Hanmi Financial Corporation — Q3 2011 Form 10-Q
Business context and reporting period. Hanmi Financial is a bank holding company whose primary subsidiary, Hanmi Bank, serves individuals and businesses primarily in Southern California. This unaudited filing covers the three and nine months ended September 30, 2011; balance-sheet comparisons are with December 31, 2010. Amounts below are in U.S. dollars unless noted.
Financial performance and position
- Earnings: Q3 net income was $4.2 million ($0.03 per diluted share), versus a $14.6 million loss in Q3 2010. Nine-month net income was $22.6 million ($0.15 per diluted share), versus a $93.3 million loss in 2010.
- Interest income and margin: Q3 interest and dividend income was $31.7 million; net interest income before credit-loss provision was $25.2 million, down from $26.3 million. Nine-month amounts were $98.2 million and $76.7 million, respectively, versus $109.9 million and $79.9 million in 2010. Net interest margin improved to 3.75% for Q3 and 3.69% year to date, from 3.49% and 3.58%.
- Other income and expenses: Noninterest income was $6.0 million for Q3 and $17.5 million for nine months. Noninterest expense was $18.9 million and $62.8 million, respectively, down 21.7% and 16.3% year over year. Efficiency ratios improved to 60.55% and 66.63%.
- Credit costs and asset quality: Credit-loss provision was $8.1 million in both Q3 and the first nine months, compared with $22.0 million and $117.5 million in the comparable 2010 periods. Nine-month net charge-offs were $53.6 million, down from $86.6 million. The allowance for loan losses was $100.8 million, or 4.97% of gross loans. Reported nonperforming loans were $95.5 million, or 4.71% of gross loans, compared with $169.0 million and 7.45% at year-end 2010; this reported measure includes loans held for sale. Nonperforming assets were $95.8 million, or 3.57% of assets.
- Balance sheet: Total assets were $2.69 billion, down from $2.91 billion. Gross loans were $2.03 billion, down 10.5%; net loans receivable were $1.89 billion. Deposits totaled $2.35 billion, down 4.6%. Stockholders’ equity rose to $203.2 million from $173.3 million.
- Funding, debt and liquidity: Cash and cash equivalents were $228.9 million. Deposits included $621.2 million of noninterest-bearing deposits; core deposits grew 12.8% to $1.52 billion, while total deposits declined. FHLB advances fell to $3.4 million from $153.7 million; other borrowings were $18.7 million and junior subordinated debentures were $82.4 million. The company reported $13.5 million of accrued interest payable, including $9.0 million accrued on the junior debentures. Bank liquidity sources included $347.4 million of remaining FHLB capacity and $135.1 million available at the Federal Reserve Discount Window; no brokered deposits or Fed Discount Window borrowings were reported.
- Cash flow: For nine months, operating activities provided $25.5 million and investing activities provided $200.4 million; financing activities used $246.7 million. Cash and cash equivalents declined $20.9 million to $228.9 million.
- Capital: Hanmi Bank’s tangible equity-to-tangible-assets ratio was 10.63%, above the 9.5% regulatory order threshold and up from 8.59% at year-end. The Bank’s total risk-based capital ratio was 14.72%, above the 10% “well-capitalized” benchmark.
Changes versus comparable periods
- Profitability returned, with four consecutive profitable quarters reported through Q3 2011. Management attributed the improvement primarily to sharply lower credit provisions and reduced noninterest expense.
- Net interest income remained lower as average loan balances contracted, but lower deposit costs and improved loan yields lifted net interest margin. Average gross loans fell 15.4% in Q3 and 17.7% year to date; average interest-bearing deposit cost fell to 1.28% for Q3 and 1.36% year to date.
- Problem assets improved through charge-offs, paydowns, loan sales and cures. However, newly identified TDRs and post-restructuring defaults remain notable: 96 loans were restructured for $50.7 million post-modification in the first nine months; $26.4 million of TDRs subsequently defaulted during that period.
- Core deposits and noninterest-bearing deposits increased, while high-cost large time deposits and FHLB funding declined. Total loans and total deposits contracted as the Bank continued balance-sheet deleveraging.
Outlook, risks and unusual items
- Management gave no quantified earnings or balance-sheet guidance. For the rest of 2011 it planned to maintain capital, improve credit quality, comply with regulatory orders, reduce problem loans through sales, and seek quality loans and core deposits.
- The Bank remains subject to a 2009 California DFI Final Order and Federal Reserve Written Agreement requiring, among other things, stronger capital, credit-risk management, problem-asset controls and liquidity planning. Restrictions include limits on dividends, debt and certain business changes without regulatory approval. Further enforcement, including possible conservatorship or receivership, is identified as a risk if material noncompliance occurs.
- Hanmi Financial suspended common dividends and has deferred junior-debenture interest payments since 2009; payments require regulatory consent. Management said the holding company had adequate liquid assets for operating needs through December 31, 2011, but its stand-alone liquid assets were only $5.1 million at quarter-end.
- Credit risks include the concentration in commercial real estate and small-to-mid-sized businesses, Southern California market exposure, collateral valuation uncertainty and continued TDR defaults. Three industry exposures exceeded 10% of gross loans: lessors of non-residential buildings (18.6%), accommodation/hospitality (14.6%) and gasoline stations (13.4%). Management expects future credit-loss provisions may still be required.
- Q3 noninterest income included a $1.7 million gain on securities sales, partly offset by a $1.4 million net loss on loan sales. Nine-month loan-sale results included $2.9 million of valuation adjustments on loans held for sale. Nine-month expenses included $2.2 million for unsuccessful capital-raising efforts. The company maintained a full deferred-tax-asset valuation allowance and reported a $718,000 out-of-period tax reserve adjustment.
- After quarter-end, CFO Brian Cho retired and Lonny Robinson was appointed CFO. Disclosed separation benefits for Cho included a $135,000 lump-sum payment, accrued vacation, medical coverage and accelerated equity awards; Robinson received salary, incentive eligibility and equity awards.
- Risks also include sensitivity to interest rates and funding availability, real-estate values, FDIC assessment costs, economic weakness, market disruption and potential U.S. sovereign-debt-related effects. The filing reports effective disclosure controls and no material litigation expected by management to adversely affect the company.
Key facts for investors to verify
- Reconcile the filing’s differing nonperforming-loan presentations: $95.5 million including loans held for sale versus $78.0 million excluding them, and confirm consistent denominator and period definitions for asset-quality ratios.
- Assess whether the lower loan-loss provision and reserve balance remain adequate given $53.6 million of nine-month net charge-offs, TDR defaults and collateral-value uncertainty.
- Track compliance with the DFI/FRB orders, the 9.5% tangible-capital requirement, regulatory restrictions and approvals for dividends, debt and funding sources.
- Evaluate deposit stability, the shift toward core deposits, available secured borrowing capacity, the holding company’s limited stand-alone liquidity and deferred junior-debenture interest.
- Determine whether loan growth, net interest income and recurring fee revenue can offset a smaller loan book and securities-sale gains that may not recur.