HANMI FINANCIAL CORP annual report, FY2020

Hanmi Financial Corporation — 2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020. This is an annual report; fourth-quarter results are also summarized below. Hanmi Financial is the holding company for Hanmi Bank, a community bank serving Korean-American and other communities across multiple U.S. states, with significant operations in California.

Key financial results and position

Metric20202019
Total revenue, as presented in the filing$267.0 million$274.3 million
Net interest income, before credit loss expense$180.9 million$175.9 million
Net interest margin, taxable-equivalent basis3.19%3.37%
Credit loss expense$45.5 million$30.2 million
Noninterest income$43.1 million$27.6 million
Noninterest expense$119.1 million$125.9 million
Net income$42.2 million$32.8 million
Diluted earnings per share$1.38$1.06
  • Net income rose 28.7%. Lower deposit interest expense and higher noninterest income—especially securities gains—more than offset reduced loan interest income and higher credit loss expense.
  • Average interest-earning asset yield fell to 3.95% from 4.73%; average cost of interest-bearing liabilities fell to 1.20% from 1.99%. The net interest spread was 2.75%, versus 2.74%.
  • At year-end, total assets were $6.20 billion, loans receivable net of allowance were $4.79 billion, deposits were $5.28 billion, and stockholders’ equity was $577.0 million. Cash and due from banks increased to $391.8 million from $121.7 million.
  • Year-end borrowings were $150.0 million, all FHLB advances; subordinated debentures were $119.0 million. The Bank had $1.44 billion of remaining FHLB borrowing capacity and $26.3 million available at the Federal Reserve Discount Window.
  • Operating cash flow was $60.2 million; investing cash flow was negative $407.6 million; financing cash flow was positive $617.6 million. Cash increased $270.2 million during the year.
  • For fourth-quarter 2020, net income was $14.3 million, or $0.47 diluted EPS, compared with $3.1 million, or $0.10, in fourth-quarter 2019.

Material changes versus the prior comparable period

  • Loans receivable increased 5.9% to $4.88 billion gross, including $301.8 million of PPP originations. Deposits increased 12.3% to $5.28 billion, with noninterest-bearing deposits up $507.1 million.
  • Credit quality weakened: nonaccrual loans increased to $83.0 million from $63.8 million; classified loans rose to $140.2 million from $94.0 million; and net charge-offs were $30.9 million, or 0.66% of average loans, versus $0.7 million, or 0.02%.
  • The allowance for credit losses increased to $90.4 million, or 1.85% of loans, from $61.4 million, or 1.33%. The company adopted CECL on January 1, 2020, recording a $17.4 million increase to the opening loan allowance and a $12.2 million after-tax reduction to opening retained earnings.
  • Noninterest income benefited from $15.7 million of securities gains, compared with $1.3 million in 2019, and a $1.0 million legal settlement. Total revenue nevertheless declined, reflecting lower interest income.
  • Annual common dividends were $0.52 per share, compared with $0.96 in 2019. The company reduced quarterly dividends during 2020 and suspended its share repurchase program after the COVID-19 emergency declaration.

Outlook, commentary, risks and unusual items

  • The filing provides no specific quantitative earnings or revenue guidance. Management said it would reassess the regular quarterly dividend on a quarterly basis and gave no assurance that future dividends would not be reduced or eliminated.
  • Management cited pandemic-related uncertainty, possible further borrower stress, collateral-value declines, higher credit losses, and pressure on asset yields and net interest margin. The filing highlights lending concentrations in lessors of non-residential buildings ($1.45 billion; 29.7% of loans), hospitality ($915.3 million; 18.8%), and retail ($303.7 million; 6.2%).
  • At year-end, $155.6 million of loans were modified under the CARES Act; $33.0 million of nonaccrual loans and leases were identified as adversely affected by the pandemic. The bank held $295.7 million of PPP loans in its portfolio and serviced $429.4 million of SBA loans sold to investors.
  • CECL estimates involve significant judgment. The auditor identified allowance-model implementation and the change in methodology for real estate portfolios as critical audit matters. Management changed the real-estate allowance methodology during 2020, citing limitations in the prior model’s ability to reflect pandemic uncertainty; the change was reported as not having a material financial-statement impact.
  • Other risks include interest-rate sensitivity, real-estate and geographic concentration, liquidity and deposit funding, cybersecurity and vendor dependence, SBA/PPP exposures, and the transition away from LIBOR. Management reported adequate liquidity and regulatory capital; the Bank’s year-end total risk-based capital ratio was 14.86% and its Tier 1 leverage ratio was 10.83%.
  • The filing reports no legal proceedings expected to have a material adverse effect. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.

Most important facts for investors to verify

  • Whether hospitality, retail, and other commercial real-estate borrowers recover, and how pandemic-affected loans migrate into delinquency, nonaccrual, charge-offs, or foreclosures.
  • Whether the $90.4 million allowance adequately reflects expected losses, including the assumptions, forecasts, and model changes used under CECL.
  • The performance and forgiveness of PPP loans, and any resulting fees, servicing income, SBA reimbursement, or litigation and regulatory exposure.
  • Whether the large increase in deposits and cash is durable, and how uninsured deposits, brokered deposits, and available borrowing capacity affect funding and liquidity.
  • Future net interest margin, given low market rates, PPP loan yields, securities reinvestment yields, and the pace of deposit repricing.
  • Dividend capacity and policy: the Bank had $17.8 million available for dividends without prior DFPI approval as of January 1, 2021, subject to regulatory and legal constraints.