 % Gain on sale of Securities........ 0 24 (24) Gain on sale of OREO.............. 42 32 10 31.25% Other service charges and fees.... 1,116 838 278 33.17% Other income...................... 85 56 29 51.79% ------------------ ----------------- ------------- -------------- TOTAL NON-INTEREST INCOME: $3,712 $3,212 $500 15.57% ================== ================= ============= ==============
FOR NINE MONTHS FOR NINE MONTHS INCREASE (DECREASE) ENDED ENDED ------------------ ----------------- -------------- ------------- 9/30/00 9/30//99 AMOUNT PERCENT (%) (Dollars in thousands) NON-INTEREST INCOME Service charges on deposits....... $ 6,578 $ 6,144 $434 7.06 % Gain on sale of SBA loans......... 1,169 826 343 41.53 % Gain on sale of Securities........ 51 178 (127) (71.35)% Gain on sale of OREO.............. 42 32 10 31.25% Other service charges and fees.... 2,615 2,160 455 21.06 % Other income...................... 226 192 34 17.71% ------------------ ----------------- -------------- ------------- TOTAL NON-INTEREST INCOME: $10,681 $9,532 $1,149 12.05% ================== ================= ============== =============
12 NON-INTEREST EXPENSES Non-interest expenses for the third quarter of 2000 increased approximately $367,000 or 5.6% to $6.9 million from $6.6 million for the same period in 1999. The increase was attributable to a combination of internal growth and change in organization structure. Salaries and employee benefits were up by $454,000 primarily due to increase in monthly bonus accrual to reflect current year's performance. Occupancy and equipment expenses were up by $225,000, due to full quarter operation of new branch in San Diego and expansion of Cerritos branch space. For the nine months ended September 30, 2000, non-interest expenses totaled $19.9 million compare with $17.8 million for the same period a year ago. Salaries and employee benefits expenses for the nine months ended September 30, 2000, increased $1.2 million or 14.1% to $10.1 million from $8.9 million for the same period in 1999. This increase was primarily due to expenses associated with annual salary adjustments and addition of new employees due to the Company's recent growth and expansion. The breakdown on non-interest expenses are reflected below:
QUARTER ENDED QUARTER ENDED INCREASE (DECREASE) ------------------ ------------------- ------------- -------------- 9/30/00 9/30/99 AMOUNT PERCENT (%) ------------------ ------------------- ------------- -------------- (Dollars in thousands) NON-INTEREST EXPENSE Salaries and benefits................ $3,607 $3,153 $454 14.40 % Occupancy and equipment.............. 862 637 225 35.32 % Data processing...................... 507 487 20 4.11% Deposit insurance premiums........... 51 38 13 34.21% Professional fees.................... 213 224 (11) (4.91)% Advertising.......................... 100 122 (22) (18.03)% Office supplies...................... 157 128 29 22.66% Communications....................... 157 131 26 19.85% Others............................... 1,280 1,647 (367) (22.28)% ------------------ ------------------- ------------- -------------- TOTAL NON-INTEREST EXPENSE: $6,934 $6,567 $367 5.59% ================== =================== ============= ==============
NINE MONTHS ENDED NINE MONTHS ENDED INCREASE (DECREASE) ------------------ ------------------- ------------- -------------- 9/30/00 9/30/99 AMOUNT PERCENT (%) ------------------ ------------------- ------------- -------------- (Dollars in thousands) NON-INTEREST EXPENSE Salaries and benefits................ $10,114 $8,861 $1,253 14.14% Occupancy and equipment.............. 2,366 1.991 375 18.838% Data processing...................... 1,556 1,487 69 4.64% Deposit insurance premiums........... 170 98 72 73.47% Professional fees.................... 666 721 (55) (7.63)% Advertising.......................... 278 257 21 8.17% Office supplies...................... 567 430 137 31.86% Communications....................... 453 396 57 14.39% Others............................... 3,740 3,536 204 5.77% ------------------ ------------------- ------------- -------------- TOTAL NON-INTEREST EXPENSE: $19,910 $17,777 $2,133 12.00% ================== =================== ============= ==============
13 FINANCIAL CONDITION SUMMARY OF CHANGES IN BALANCE SHEETS SEPTEMBER 30, 2000 COMPARED TO DECEMBER 31, 1999 At September 30, 2000, the Company's total assets increased by $206.1 million or 27.8% to $946.3 million from $740.2 million at December 31, 1999. Net loans, net of unearned loan fees and reserve for loan loss and include loans held for sale, amounted $595.7 million at September 30, 2000, which represents an increase of $121.0 million or 25.5% from $474.7 million at December 31, 1999. Total deposits also increased by $193.7 million or 29.53% to $849.4 million at September 30, 2000 from $655.7 million at December 31, 1999. INVESTMENT SECURITY PORTFOLIO The Company classified its securities as held-to-maturity or available-for-sale under FASB 115. Those securities that the Company has the ability and intent to hold to maturity are classified as "held-to-maturity securities". All other securities are classified as "available-for-sale". The Company owned no trading securities at September 30, 2000. Securities classified as held-to-maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts, and securities as available-for-sale are stated at market value. The securities currently held by the Company are U.S. Treasury bond, U.S. agencies, municipal bonds, corporate bonds, and an investment in a tax credit fund. As of September 30, 2000, held-to-maturity securities totaled $50.7 million and available-for-sale securities totaled $153.6 million, compared to $66.2 million and $105.0 million at December 31, 1999, respectively. Unrealized losses, net of tax effect, on securities available-for-sale were $2.1 million compared with unrealized losses, net of tax effect, of $3.1 million as of year-end 1999.
AT SEPTEMBER 30, 2000 (UNAUDITED) ----------------------------------- AMORTIZED MARKET UNREALIZED COST VALUE GAIN/(LOSS) ---------- ----------- ----------- (Dollars in thousands) HELD- TO-MATURITY U.S. Treasury bond U.S. agencies $ 1,048 $ 1,034 $ (14) Municipal bonds 3,821 3,725 (96) Mortgage backed securities 3,460 3,407 (53) Corporate bonds 42,387 42,207 (180) ---------- ----------- ----------- TOTAL $ 50,716 $ 50,373 $ (343) ========== =========== =========== AVAILABLE-FOR-SALE U.S. agencies $ 60,016 $ 57,360 $ (2,656) Municipal bonds 18,911 18,483 (428) Mortgage backed securities 52,120 51,912 (208) Corporate bonds 26,208 25,840 (368) ---------- ----------- ----------- TOTAL $157,255 $153,595 $ (3,660) ========== =========== ===========
14 LOAN PORTFOLIO The Company carries all loans at face amount, less payments collected, net of deferred loan origination fees and costs and the allowance for possible loan losses. Interest on all loans is accrued daily on a simple interest basis. Once a loan is placed on non-accrual status, accrual of interest is discontinued and previously accrued interest is reversed. Loans are placed on a non-accrual status when principal and interest on a loan is past due 90 days or more, unless a loan is both well-secured and in process of collection. The Company's gross loans were $609.0 million at September 30, 2000. This represented an increase of $122.1 million or 25.1% over gross loans of $486.8 million at December 31, 1999. Total commercial loans, comprised of domestic commercial, trade-financing loans, and SBA commercial loans, at September 30, 2000, were approximately $375.2 million, which represented an increase of $96.2 million or 34.5% from $279.0 million at December 31, 1999. Trade financing loans, at September 30, 2000, totaled $28.4 million, which represented an increase of $10.3 million or 56.9% from $18.1 million at December 31, 1999. This increase is due to the active trade financing as the Asian economy recovered from the economic crisis in late 1998. Small Business Administration loans (SBA loans) increased $15.0 million or 45.9% during the last three-quarter of year 2000 to $47.7 million from $32.7 million at December 31, 1999. The following table shows the Company's loan composition by type:
SEPTEMBER 30, 2000 DECEMBER 31,1999 (UNAUDITED) ----------------------------- ------------------------------- AMOUNT PERCENT AMOUNT PERCENT --------------- ------------- --------------- --------------- LOAN PORTFOLIO COMPOSITION: (Dollars in thousands) Commercial and industrial loans............ $375,165 61.61% $278,958 57.31% Real estate loans.......................... 195,787 32.15% 169,142 34.75% Installment loans.......................... 38,001 6.24% 38,682 7.94% --------------- ------------- --------------- --------------- Total loans outstanding (1)............. 608,953 486,782 Unearned income on loans, net of costs (1,666) (1,508) Less: Allowance for Loan Losses........... (11,577) (10,624) --------------- --------------- NET LOANS RECEIVABLE (1)...................... $595,710 $474,650 =============== ===============
(1) amount included loans held for sale of $18,155 at September 30, 2000 and $ 18,501 at December 31, 1999 At September 30, 2000, the Company's nonperforming assets (nonaccrual loans, loans 90 days or more past due and still accruing interest, restructured loans, and other real estate owned) increased to $7.7 million from $4.1 million last year. The reason was two line of credits, total amount of $4 million, were classified as past due status due to delayed renewal of line of credit. Those lines were renewed in October, and cleared from past due status. Excluding this occurrence, total non-performing assets were about the same level as of December 31, 1999. 15 The following table shows the composition of the Company's nonperforming assets as of the dates indicated.
SEPTEMBER 30, 2000 DECEMBER 31, 1999 (UNAUDITED) ------------------- ------------------ (DOLLARS IN THOUSANDS) Nonaccrual loans ...................... $2,905 $2,953 Loan past due 90 days or more, still accruing .............................. 4,469 79 ------------------- ------------------ Total Nonperforming Loans .......... 7,374 3,032 Other real estate owned ............... 291 ------------------- ------------------ TOTAL NONPERFORMING ASSETS .......... $7,665 $3,032 =================== ==================
ALLOWANCE AND PROVISION FOR LOAN LOSSES The allowance for loan losses represents the amounts that the Company has set aside for the specific purpose of absorbing losses that may occur in the Company's loan portfolio. The provision for loan losses is an expense charged against operating income and added to the allowance for loan losses. Management of the Company continues to carefully monitor the allowance for loan losses in relation to the size of the Company's loan portfolio and known risks or problem loans. At September 30, 2000, the allowance for loan losses increased to $11.6 million, which represented the increase of $953,000 or 9.0% increase, compared to $10.6 million at December 31, 1999. The allowance for loan losses to gross loans ratio was 1.90% at September 30, 2000, which is slightly lower than 2.18% at December 31, 1999, but well above the average ratio of the peer banks based on asset size. The Company provided additional reserve of $1.6 million during the first three quarters of 2000, and the management believes the level of allowance as of September 30, 2000 is adequate to absorb losses inherent in the loan portfolio. 16 The following table shows the provisions made for loan losses, the amount of loans charged off, the recoveries on loans previously charged off together with the balance in the allowance for possible loan losses at the beginning and end of each period, the amount of average and total loans outstanding, and other pertinent ratios as of the dates and for the periods indicated:
SEPTEMBER 30, 2000 DECEMBER 31, 1999 (UNAUDITED) -------------------- ---------------------- (DOLLARS IN THOUSANDS) LOANS: Average total loans ................................ $547,577 $407,171 Total gross loans at end of period ................. 608,953 486,782 ALLOWANCE: BALANCE - BEGINNING OF PERIOD ...................... $ 10,624 $ 10,423 Loans charged off: .............................. 1,289 2,001 Less: Recoveries on loan previous charged off ... 642 1,202 -------------------- ---------------------- Less: Net loan charged-off ......................... 647 799 Add: Provision for loan losses .................... 1,600 1,000 -------------------- ---------------------- BALANCE - END OF PERIOD ............................ $ 11,577 $ 10,624 -------------------- ---------------------- RATIO Net loan charge-offs to average total loans ......... 0.12% 0.20% Allowance for loan losses to gross loans at end of period............................................. 1.90% 2.18% Net loans charge-offs to allowance for loan losses at the end of period ................................. 5.59% 7.52% Allowance for loan losses to nonperforming loans .... 151.04% 350.40%
DEPOSITS AND OTHER BORROWINGS At September 30, 2000, the Company's total deposits were $849.4 million. This represented an increase of $193.7 million or 29.53%, from total deposits of $655.7 million at December 31, 1999. Demand deposits totaled $222.8 million, representing an increase of approximately $29.6 million or 15.35% from total demand deposits of $193.2 million at December 31, 1999. Time deposits over $100,000 totaled $191.4 million, which accounted 22.5% of total deposit, at September 30, 2000. This represented an increase of approximately $67.9 million or 55.0%, compared to $123.5 million at December 31, 1999. Time deposit under $100,000 totaled $265.3 million, which accounted 31.2% of total deposit, at September 30, 2000. This represented an increase of approximately $74.6 million or 39.1%, compared to $190.7 million at December 31, 1999. SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL In order to ensure adequate levels of capital, the Company conducts an ongoing assessment of projected sources and uses of capital in conjunction with projected increases in assets and levels of risk. Management considers, among other things, on an ongoing basis, cash generated from operations, access to capital from financial markets or the issuance of additional securities, including common stock or notes, to meet the Company's capital needs. Total shareholders' equity was $80.3 million at September 30, 2000. This represented an increase of $12.5 million or 18.4% over total shareholders' equity of $67.8 million at December 31, 1999. 17 The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. The following table presents the amounts of regulatory capital and the capital ratio for the Company, compared to regulatory capital requirements for adequacy purposes as of September 30, 2000.
AS OF SEPTEMBER 30, 2000 (DOLLARS IN THOUSANDS) ------------------------------------------------------------------------- ACTUAL REQUIRED EXCESS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ------ ------- ----- ------ ----- Total capital (to risk-weighted assets) $86,753 12.57% $55,214 8% 31,539 4.57% Tier I capital (to risk-weighted assets) 77,628 11.25% 27,607 4% 50,021 7.25% Tier I capital (to total assets) 77,628 8.20% 37,854 4% 39,774 4.20%
18 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK GENERAL Market risk is the risk of loss to future earnings, to fair values, or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, and other market changes that affect market risk sensitive instruments. Market risk is attributed to all market risk sensitive financial instruments, including securities, loans, deposits, and borrowings, as well as derivative instruments. Our exposure to market risk is a function of our asset and liability management activities and other roles as a financial intermediary in customer-related transactions. The objective of market risk management is to avoid excessive exposure of our earnings and equity to loss and to reduce the volatility inherent in certain financial instruments. The management of market risk is governed by policies reviewed and approved annually by the Board of Directors ("Board"). The Board delegates responsibility for market risk management to the Asset and Liability Management Committee (ALCO), which is composed of the Company's senior executives and other designated officers. ALCO makes changes in the mix of assets and liabilities. ALCO also reviews and approves market risk-management programs and market risk limits LIQUIDITY AND INTEREST RATE SENSITIVITY Liquidity risk is the risk to earnings or capital resulting from the Company's inability to meet its obligations when they come due without incurring unacceptable losses. Liquidity risk includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect the Company's ability to liquidate assets quickly and with a minimum loss of value. Factors considered in liquidity risk management are stability of the deposit base, marketability, maturity, and pledging of investments, and demand for credit. In general, the Company manages liquidity risk daily by controlling the level of federal funds and the use of funds provided by the cash flow from the investment portfolio and scheduled loan repayment. To meet unexpected demands, lines of credit are maintained with correspondent banks, and the Federal Reserve Bank. The sale of securities available-for-sale also can also serve as a contingent source of funds. Increases in deposit rates are considered a last resort as a means of raising funds to increase liquidity. The Company's liquid assets include cash and cash equivalents, interest-bearing deposits in corresponding banks and securities available-for-sale. The aggregate of these assets totaled $266.0 million at September 30, 2000 compared to $ 168.6 million at December 31, 1999. Because the primary sources and uses of funds are loans and deposits, the relationship between gross loans and deposits provides a useful measure of the Company's liquidity. Typically, the closer the ratio of loans to deposits is to 100%, the more reliant the Company relies on its loan portfolio to provide for short- term liquidity needs. Because repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the 19 loan to deposit ratio, the less liquid are the Company's assets. For the first nine months of 2000, the Company's loan to deposit ratio averaged 73.43%, compared to an average ratio of 58.26% for the same period last year. The Company is engaged in asset and liability management activities with the objective of reducing adverse changes in earnings as a result of changes in interest rates. The management monitors the interest rate risk relates to the timing and magnitude of the repricing of assets compared to liabilities and has the control of risks associated with movements in interest rates. The ALCO meets monthly to monitor the interest rate risk and may direct changes in the composition of the balance sheet. The company's balance sheet is inherently asset sensitive, which means that assets generally reprice more often than liabilities. Since an asset-sensitive balance sheet tends to reduce net interest income when interest rates decline and to increase net interest income when interest rate rise, careful forecast of interest rate and security portfolio changes are used to manage the interest rate risk. The Company currently uses the interest rate gap to measure interest rate risk. It is the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within specified periods. The gap analysis presented below indicates that assets that are rate sensitive within one year exceeded liabilities within that same period by $10.7 million at September 30, 2000. The following table shows the Company's gap position as of September 30, 2000. 20
(Dollars in thousands) AFTER SIX AFTER ONE MONTHS BUT YEAR BUT WITHIN WITHIN ONE WITHIN FIVE AFTER NON-SENSITIVE SIX MONTHS YEAR YEARS FIVE YEARS ASSETS TOTAL ----------- ------------ -------------- ------------ ------------- ----------- ASSETS CASH $63,528 $63,528 INVESTMENTS: Fixed $34,194 $27,747 $81,132 $58,866 201,941 Floating 6,030 6,030 Unrealized Loss (3,660) (3,660) LOANS: Fixed 16,489 30,682 55,492 59,775 162,438 Floating 425,281 7,670 13,226 338 446,515 Unearned income & LLR (13,243) (13,243) Federal funds sold 48,600 48,600 Accrued interest receivable 6,651 6,651 Customer liabilities 2,254 2,254 Other assets 2,776 22,509 25,285 ----------- ------------ -------------- ------------ ------------- ----------- TOTAL ASSETS $539,499 $66,099 $149,850 $121,757 $69,134 $946,339 =========== ============ ============== ============ ============= =========== LIABILITIES DEPOSITS: Demand deposit 17,825 69,069 113,640 22,280 222,814 Time certificate of 90,069 98,195 2,902 200 191,366 deposit $100,000 or more Time certificate of 91,748 150,383 22,978 183 265,292 deposit Under $100,000 Money market 7,374 48,153 46,075 3,688 105,290 Savings Accounts 4,278 27,835 26,893 5,623 64,629 ACCRUED INTEREST PAYABLE 5,220 5,220 ACCEPTANCE OUTSTANDING 2,254 2,254 OTHER BORROWED MONEY 3,888 3,888 OTHER LIABILITIES 5,279 5,279 ----------- ------------ -------------- ------------ ------------- ----------- TOTAL LIABILITIES 222,656 393,635 212,488 31,974 5,279 866,032 ----------- ------------ -------------- ------------ ------------- ----------- SHAREHOLDERS' EQUITY 80,307 80,307 ------------- ----------- TOTAL LIABILITIES AND 222,656 393,635 212,488 31,974 85,586 946,339 =========== ============ ============== ============ ============= =========== SHAREHOLDERS' EQUITY Net gap position 316,843 (327,536) (62,638) 89,783 (16,452) Net cumulative gap position 316,843 (10,693) (73,331) 16,452 Cumulative gap/assets 33.48% (1.13)% (7.75)% 1.74% Cumulative gap/interest earning assets 37.21% (1.26)% (8.61)% 1.93% ----------- ------------ -------------- ------------ ------------- -----------
21 PART II ITEM 1 LEGAL PROCEEDINGS None ITEM 2 CHANGES IN SECURITIES At September 15, 2000, 20,271 new shares were issued to employee of Hanmi Bank, as bonus at $13.75. ITEM 3 DEFAULTS UPON SENIOR SECURITIES None ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5 OTHER INFORMATION None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (b) Reports on Form 8-K None SIGNATURES 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. Hanmi Financial Corporation Date: November 14, 2000 By /s/ Yong Ku Choe --------------------------------- Yong Ku Choe Chief Financial Officer (Principal financial officer and duly authorized signatory) 22