Hanmi Financial Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Hanmi Financial is a bank holding company whose primary subsidiary, Hanmi Bank, conducts commercial banking, lending and investment activities. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2021 / Sep. 30, 2021 | Comparison |
|---|---|---|
| Net income | $26.6 million; diluted EPS $0.86 | Q3 2020: $16.3 million; $0.53 |
| Net interest income, before credit loss expense | $50.0 million | Q3 2020: $45.6 million |
| Credit loss recovery | $7.2 million | Q3 2020: $38,000 expense |
| Noninterest income | $12.5 million | Q3 2020: $7.1 million |
| Noninterest expense | $32.5 million | Q3 2020: $29.9 million |
| Net interest margin, taxable-equivalent basis | 3.07% | Q3 2020: 3.13% |
| Total assets | $6.78 billion | Dec. 31, 2020: $6.20 billion |
| Loans receivable, before allowance | $4.86 billion | Dec. 31, 2020: $4.88 billion |
| Total deposits | $5.73 billion | Dec. 31, 2020: $5.28 billion |
| Cash and due from banks | $824.3 million | Dec. 31, 2020: $391.8 million |
| Allowance for credit losses | $76.6 million; 1.58% of loans | Dec. 31, 2020: $90.4 million; 1.85% |
| Borrowings and subordinated debentures | $352.3 million | Dec. 31, 2020: $269.0 million |
| Stockholders’ equity | $619.1 million | Dec. 31, 2020: $577.0 million |
For the nine months, net income was $65.3 million, or $2.13 diluted EPS, versus $27.9 million, or $0.91, in 2020. Net interest income before credit loss expense was $145.6 million versus $134.0 million; the taxable-equivalent net interest margin was 3.12% versus 3.21%.
Nine-month cash flows: operating activities provided $65.5 million (2020: $40.3 million); investing activities used $153.1 million (2020: $341.5 million); financing activities provided $520.1 million (2020: $539.3 million). Cash increased $432.5 million to $824.3 million.
The Bank’s September 30 capital ratios included total risk-based capital of 15.17%, Tier 1 risk-based capital of 13.91%, and Tier 1 leverage of 10.86%; the filing states the Bank exceeded “well capitalized” requirements. Available FHLB borrowing capacity was $1.37 billion; an additional $24.6 million was available through the Federal Reserve Discount Window. The loan-to-deposit ratio was 84.8%, down from 92.5% at year-end 2020.
Material changes and management commentary
- Q3 earnings rose primarily because of the $7.2 million credit loss recovery, higher noninterest income and higher net interest income, partly offset by increased operating expenses.
- Q3 noninterest income increased 75.2% year over year, mainly from higher SBA and PPP loan-sale gains and deposit service charges. Nine-month noninterest income declined 9.0%, largely because 2020 included a $15.7 million securities-sale gain; 2021 SBA and PPP loan-sale gains increased by $10.0 million.
- Nine-month credit loss expense shifted from $40.4 million in 2020 to an $8.5 million recovery in 2021. Management attributed the release in part to improving unemployment assumptions and reduced problem assets; it cautioned that pandemic-related uncertainty remains.
- Deposits grew $454.5 million from year-end, primarily from noninterest-bearing deposits. Cash and securities rose amid excess liquidity. The company issued $110.0 million of subordinated notes in August 2021; notes carry a 3.75% fixed rate through August 2026, then a floating rate.
- Nonperforming loans fell to $21.2 million, or 0.44% of loans, from $83.0 million, or 1.70%, at year-end. Classified loans were $82.4 million, down from $140.2 million, while special-mention loans rose to $130.6 million from $77.0 million.
Outlook, risks and unusual items
- The filing provides no quantitative earnings or operating guidance. Management said the Board increased the quarterly dividend to $0.20 per share for Q4 2021 and expects to reassess dividends in subsequent quarters. The Bank had no remaining 2021 dividend capacity without prior regulatory approval; it could pay approximately $100 million without such approval at the start of 2022.
- COVID-19 effects remain uncertain. Risks cited include deterioration in borrower performance, collateral values and credit quality; changes to credit loss estimates; reduced demand; operational and cybersecurity disruptions; and risks related to PPP loans.
- Credit and concentration risks include hospitality loans of $787.6 million (16.2% of loans) and loans to lessors of nonresidential buildings of $1.57 billion (32.4%). Uninsured deposits totaled $2.53 billion. Loans modified under the CARES Act were $12.0 million, down from $155.6 million at year-end; some modified loans remained adversely graded or nonaccrual.
- Interest-rate simulations estimated that a 100-basis-point rate decline would reduce net interest income by 5.27% over 1–12 months and 9.29% over 13–24 months. Management cautioned that simulations depend on assumptions and may not predict actual results.
- The company reported no material change in risk factors, no material litigation expected to affect financial condition, and no subsequent events identified as of the financial-statement issuance date. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether the credit loss recovery and improved nonperforming-loan measures persist, particularly across hospitality and pandemic-affected borrowers.
- How deposit growth, including the substantial uninsured-deposit base, develops and affects funding costs and liquidity.
- Whether SBA/PPP loan-sale income and increased service-charge revenue are sustainable after pandemic-related programs and activity change.
- The effect of the new subordinated debt and interest-rate movements on funding costs, net interest margin and capital.
- Whether the Q4 dividend increase and any future distributions remain supportable given Bank-level dividend restrictions and regulatory approval requirements.