Hanmi Financial Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; filed November 9, 2022. Hanmi Financial is a bank holding company whose principal subsidiary, Hanmi Bank, conducts traditional deposit-taking, lending and investment activities. Amounts below are U.S. dollars; figures are in millions unless noted.
Financial performance and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $63.1 | $50.0 | $173.1 | $145.6 |
| Credit loss expense (recovery) | $0.6 | ($7.2) | $0.8 | ($8.5) |
| Noninterest income | $8.9 | $12.5 | $26.7 | $31.2 |
| Noninterest expense | $33.3 | $32.5 | $96.4 | $92.8 |
| Net income | $27.2 | $26.6 | $72.9 | $65.3 |
| Diluted EPS | $0.89 | $0.86 | $2.39 | $2.13 |
| Taxable-equivalent net interest margin | 3.66% | 3.07% | 3.44% | 3.12% |
- Q3 net income rose about 2% year over year; nine-month net income rose about 12%. Q3 net interest income increased $13.1 million, while lower loan-sale gains and the comparison with a prior-year credit-loss recovery weighed on results.
- At September 30, total assets were $7,128.5 million, gross loans $5,801.0 million, deposits $6,201.4 million and stockholders’ equity $608.9 million. The loan-to-deposit ratio was 93.5%.
- Cash and due from banks was $275.2 million, down from $609.0 million at December 31, 2021. Management attributed the decline mainly to strong loan production and redemption of subordinated notes. Nine-month operating cash flow was $100.4 million, investing cash flow was negative $702.8 million, and financing cash flow was positive $268.6 million.
- Borrowings were $100.0 million and subordinated debentures were $129.3 million, for combined borrowings and subordinated debt of $229.3 million, down from $352.5 million at year-end. The Bank reported $1.39 billion of remaining FHLB borrowing capacity and $23.0 million available through the Federal Reserve Discount Window.
- The allowance for credit losses was $71.6 million, or 1.23% of loans, versus $72.6 million and 1.41% at year-end. Nonperforming loans were $11.6 million (0.20% of loans); nonperforming assets were $12.4 million (0.17% of assets).
- Available-for-sale securities had fair value of $830.2 million against amortized cost of $967.4 million, a $137.2 million pre-tax unrealized loss. Accumulated other comprehensive loss was $96.1 million, compared with $8.4 million at year-end; management linked the securities decline to rising interest rates.
- The Bank’s September 30 regulatory capital ratios included total risk-based capital of 13.76%, Tier 1 risk-based capital of 12.73%, common equity Tier 1 of 12.73% and Tier 1 leverage of 11.02%. The filing states the Bank exceeded “well capitalized” thresholds.
Material changes versus comparable periods
- Q3 net interest income grew 26% year over year, reflecting higher average loan balances and yields as rates rose. Taxable-equivalent net interest margin increased 59 basis points to 3.66%.
- Q3 interest expense rose 54% to $8.4 million, largely from higher deposit rates; average cost of interest-bearing deposits increased to 0.78% from 0.30%. For the nine months, net interest income rose 19%.
- Q3 noninterest income fell 29%, mainly because gains on SBA and other loan sales were lower. Nine-month gains on loan sales were also lower, with no PPP loan-sale gains in 2022.
- Deposits increased 7.2% from year-end, to $6.20 billion; loans before allowance increased to $5.80 billion from $5.15 billion. Loans included commercial real estate, commercial and industrial, residential and equipment-financing exposures.
- On March 30, 2022, the Company redeemed $100 million of 2027 subordinated notes and recorded a $1.1 million pre-tax charge for unamortized issuance costs. Subordinated debt and borrowings subsequently declined.
Outlook, commentary and risks
- The filing provides no specific earnings, revenue, margin or loan-growth guidance. Management said it would continue to reassess the quarterly dividend; the Q3 dividend paid was $0.25 per share, and the filing refers to a $0.25 fourth-quarter dividend declaration.
- Management considered the allowance for credit losses adequate at September 30, while noting that its estimates incorporate economic forecasts, unemployment assumptions and qualitative adjustments. It identified deteriorating unemployment assumptions and rising rates among factors considered.
- Special-mention loans were $123.0 million, up from $95.3 million at year-end. The increase included a $41.1 million borrower relationship affected by management turnover and delays in acceptable borrowing certificates; the company said it was working with the borrower’s new management and parent company. Classified loans declined to $47.7 million from $60.6 million.
- Interest-rate sensitivity modeling estimated that a parallel 200-basis-point rate increase would raise net interest income 5.61% over 1–12 months and 7.51% over 13–24 months; a 200-basis-point decrease would reduce it 10.38% and 17.05%, respectively. Management cautioned that simulations rely on assumptions and are not forecasts.
- Risks highlighted include economic deterioration, inflation and interest-rate movements, real-estate values, borrower performance and credit quality, competition for deposits and loans, funding access, cybersecurity and operational disruptions, regulation, and continued uncertainty related to COVID-19. The filing reported no material change in previously disclosed risk factors.
- Uninsured deposits totaled $2.87 billion. The filing also reports $829.5 million of commitments, including unused credit commitments and standby and commercial letters of credit.
- No subsequent events were identified as of issuance. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting. Ordinary-course litigation was not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether loan and deposit repricing sustains net interest margin as deposit costs rise, and how the bank’s rate sensitivity evolves.
- Trends in unrealized securities losses and their potential effect on accumulated comprehensive loss, equity and liquidity.
- Performance of the $41.1 million criticized borrower relationship, changes in special-mention and classified loans, and future charge-offs and allowance levels.
- Deposit retention, uninsured-deposit concentration, loan-to-deposit ratio and continued access to FHLB and other borrowing capacity.
- Loan-sale gains, including SBA production and margins, and the contribution of these gains to reported earnings.
- Dividend capacity and capital levels, including the effect of continued loan growth and the declared fourth-quarter dividend.