Hanmi Financial Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; financial statements are unaudited. Hanmi Financial is a bank holding company whose primary business is deposit-taking, lending and investing through Hanmi Bank.
Financial performance and position
| Metric | Q3 2016 | Comparable period | Nine months 2016 | Comparable period |
|---|---|---|---|---|
| Net income | $13.1 million | $14.0 million in Q3 2015 | $42.1 million | $39.0 million in 2015 |
| Diluted EPS | $0.41 | $0.44 | $1.31 | $1.22 |
| Net interest income, before loan-loss provision | $39.6 million | $36.0 million | $118.1 million | $110.5 million |
| Noninterest income | $8.7 million | $13.6 million | $25.0 million | $35.5 million |
| Noninterest expense | $28.3 million | $28.7 million | $82.3 million | $87.1 million |
| Net interest margin, taxable-equivalent | 3.86% | 3.81% | 3.95% | 3.89% |
Q3 net income declined about 6% year over year, while nine-month net income increased 7.9%. The nine-month result benefited from stronger net interest income, lower expenses and a lower effective tax rate. The nine-month effective tax rate was 35.6%, including a $1.8 million benefit from finalizing amended 2014 tax returns; without it, management reported 38.4%.
- Balance sheet at September 30: Assets were $4.40 billion; loans receivable before allowance were $3.55 billion, up 11.6% from year-end 2015; deposits were $3.77 billion, up 7.4%. Stockholders’ equity was $531.2 million.
- Funding and liquidity: Noninterest-bearing deposits were $1.23 billion, 32.7% of deposits. Cash and due from banks was $130.2 million, down from $164.4 million at year-end. FHLB advances were $55.0 million, down from $170.0 million; $696.3 million of FHLB borrowing capacity remained available. Operating cash flow was $36.9 million for the first nine months; investing activities used $197.8 million and financing activities provided $126.8 million.
- Debt: Total reported borrowings, including subordinated debentures, were $73.9 million at quarter-end. Subordinated debentures were $18.9 million.
- Credit quality: Nonperforming assets were $21.9 million, or 0.50% of assets, versus $27.6 million at year-end. Nonaccrual non-PCI loans were $10.9 million; there were no non-PCI loans 90 days past due and still accruing. The allowance for loan losses was $39.0 million, 1.10% of loans; the company recorded a $1.5 million negative provision in Q3 and a $4.5 million negative provision for the nine months.
- Capital: Hanmi Bank reported total risk-based capital of 14.61%, common equity Tier 1 of 13.50% and Tier 1 leverage of 11.36%; it met the regulatory “well capitalized” thresholds.
Material changes and unusual items
- Loan growth and a larger share of loans in earning assets lifted net interest income. This was partly offset by lower loan yields and higher funding costs.
- Noninterest income fell 36.0% in Q3 and 29.6% year to date, principally because gains on securities sales and dispositions of purchased credit-impaired (PCI) loans were substantially lower than in 2015. Q3 2016 included a $1.0 million gain on sale of a branch facility.
- Q3 noninterest expense included a $1.4 million charge from finalizing prior-year FDIC loss-share claims. Nine-month expenses fell 5.6%, mainly as merger-related, professional and data-processing costs declined.
- Available-for-sale securities declined to $549.0 million from $698.3 million at year-end, while their net unrealized position improved from a $2.3 million loss to an $11.1 million gain.
- Effective July 19, 2016, Hanmi Bank voluntarily withdrew from the Federal Reserve System and became a state non-member bank regulated by California’s Department of Business Oversight and the FDIC. The Federal Reserve canceled the Bank’s stock holdings for $14.4 million in cash.
- On October 27, 2016, the Bank acquired $209 million of equipment leases from Banc of California; a further $25 million was expected to transfer before year-end. The acquired operation is to become the Commercial Equipment Leasing Division.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management’s forward-looking statements are subject to risks including economic and credit conditions, interest-rate and spread changes, loan and deposit competition, real-estate exposure, loan-loss estimates, regulation, liquidity and capital needs, and acquisition integration. Loan exposure is concentrated in lessor of nonresidential buildings (30.9% of loans) and hospitality (18.5%). The company reported $341.6 million of undisbursed loan commitments, including $330.1 million of commitments to extend credit.
Management considered the loan-loss allowance adequate but noted that its estimates depend on uncertain assumptions and future conditions. Interest-rate simulations estimated that an instantaneous 100-basis-point increase would raise one-year net interest income by 1.19%; larger modeled increases also showed higher estimated net interest income, but a 300-basis-point rise reduced estimated economic value of equity by 0.83%. These are model estimates, not forecasts. Management reported no material changes to previously disclosed risk factors, no material expected impact from ongoing tax examinations, and no material adverse effect expected from ordinary-course litigation.
Key facts for investors to verify
- Whether loan growth and deposit mix sustain net interest income and margins as loan yields decline and funding costs rise.
- Whether lower nonperforming loans persist, and whether rising OREO ($11.0 million versus $8.5 million at year-end) or PCI loan performance creates additional losses.
- How repeatable earnings are without 2015’s larger securities and PCI disposition gains, and after the Q3 branch gain, FDIC claim charge and tax benefit.
- How the equipment-lease acquisition, including the expected additional $25 million transfer, affects growth, risk and integration costs.
- Whether available liquidity, capital ratios and interest-rate sensitivity remain adequate as commitments and the balance sheet expand.