Hanmi Financial Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Hanmi Financial is a bank holding company whose primary business is traditional banking through Hanmi Bank. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2022 / June 30, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net income | $25.1 million; diluted EPS $0.82 | Q2 2021: $22.1 million; $0.72 |
| Net interest income | $59.0 million | Q2 2021: $49.6 million |
| Net interest margin, taxable-equivalent | 3.55% | Q2 2021: 3.19% |
| Noninterest income | $9.3 million | Q2 2021: $8.9 million |
| Noninterest expense | $31.5 million | Q2 2021: $30.8 million |
| Credit loss expense (recovery) | $1.6 million expense | Q2 2021: $3.3 million recovery |
| Loans receivable, gross | $5.66 billion | December 31, 2021: $5.15 billion |
| Total deposits | $5.98 billion | December 31, 2021: $5.79 billion |
| Cash and due from banks | $217.2 million | December 31, 2021: $609.0 million |
| Stockholders’ equity | $618.3 million | December 31, 2021: $643.4 million |
- Six-month results: Net income was $45.7 million, or $1.50 diluted EPS, versus $38.8 million, or $1.26, in the first half of 2021. Net interest income was $110.0 million versus $95.6 million; taxable-equivalent net interest margin was 3.32% versus 3.14%.
- Cash flow, first half: Operating activities provided $50.7 million; investing activities used $541.8 million, primarily reflecting loan growth; financing activities provided $99.4 million. Cash declined $391.7 million.
- Debt and funding: Borrowings were $145.0 million and subordinated debentures were $129.1 million at quarter-end. The company redeemed $100 million of 2017 subordinated notes in March and recorded a $1.1 million pretax charge for unamortized issuance costs. The Bank also had $110 million of brokered deposits.
- Liquidity and capital: The loan-to-deposit ratio was 94.6%. Remaining FHLB borrowing capacity was $1.47 billion; Federal Reserve Discount Window capacity was $25.4 million, with no borrowings. The Bank’s total risk-based capital ratio was 13.70% and Tier 1 leverage ratio was 11.00%; it exceeded regulatory “well-capitalized” thresholds.
Material changes versus comparable periods
- Q2 net income increased about 13% year over year, supported by a $9.5 million increase in net interest income and modestly higher noninterest income. The larger credit loss expense, compared with a recovery in Q2 2021, partly offset the improvement.
- Loan growth drove higher interest income: gross loans rose approximately $504 million from year-end 2021. Management cited $1.15 billion of new loan production in the first half, partly offset by sales, payoffs, amortization and other reductions.
- Deposit growth was $193 million from year-end, led by noninterest-bearing demand deposits. Cash fell as liquidity funded loan production and the subordinated-note redemption.
- Rising rates reduced the fair value of available-for-sale securities: fair value was $860.2 million against $955.3 million amortized cost, with $95.2 million of gross unrealized losses. Year-to-date other comprehensive loss, net of tax, was $58.1 million; accumulated other comprehensive loss was $66.6 million.
- Noninterest income for the first half fell $0.9 million year over year, mainly because PPP loan-sale gains declined $2.7 million; increased deposit service charges and fees partly offset the decline. First-half noninterest expense rose $2.9 million, including higher compensation, advertising, data-processing and other operating costs.
- Asset-quality measures improved from year-end: nonperforming loans were $11.0 million, or 0.20% of loans, versus $13.4 million, or 0.26%; special-mention loans were $80.5 million versus $95.3 million; classified loans were $53.0 million versus $60.6 million.
Outlook, commentary and risks
- The filing provides no specific earnings or revenue guidance. Management said the Board would continue to reassess quarterly dividends. A $0.25-per-share third-quarter 2022 dividend had been declared after quarter-end; Q1 and Q2 dividends were $0.22 per share.
- Management attributed margin improvement to larger earning-asset balances and lower funding costs, while noting lower average loan yields. The company’s interest-rate simulation estimated that a parallel 300-basis-point increase could raise net interest income 9.19% over 1–12 months; a 100-basis-point decrease could reduce it 5.10%. These are model estimates, not forecasts, and depend on assumptions about rates, prepayments and deposit behavior.
- Credit exposure remains concentrated in lessors of nonresidential buildings (32.2% of loans) and hospitality (12.2%). Management cited strong loan growth as a factor in credit-loss provisioning, alongside improved asset quality and economic forecasts. COVID-19 uncertainty and economic conditions may affect credit-loss estimates.
- Uninsured deposits totaled $2.75 billion. Other identified risks include competition for loans and deposits, interest-rate and real-estate-market changes, inflation, borrower performance, cyber and operational risks, and access to cost-effective funding. The filing reported no material change in risk factors from the 2021 Form 10-K.
- Management reported adequate liquidity and effective disclosure controls. Ordinary-course legal matters were not expected to have a material adverse effect; no material subsequent events were identified.
Important facts for investors to verify
- Whether loan growth, deposit growth and funding costs support continued net interest income and margin performance as rates change.
- The composition and performance of commercial-property and hospitality exposures, including criticized loans and borrower sensitivity to economic conditions.
- The effect of unrealized securities losses on tangible capital, liquidity choices and the company’s ability or intent to hold securities to recovery.
- Credit-loss allowance assumptions and any changes in delinquencies, charge-offs, nonperforming loans or off-balance-sheet commitments.
- Deposit retention and concentration, uninsured deposit levels, and availability of pledged-collateral borrowing capacity.
- The sustainability of dividends and capital ratios after loan growth, the debt redemption and market-value changes.