Hanmi Financial Corp. — Q1 2023 Form 10-Q
Business context and reporting period: Hanmi Financial is a bank holding company whose primary subsidiary, Hanmi Bank, conducts traditional deposit-taking, lending and investment activities. This unaudited report covers the three months ended March 31, 2023; year-over-year comparisons are against Q1 2022 unless otherwise noted.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior date |
|---|---|---|
| Interest and dividend income | $87.3 million | $56.9 million in Q1 2022 |
| Net interest income | $57.9 million | $51.0 million in Q1 2022 |
| Net interest margin, taxable-equivalent | 3.28% | 3.10% in Q1 2022 |
| Net interest spread, taxable-equivalent | 2.10% | 2.77% in Q1 2022 |
| Credit loss expense | $2.1 million | $1.4 million recovery in Q1 2022 |
| Noninterest income | $8.3 million | $8.5 million in Q1 2022 |
| Noninterest expense | $32.8 million | $31.7 million in Q1 2022 |
| Net income / diluted EPS | $22.0 million / $0.72 | $20.7 million / $0.68 in Q1 2022 |
| Cash and due from banks | $386.2 million | $352.4 million at December 31, 2022 |
| Loans receivable, gross | $5.98 billion | $5.97 billion at December 31, 2022 |
| Total deposits | $6.20 billion | $6.17 billion at December 31, 2022 |
| Stockholders’ equity | $662.2 million | $637.5 million at December 31, 2022 |
| FHLB advances / subordinated debentures | $350.0 million / $129.6 million | FHLB advances unchanged; subordinated debentures $129.4 million at December 31, 2022 |
Cash flow: Net cash provided by operating activities was $36.1 million, investing activities used $27.4 million, and financing activities provided $25.0 million. Cash increased $33.8 million during the quarter to $386.2 million. In Q1 2022, operating cash flow was $20.1 million, investing cash outflow was $206.9 million, and financing cash outflow was $109.7 million.
Liquidity and capital: The loan-to-deposit ratio was 96.4%, versus 96.7% at year-end. Uninsured deposits totaled $2.60 billion. The Bank reported $1.15 billion of remaining FHLB borrowing capacity and $22.2 million available through the Federal Reserve Discount Window and Bank Term Funding Program; it had no borrowings from the latter sources. The Bank’s total risk-based capital ratio was 14.15%, above the 10.00% well-capitalized threshold; its Tier 1 leverage ratio was 11.06%, above the 5.00% threshold.
Material changes and management commentary
- Net income rose about 6% year over year, mainly as $6.9 million higher net interest income more than offset higher credit loss expense and operating costs.
- Interest income increased $30.4 million, while interest expense rose $23.5 million, primarily reflecting higher market rates and deposit costs. Average deposit cost increased to 1.69% from 0.14%; average cost of interest-bearing deposits rose to 2.73% from 0.26%.
- Net interest margin increased to 3.28% from 3.10%, but the spread narrowed to 2.10% from 2.77% as liability costs rose sharply.
- Noninterest expense increased $1.1 million; salaries and benefits rose $2.9 million, attributed to merit and bonus increases and a 3.3% increase in average full-time equivalent employees. SBA loan-sale gains declined $0.7 million, partly offset by higher swap fee income.
- Gross loans grew modestly from year-end. Q1 loan production was $303.6 million, offset by sales, payoffs, amortization and other reductions. Deposits increased $33.0 million, with time deposits up $424.0 million and other deposits down $391.0 million.
- Available-for-sale securities had fair value of $878.7 million and gross unrealized losses of $111.7 million at quarter-end; accumulated other comprehensive loss was $79.1 million, net of tax. Management said it intended and expected to be able to hold the securities until recovery and recorded no credit-loss allowance for them.
- Nonperforming loans rose to $20.1 million, or 0.34% of loans, from $9.8 million, or 0.17%, at year-end. The increase was primarily a $10.0 million nonperforming healthcare-industry commercial and industrial loan, with a specific reserve of $2.5 million. Net charge-offs were $1.5 million, compared with net recoveries of $0.1 million in Q1 2022.
Outlook, risks and other items
The filing provides no specific earnings, growth or margin guidance. Management describes forward-looking results as subject to economic, credit, funding, interest-rate, regulatory and operational uncertainties. It says the Bank has adequate liquidity, while noting that funding needs could require use of available borrowing capacity.
- Newly highlighted risks include market volatility and depositor confidence following 2023 bank failures, the possibility of deposit outflows, and the need to manage liquidity, uninsured deposits, capital and interest-rate exposure.
- Management warns that selling securities to meet liquidity needs could realize losses and adversely affect capital and results. The effectiveness or sufficiency of available funding sources, including BTFP, is not guaranteed.
- Interest-rate simulations estimate that a 300-basis-point rate decline would reduce net interest income by 11.32% over 1–12 months and 13.93% over 13–24 months; management cautions that simulations rely on assumptions and are not forecasts.
- The board declared a $0.25-per-share quarterly dividend on April 27, 2023, payable May 24, 2023. The filing says the Bank could pay approximately $156.1 million in dividends to the parent without prior DFPI approval, after giving effect to the declared dividend.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, and no legal proceeding expected to have a material adverse effect. No loans were modified in the quarter.
Important facts for investors to verify
- Whether deposit balances and the composition of funding remain stable, particularly the $2.60 billion in uninsured deposits and the shift toward time deposits.
- Whether higher deposit and borrowing costs continue to pressure the net interest spread despite the improved reported margin.
- Developments in the $10.0 million healthcare loan, its $2.5 million specific reserve, nonperforming loans and charge-offs.
- The size and duration of unrealized securities losses, and whether liquidity needs could force securities sales.
- Whether reported borrowing capacity, capital ratios and dividend capacity remain adequate under changing market and regulatory conditions.