Hanmi Financial Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; balance-sheet comparisons are to December 31, 2020. Hanmi Financial is a bank holding company whose primary subsidiary, Hanmi Bank, conducts traditional deposit-taking, lending, and investment activities. Dollar amounts below are in millions unless otherwise indicated.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $49.6 | $44.4 | $95.6 | $88.4 |
| Credit loss recovery (expense) | $3.3 recovery | $24.6 expense | $1.2 recovery | $40.3 expense |
| Noninterest income | $8.9 | $20.9 | $18.7 | $27.2 |
| Noninterest expense | $30.8 | $27.1 | $60.3 | $58.2 |
| Net income | $22.1 | $9.2 | $38.8 | $11.5 |
| Diluted EPS | $0.72 | $0.30 | $1.26 | $0.38 |
| Net interest margin, taxable-equivalent | 3.19% | 3.15% | 3.14% | 3.25% |
- Q2 net interest income rose despite lower interest and dividend income, as interest expense fell to $5.0 million from $11.3 million. Lower deposit rates and a shift from time deposits to lower-cost accounts were key factors.
- Q2 noninterest income fell mainly because the prior-year quarter included a $15.7 million securities-sale gain. Q2 2021 included $3.3 million of gains on SBA loan sales; six-month results also included $2.7 million of gains on PPP loan sales. Six-month 2020 included the $15.7 million securities gain.
- Noninterest expense increased 13.4% in Q2, primarily from higher salaries and benefits, including lower capitalization of loan origination costs and higher bonus and incentive expense.
Balance sheet, funding, and capital
- Total assets were $6.58 billion, up from $6.20 billion at year-end. Cash and due from banks rose to $697.8 million from $391.8 million; available-for-sale securities rose to $862.1 million from $753.8 million.
- Loans before allowance were $4.82 billion, down from $4.88 billion. Deposits increased to $5.63 billion from $5.28 billion, principally due to $455.9 million of additional noninterest-bearing deposits. The loan-to-deposit ratio was 85.6%, versus 92.5% at year-end.
- Total deposits included $2.35 billion of noninterest-bearing deposits and $3.28 billion of interest-bearing deposits. Aggregate uninsured deposits were $2.35 billion.
- Borrowings were $150.0 million of FHLB advances; subordinated debentures were $119.2 million, making reported borrowings and subordinated debentures $269.2 million combined. The FHLB advances had a 1.20% weighted-average rate. The company reported $1.37 billion of remaining FHLB borrowing capacity and $38.5 million available through the Federal Reserve Discount Window.
- Stockholders’ equity was $603.0 million, compared with $577.0 million at year-end. The Bank’s total risk-based capital ratio was 15.25%, and its Tier 1 leverage ratio was 10.89%; the filing states that the Bank met the “well capitalized” thresholds.
Cash flow and asset quality
- For the first six months, operating cash flow was $130.7 million, investing cash flow was negative $171.4 million, and financing cash flow was positive $346.7 million. Cash increased by $305.9 million to $697.8 million.
- The allowance for credit losses was $83.4 million, or 1.73% of loans, down from $90.4 million, or 1.85%, at year-end. Six-month net charge-offs were $3.9 million, compared with $28.6 million in the first half of 2020.
- Nonperforming loans were $52.0 million, down from $83.0 million; nonperforming assets were $52.7 million, down from $85.4 million. Special-mention loans increased to $121.8 million from $77.0 million, while classified loans declined to $110.1 million from $140.2 million.
- Loans modified under CARES Act provisions declined to $72.3 million from $155.6 million. At June 30, 2021, $36.7 million of those modified loans were special mention and $12.7 million were classified.
Material changes and notable items
- Net income increased substantially year over year, reflecting credit-loss recoveries rather than the large provisions recorded in 2020, lower funding costs, and higher SBA-related gains. The comparison is also affected by the prior-year securities-sale gain.
- Loan mix shifted: hospitality commercial-property loans were $795.7 million, down from $860.0 million at year-end; commercial and industrial loans were $587.7 million, down from $757.3 million. PPP loans included in commercial and industrial loans fell to $144.1 million from $295.7 million.
- The allowance included a $2.1 million provision for an SBA guarantee repair loss in the first half. Management attributed the allowance recovery in part to improving unemployment assumptions, while noting uncertainty around the pandemic and borrower performance.
- After quarter-end, the company collected $4.6 million, including interest, to fully pay off one film tax-credit loan and received a $5.4 million partial payment on a second. Management expected the remaining amount on the latter loan to be collected before the end of Q3.
- The company reinstated its share repurchase program in February 2021; it repurchased 55,000 shares for $946,000 during the first half. The Q2 dividend declared was $0.12 per share. The Board said it would continue to reassess future dividends.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year performance.
- COVID-19 remains a source of uncertainty, including potential effects on borrower repayment, collateral values, credit-loss estimates, demand, interest margins, and operations. Hospitality and restaurant businesses are identified among sectors particularly affected.
- Credit concentrations warrant attention: lessors of nonresidential buildings represented 30.7% of loans and hospitality 17.8% at June 30, 2021. Management notes that deterioration in economic conditions, real estate values, or borrower finances could increase losses.
- On July 21, 2021, Hanmi Bank received a “Needs to Improve” CRA rating from the FDIC for the period March 29, 2018 to May 3, 2021. The filing says this restricts certain expansionary activities, including some mergers and acquisitions and branch actions, and removes expedited application processing until the next public CRA rating.
- Other stated risks include interest-rate and funding pressures, competition, regulatory action, cybersecurity and vendor disruptions, SBA/PPP-related risks, and the Bank’s ability to distribute dividends to the holding company. The company disclosed ordinary-course litigation and said its resolution was not expected to materially affect financial condition, results, or liquidity.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts investors should verify
- How the “Needs to Improve” CRA rating affects Hanmi Bank’s growth plans, regulatory applications, and potential strategic transactions.
- Whether credit quality continues to improve, particularly in hospitality and other commercial-property exposures, and whether special-mention loans or CARES Act-modified loans migrate to classified or nonperforming status.
- Whether the $83.4 million allowance remains adequate as economic forecasts and pandemic-related borrower conditions evolve, including the SBA guarantee repair exposure.
- Whether the unusually high cash and deposit balances persist, and how deposit mix, uninsured deposits, loan growth, and reinvestment yields affect net interest margin.
- Whether post-quarter collections on the two film tax-credit loans are completed as expected and whether remaining balances are collected.
- How future dividends and share repurchases are balanced against capital needs and the Bank’s regulatory distribution limits.