Hanmi Financial Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014 unless otherwise noted. Hanmi is a bank holding company operating Hanmi Bank. Year-over-year comparisons are affected by the August 2014 acquisition of Central Bancorp (CBI); Q1 2014 did not include CBI’s operations.
Financial performance
| Metric | Q1 2015 | Comparable period |
|---|---|---|
| Interest and dividend income | $41.7 million | $30.4 million in Q1 2014 |
| Net interest income before credit-loss provision | $37.7 million | $27.1 million in Q1 2014 |
| Credit-loss provision | Negative provision of $2.0 million | Negative provision of $3.3 million in Q1 2014 |
| Noninterest income | $10.6 million | $6.2 million in Q1 2014 |
| Noninterest expense | $31.7 million | $17.8 million in Q1 2014 |
| Income before taxes | $18.6 million | $18.8 million in Q1 2014 |
| Net income | $11.1 million | $11.0 million in Q1 2014 |
| Diluted EPS | $0.35 | $0.34 in Q1 2014 |
- Net interest margin was 3.92%, versus 3.90% in Q1 2014 and 3.80% in Q4 2014. Excluding purchase-accounting effects, Q1 2015 margin was 3.30%; acquired-loan discount accretion contributed 0.45 percentage points of margin, partly offset by other purchase-accounting items.
- The efficiency ratio was 65.63%, or 62.30% excluding merger and integration costs, compared with 53.43% in Q1 2014. The higher reported expenses chiefly reflect the larger post-acquisition business, integration, and infrastructure costs.
- Net cash used in operating activities was $5.0 million, versus $23.3 million provided in Q1 2014. Investing activities provided $185.6 million, mainly from securities sales and maturities; financing activities used $156.8 million, including repayment of $150.0 million in FHLB advances. Cash increased $23.7 million to $182.1 million.
Financial position, liquidity and capital
- Total assets were $4.08 billion, down from $4.23 billion at year-end, primarily as available-for-sale securities fell to $858.1 million from $1.06 billion. Net loans were $2.77 billion; gross loans increased $31.3 million during the quarter to $2.82 billion.
- Deposits were $3.55 billion, down $4.1 million. Noninterest-bearing deposits rose $41.7 million to $1.06 billion and represented 30.0% of deposits. Stockholders’ equity was $467.5 million.
- FHLB advances were zero at quarter-end, down from $150.0 million. Subordinated debentures were $18.6 million. The Bank reported $649.6 million of available FHLB borrowing capacity and $55.9 million available from the Federal Reserve Discount Window; it also had $100 million of repurchase-agreement capacity and $95 million in unsecured federal-funds lines.
- Management said the company and Bank had adequate liquidity; the company believed it could meet operating cash needs through March 31, 2016. The Bank’s primary funding source remains deposits.
- The Bank was well capitalized: total risk-based capital was 15.33%, Tier 1 risk-based capital 14.08%, common equity Tier 1 14.08%, and Tier 1 leverage 10.72% at March 31, 2015.
Changes, credit quality and unusual items
- CBI acquisition effects materially increased year-over-year average loans, securities, deposits and expenses. Average loans rose 25.0% and average investment securities 87.1%; average interest-earning assets rose 38.1%. Management attributed higher net interest income mainly to acquired balances, loan growth and lower deposit costs.
- Noninterest income increased 71.1%, supported by SBA loan-sale gains ($1.7 million), investment-security gains ($2.2 million), PCI-loan disposition gains ($0.9 million), and higher service charges. Noninterest expense rose 78.1%; merger and integration costs were $1.6 million, and professional fees rose to $2.3 million, partly to strengthen infrastructure and meet heightened control standards.
- Q1 2015 included a $2.0 million negative credit-loss provision and $1.7 million of net loan recoveries. The allowance for loan losses was $53.0 million, or 1.88% of gross loans, versus $52.7 million and 1.89% at year-end.
- Credit indicators were mixed: nonaccrual non-PCI loans increased 15.7% from year-end to $29.3 million; loans at least 30 days past due increased to $34.4 million from $24.3 million. Nonperforming assets were $41.4 million, compared with $41.1 million at year-end, while OREO declined to $12.1 million from $15.8 million. The allowance was 181% of nonperforming non-PCI loans.
- Portfolio concentrations include nonresidential buildings at 26.9% of gross loans, hospitality at 18.3%, and gas stations at 13.1%. Total TDRs were $26.0 million; $14.6 million were on nonaccrual status.
- Available-for-sale securities generated an $8.9 million net unrealized gain at quarter-end, compared with a $1.0 million net unrealized loss at year-end. No other-than-temporary impairment charge was recorded.
- CBI purchase accounting remains estimate-sensitive: acquired asset and liability fair values were provisional and subject to measurement-period adjustment. The acquisition had produced a $14.6 million bargain-purchase gain in 2014. Management’s unaudited pro forma results, assuming CBI had been acquired at the start of 2014, showed Q1 2015 revenue of $53.5 million and continuing-operations net income of $12.6 million, versus $56.2 million and $16.3 million in Q1 2014; these figures are not necessarily indicative of actual or future results.
Outlook, risks and other disclosures
- The filing provides no specific earnings or revenue guidance. Management described its interest-rate risk approach as emphasizing capital protection and stable earnings. Its model estimated that an immediate 100-basis-point rate increase would raise annual net interest income by 4.18% but reduce economic value of equity by 1.18%; management cautioned that the simulation is assumption-dependent and not a forecast.
- Key stated risks include credit quality and allowance adequacy, real-estate and industry concentrations, interest-rate and securities-market changes, competition for loans and deposits, acquisition integration, expense control, regulation or supervisory action, and economic conditions in operating markets. Basel III capital-conservation-buffer requirements were scheduled to begin in 2016.
- The company declared a $0.11-per-share dividend for Q1 2015, paid April 14, 2015. Management reported no material change in previously disclosed risk factors, no material subsequent events, and no litigation expected to materially affect financial condition, results or liquidity. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether loan delinquencies and nonaccrual balances continue to rise, especially in concentrated real-estate and hospitality exposures, and whether recoveries and negative provisions remain sustainable.
- The quality and resolution of acquired CBI PCI loans, OREO, TDRs, and provisional purchase-accounting estimates.
- Whether acquisition-related and infrastructure expenses decline, and how core profitability compares with results that include purchase-accounting accretion and securities-sale gains.
- Deposit stability, liquidity capacity and capital levels under stress, including the sensitivity of net interest income and economic value of equity to rate changes.
- The sustainability of dividends and the effect of securities portfolio changes, unrealized gains, and future securities sales on earnings and capital.