Hanmi Financial Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; balance-sheet comparisons are against December 31, 2018 unless otherwise noted. Hanmi Financial is a bank holding company whose primary business is deposit-taking, lending and investing through Hanmi Bank. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income, before provision | $44.1 | $45.3 | $131.9 | $135.4 |
| Provision for loan and lease losses | $1.6 | $0.2 | $19.4 | $0.9 |
| Noninterest income | $6.9 | $6.2 | $20.8 | $18.2 |
| Noninterest expense | $32.6 | $29.0 | $91.8 | $88.3 |
| Net income | $12.4 | $16.1 | $29.7 | $46.5 |
| Diluted EPS | $0.40 | $0.50 | $0.96 | $1.43 |
| Net interest margin, taxable-equivalent basis | 3.36% | 3.48% | 3.39% | 3.59% |
| Return on average assets | 0.90% | 1.17% | 0.73% | 1.17% |
| Return on average equity | 8.67% | 10.91% | 7.03% | 10.79% |
Quarterly net income fell 23% year over year; nine-month net income fell 36%. Management attributed the nine-month decline primarily to a large credit-loss provision in Q2. Higher deposit funding costs also pressured net interest income and margin: for Q3, interest expense rose to $18.1 million from $14.7 million as interest income increased to $62.2 million from $60.0 million.
Financial position, cash flow and capital
- Total assets were $5.53 billion, versus $5.50 billion at year-end 2018. Gross loans and leases were $4.57 billion, down from $4.60 billion; net loans were $4.52 billion.
- Deposits were $4.69 billion, down 1.2% from $4.75 billion. Noninterest-bearing deposits increased $103.6 million, while time deposits of $100,000 or more declined $138.3 million.
- Cash and due from banks were $150.7 million. For the nine months, operating cash flow was $55.7 million; investing activities used $3.5 million and financing activities used $56.9 million. Cash declined $4.7 million from year-end.
- Borrowings were $75.0 million, all FHLB term advances, compared with $55.0 million of overnight advances at year-end. Subordinated debentures were $118.2 million. The Bank reported $769.6 million of remaining FHLB borrowing capacity and $29.6 million available through the Federal Reserve Discount Window; neither source had outstanding FRB borrowing.
- Hanmi Bank reported regulatory capital ratios of 14.65% total risk-based, 13.55% Tier 1 and common equity Tier 1, and 11.86% Tier 1 leverage; it exceeded the thresholds to be classified as well capitalized. Tangible common equity to tangible assets was 10.20%.
- Quarterly and nine-month dividends were $0.24 and $0.72 per share, respectively. No shares were repurchased under the announced buyback program during Q3.
Material changes, credit quality and unusual items
- Credit quality weakened materially. Nonperforming loans and leases increased to $64.7 million from $15.5 million at year-end; classified loans and leases rose to $80.7 million from $29.5 million. The allowance for loan and lease losses was $50.7 million, or 1.11% of loans and leases, versus $32.0 million, or 0.69%, at year-end.
- The principal driver was a $40.0 million troubled relationship—comprising a $27.5 million land loan and a $12.5 million business loan—placed on nonaccrual in Q2. The company recorded a $15.7 million specific allowance associated with the relationship. Total TDRs were $60.8 million, versus $10.3 million at year-end; $57.8 million were on nonaccrual.
- Noninterest expense increased 12.4% in Q3, principally from professional fees—including costs related to the troubled-loan reporting delay, CECL implementation and legal fees associated with a previously terminated merger—plus higher occupancy and data-processing costs. Nine-month expense increased 4.0%, partly offset by lower salaries after branch closures and other cost reductions.
- Nine-month noninterest income included a $1.2 million gain on sale of bank premises and a $1.3 million net gain on securities sales. The company sold its tax-exempt municipal bonds during the first half of 2019. Q3 SBA loan-sale gains increased to $1.8 million from $1.1 million a year earlier.
- Effective January 1, 2019, the company adopted lease accounting and reported $38.2 million of operating lease right-of-use assets and $38.8 million of lease liabilities at September 30.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial forecast. Management said it continued CECL implementation; parallel processing and model-output review had begun, but the financial impact was still being evaluated. As a large accelerated filer, the company expected to adopt CECL for periods beginning after December 15, 2019.
- Management identified sensitivity to deposit pricing, interest-rate changes, loan demand and credit conditions. Its rate simulation showed that an instantaneous 100-basis-point rate decrease could reduce modeled net interest income by 3.39% over 1–12 months and 7.65% over 13–24 months. Management cautioned that simulations depend on assumptions and are not forecasts.
- Portfolio concentrations include lessors of nonresidential buildings at 28.9% of loans and leases and hospitality at 19.0%. The filing also cites risks involving borrower performance, real-estate values, funding access, competition, cyber and operational systems, regulation and natural disasters.
- Disclosure controls and procedures were deemed ineffective because of a material weakness in review controls for the fair value of collateral-dependent impaired loans. Management described planned remediation through stronger policy documentation, training and review documentation; remediation was not stated as complete.
- Management reported no material change to previously disclosed risk factors and no legal proceedings expected to materially affect financial condition, results or liquidity. It did not anticipate material changes from tax examinations; a California tax settlement resulted in $0.4 million of provision expense and a $0.9 million payment.
Most important facts for investors to verify
- Whether the $40.0 million troubled relationship stabilizes, and whether nonaccrual loans, TDRs, classified assets and specific reserves rise or fall.
- Whether deposit costs moderate and net interest margin stabilizes amid changing rates and deposit mix.
- The eventual CECL adoption impact on provisions, allowance levels, capital and earnings.
- Progress and effectiveness of remediation for the material weakness in collateral-dependent loan valuation controls.
- Deposit trends, available borrowing capacity and capital ratios, particularly in light of real-estate and hospitality concentrations.