Hanmi Financial Corporation — Q2 2019 Form 10-Q
Business context and reporting period. Hanmi Financial is a bank holding company whose subsidiary, Hanmi Bank, conducts traditional banking, lending and investment activities. This unaudited report covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods; balance-sheet comparisons are to December 31, 2018.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest and dividend income | $61.5 million | $57.3 million | $123.9 million | $112.4 million |
| Net interest income, before provision | $43.0 million | $45.1 million | $87.9 million | $90.0 million |
| Provision for loan and lease losses | $16.7 million | $0.1 million | $17.8 million | $0.7 million |
| Net income | $2.7 million | $15.5 million | $17.3 million | $30.4 million |
| Diluted earnings per share | $0.09 | $0.48 | $0.56 | $0.94 |
| Net interest margin, taxable-equivalent basis | 3.30% | 3.60% | 3.41% | 3.65% |
- Q2 pre-tax income was $3.9 million versus $21.4 million; the six-month figures were $24.8 million versus $42.0 million. The Q2 effective tax rate was 31.5%, compared with 27.5%; the six-month rate was 30.2%, compared with 27.7%.
- Noninterest income increased 30% to $7.7 million in Q2 and 16.5% to $14.0 million for the first half. Noninterest expense rose 2.1% to $30.1 million in Q2 and was nearly unchanged at $59.2 million for the first half.
- At June 30, assets were $5.51 billion, deposits $4.76 billion, and stockholders’ equity $564.5 million. Gross loans and leases were $4.56 billion, down from $4.60 billion at year-end; the allowance was $49.4 million, up from $32.0 million.
- Deposits increased $14.8 million from year-end. FHLB advances were zero, versus $55.0 million at year-end; subordinated debentures were $118.1 million. The Bank had $905.0 million of remaining FHLB borrowing capacity and $29.6 million available through the Federal Reserve Discount Window.
- For the first half, operating cash flow was $37.9 million, investing cash use was $7.0 million, and financing cash use was $55.4 million. Cash and due from banks declined $24.5 million to $130.9 million.
- The Bank remained well capitalized: total risk-based capital was 14.62%, Tier 1 risk-based capital 13.54%, common equity Tier 1 13.54%, and Tier 1 leverage 11.67%.
Material changes and notable items
- Credit costs drove the earnings decline. Management attributed most of the higher provision to a $15.7 million specific allowance on a $40.7 million borrower relationship, comprising a $27.9 million land loan and a $12.8 million business loan. The loans were current, but were placed on nonaccrual following review of project status, approaching maturities and guarantor liquidity.
- Nonperforming loans and leases rose to $63.0 million from $15.5 million at year-end; nonperforming assets were $63.5 million, or 1.15% of assets. Classified loans and leases increased to $75.7 million from $29.5 million. Total troubled debt restructurings rose to $47.1 million from $10.3 million, including $44.1 million on nonaccrual.
- Interest expense increased faster than interest income: Q2 interest expense rose 51.5% to $18.5 million, and the first-half amount rose 61% to $36.0 million. Management cited higher deposit rates and a greater share of higher-cost time deposits; the taxable-equivalent net interest margin contracted in both comparisons.
- Q2 other operating income benefited from a gain on sale of a vacant Southern California building. The company also recorded $570,000 of Q2 net securities-sale gains; first-half net gains were $1.3 million, including the sale of its tax-exempt municipal bonds.
- First-half expense reductions in salaries and benefits were attributed in part to branch closures and employee cost reductions, offset by higher data-processing, professional and other costs, including disaster recovery, CECL implementation and repossessed-equipment valuation costs. A $400,000 tax provision was recorded in Q1 in connection with settlement of California tax audits; the company paid $900,000.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management said it was still evaluating the financial-statement impact of CECL, effective for the company in 2020. Methodology development, data validation and initial model testing were completed; parallel processing and model-output review were planned to begin in Q3 2019.
- Management identified risks including economic and credit deterioration, real-estate values, interest-rate and deposit-cost movements, competition for loans and deposits, liquidity and capital needs, cyber and operational risks, regulatory changes, and the adequacy of credit-loss allowances. The loan portfolio is concentrated in lessors of nonresidential buildings (29.2%) and hospitality (19.3%).
- Disclosure controls and procedures were deemed ineffective because of a material weakness in the operating effectiveness of controls for reviewing collateral values on impaired loans. Management described planned remediation through stronger policy documentation, training and review documentation. Remediation was underway after quarter-end.
- Undisbursed loan commitments totaled $353.7 million, including commitments to extend credit, standby letters of credit and commercial letters of credit. Management reported no material change in previously disclosed risk factors and no material expected adverse impact from ordinary-course litigation.
Important facts for investors to verify
- Current status, collateral valuations, guarantor support and recovery prospects for the $40.7 million loan relationship and other nonaccrual or classified exposures.
- Whether the $49.4 million loan-loss allowance adequately reflects rising nonperforming loans, restructurings and portfolio concentrations.
- Progress and effectiveness of remediation for the collateral-valuation control weakness.
- CECL adoption assumptions and the eventual impact on reserves, earnings and capital.
- Whether deposit pricing and funding mix continue to pressure net interest margin, and whether unusual gains materially affected reported noninterest income.