Hanmi Financial Corporation — Q3 2023 Form 10-Q
Business context and reporting period
Hanmi Financial Corporation is a bank holding company whose primary subsidiary, Hanmi Bank, conducts traditional deposit-taking, lending and investment activities. This unaudited quarterly report covers the three and nine months ended September 30, 2023; balance-sheet comparisons are generally against December 31, 2022. Amounts below are in U.S. dollars unless noted.
Financial results and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest and dividend income | $94.1 million | $71.5 million | $272.1 million | $191.6 million |
| Interest expense | $39.2 million | $8.4 million | $104.0 million | $18.5 million |
| Net interest income, before credit loss expense | $54.9 million | $63.1 million | $168.1 million | $173.1 million |
| Credit loss expense | $5.2 million | $0.6 million | $7.2 million | $0.8 million |
| Noninterest income | $11.2 million | $8.9 million | $27.5 million | $26.7 million |
| Noninterest expense | $34.2 million | $33.3 million | $101.3 million | $96.4 million |
| Net income | $18.8 million | $27.2 million | $61.4 million | $72.9 million |
| Diluted earnings per share | $0.62 | $0.89 | $2.01 | $2.39 |
Net interest margin, on a taxable-equivalent basis, was 3.03% for Q3, versus 3.66% a year earlier, and 3.14% for the nine-month period, versus 3.44%. The nine-month effective tax rate was 29.5%, compared with 28.9%.
At September 30, 2023, total assets were $7.35 billion, net loans were $5.95 billion, deposits were $6.26 billion, borrowings were $162.5 million, subordinated debentures were $129.9 million, and stockholders’ equity was $663.4 million. The allowance for credit losses was $67.3 million, equal to 1.12% of loans. Nonperforming loans were $15.8 million, or 0.26% of loans; nonperforming assets were $15.9 million, or 0.22% of assets.
For the first nine months, operating cash flow was $99.6 million, investing cash outflow was $40.5 million, and financing cash outflow was $122.6 million. Cash and due from banks fell by $63.4 million from year-end 2022 to $289.0 million.
The Bank remained well capitalized: its total risk-based capital ratio was 14.42%, common equity Tier 1 ratio 13.42%, and Tier 1 leverage ratio 11.25%. The company reported corresponding ratios of 15.07%, 11.95%, and 10.27%.
Material changes versus comparable periods
- Q3 net income declined $8.4 million year over year. Management attributed the decrease mainly to an $8.2 million reduction in net interest income and a $4.6 million increase in credit loss expense, partly offset by higher noninterest income and lower income tax expense.
- For the nine months, net income declined $11.5 million. Net interest income fell $5.0 million, noninterest expense increased $4.9 million, and credit loss expense increased $6.4 million.
- Interest income rose as asset yields increased, but interest expense grew much faster as deposit and borrowing rates and interest-bearing deposit balances increased. Q3 cost of interest-bearing deposits was 3.53%, versus 0.78% a year earlier; the average deposit cost, including noninterest-bearing deposits, was 2.33%, versus 0.43%.
- Loans before allowance increased $53.7 million from December 2022 to $6.02 billion. Deposits increased $92.0 million, while the mix shifted: noninterest-bearing deposits fell $378.4 million and interest-bearing deposits rose $470.4 million.
- FHLB advances declined $187.5 million from year-end to $162.5 million. Stockholders’ equity increased $25.8 million, reflecting earnings, partly offset by dividends, securities-related accumulated other comprehensive loss, and share repurchases.
Outlook, commentary, risks and unusual items
The filing provides no specific earnings or financial guidance. Management said it believes the Company and Bank have adequate liquidity to meet current obligations. At quarter-end, remaining FHLB borrowing capacity was $1.32 billion; an additional $23.9 million was available through the Federal Reserve Discount Window and Bank Term Funding Program. Management noted that actual liquidity and interest-rate outcomes depend on deposit behavior, funding access, market rates, and collateral availability.
Key exposures include rising funding costs, deposit competition and potential changes in deposit composition, uninsured deposits, interest-rate and securities-market volatility, commercial real estate and other borrower credit risks, and potential deterioration in real estate values or economic conditions. Uninsured deposits totaled $2.49 billion at September 30, 2023. Commercial property lending represented 61.3% of loans; loans to lessors of nonresidential buildings were 28.9% of loans, and hospitality loans were 11.8%. Management also identified operational and cybersecurity risks, regulatory matters, and the adequacy of credit-loss estimates among the risks affecting results.
Q3 credit loss expense included a $5.2 million loan-loss provision. Nine-month net charge-offs were $12.1 million, versus $1.1 million in the prior-year period, including charge-offs on two nonperforming commercial and industrial loans and equipment-financing loans. Nonperforming loans increased from $9.8 million at year-end 2022, primarily following a $10.0 million healthcare-industry C&I loan becoming nonperforming; a $5.1 million charge-off was recorded on that loan during Q3.
Unusual items included a $4.0 million pretax gain on a branch sale-leaseback, a $1.9 million legal settlement recorded in the nine-month period, and a $1.9 million loss on sales of $8.1 million of securities. The sale-leaseback included a 10-year lease with two five-year renewal options. The quarter-end securities portfolio had $140.0 million of gross unrealized losses, primarily associated with interest rates; the Company reported that it did not expect credit losses on the portfolio and had the intent and ability to hold the securities until recovery. A quarterly dividend of $0.25 per share was declared after quarter-end for payment in November 2023.
Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It stated that ordinary-course litigation was not expected to have a material adverse effect; no material risk-factor changes were reported beyond those previously disclosed.
Important facts for investors to verify
- Whether deposit pricing and mix continue to pressure net interest margin, particularly as time deposits mature and uninsured deposits remain significant.
- Trends in commercial real estate concentrations, criticized and nonperforming loans, charge-offs, and the adequacy of the allowance for credit losses.
- The impact of interest-rate movements on earnings and the fair value of the securities portfolio, including the $140.0 million unrealized loss position.
- Liquidity and funding capacity under adverse conditions, including reliance on FHLB collateral and the behavior of deposits and customer credit commitments.
- How much reported noninterest income reflects recurring operations versus the branch sale-leaseback gain and legal settlement, and the ongoing costs of the related lease.