Hanmi Financial Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results include Central Bancorp, Inc. (CBI) only from its August 31, 2014 acquisition date, limiting comparability with prior periods. Dollar amounts below are in millions unless noted.
Business context and material developments
- Hanmi is a bank holding company operating Hanmi Bank. On August 31, 2014, it acquired CBI, parent of United Central Bank, expanding the bank to 49 branches across multiple states.
- Hanmi paid $80.2 million in total consideration and related pre-closing payments. CBI contributed approximately $1.256 billion of assets and $1.099 billion of deposits at acquisition. The provisional purchase accounting recorded a $6.6 million bargain purchase gain; acquired fair values remain subject to adjustment for up to one year.
- In June 2014, Hanmi sold its two insurance subsidiaries. The $3.5 million sale price included $2.0 million paid at signing, reduced by cash included with the businesses, and $1.5 million payable in three annual installments through June 2017. The sale was reported as discontinued operations.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net interest income, before credit-loss provision | $30.7 in 2014; $28.5 in 2013 | $86.6 in 2014; $81.2 in 2013 |
| Noninterest income | $14.3; $6.1 | $25.2; $19.9 |
| Noninterest expense | $26.8; $17.6 | $63.6; $53.9 |
| Net income | $13.3; $10.4 | $35.3; $29.9 |
| Diluted EPS | $0.41; $0.33 | $1.10; $0.95 |
| Net interest margin | 3.67%; 4.28% | 3.86%; 4.08% |
Q3 noninterest income included the $6.6 million bargain purchase gain and an $807,000 gain from early termination of CBI’s retirement plan. Q3 noninterest expense included $3.4 million of merger and integration costs; nine-month costs were $3.6 million. Management attributed higher net interest income mainly to growth in loans and securities, partly offset by lower asset yields. The Q3 margin fell 27 basis points from the prior quarter, and was also below the year-earlier period.
- Credit costs and asset quality: No net provision for credit losses was recorded in Q3. For the first nine months, a $7.2 million negative provision reflected improved historical loss rates and fewer classified legacy loans. Nine-month net recoveries were $1.1 million, compared with $6.2 million of net charge-offs in 2013.
- Balance sheet at September 30: Total assets were $4.228 billion versus $3.054 billion at December 31, 2013; net loans were $2.628 billion versus $2.177 billion; securities available for sale were $1.129 billion versus $530.9 million. Total deposits were $3.598 billion versus $2.512 billion. Growth largely reflects CBI.
- Cash flow, first nine months: Operating cash flow was $24.7 million, down from $48.0 million in 2013; investing activities provided $37.7 million versus using $71.8 million; financing activities used $44.8 million versus $50.4 million. Ending cash and cash equivalents were $197.0 million, up from $179.4 million at year-end 2013. Investing cash flow included $117.0 million of net cash acquired with CBI.
- Shareholders’ equity: $435.2 million at September 30, compared with $400.1 million at year-end. Book value was $13.64 per share. A $0.07-per-share cash dividend was paid October 10, 2014.
Debt, liquidity, capital and credit risks
- FHLB advances were $110.0 million at quarter-end, down from $127.5 million at year-end. Hanmi also assumed $18.5 million of subordinated debentures at fair value and a $15.7 million rescinded stock obligation; accrued interest on that obligation was $5.1 million. The filing reports total borrowings of $128.5 million, comprising FHLB advances and subordinated debentures.
- Cash and cash equivalents were $197.0 million. The Bank reported $559.2 million of remaining FHLB borrowing capacity, $65.1 million available at the Federal Reserve Discount Window, and $95.0 million of unsecured federal-funds lines. Management considered liquidity adequate; Hanmi Financial separately expected adequate stand-alone operating liquidity through September 30, 2015.
- The Bank was “well capitalized”: total risk-based capital ratio 16.28%, Tier 1 risk-based ratio 15.00%, and Tier 1 leverage ratio 12.81%. Management expected the company and Bank to meet Basel III requirements.
- Nonperforming assets, excluding purchased credit-impaired loans, were $48.8 million, or 1.15% of assets, versus $26.6 million at year-end. Nonperforming loans were $24.0 million, or 0.90% of gross loans, down from $25.9 million. The increase in total nonperforming assets chiefly reflected $22.3 million of acquired other real estate owned (OREO); quarter-end OREO totaled $24.8 million across 40 properties.
- Classified non-PCI loans were $45.0 million at quarter-end, down from $82.2 million at year-end and 47.5% below the year-earlier level. However, criticized loans rose to $87.0 million from $21.5 million at year-end. Delinquent loans of 30 days or more were $19.2 million, up from $16.3 million at year-end.
- Loan concentrations included lessors of nonresidential buildings (24.5% of gross loans), accommodation (17.7%), and gas stations (13.4%). Total undisbursed loan commitments were $340.4 million, including $327.4 million of commitments to extend credit.
Outlook, contingencies and unusual items
- The filing provides no specific earnings or revenue guidance. Management cited strategic opportunities from CBI, including access to new markets, anticipated cost savings and operational efficiencies, and potential capital deployment; these benefits are not assured.
- Interest-rate simulation estimated that an instantaneous 100-basis-point increase would raise one-year net interest income 4.70% while reducing economic value of equity 3.60%; a 100-basis-point decrease would reduce net interest income 4.41% and economic value of equity 3.40%. Management cautioned that these simulations depend on assumptions and may not predict actual results.
- Key uncertainties include provisional acquisition valuations and purchased-loan cash-flow estimates, integration and realization of expected efficiencies, interest-rate and credit risks, and real-estate collateral values. Management reported no material change in previously disclosed risk factors.
- Hanmi disclosed ordinary-course litigation that management did not expect to materially affect financial condition, results or liquidity. Tax authorities were examining specified federal and state tax years; management did not anticipate a material financial-statement impact. The company had not completed its assessment of CBI’s internal-control environment by quarter-end and expected completion before year-end; it performed additional procedures to substantiate CBI’s Q3 results.
Important facts for investors to verify
- Track final CBI purchase-accounting adjustments, acquired-loan performance, and whether projected integration savings and efficiencies are realized.
- Reconcile the effect of the $6.6 million bargain purchase gain and other acquisition-related items when assessing recurring earnings and the effective tax rate.
- Monitor criticized and classified loans, delinquencies, TDRs, acquired PCI loans, OREO dispositions, and reserve adequacy as the combined portfolio seasons.
- Assess the sustainability of net interest margin and deposit funding costs amid lower asset yields and expanded balances.
- Verify liquidity and capital after acquisition integration, commitment funding, and implementation of Basel III requirements.