Hanmi Financial Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; balance-sheet comparisons are primarily with December 31, 2019. Hanmi Financial is a bank holding company whose primary subsidiary, Hanmi Bank, conducts traditional deposit, lending and investment activities. Amounts below are in millions unless noted.
Financial results and condition
| Metric | Q3 2020 / September 30, 2020 | Comparison |
|---|---|---|
| Net income; diluted EPS | $16.3; $0.53 | Q3 2019: $12.4; $0.40 |
| Net interest income | $45.6 | Q3 2019: $44.1 |
| Net interest margin, tax-equivalent | 3.13% | Q3 2019: 3.36% |
| Noninterest income | $7.1 | Q3 2019: $6.9 |
| Noninterest expense | $29.9 | Q3 2019: $32.6 |
| Credit loss expense | $0.04 | Q3 2019: $1.6 loan-loss provision; presentation differs after CECL adoption |
| Assets | $6,106.8 | December 31, 2019: $5,538.2 |
| Loans, gross; allowance for credit losses | $4,834.1; $86.6 | December 31, 2019: $4,610.1; $61.4 |
| Deposits | $5,194.3 | December 31, 2019: $4,699.0 |
| Cash and due from banks | $359.8 | December 31, 2019: $121.7 |
| Borrowings; subordinated debentures | $150.0; $118.8 carrying amount | December 31, 2019: $90.0; $118.4 |
| Nonperforming loans; nonperforming assets | $64.3; $65.4 | December 31, 2019: $63.8; $63.8 |
- For the first nine months, net income was $27.9 million and diluted EPS was $0.91, versus $29.7 million and $0.96 in 2019. Net interest income was $134.0 million versus $131.9 million; net interest margin was 3.21% versus 3.39%.
- Nine-month operating cash flow was $40.3 million, compared with $55.7 million in 2019. Investing activities used $341.5 million; financing activities provided $539.3 million. Cash increased $238.1 million during the period.
- At September 30, the Bank’s capital ratios included total risk-based capital of 14.77%, common equity Tier 1 of 13.51%, and Tier 1 leverage of 10.88%. The filing states the Bank exceeded well-capitalized thresholds. FHLB borrowing capacity was $1.43 billion; the Bank also reported $33.6 million of available Federal Reserve Discount Window capacity.
- Q3 return on average assets was 1.08% and return on average equity was 11.74%; nine-month figures were 0.64% and 6.72%. The Q3 efficiency ratio was 56.73% (64.04% in Q3 2019).
Material changes and notable items
- Q3 net income rose year over year, principally as deposit interest expense fell and noninterest expense declined. Nine-month earnings fell, mainly because credit loss expense increased, partly offset by lower funding costs and securities-sale gains.
- Hanmi adopted CECL on January 1, 2020. Adoption increased the opening loan-loss allowance by $17.4 million, reduced the off-balance-sheet allowance by $0.3 million, and reduced retained earnings by $12.2 million after tax. The September 30 loan allowance was $86.6 million, or 1.79% of gross loans.
- Nine-month noninterest income included $15.7 million of realized gains from sales of $495.6 million of securities; there were no securities-sale gains in Q3. Management said the sales captured unrealized gains in the low-rate environment and proceeds were reinvested in U.S. Treasury and government-agency securities.
- The company recorded $31.2 million of loan charge-offs in the first nine months, including a $25.2 million charge-off tied to a troubled loan relationship. Nonperforming loans were broadly stable versus year-end, while classified loans increased to $106.2 million from $94.0 million at year-end; $21.7 million of classified loans were identified as adversely affected by COVID-19.
- Deposits grew $495.3 million from year-end, including a $569.4 million increase in noninterest-bearing demand deposits. Gross loans grew $224.0 million; the portfolio included $302.9 million of PPP loans. The Bank had $578.5 million of COVID-related modified loans at quarter-end, all reported current.
- The Board reduced the quarterly dividend to $0.08 per share for Q3 and Q4 2020, from $0.24 in Q1 and $0.12 in Q2, citing pandemic uncertainty. Share repurchases were suspended.
Outlook, risks and contingencies
- The filing provides no specific earnings, revenue, margin or credit-loss guidance. Management said it would reassess the dividend quarterly and could reduce or eliminate future dividends.
- Management described COVID-19’s ultimate effects as uncertain and dependent on economic reopening, employment, borrower performance and other developments. Risks include higher delinquencies and credit losses, falling real-estate collateral values, reduced loan demand, margin pressure from low rates, PPP-related litigation or SBA-guarantee risk, and increased remote-work and vendor cybersecurity/operational risks.
- Credit exposure is concentrated in real estate: lessors of nonresidential buildings represented 28.3% of loans and hospitality 19.4% at September 30. Hospitality and retail businesses were among sectors identified as particularly affected by the pandemic.
- Off-balance-sheet commitments totaled $510.9 million, including $444.8 million of commitments to extend credit. Management reported adequate liquidity and capital; the filing notes regulatory, economic, interest-rate, borrower-credit and funding risks.
- The company adopted the five-year regulatory capital transition relief for CECL. Management reported no material change in risk factors from prior filings and no subsequent event requiring disclosure. Ordinary-course litigation was not expected by management to have a material adverse effect.
Important facts for investors to verify
- How the $578.5 million of COVID-modified loans perform as relief periods end, and whether loan grades, delinquencies, nonaccruals or charge-offs worsen.
- Whether the CECL allowance and its economic forecasts adequately reflect portfolio risks, particularly hospitality, commercial real estate and PPP-related exposures.
- How much earnings depended on deposit-cost reductions and the nonrecurring $15.7 million securities gain, given the lower reported net interest margin.
- Whether deposit growth persists, liquidity capacity remains available, and the increased use of FHLB advances affects funding costs.
- Future dividend decisions and capital levels, including the consequences of the reduced dividend and suspended repurchases.