Hanmi Financial Corporation — Q3 2015 Form 10-Q
Business context and reporting period. Hanmi Financial is a bank holding company whose primary business is deposit-taking, lending and investment through Hanmi Bank. This unaudited filing covers the three and nine months ended September 30, 2015. Comparisons are affected by the August 31, 2014 acquisition of Central Bancorp (CBI): its results are included only from the acquisition date in 2014, but for the full comparable periods in 2015.
Financial results and position
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income before loan-loss provision | $36.0 | $31.1 | $110.5 | $85.3 |
| Net interest income after provision | $39.7 | $31.0 | $118.3 | $92.8 |
| Noninterest income | $13.6 | $21.6 | $35.5 | $33.3 |
| Noninterest expense | $28.7 | $25.5 | $87.1 | $61.8 |
| Net income | $14.0 | $21.8 | $39.0 | $43.8 |
| Diluted EPS | $0.44 | $0.68 | $1.22 | $1.39 |
| Net interest margin | 3.80% | 3.72% | 3.89% | 3.80% |
- Profitability and margins: Reported net interest margin improved year over year, but excluding acquisition-accounting effects it was 3.48% versus 3.60% in Q3 and 3.40% versus 3.77% for the nine months. Q3 return on average assets was 1.38% (2.46% in 2014); return on average equity was 11.55% (19.97%).
- Balance sheet at September 30, 2015: Total assets were $4.21 billion, loans receivable net of allowance were $3.00 billion, securities available for sale were $669.3 million, and deposits were $3.52 billion. Stockholders’ equity was $485.4 million; book value per share was $15.18 and tangible book value per share $15.12.
- Loans and credit: Gross loans were $3.05 billion, up 9.2% from year-end 2014. The allowance for loan losses was $46.4 million, or 1.52% of loans, versus $52.7 million and 1.91% at year-end. The company recorded negative provisions of $3.7 million in Q3 and $7.8 million year to date. Nine-month net recoveries were $1.5 million.
- Asset quality: Nonperforming assets were $37.2 million, 0.88% of assets, versus $41.1 million, 0.97%, at year-end 2014. Nonaccrual non-PCI loans were $23.9 million; OREO was $13.2 million. Total TDRs were $18.2 million, including $10.4 million nonaccrual TDRs.
- Cash flow: For the nine months, operating activities provided $36.6 million, investing activities provided $86.2 million, and financing activities used $45.8 million. Cash and due from banks increased $77.0 million to $235.3 million.
- Funding and debt: Deposits declined $38.1 million from year-end. Noninterest-bearing deposits rose $91.6 million to $1.11 billion and were 31.6% of deposits. FHLB advances were $150.0 million and subordinated debentures $18.7 million; total reported borrowings were $168.7 million.
- Capital and liquidity: Hanmi Bank’s total risk-based, Tier 1 risk-based, common equity Tier 1 and Tier 1 leverage ratios were 14.69%, 13.43%, 13.43% and 11.14%, respectively; the Bank met the filing’s “well capitalized” thresholds. Management said the holding company had adequate liquid assets through September 30, 2016 and the Bank could meet current obligations. Available FHLB borrowing capacity was $351.1 million; additional disclosed sources included a $35.9 million Federal Reserve Discount Window capacity and $95 million in unsecured federal funds lines.
Material changes and drivers
- Q3 net income fell $7.8 million year over year, while nine-month net income fell $4.8 million. Comparisons are heavily affected by the $14.6 million after-tax CBI bargain-purchase gain recognized in 2014. The company’s non-GAAP adjusted net income, excluding that gain and adding back merger costs, was $14.0 million versus $9.2 million in Q3 2014, and $40.0 million versus $31.8 million for the nine months.
- Loan growth and CBI-related balances supported higher net interest income. Acquisition accounting contributed $3.1 million to Q3 net interest income and $13.5 million for the nine months, including purchased-loan discount accretion and acquired time-deposit premium amortization.
- Q3 noninterest income declined 37.2%, largely because the prior-year period included the bargain-purchase gain. Q3 2015 included $4.3 million of PCI loan disposition gains and $2.0 million of securities gains. Nine-month noninterest income rose 6.7%, with PCI disposition gains of $8.0 million, securities gains of $6.1 million and SBA loan-sale gains of $4.9 million.
- Noninterest expense increased 12.7% in Q3 and 41.1% for the nine months, mainly from CBI-related staffing and occupancy costs; professional fees also rose, partly for infrastructure and control improvements. The efficiency ratio worsened to 57.97% in Q3 from 48.35% and to 59.65% for the nine months from 52.05%.
- The effective tax rate was 43.09% in Q3 and 41.55% for the nine months, versus 19.76% and 31.20% in the prior-year periods; management notes that 2014 rates were affected by the bargain gain and merger costs.
- Securities declined 36.9% from year-end, mainly after $410.0 million of sales during the nine months. Deposits declined modestly as higher-rate time deposits ran off, while the noninterest-bearing share of deposits increased.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management emphasized stable earnings and capital protection in interest-rate management; its rate-sensitivity model estimated net interest income increases of 3.36%, 6.64% and 10.07% under +100, +200 and +300 basis-point parallel-rate scenarios. The filing cautions that these estimates depend on assumptions and are not forecasts; a -100 basis-point result was not meaningful in the low-rate environment.
- Key disclosed risks include borrower credit deterioration, commercial real estate and industry concentrations, interest-rate and securities-market movements, competition for loans and deposits, liquidity and capital needs, regulatory or supervisory action, acquisition integration, expense control, and reliance on SBA lending and servicing. Loans to lessors of nonresidential buildings, hospitality and gas stations represented 26.0%, 18.7% and 11.9% of loans, respectively.
- PCI loan accounting and related disposition gains are significant judgment-sensitive items. PCI loans had a $25.1 million recorded balance and $3.1 million allowance at September 30; $10.7 million of the PCI balance was contractually 90 days or more past due, though such loans are accounted for as accruing when expected cash flows can be estimated.
- Other notable items: a $0.11 per-share Q3 dividend was paid October 15, 2015; the rescinded stock obligation was paid in full; no subsequent events requiring disclosure were reported. Management reported effective disclosure controls, no material change in internal controls, and no material changes to previously disclosed risk factors. Ordinary-course litigation was not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether improving credit indicators and negative loan-loss provisions remain supportable, particularly given commercial real estate concentrations and PCI loan performance.
- How much future earnings depend on acquisition-accounting accretion, PCI dispositions, securities-sale gains and other nonrecurring or judgment-sensitive items.
- Whether underlying margins and expense efficiency improve, given that reported margin gains included acquisition accounting and expenses rose materially.
- Deposit stability, time-deposit repricing and access to contingent funding if loan growth or deposit outflows increase.
- Capital ratios and dividend capacity as Basel III requirements and the capital conservation buffer take effect.