Hanmi Financial Corporation — Q2 2017 Form 10-Q
Business context and period. Hanmi Financial is a bank holding company whose subsidiary, Hanmi Bank, provides commercial banking, lending and investment services. This unaudited report covers the three and six months ended June 30, 2017; comparative income and cash-flow figures are for the corresponding 2016 periods. Balance-sheet comparisons are with December 31, 2016 unless noted.
Financial results and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income, before provision | $43.2 million | $40.0 million | $85.5 million | $78.6 million |
| Provision for loan and lease losses | $0.4 million | $(1.5) million | $0.3 million | $(3.0) million |
| Noninterest income | $9.7 million | $9.4 million | $16.9 million | $16.3 million |
| Noninterest expense | $28.9 million | $27.9 million | $56.2 million | $53.9 million |
| Net income | $14.5 million | $14.1 million | $28.2 million | $29.0 million |
| Diluted EPS | $0.45 | $0.44 | $0.87 | $0.90 |
- Q2 net interest margin was 3.81%, down from 4.02% a year earlier; excluding acquisition-accounting effects, it was 3.76% versus 3.84%. First-half margin was 3.85% versus 4.00% (3.80% versus 3.75% excluding acquisition accounting).
- At June 30, total assets were $4.97 billion; net loans and leases were $4.04 billion, deposits $4.26 billion, and stockholders’ equity $550.1 million.
- Loans and leases before allowance rose 6.0% from year-end to $4.07 billion; deposits rose 11.8% to $4.26 billion. Securities available for sale totaled $571.8 million, up from $517.0 million.
- Six-month cash flows: $31.0 million provided by operations, $278.8 million used in investing, and $239.2 million provided by financing. Cash and due from banks ended at $138.5 million, down $8.7 million from year-end.
- The allowance for loan and lease losses was $33.8 million, or 0.83% of loans and leases. Nonperforming assets were $20.8 million, 0.42% of assets, compared with $18.9 million and 0.40% at year-end. Nonaccrual loans and leases increased to $16.5 million from $11.4 million; there were no non-PCI loans or leases 90 days past due and still accruing.
- The Bank reported total risk-based capital of 15.44%, common equity Tier 1 of 14.62%, and Tier 1 leverage of 12.89%; it met the regulatory “well capitalized” thresholds.
Material changes and notable items
- Q2 net income increased 2.2% year over year, while first-half net income declined 2.5%. Higher net interest income reflected loan growth, but was partly offset by a smaller negative provision benefit and higher expenses. First-half 2016 included a $1.8 million tax benefit from finalizing amended 2014 tax returns; the 2017 effective tax rate was 38.5%, versus 34.2% in first-half 2016.
- Interest expense rose as deposit costs increased and the company issued $100 million of fixed-to-floating subordinated notes in March 2017. The notes carry a 5.45% fixed rate through March 2022, then a floating rate of three-month LIBOR plus 3.315%; net carrying value at quarter-end was $97.9 million. FHLB advances fell to $20 million from $315 million at year-end, while subordinated debentures totaled $117.0 million.
- SBA loan-sale gains increased to $2.7 million in Q2 and $4.1 million in the first half. Securities sales generated gains of $0.9 million and $1.2 million, respectively; PCI loan disposition gains decreased year over year.
- Credit indicators were mixed: OREO declined to $4.3 million from $7.5 million, but nonaccrual balances increased, particularly in leases, commercial and industrial loans, and consumer loans. The allowance includes management estimates and is subject to uncertainty.
- The portfolio is concentrated in real estate lending; lessors of nonresidential buildings represented 30.9% of loans and leases and hospitality 18.3% at June 30.
Outlook, risks and contingencies
- The filing gives no specific earnings, growth, margin or credit-loss guidance. Management says the interim results are not necessarily indicative of full-year results and describes liquidity as adequate.
- Available FHLB borrowing capacity was $736.5 million at June 30, supported by pledged loans; an additional $9.5 million was available through the Federal Reserve Discount Window. The Bank also had $145.1 million of brokered deposits.
- Interest-rate simulations showed that a 100-basis-point rate decrease could reduce modeled net interest income by 7.00% over 1–12 months and 11.87% over 13–24 months. Management cautions that simulations depend on assumptions and are not forecasts.
- Risks cited include economic and credit-market conditions, interest-rate and margin changes, borrower performance, real estate exposure and natural disasters, SBA lending, competition for loans and deposits, regulation, litigation, capital and liquidity, and the adequacy of loss allowances. The company reported no material change to previously disclosed risk factors.
- Ordinary-course litigation was not expected by management to materially affect financial condition, results or liquidity. No material subsequent events were reported. Disclosure controls were deemed effective, and no material change in internal control was reported.
Most important facts for investors to verify
- Whether the rise in nonaccrual loans and leases persists, especially in lease receivables, and how it affects future provisions and charge-offs.
- Whether deposit repricing and competition continue to pressure funding costs and net interest margin as loans grow.
- How much earnings depend on SBA loan-sale and securities gains, and on acquisition-accounting accretion, versus recurring income.
- Whether the allowance remains adequate relative to portfolio growth, real estate and hospitality concentrations, and changing credit trends.
- The effect of the new subordinated notes and future rate changes on interest expense, capital, and modeled earnings sensitivity.
- Potential implementation effects of upcoming accounting standards, particularly expected-credit-loss accounting and lease accounting; the filing says evaluation was ongoing.