Hanmi Financial Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Hanmi is a bank holding company whose subsidiary, Hanmi Bank, conducts traditional deposit-taking, lending and investment activities. Financial amounts below are in U.S. dollars; “million” and “billion” are abbreviated.
Financial performance and position
| Metric | Q3 2018 / Sep. 30, 2018 | Comparable period / prior date |
|---|---|---|
| Net income | $16.1 million; diluted EPS $0.50 | Q3 2017: $14.9 million; $0.46 |
| Net interest income, before provision | $45.3 million | Q3 2017: $44.9 million |
| Noninterest income | $6.2 million | Q3 2017: $8.8 million |
| Noninterest expense | $29.0 million | Q3 2017: $28.7 million |
| Net income, nine months | $46.5 million; diluted EPS $1.43 | 2017: $43.2 million; $1.33 |
| Assets | $5.49 billion | Dec. 31, 2017: $5.21 billion |
| Loans and leases, net | $4.55 billion | Dec. 31, 2017: $4.27 billion |
| Deposits | $4.61 billion | Dec. 31, 2017: $4.35 billion |
Q3 return on average assets was 1.17% and return on average equity was 10.91%. The taxable-equivalent net interest margin was 3.48% in Q3 and 3.59% for the first nine months, versus 3.79% and 3.83%, respectively, in 2017. The Q3 efficiency ratio was 56.28%, compared with 53.33% a year earlier.
For the first nine months, operating cash flow was $58.9 million, investing activities used $294.4 million and financing activities provided $241.3 million; cash increased $5.8 million to $159.6 million. These cash-flow figures reflect banking balance-sheet activity and should not be read as operating earnings.
At September 30, borrowings were $160.0 million, all overnight FHLB advances; subordinated debentures were $117.7 million. The Bank had $663.4 million of remaining FHLB borrowing capacity and $115.0 million of unsecured federal-funds lines with no balances drawn. Brokered deposits were $300.6 million. Hanmi Bank’s total risk-based capital ratio was 14.76%, and it remained “well capitalized” under regulatory standards.
Material changes versus comparable periods
- Q3 net income rose 7.8% year over year, although pretax income fell to $22.3 million from $24.8 million. The lower tax expense and effective tax rate—28.0% versus 39.9%—more than offset weaker noninterest income.
- Q3 noninterest income declined 29.5%, mainly because of lower SBA loan-sale gains, PCI loan disposition gains and securities gains. Nine-month noninterest income fell 29.2%; 2018 included a $0.3 million net securities loss, compared with a $1.5 million gain in 2017.
- Net interest margin compressed as funding costs rose: Q3 interest expense increased 64.6% year over year, while taxable-equivalent net interest income was nearly unchanged. Management attributed this to higher deposit rates and greater borrowing costs offsetting loan growth.
- Loans and leases increased 6.5% and deposits increased 6.1% from year-end 2017. Time deposits rose while money-market and savings deposits declined.
- Net unrealized losses on available-for-sale securities widened to $15.9 million from $3.2 million at year-end 2017. Management said it did not intend, and was not more likely than not required, to sell the loss-position securities before recovery; it recorded no impairment charge.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or growth guidance. Management described loan growth as primarily driven by new production and considered the loan-loss allowance adequate, while noting that estimates are uncertain and actual losses may differ.
- Credit quality bears watching: nonperforming loans and leases increased to $18.3 million, or 0.40% of loans and leases, from $15.8 million and 0.37% at year-end. The allowance was $31.7 million, equal to 173.3% of nonperforming loans and leases. Impaired loans were $30.3 million; total TDRs were $13.4 million.
- Special-mention loans and leases rose to $38.1 million from $17.5 million at year-end; classified balances were $33.2 million versus $31.2 million. The portfolio has notable exposure to lessors of nonresidential buildings (30.6% of loans and leases) and hospitality (18.0%).
- In August, the Board authorized repurchases of up to 5% of outstanding shares. In Q3, the Company repurchased 429,558 shares for $11.1 million, leaving 1,170,442 shares authorized for repurchase. Nine-month dividends paid were $23.3 million.
- The proposed acquisition of SWNB Bancorp, announced for approximately $76.7 million, failed to obtain the required shareholder vote and was terminated in September. Hanmi filed suit in October alleging breaches of the merger and voting agreements and seeking damages, including the termination fee. Merger and integration costs were $466,000 in Q3 and $846,000 for the nine months.
- Interest-rate simulations showed that a 100-basis-point rate decline could reduce modeled net interest income 3.41% over 1–12 months and 6.30% over 13–24 months; modeled economic value of equity declined 3.85% under that scenario. These are sensitivity estimates, not forecasts.
- Management identified general economic, credit, real-estate, interest-rate, funding, regulatory, competition and litigation risks. No material changes to previously disclosed risk factors were reported. Controls and procedures were judged effective; no material change in internal control was reported.
- The Company adopted revenue-recognition and other accounting standards in 2018 without a material impact. It expected to adopt the lease standard in 2019 and was still evaluating the expected-credit-loss standard, effective for it in 2020.
Important facts for investors to verify
- Whether loan growth can continue without further deterioration in nonperforming, impaired, criticized or concentrated exposures, particularly hospitality and commercial property.
- Whether deposit pricing, time-deposit mix and FHLB borrowing costs continue to compress net interest margin.
- The eventual recoverability and valuation effects of the securities portfolio’s unrealized losses, and how interest-rate changes affect earnings and capital.
- The status and potential financial impact of the SWNB litigation, including any recoverable termination fee or damages.
- The pace and cost of remaining share repurchases, dividend capacity, and capital ratios as assets grow and regulatory requirements change.
- The eventual implementation impact of the expected-credit-loss standard; the filing does not provide a clear quantified estimate.