Hanmi Financial Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Hanmi Financial is a bank holding company whose primary subsidiary, Hanmi Bank, provides deposits and commercial, real estate and consumer lending, principally in Southern California. Financial amounts below are in U.S. dollars; income statement and cash flow figures are in millions unless noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income before credit-loss provision | $28.0 | $27.2 | $56.0 | $52.8 |
| Provision for credit losses | $(3.9) benefit | $0 | $(7.2) benefit | $0 |
| Non-interest income | $5.1 | $6.7 | $10.9 | $13.9 |
| Non-interest expense | $18.6 | $18.6 | $36.8 | $36.3 |
| Continuing-operations net income | $11.5 | $9.3 | $22.5 | $19.5 |
| Consolidated net income | $11.0 | $9.5 | $22.0 | $19.5 |
| Diluted EPS, continuing operations | $0.36 | $0.29 | $0.70 | $0.62 |
| Net interest margin | 3.94% | 4.10% | 3.98% | 3.98% |
Q2 net income rose about 16% year over year, while continuing-operations income rose 23%. Six-month consolidated net income increased about 13%. Q2 results included a $3.9 million negative credit-loss provision, reflecting improved historical loss rates, qualitative factors and classified-loan levels. For the six months, net loan recoveries were $1.8 million, versus $3.9 million of net charge-offs a year earlier.
Growth in average loan and securities balances lifted net interest income, but lower yields on new and renewing loans pressured margin. Q2 net interest margin declined 16 basis points year over year and 8 basis points from Q1 2014. Non-interest income fell 25% in Q2 and 22% for the half, largely because gains on SBA loan sales were lower; the six-month comparison also benefited from a $1.5 million increase in securities-sale gains. Compensation costs increased, partly offset by lower professional fees.
Financial position, liquidity and capital
- Assets and loans: Total assets were $3.095 billion at June 30, up from $3.054 billion at year-end 2013. Gross loans were $2.349 billion, up 5.2% since year-end; net loans were $2.301 billion. Real estate lending represented $2.090 billion of gross loans.
- Deposits and funding: Deposits totaled $2.545 billion, up 1.3% since year-end. Noninterest-bearing deposits rose to $910 million, or 35.8% of deposits. The Bank reported no brokered deposits. FHLB advances declined to $97 million from $128 million.
- Cash flow: Six-month operating cash flow was $26.4 million; investing cash use was $82.1 million and financing cash flow was $0.2 million provided. Cash and equivalents declined $55.6 million to $123.8 million.
- Liquidity: Management said the Bank had adequate liquidity. Available FHLB borrowing capacity was $533.7 million; the Bank also reported a $70.6 million Federal Reserve discount-window source and $95 million of unsecured federal funds lines. These facilities are subject to collateral, availability and other conditions.
- Capital: At June 30, the Bank’s total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 17.17%, 15.91% and 13.49%, respectively, all above applicable “well-capitalized” thresholds. Stockholders’ equity was $426.3 million.
Asset quality, material developments and outlook
- Asset quality: Non-accrual loans were $25.4 million, down 1.9% from year-end; nonperforming loans were 1.08% of gross loans. Nonperforming assets were $27.1 million, including $1.7 million of other real estate owned. Delinquent loans of 30 days or more increased 3.9% to $16.9 million. Impaired loans declined to $47.9 million from $53.1 million at year-end.
- Restructured loans: Troubled debt restructurings totaled $23.6 million, down from $30.0 million at year-end; $11.1 million were on non-accrual status. Six-month TDR defaults included six loans with a recorded investment of $2.0 million.
- Insurance subsidiaries sold: Chun-Ha and All World were sold June 30 for a stated $3.5 million total price: $2.0 million at signing, reduced by cash transferred with the businesses, and $1.5 million payable in three annual installments through June 2017. The transaction resulted in a $467,000 Q2 discontinued-operations loss after tax.
- Acquisition: Subsequent to quarter-end, regulatory clearances were received for the planned acquisition of Central Bancorp and merger of its United Central Bank subsidiary into Hanmi Bank. Closing was expected August 31, 2014, subject to customary conditions.
- Other unusual items: Hanmi early-adopted proportional amortization accounting for affordable-housing investments, retrospectively. The change reduced 2013 continuing-operations net income by $32,000 for Q2 and $84,000 for the first half. The first-half cash dividend was $2.2 million; management reported a $0.07-per-share Q2 dividend paid July 14.
- Risks and outlook: No specific earnings or margin guidance is provided. Management cited uncertainty from economic conditions, real estate values, interest rates, borrower financial health and competition. Loan concentrations included lessors of nonresidential buildings (28.8% of gross loans), accommodation (14.9%) and gas stations (12.4%). A modeled instantaneous +300-basis-point rate shock increased estimated one-year net interest income 14.58% but reduced estimated economic value of equity 15.20%; management cautioned that the simulation is assumption-dependent and not a forecast.
Important facts for investors to verify
- Whether the negative provision is sustainable as loan growth continues, and how allowance coverage and classified-loan trends develop.
- Performance of the Southern California commercial real estate portfolio, including the identified industry concentrations, delinquent loans and TDRs.
- Whether core-deposit growth and lower funding costs can offset pressure on loan yields and net interest margin.
- Completion, integration costs and expected financial effects of the Central Bancorp/United Central Bank acquisition.
- Collection of the remaining $1.5 million insurance-sale consideration and the effects of the sale-related tax items.
- Liquidity and capital effects of loan growth, deposit mix, pledged collateral, interest-rate movements and implementation of Basel III requirements.