Hanmi Financial Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are principally against December 31, 2013. Hanmi is a bank holding company whose primary subsidiary, Hanmi Bank, mainly serves Southern California. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and condition
| Metric | Q1 2014 | Comparable / prior date |
|---|---|---|
| Net income; diluted EPS | $11.0; $0.35 | Q1 2013: $10.1; $0.32 |
| Net interest income before credit provision | $28.0 | Q1 2013: $25.6 reported; $25.7 on a tax-equivalent basis |
| Net interest margin; net interest spread | 4.02%; 3.74% | Q1 2013: 3.86%; 3.54% |
| Non-interest income; non-interest expense | $7.2; $19.8 | Q1 2013: $8.4; $19.2 |
| Return on average assets; return on average equity | 1.50%; 11.02% | Q1 2013: 1.45%; 10.71% |
| Cash flow from operations; investing; financing | $23.3; $2.4; $(0.7) | Net cash increased $25.0 to $204.4 |
| Total assets; stockholders’ equity | $3,097.0; $414.7 | Dec. 31, 2013: $3,055.5; $401.2 |
| Gross loans; allowance for loan losses | $2,276.4; $56.6 | Dec. 31, 2013: $2,234.1; $57.6 |
| Deposits; FHLB advances | $2,506.6; $132.4 | Dec. 31, 2013: $2,512.3; $127.5 |
- Net income increased 9.1% year over year. Net interest income growth reflected higher average loan balances and the elimination of interest on redeemed trust-preferred securities; loan yields fell, while the cost of interest-bearing liabilities declined.
- A $3.3 million negative provision for credit losses benefited earnings, driven by $4.3 million of loan recoveries against $1.6 million of charge-offs. The allowance ended at 2.49% of gross loans.
- Non-interest income fell 13.5% year over year, principally because SBA guaranteed-loan sale gains declined to $0.5 million from $2.7 million. A $1.4 million securities-sale gain partly offset that decrease. Non-interest expense rose 3.3%, mainly on higher salaries and benefits, partly offset by lower professional fees.
- Income tax expense was $7.7 million; the effective tax rate rose to 41.0% from 31.7%, mainly after California EZ deductions and hiring credits expired.
- At March 31, cash and cash equivalents were $204.4 million. Deposits were nearly unchanged from year-end; noninterest-bearing deposits were $827.2 million, or 33.0% of deposits. Management reported no brokered deposits.
- The Bank’s regulatory capital ratios were 17.23% total risk-based, 15.96% Tier 1 risk-based and 13.18% Tier 1 leverage, above the stated “well-capitalized” thresholds. FHLB advances were $132.4 million; reported remaining FHLB borrowing capacity was $546.8 million.
Material changes and credit quality
- Gross loans increased 1.9% from year-end and 7.3% from March 2013, with growth concentrated in real estate lending. Residential property loans rose 39.5% from year-end. Commercial and industrial loans declined 5.5% from year-end.
- Management reported deposits up 7.4% year over year and core deposits at 81.0% of total deposits, versus 76.1% a year earlier. Quarter-end deposits nevertheless declined 0.23% from December 31.
- Non-performing loans were $25.0 million, down 3.3% from year-end; non-performing assets were $25.0 million, down 6.0%, with no OREO remaining. Delinquent loans of 30 days or more increased 15.3% from year-end to $18.8 million. No loans were 90 days past due and still accruing.
- Impaired loans were $50.4 million, down from $53.1 million at year-end. Total troubled debt restructurings were $24.9 million, down from $30.0 million; $11.2 million were on non-accrual status. Seven loans totaling $2.0 million were restructured during the quarter.
- Available-for-sale securities totaled $521.0 million and had net unrealized losses of $11.5 million, improved from $18.2 million at year-end. Management recorded no other-than-temporary impairment, citing no intent or likely requirement to sell before recovery and no identified credit impairment.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said the interim results are not necessarily indicative of full-year results. It expected the Company and Bank to meet Basel III capital requirements as implementation begins in 2015.
- Management stated that the Company had adequate stand-alone liquidity through March 31, 2015 and that the Bank had adequate liquidity for current obligations. Available sources included FHLB capacity and a $74.7 million Federal Reserve discount-window source; the Bank had no brokered deposits.
- Hanmi agreed to acquire Central Bancorp, parent of United Central Bank, for $50.0 million cash, subject to purchase-price adjustments. CBI shareholders approved the transaction on April 17, 2014; closing was expected in the second half of 2014, subject to regulatory approvals and customary conditions. CBI reported $1.4 billion in assets at December 31, 2013.
- Credit risk includes concentrations in lessor of nonresidential buildings (27.8% of gross loans), accommodation (15.0%) and gas stations (13.1%). The portfolio is largely commercial real estate and commercial lending, with much lending in Southern California. Management cited potential effects from economic conditions, real-estate values, interest rates and borrower finances.
- Interest-rate sensitivity modeling estimated that a 100-basis-point increase would raise annual net interest income 6.11%, while a 100-basis-point decrease would reduce it 11.63%. Management cautioned that these scenarios depend on assumptions and are not forecasts.
- Management extended its allowance look-back period from 12 to 16 quarters. It said the change kept the allowance consistent with the prior quarter; the prior methodology would have produced a $9.5 million negative provision, which management considered imprudent given portfolio risks.
- The filing reported ordinary-course litigation with no expected material adverse effect in management’s view, no material change in previously disclosed risk factors, and effective disclosure controls as of March 31, 2014.
Important facts for investors to verify
- Whether recoveries, provision reversals and the revised allowance methodology are sustainable, and how delinquency trends and criticized/classified loans develop.
- The quality and risk concentrations of commercial real-estate and industry exposures, including accommodation and gas-station lending, and the performance of restructured loans.
- Whether core-deposit growth and borrowing capacity remain sufficient to support loan growth, funding needs and the proposed acquisition.
- The CBI transaction’s final purchase-price adjustments, regulatory approvals, closing timing, integration costs and expected financial contribution.
- The sensitivity of earnings and securities values to interest-rate changes, and the impact of the higher effective tax rate following expiration of California tax benefits.