Hanmi Financial Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Hanmi Financial is a bank holding company whose primary subsidiary, Hanmi Bank, conducts commercial banking, including deposit-taking, lending, and investing. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income, before credit losses | $55.4 | $59.0 | $113.3 | $110.0 |
| Net interest margin, taxable-equivalent | 3.11% | 3.55% | 3.20% | 3.32% |
| Credit loss expense (recovery) | ($0.1) | $1.6 | $2.1 | $0.2 |
| Noninterest income | $7.9 | $9.3 | $16.3 | $17.8 |
| Noninterest expense | $34.3 | $31.5 | $67.1 | $63.2 |
| Net income | $20.6 | $25.1 | $42.6 | $45.7 |
| Diluted earnings per share | $0.67 | $0.82 | $1.39 | $1.50 |
- Revenue and margins: Q2 interest and dividend income rose 43.6% to $90.8 million, but interest expense increased to $35.3 million from $4.2 million as deposit and borrowing costs rose. Q2 net interest spread was 1.79%, versus 3.31% a year earlier.
- Profitability: Q2 net income fell about 17.7% year over year; first-half net income fell about 6.8%. Q2 return on average assets was 1.12% and return on average equity was 11.14%.
- Cash flow: For the first six months, operating cash flow was $70.1 million, investing cash flow was $16.7 million, and financing cash flow was negative $94.4 million. Cash and due from banks declined $7.5 million to $344.9 million.
- Balance sheet and liquidity: Total assets were $7.34 billion. Deposits were $6.32 billion, up $147.7 million from year-end; the loan-to-deposit ratio was 94.4%. Loans, before allowance, were $5.97 billion, essentially unchanged from December 31, 2022. Management stated that the Bank had adequate liquidity; available borrowing capacity was $1.29 billion at the FHLB and $25.6 million through the Federal Reserve Discount Window and BTFP, with no borrowings from the latter sources.
- Debt and capital: FHLB advances were $125.0 million, down from $350.0 million at year-end; subordinated debentures were $129.7 million. Total capital ratios at Hanmi Bank were 14.45% risk-based and 11.21% Tier 1 leverage; the Bank exceeded well-capitalized thresholds. Stockholders’ equity was $668.6 million.
Material changes and notable items
- Higher market rates lifted asset yields but sharply increased funding costs: Q2 interest-bearing deposit cost rose to 3.25% from 0.31% year over year. Noninterest-bearing deposits declined to 34.9% of deposits from 41.3% at year-end, while time deposits increased.
- Nonperforming loans rose to $22.2 million, or 0.37% of loans, from $9.8 million, or 0.17%, at year-end. The increase principally reflected a $10.0 million healthcare-industry commercial and industrial loan with a $3.3 million specific allowance. Net loan charge-offs were $3.2 million for the first half, driven mainly by equipment financing.
- Special mention loans declined to $44.6 million from $79.0 million at year-end; classified loans declined to $38.8 million from $46.2 million. The allowance for credit losses was $71.0 million, or 1.19% of loans, versus $71.5 million, or 1.20%, at year-end.
- Q2 noninterest income included a $1.9 million legal settlement and a $1.9 million loss on sales of securities. The securities sale generated $8.1 million in proceeds; the portfolio had $119.2 million of gross unrealized losses at June 30. Management said it had the ability and intent to hold the remaining securities and did not expect credit losses on them.
- Q2 noninterest expense increased 8.9%, primarily due to salaries and employee benefits, including annual merit increases and lower capitalization of loan origination costs. First-half expenses rose 6.2% year over year.
- The company repurchased 100,000 shares for $1.4 million during the first half and paid $15.3 million in dividends. A $0.25-per-share quarterly dividend was declared after quarter-end for payment in August 2023.
Outlook, risks, and contingencies
The filing provides no specific earnings, revenue, or margin guidance. Management describes forward-looking expectations as subject to uncertainty, including interest-rate changes, competition for deposits and loans, deposit mix and uninsured-deposit levels, liquidity and funding access, credit quality, real estate values, economic conditions, inflation, regulation, and operational and cybersecurity risks. The loan portfolio includes concentrations in lessor of nonresidential buildings (29.4% of loans) and hospitality (11.6%). Total off-balance-sheet commitments were $893.5 million, including $791.8 million of unused credit commitments. Management stated ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Investor verification priorities
- Track deposit pricing, mix, uninsured deposits, and the effect of funding costs on net interest margin.
- Review the status, collateral, and loss exposure of the $10.0 million healthcare loan, plus trends in nonperforming loans and equipment-financing charge-offs.
- Assess commercial real estate and hospitality concentrations, maturities, and borrower performance amid changing economic and property-market conditions.
- Monitor liquidity capacity and the securities portfolio’s unrealized losses, including whether any securities sales become necessary.
- Separate recurring earnings from the legal settlement and securities-sale loss, and evaluate the sustainability of dividends and repurchases against capital and funding needs.