Hanmi Financial Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Hanmi Financial is a bank holding company whose principal business is deposit-taking, lending and investing through Hanmi Bank. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise noted.
Key financial results and condition
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income, before loan-loss provision | $45.1 | $43.2 | $90.0 | $85.5 |
| Provision for loan and lease losses | $0.1 | $0.4 | $0.7 | $0.3 |
| Noninterest income | $5.9 | $9.7 | $12.0 | $16.9 |
| Noninterest expense | $29.5 | $28.9 | $59.3 | $56.2 |
| Income before tax | $21.4 | $23.5 | $42.0 | $45.9 |
| Net income | $15.5 | $14.5 | $30.4 | $28.2 |
| Diluted EPS | $0.48 | $0.45 | $0.94 | $0.87 |
Q2 net income rose 7.6%; first-half net income rose 7.7%. Lower taxes supported earnings: the effective tax rate was 27.5% in Q2 and 27.7% for the first half, versus 38.5% in both comparable 2017 periods. Pretax income declined year over year in both periods.
- Margins and returns: Tax-equivalent net interest margin was 3.60% in Q2 and 3.65% for the first half, down from 3.81% and 3.85%, respectively. Q2 return on average assets was 1.17%; return on average equity was 10.81%.
- Balance sheet at June 30: Assets were $5.42 billion; deposits $4.43 billion; loans and leases before allowance $4.54 billion; securities available for sale $565.5 million; stockholders’ equity $571.7 million. Since December 31, 2017, assets increased $204.7 million, loans and leases increased $237.7 million, and deposits increased $77.9 million.
- Credit quality: Nonperforming loans and leases were $15.8 million, or 0.35% of loans and leases, essentially unchanged from year-end; nonperforming assets were $16.1 million, down from $17.8 million. The allowance was $31.8 million, 0.70% of loans and leases and 201.33% of nonperforming loans. Special-mention loans and leases increased to $48.9 million from $17.5 million at year-end; classified balances were $31.8 million versus $31.2 million.
- Funding, debt and liquidity: FHLB overnight borrowings were $270.0 million, up from $150.0 million at year-end; subordinated debentures were $117.5 million. The Bank had $557.3 million of remaining FHLB borrowing capacity, $17.4 million available at the Federal Reserve Discount Window, and $95.0 million in unused federal funds lines. Brokered deposits were $250.7 million.
- Capital: Hanmi Bank was categorized as well capitalized, with total risk-based capital of 14.86%, common equity Tier 1 of 14.15%, and Tier 1 leverage of 12.42% at June 30.
- Cash flow, first half: Operating cash flow was $38.9 million, investing cash outflow $238.6 million, and financing cash inflow $182.3 million. Cash and cash equivalents decreased $17.4 million to $136.5 million.
Material changes versus comparable periods
- Net interest income increased on loan growth, but funding costs rose faster: first-half interest expense increased 58.1% to $22.4 million, while interest income increased 12.0% to $112.8 million. The first-half net interest margin declined 20 basis points.
- Noninterest income fell 38.7% in Q2 and 29.0% for the first half. Key drivers were lower gains on SBA loan sales, lower PCI loan disposition gains, and weaker securities results. First-half 2018 included a $0.4 million net securities loss, including losses from the sale of mutual funds; first-half 2017 had a $1.2 million securities gain.
- First-half noninterest expense rose 5.5%, principally due to a 7.2% increase in salaries and benefits and $0.4 million of SWNB merger and integration costs. Management cited merit increases and 5.6% headcount growth year over year.
- Unrealized losses on available-for-sale securities increased: the net unrealized loss was $13.1 million at June 30, versus $3.2 million at year-end. First-half other comprehensive loss was $7.4 million.
Outlook, risks and unusual items
- SWNB transaction: Hanmi agreed to acquire privately held SWNB Bancorp, whose bank had approximately $411 million of assets and six branches in Houston, Dallas and Austin. Estimated consideration was $76.7 million; closing was expected late in Q3 2018, subject to SWNB shareholder and regulatory approvals. Integration costs were recorded in Q2. The filing gives no earnings or cost-synergy guidance.
- Management outlook: The filing provides no quantified financial guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Principal risks: Interest-rate and deposit-cost pressure, credit deterioration, real-estate and hospitality concentrations, liquidity and capital needs, competition for deposits and loans, and execution/integration of acquisitions. Loans to lessors of nonresidential buildings were 30.1% of loans and leases; hospitality exposure was 17.7%.
- Rate sensitivity: Management’s modeled parallel 100-basis-point rate decrease indicated a 2.18% reduction in net interest income over 1–12 months and a 5.36% reduction over 13–24 months. These are scenario estimates, not forecasts.
- Accounting and contingencies: The company adopted revenue-recognition guidance with no material impact. It was evaluating the future CECL expected-credit-loss standard; the impact was not yet determined. Management reported no material changes to previously disclosed risk factors, no material subsequent events, and no litigation expected to materially affect results. Certain state and federal tax years remained subject to examination; management did not anticipate material financial-statement changes.
Important facts for investors to verify
- Whether the SWNB acquisition closed on schedule, its final consideration, and subsequent integration costs and results.
- Whether deposit pricing and FHLB borrowing costs continue to outpace asset-yield increases and further pressure net interest margin.
- Credit trends, particularly the increase in special-mention balances, hospitality nonperformers, lease charge-offs, and the adequacy of the loan-loss allowance.
- Realized or further unrealized securities losses and the effect of interest-rate movements on capital and comprehensive income.
- The eventual CECL adoption impact and any material change in tax-audit exposure or liquidity/capital position.