Hanmi Financial Corporation — Q2 2020 Form 10-Q
Business context and reporting period. Hanmi Financial is a bank holding company whose primary subsidiary, Hanmi Bank, provides traditional banking, lending and investment services. This unaudited filing covers the three and six months ended June 30, 2020; balance-sheet comparisons are principally with December 31, 2019. Results reflect the COVID-19 disruption and the January 1, 2020 adoption of the CECL expected-credit-loss standard.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income, before credit loss expense | $44.4 million | $43.0 million | $88.4 million | $87.9 million |
| Credit loss expense | $24.6 million | $16.7 million | $40.3 million | $17.8 million |
| Noninterest income | $20.9 million | $7.7 million | $27.2 million | $14.0 million |
| Noninterest expense | $27.1 million | $30.1 million | $58.2 million | $59.2 million |
| Net income | $9.2 million | $2.7 million | $11.5 million | $17.3 million |
| Diluted earnings per share | $0.30 | $0.09 | $0.38 | $0.56 |
| Net interest margin, tax-equivalent | 3.15% | 3.30% | 3.25% | 3.41% |
| Efficiency ratio | 41.51% | 59.43% | 50.36% | 58.13% |
Q2 pretax income was $13.6 million. The quarter’s $15.7 million net gain on securities sales materially lifted noninterest income and earnings; it is not a recurring operating source. Six-month net income fell year over year, mainly because of higher credit loss expense, partly offset by the securities gain. Lower deposit costs helped net interest income, while lower asset yields weighed on margin. Q2 return on average assets and equity were 0.63% and 6.73%, respectively; six-month figures were 0.41% and 4.18%.
Financial position, cash flow and credit
- Scale and funding: Total assets were $6.22 billion, up from $5.54 billion at year-end. Deposits were $5.21 billion, up $510.8 million; noninterest-bearing deposits rose $473.6 million. Cash and due from banks increased to $546.0 million from $121.7 million.
- Loans and credit reserves: Gross loans were $4.83 billion, versus $4.61 billion at year-end; net loans were $4.74 billion. The allowance for credit losses was $86.3 million, or 1.79% of loans, compared with $61.4 million, or 1.34%, at year-end. The allowance included a $25.7 million qualitative amount for COVID-related uncertainty.
- Credit quality: Nonperforming loans were $58.3 million (1.21% of loans), down from $63.8 million at year-end; nonperforming assets were $58.4 million (0.94% of assets). Six-month net charge-offs were $28.6 million, including a $25.2 million charge-off of a previously identified troubled relationship. Classified loans were $93.9 million, broadly unchanged from year-end.
- Cash flow: For the six months, operating activities provided $23.9 million, investing activities used $258.6 million, and financing activities provided $659.1 million. Cash increased $424.4 million. Financing included deposit growth and $176.8 million in borrowing proceeds.
- Debt and liquidity: Borrowings were $251.8 million at June 30, including $150.0 million of FHLB advances and $101.8 million of Federal Reserve PPP Liquidity Facility advances; the latter were repaid after quarter-end. Subordinated debentures, net, were $118.7 million. FHLB available borrowing capacity was reported at $1.5 billion, subject to a $1.4 billion statutory lending limit; additional Federal Reserve Discount Window capacity was $47.9 million.
- Capital: Hanmi Bank remained well capitalized, with total risk-based capital of 13.62%, Tier 1 risk-based capital of 12.36%, common equity Tier 1 of 12.36%, and Tier 1 leverage of 11.03%. Company common equity Tier 1 was 10.46%. Tangible common equity to tangible assets was 8.63%, down from 9.98% at year-end.
Material changes and unusual items
- CECL adoption increased the opening loan-loss allowance by $17.4 million, reduced the off-balance-sheet allowance by $0.3 million, and reduced opening retained earnings by $12.2 million after tax. The company subsequently revised its loss-estimation approach for several loan portfolios in response to COVID-19 uncertainty.
- Q2 securities sales generated a $15.7 million gain as Hanmi repositioned its portfolio to realize unrealized gains in a low-rate environment. The company reinvested proceeds in U.S. Treasury and agency securities.
- At June 30, $301.8 million of PPP loans were included in commercial and industrial loans. The company also reported approximately $1.4 billion of loans modified under CARES Act Section 4013. These temporary modifications were not treated as troubled debt restructurings under the applicable relief.
- The quarterly dividend was reduced from $0.24 per share in Q1 to $0.12 in Q2; the company also reported a $0.08-per-share Q3 dividend. Management said future dividends would be reassessed quarterly. The share repurchase program was suspended amid the pandemic.
- A previously disclosed material weakness in IT access and segregation-of-duties controls was reported remediated as of June 30 after implementation and testing of enhanced controls. Management concluded disclosure controls were effective at period-end.
Outlook, commentary and risks
The filing provides no specific earnings or revenue guidance. Management said the duration and effects of COVID-19 were highly uncertain. Risks identified include further deterioration in borrower repayment capacity, higher delinquencies and credit losses, declining collateral values, additional reserve needs, reduced net interest margin in a low-rate environment, and possible pressure on dividends. Hanmi also noted PPP-related litigation, regulatory, reputational and guarantee-funding risks; increased remote-work cybersecurity exposure; and potential disruption from third-party vendors. Hospitality, restaurant/food service and retail were identified as particularly affected sectors. The bank’s loan concentrations included lessors of nonresidential buildings (28.7% of loans) and hospitality (19.6%).
Management stated that the company and bank had adequate liquidity, and the bank exceeded regulatory well-capitalized thresholds. These assessments remain subject to economic conditions, deposit and borrowing availability, and the performance of modified and PPP borrowers.
Most important facts for investors to verify
- Whether reserve levels and credit-loss assumptions adequately reflect COVID-19 impacts, particularly for hospitality, retail, food service and real-estate exposures.
- Performance of the approximately $1.4 billion of CARES Act-modified loans and the $301.8 million of PPP loans, including the status of guarantees and forgiveness.
- How much of reported earnings depended on the $15.7 million securities gain, and whether net interest margin stabilizes as rates and funding costs change.
- Liquidity and capital after repayment of the $101.8 million PPPLF advance, continued deposit movements, and any further changes to dividends or repurchases.
- Credit trends behind the $28.6 million in six-month net charge-offs, nonperforming loans, and commercial real-estate concentrations.
- The source reports $479.9 million of securities sales in management commentary and $495.6 million of proceeds in the cash-flow and securities disclosures; investors should confirm the basis for the difference.