Hanmi Financial Corporation — Q1 2017 Form 10-Q
Business and period: Hanmi Financial is a bank holding company whose principal subsidiary, Hanmi Bank, conducts traditional banking, lending and investment activities. This unaudited report covers the three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted.
Key financial results
| Metric | Q1 2017 | Comparison / context |
|---|---|---|
| Total assets | $4.81 billion | Up from $4.70 billion at Dec. 31, 2016; $4.31 billion at Mar. 31, 2016 |
| Net interest income, before provision | $42.4 million | Up 9.8% from $38.6 million |
| Net interest margin | 3.89% | 3.98% in Q1 2016; excluding acquisition accounting, 3.85% versus 3.68% |
| Noninterest income | $7.2 million | Up 3.7% from $7.0 million |
| Noninterest expense | $27.2 million | Up 4.5% from $26.1 million |
| Income before tax | $22.4 million | Up 6.8% from $21.0 million |
| Net income / diluted EPS | $13.8 million / $0.43 | Down from $14.8 million / $0.46 |
| Cash flow from operations | $20.1 million | Versus $5.8 million in Q1 2016 |
| Cash and due from banks | $138.6 million | Down from $147.2 million at year-end |
Net cash decreased $8.6 million during the quarter. Investing activities used $128.2 million, principally reflecting loan growth and securities purchases; financing activities provided $99.4 million, including deposit growth and the subordinated-note issuance. Cash flow should be read in light of these substantial balance-sheet movements.
Balance sheet, funding and capital
- Loans and leases before the allowance were $3.94 billion at March 31, up 2.6% from year-end and 19.3% from March 2016. Net loans and leases were $3.91 billion. Growth reflected new production and residential mortgage purchases, partly offset by repayments and SBA loan sales.
- Deposits were $4.08 billion, up $273.4 million, or 7.2%, from year-end. Money-market and savings deposits rose $205.3 million. Noninterest-bearing deposits were $1.24 billion, or 30.4% of deposits.
- FHLB advances fell to $50.0 million from $315.0 million at year-end. The company issued $100 million of fixed-to-floating subordinated notes on March 21; the reported balance, net of issuance costs, was $97.7 million. The notes carry a 5.45% fixed rate through March 2022, then a floating rate tied to three-month LIBOR plus 3.315%.
- At March 31, the Bank reported total risk-based capital of 15.91%, Tier 1 risk-based capital of 15.07%, common equity Tier 1 of 15.07%, and Tier 1 leverage of 13.08%; it met the regulatory “well capitalized” thresholds. The company’s respective reported ratios were 16.16%, 12.93%, 12.56%, and 11.21%.
- The Bank reported $710.3 million of remaining FHLB borrowing capacity and $9.9 million of available Federal Reserve discount-window capacity. Management stated that the company and Bank had adequate liquidity. Brokered deposits were $145 million.
Changes and asset quality
- Net income declined 6.9%, despite higher pretax income. Management attributed the decline principally to a $1.8 million tax benefit in Q1 2016 from finalizing amended 2014 tax returns. The effective tax rate was 38.5% versus 29.5%; excluding the prior-year benefit, the 2016 rate would have been 38.0%.
- Interest income increased with loan growth, but interest expense rose 46.0% to $6.0 million as deposit costs and borrowings increased. Reported net interest margin declined year over year, while the margin excluding acquisition-accounting effects improved.
- The loan-loss provision was an $80,000 credit, compared with a $1.5 million credit in Q1 2016. Q1 2017 included $803,000 of net recoveries, compared with $384,000 of net charge-offs a year earlier. The allowance was $33.2 million, or 0.84% of loans and leases, versus $32.4 million at year-end.
- Nonperforming assets declined to $17.4 million, or 0.36% of assets, from $18.9 million, or 0.40%, at year-end, mainly as OREO fell to $4.6 million from $7.5 million. Nonaccrual loans and leases increased to $12.8 million from $11.4 million; the nonperforming-loan ratio rose to 0.32% from 0.30%. There were no non-PCI loans 90 days or more past due and still accruing.
- Total troubled debt restructurings were $17.0 million, down from $18.0 million at year-end. Total loans and leases past due 30–89 days were $12.6 million, compared with $7.4 million at year-end.
Outlook, risks and unusual items
The filing provides no specific earnings or growth guidance. Management says results depend on loan and deposit competition, interest rates and spread, borrower performance, credit quality and allowance estimates, economic and real-estate conditions, regulation, liquidity and capital, and the ability to control expenses. Lending is concentrated in real estate, commercial, SBA and trade-finance activities, primarily in California, Texas and Illinois. Two industry concentrations exceeded 10% of loans: lessors of nonresidential buildings at 31.1% and hospitality at 17.0%.
Interest-rate simulations are estimates, not forecasts. A modeled 100-basis-point rate decline reduced net interest income by 6.31% over 12 months and 11.20% over 24 months; a 300-basis-point increase reduced the 12-month measure by 0.47% but increased the 24-month measure by 4.54%. The filing cautions that actual outcomes may differ as assumptions, customer behavior and market conditions change.
Unusual or notable items included the new subordinated-note issuance, a $269,000 securities-sale gain, and the prior-year tax benefit affecting the earnings comparison. The company reported no material change in previously disclosed risk factors, no material subsequent event requiring disclosure, and no litigation expected by management to materially affect its financial condition, results or liquidity. Management reported effective disclosure controls and no material change in internal control over financial reporting.
New accounting standards discussed include expected-credit-loss guidance (CECL), effective for the company after December 15, 2019, and lease-accounting guidance expected to increase reported assets and liabilities when adopted in 2019. Management was evaluating their effects.
Important facts for investors to verify
- Whether deposit growth and loan production can be sustained without materially higher funding costs or reduced margins.
- Credit trends, particularly the increase in nonaccrual loans and 30–89-day delinquencies, and the adequacy of the $33.2 million loan-loss allowance.
- Exposure to real-estate and hospitality concentrations, along with the performance and collateral values of TDRs and acquired credit-impaired loans.
- The effect of the $100 million subordinated notes on future interest expense, capital and funding mix, and the continuing availability of contingent borrowing capacity.
- The assumptions behind the interest-rate simulations and the possible effects of rate changes on net interest income and economic value of equity.
- The filing’s non-GAAP margin measures and comparisons, including the effect of acquisition-accounting adjustments and the Q1 2016 tax benefit.