Hanmi Financial Corporation — Q1 2022 Form 10-Q
Business context and reporting period. Hanmi Financial is a bank holding company whose primary subsidiary, Hanmi Bank, conducts commercial banking, lending and investment activities. This unaudited filing covers the three months ended March 31, 2022; balance-sheet comparisons are primarily with December 31, 2021. Amounts below are U.S. dollars.
Financial performance and position
- Profitability: Net income was $20.7 million, up 24% from $16.7 million in Q1 2021. Diluted EPS was $0.68 versus $0.54. Income before tax was $29.2 million versus $24.2 million.
- Interest income and margins: Net interest income was $51.0 million, up $5.0 million year over year. On a taxable-equivalent basis, net interest margin was 3.10%, compared with 3.09%; net interest spread was 2.77%, compared with 2.81%. Average interest-earning assets increased 10.7% to $6.67 billion.
- Noninterest income and expense: Noninterest income declined 13% to $8.5 million, mainly because Q1 2021 included gains on PPP loan sales. Noninterest expense rose 7% to $31.7 million, including higher compensation, advertising and loan-related costs.
- Credit costs and asset quality: The company recorded a $1.4 million credit-loss recovery, compared with $2.1 million of expense in Q1 2021. The allowance for credit losses was $71.5 million, or 1.34% of loans, versus $72.6 million, or 1.41%, at year-end. Nonperforming loans were $11.5 million (0.21% of loans), down from $13.4 million (0.26%); nonperforming assets were $12.1 million.
- Cash flow and liquidity: Operating cash flow was $20.1 million; investing cash flow was negative $206.9 million and financing cash flow negative $109.7 million. Cash and due from banks fell $296.5 million to $312.5 million, primarily to fund loan growth and the subordinated-note redemption. Management said the company and bank had adequate liquidity. The bank reported $1.45 billion of remaining FHLB borrowing capacity and $28.2 million available through the Federal Reserve Discount Window.
- Loans and deposits: Gross loans reached $5.34 billion, up $186.0 million from year-end; net loans were $5.27 billion. Deposits were $5.78 billion, essentially unchanged, with noninterest-bearing deposits increasing to $2.68 billion. The loan-to-deposit ratio increased to 92.3% from 89.0%.
- Debt and capital: Borrowings and subordinated debentures totaled $254.0 million, down from $352.5 million at year-end, mainly following redemption of $100 million of 2017 subordinated notes. The redemption generated a $1.1 million pretax charge for unamortized issuance costs. The bank’s total risk-based capital ratio was 14.19%; management said it exceeded the well-capitalized minimums.
- Other comprehensive income and equity: A $36.4 million after-tax unrealized loss on available-for-sale securities contributed to comprehensive loss of $15.7 million for the quarter. Stockholders’ equity declined to $621.5 million from $643.4 million at year-end. The securities portfolio’s fair value was $877.0 million, with $64.0 million of gross unrealized losses at March 31.
Material changes versus comparable periods
- Net income benefited from higher net interest income and a swing from credit-loss expense to recovery. These gains were partly offset by lower noninterest income and higher operating expenses.
- Net interest income increased as average loan and securities balances grew; average loan yields declined slightly, while the securities yield increased. Deposit costs declined, but interest expense included the new 2021 Notes and the redemption charge on the 2017 Notes.
- Loan balances expanded while deposits remained nearly flat. Noninterest-bearing deposits grew, offsetting declines in time deposits.
- Special-mention loans rose to $141.0 million from $95.3 million at year-end, while classified loans declined to $57.4 million from $60.6 million. Loans in hospitality were $765.1 million, or 14.3% of loans; lessors of nonresidential buildings represented $1.73 billion, or 32.3%.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said it would continue to reassess the quarterly dividend; the Q1 dividend was $0.22 per share, and the board had declared a Q2 dividend by the filing date.
- Management cited the uncertain effects of COVID-19, economic conditions and interest rates on borrowers, asset quality, loan-loss estimates and business activity. Other disclosed risks include competition for loans and deposits, real-estate values, cyber and operational risks, and access to cost-effective funding.
- Interest-rate simulations estimated higher net interest income under rising-rate scenarios and lower income under a 100-basis-point decline. Management cautioned that these modeled estimates depend on assumptions and may not predict actual results.
- The company stated that no subsequent events were identified, no material risk-factor changes had occurred since its 2021 annual report, and ordinary-course legal proceedings were not expected to have a material adverse impact.
Important facts for investors to verify
- Whether loan growth and the 92.3% loan-to-deposit ratio remain supportable if deposit balances or funding costs change.
- Trends in special-mention loans, particularly hospitality exposure, and whether credit-loss reserves remain adequate as forecasts and borrower conditions evolve.
- The effect of rising rates on securities valuations, accumulated other comprehensive loss, capital and reported equity.
- Whether higher net interest income can offset fee-income variability, expense growth and the effects of changes in rates on funding costs.
- The remaining subordinated-debt obligations, maturities and interest-rate terms following the 2017 Notes redemption.