Hanmi Financial Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Hanmi Financial is a bank holding company whose principal business is deposit-taking, lending and investment through Hanmi Bank. Unless otherwise stated, amounts are in millions of dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income, before provision | $44.9 | $39.6 | $130.5 | $118.1 |
| Provision for loan and lease losses | $0.3 | ($1.5) income | $0.6 | ($4.5) income |
| Noninterest income | $8.8 | $8.7 | $25.7 | $25.0 |
| Noninterest expense | $28.7 | $28.3 | $84.8 | $82.3 |
| Net income | $14.9 | $13.1 | $43.2 | $42.1 |
| Diluted EPS | $0.46 | $0.41 | $1.33 | $1.31 |
- Q3 net income increased 13.7%; nine-month net income increased 2.6%. Growth was driven chiefly by higher net interest income as the loan and lease portfolio expanded.
- Tax-equivalent net interest margin was 3.79% in Q3 and 3.83% for the first nine months, versus 3.86% and 3.95%, respectively, in 2016. Excluding acquisition-accounting effects, margins were 3.76% and 3.79%, compared with 3.75% and 3.76%.
- Q3 return on average assets was 1.18%; return on average equity was 10.73%. The efficiency ratio was 53.33%.
Financial position, cash flow and liquidity
- At September 30, total assets were $5.11 billion, loans and leases before allowance were $4.20 billion, deposits were $4.30 billion, and stockholders’ equity was $559.2 million. Compared with year-end 2016, assets increased 8.7%, loans and leases 9.1%, and deposits 12.8%.
- Cash and due from banks were $138.1 million. For the nine months, operating cash flow was $55.8 million, investing cash flow was negative $427.2 million, and financing cash flow was positive $362.3 million; cash declined $9.1 million.
- FHLB advances were $110.0 million, down from $315.0 million at year-end. Subordinated debentures were $117.1 million, reflecting a $100 million fixed-to-floating note offering issued in March 2017. The notes carry a 5.45% fixed rate through March 2022, then three-month LIBOR plus 3.315%, and mature in 2027.
- The Bank reported $698.9 million of remaining FHLB borrowing capacity and $8.9 million available at the Federal Reserve Discount Window. Brokered deposits were $145.2 million. Management said the Company and Bank had adequate liquidity.
- Hanmi Bank was well capitalized: total risk-based capital was 15.32%, common equity Tier 1 was 14.55%, and Tier 1 leverage was 12.66%. The Company’s respective ratios were 15.58%, 12.20%, and 10.92%.
Material changes and credit quality
- Average loans and leases rose 17.7% in Q3 and 19.3% year to date versus 2016, reflecting loan production and the Commercial Equipment Leasing Division launched in late 2016. Interest expense also rose sharply, including from higher deposit costs and the new subordinated notes.
- Nonperforming assets declined to $16.5 million, or 0.32% of assets, from $18.9 million, or 0.40%, at year-end 2016, largely as OREO fell to $1.9 million from $7.5 million.
- Nonaccrual non-PCI loans and leases increased to $14.6 million from $11.4 million; the increase was primarily in lease receivables. The allowance for loan and lease losses was $32.5 million, or 0.77% of loans and leases, versus $32.4 million, or 0.84%, at year-end. Allowance coverage of nonperforming non-PCI loans was 217.7%.
- Q3 charge-offs were $2.4 million versus $0.1 million in Q3 2016. Nine-month net charge-offs were $0.5 million, compared with net recoveries of $0.7 million in the prior-year period. Management considered the allowance adequate, while noting estimates depend on uncertain future conditions.
- Noninterest income included $2.5 million of Q3 SBA loan-sale gains and $0.3 million of securities-sale gains. Nine-month securities-sale gains were $1.5 million. Q3 2016 other income included a branch-sale gain; prior-year expense also included a $1.4 million charge related to finalizing FDIC loss-share claims.
Outlook, risks and other matters
- The filing provides no specific earnings, growth or margin guidance. Management emphasizes stable earnings and capital protection; its interest-rate simulations are estimates, not forecasts. A 100-basis-point rate decline was modeled to reduce net interest income by 6.74% over 1–12 months and 11.63% over 13–24 months.
- Key disclosed risks include credit quality and allowance estimates, interest-rate and funding-cost changes, competition for loans and deposits, economic and real-estate conditions in the company’s markets, natural disasters affecting real-estate exposures, SBA-related risks, regulation, and the ability to control expenses.
- Management reported no material changes to previously disclosed risk factors, no material changes to contractual obligations, and no subsequent events requiring disclosure. It concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting. Ordinary-course litigation was not expected to have a material adverse effect.
- Management identified upcoming accounting standards, including revenue recognition, leases and expected-credit-loss accounting; it did not expect a material impact from revenue recognition, while the impact of CECL was still being evaluated.
Investor verification points
- Assess the rise in nonaccrual loans and leases and Q3 charge-offs, especially lease and commercial-and-industrial exposures, alongside the allowance’s adequacy.
- Review the loan portfolio’s concentration: lessors of nonresidential buildings represented 30.1% and hospitality 17.6% of loans and leases outstanding.
- Track deposit pricing and funding mix, given higher interest-bearing deposit costs, the new subordinated debt, and the presence of brokered deposits.
- Separate recurring operating performance from SBA and securities-sale gains and other prior-period unusual items; compare reported margins with acquisition-accounting-adjusted margins.
- Verify the company’s assumptions for rate sensitivity, liquidity availability, and future adoption impacts of CECL and lease accounting.