Hanmi Financial Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Hanmi Financial is a bank holding company whose primary subsidiary, Hanmi Bank, conducts traditional deposit-taking, lending and investment activities. Unaudited results are not necessarily indicative of full-year results.
Financial results and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior date |
|---|---|---|
| Net interest income | $46.0 million | $44.0 million in Q1 2020 |
| Credit loss expense | $2.1 million | $15.7 million in Q1 2020 |
| Noninterest income | $9.8 million | $6.2 million in Q1 2020 |
| Noninterest expense | $29.5 million | $31.1 million in Q1 2020 |
| Net income; diluted EPS | $16.7 million; $0.54 | $2.4 million; $0.08 in Q1 2020 |
| Net interest margin, tax-equivalent | 3.09% | 3.36% in Q1 2020 |
| Net interest spread, tax-equivalent | 2.81% | 2.80% in Q1 2020 |
| Total assets | $6.44 billion | $6.20 billion at December 31, 2020 |
| Loans receivable, gross | $4.82 billion | $4.88 billion at December 31, 2020 |
| Total deposits | $5.51 billion | $5.28 billion at December 31, 2020 |
| Cash and due from banks | $646.4 million | $391.8 million at December 31, 2020 |
| Stockholders’ equity | $581.8 million | $577.0 million at December 31, 2020 |
- Net cash provided by operating, investing and financing activities was $6.6 million, $17.3 million and $230.7 million, respectively; cash increased by $254.6 million during the quarter.
- Interest-earning asset yield fell to 3.50% from 4.50% in Q1 2020, while the cost of interest-bearing liabilities fell to 0.69% from 1.70%. Lower funding costs supported higher net interest income, partly offset by lower asset yields.
- The allowance for credit losses was $88.4 million, or 1.83% of gross loans, versus $90.4 million, or 1.85%, at year-end. Net charge-offs were $3.0 million, or 0.25% of average loans, compared with $27.3 million, or 2.41%, in Q1 2020.
- Nonperforming loans were $55.1 million (1.14% of loans) and nonperforming assets were $56.6 million (0.88% of assets), down from $83.0 million and $85.4 million, respectively, at year-end.
- Borrowings included $150.0 million of FHLB advances and $119.1 million of subordinated debentures. The FHLB advances carried a 1.20% weighted-average rate. The Bank reported $1.39 billion of remaining FHLB borrowing capacity and $31.1 million available through the Federal Reserve Discount Window. Management stated that the Company and Bank had adequate liquidity.
- The Bank’s total risk-based, Tier 1 risk-based, CET1 and leverage ratios were 15.26%, 14.01%, 14.01% and 10.99%, respectively; management said the Bank remained well capitalized.
Material changes and notable items
- Year-over-year net income increased substantially as credit loss expense was lower than the elevated Q1 2020 provision, alongside improved net interest income and lower operating expenses. Management attributes the prior-period provision to COVID-19 qualitative factors, other qualitative factors, a specific troubled-loan provision and an off-balance-sheet provision.
- Noninterest income rose 57.6%, primarily reflecting a $2.5 million gain on sale of $108.6 million of PPP loans and $1.7 million in gains on sales of non-PPP SBA loans. A $250,000 legal settlement and $99,000 securities gain also contributed.
- Deposits increased $234.8 million from year-end, driven mainly by a $275.9 million increase in noninterest-bearing demand deposits. The loan-to-deposit ratio declined to 87.4% from 92.5%. Uninsured deposits totaled $2.27 billion.
- Loans modified under CARES Act provisions declined to $116.4 million from $155.6 million at year-end. Special mention loans increased to $96.1 million from $77.0 million, and classified loans rose to $147.4 million from $140.2 million. Hospitality exposure is material: hospitality loans were $842.0 million, while the industry concentration disclosure reports $880.9 million, or 18.3% of loans; verify the differing scope or classification.
- Q1 2021 included $2.1 million of provision for an SBA guarantee repair loss; the filing also reports a $450,000 negative provision for off-balance-sheet items and a $471,000 negative provision for accrued-interest receivables related to CARES Act-modified loans.
- The Board increased the quarterly dividend to $0.10 per share in Q1 2021 and authorized an increase to $0.12 in Q2 2021. The filing gives no earnings or revenue guidance; management said it would continue to reassess dividends.
Outlook, risks and contingencies
- Management emphasized that COVID-19’s effect remained uncertain and could affect borrowers, collateral values, loan demand, credit losses, net interest income, liquidity and operating results. The allowance depends on estimates and economic forecasts; actual outcomes may differ.
- Other disclosed risks include interest-rate and margin sensitivity, real estate and hospitality exposure, competition for loans and deposits, access to cost-effective funding, cybersecurity and third-party service disruptions, regulatory changes, and the adequacy of credit-loss reserves. The filing highlights possible PPP-related litigation, regulatory and SBA-guarantee risks.
- Undisbursed loan commitments totaled $580.9 million, including $463.8 million of commitments to extend credit, $48.9 million of standby letters of credit and $68.1 million of commercial letters of credit.
- Management reported no material change in risk factors from the 2020 Form 10-K, no material litigation expected to adversely affect the Company, and no subsequent event requiring disclosure.
Important facts for investors to verify
- Whether lower credit costs and SBA/PPP loan-sale gains are sustainable, and how PPP forgiveness and sales affect future loan balances and earnings.
- Performance and risk migration in modified, special mention and classified loans, particularly hospitality and other COVID-affected borrowers; also reconcile the hospitality exposure figures reported in different sections.
- How asset-yield compression, deposit pricing and the large cash and securities balances affect net interest margin as rates and deposit levels change.
- Whether deposit growth persists and how the $2.27 billion of uninsured deposits affects funding stability and liquidity.
- Future credit-loss provisions, charge-offs, SBA guarantee repairs and reserve assumptions, given uncertainty in economic forecasts and collateral valuations.
- Dividend decisions, share repurchases and capital levels; Q1 repurchases were 55,000 shares under the public program, with 934,600 shares remaining authorized at March 31.