Hanmi Financial Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Hanmi Financial is a bank holding company whose primary subsidiary, Hanmi Bank, conducts traditional banking and lending activities. The unaudited financial statements are prepared under U.S. GAAP.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net interest income before credit loss expense | $44.0 million | $44.9 million in Q1 2019 |
| Net interest margin, tax-equivalent | 3.36% | 3.52% in Q1 2019 |
| Credit loss expense | $15.7 million | $1.1 million in Q1 2019 |
| Noninterest income | $6.2 million | $6.3 million in Q1 2019 |
| Noninterest expense | $31.1 million | $29.1 million in Q1 2019 |
| Net income / diluted EPS | $2.35 million / $0.08 | $14.67 million / $0.48 in Q1 2019 |
| Return on average assets / equity | 0.17% / 1.69% | 1.09% / 10.62% in Q1 2019 |
| Total assets | $5.62 billion | $5.54 billion at Dec. 31, 2019 |
| Loans, gross / net | $4.54 billion / $4.48 billion | $4.61 billion / $4.55 billion at Dec. 31, 2019 |
| Deposits | $4.58 billion | $4.70 billion at Dec. 31, 2019 |
| Allowance for credit losses | $66.5 million; 1.46% of loans | $61.4 million at Dec. 31, 2019 |
| Nonperforming loans | $52.2 million; 1.15% of loans | $63.8 million; 1.38% at Dec. 31, 2019 |
| Stockholders’ equity | $553.0 million | $563.3 million at Dec. 31, 2019 |
Interest and dividend income declined to $58.9 million from $62.4 million, while interest expense fell to $15.0 million from $17.5 million. Management attributed the lower net interest income primarily to lower loan yields, partly offset by lower deposit costs and a smaller average balance of time deposits. The efficiency ratio rose to 61.89% from 56.83%.
Net cash from operating activities was $24.3 million, investing activities provided $61.2 million, and financing activities provided $83.4 million. Cash and due from banks increased $168.9 million to $290.5 million, primarily reflecting increased borrowings and liquidity measures.
At March 31, FHLB borrowings were $300 million, up from $90 million at year-end; subordinated debentures had a carrying value of $118.5 million. The Bank reported $1.22 billion of remaining FHLB borrowing capacity, $50.6 million available at the Federal Reserve Discount Window, and $115 million in unsecured federal funds lines, with no outstanding FRB or federal funds line borrowings. The Bank’s regulatory capital ratios exceeded “well-capitalized” thresholds: total risk-based capital 14.29%, Tier 1 risk-based 13.12%, CET1 13.12%, and Tier 1 leverage 11.35%.
Material changes and unusual items
- Net income fell sharply year over year, primarily due to credit loss expense and a $25.2 million charge-off associated with a previously identified troubled loan relationship.
- The company adopted CECL on January 1, 2020. Adoption increased the opening loan-loss allowance by $17.4 million, reduced the opening off-balance-sheet allowance by $0.3 million, and reduced retained earnings by $12.2 million after tax. Q1 credit loss expense included a $7.4 million COVID-19 qualitative provision, $4.9 million primarily for other qualitative factors, $2.6 million for the troubled loan relationship, and $0.8 million for off-balance-sheet exposures.
- Gross loans declined 1.4% from year-end, reflecting lower production and management’s continued residential mortgage run-off strategy. Deposits declined 2.5%, principally due to lower higher-cost time deposits.
- Net loan charge-offs were $27.3 million, versus $0.2 million in Q1 2019. Classified loans were $88.2 million, down from $94.0 million at year-end; management cited the charge-off as a principal reason. Loans 90 days or more past due but still accruing totaled $5.8 million, versus none at year-end.
- The securities portfolio’s net unrealized gain increased to $16.7 million from $4.8 million at year-end, contributing to accumulated other comprehensive income.
Outlook, COVID-19, risks and contingencies
- Management said COVID-19’s effects on borrowers, credit quality, asset values, liquidity and earnings were uncertain and could materially adversely affect results. The allowance estimate may change as economic conditions and forecasts evolve; the filing provides no earnings or full-year financial guidance.
- By April 30, 2020, the Bank had disbursed approximately $157 million under the SBA Paycheck Protection Program and approved 1,242 COVID-related payment-modification requests representing approximately $707 million, or 16% of the loan and lease portfolio. These are post-quarter-end developments.
- The Board reduced the second-quarter 2020 dividend to $0.12 per share from $0.24 in Q1 and said it would reassess future quarterly dividends. The share repurchase program was suspended during the national emergency.
- Loan concentrations included lessors of nonresidential buildings (28.5% of loans) and hospitality (20.8%). Management identified hospitality, food service and retail as particularly vulnerable to COVID-related stress.
- Disclosure controls and procedures were deemed ineffective because of an unremediated material weakness in IT general controls involving user access and segregation of duties. No financial-statement misstatements were identified; remediation was underway, but management said there had not been enough time to conclude the weakness was corrected.
- Ordinary-course litigation was not expected by management to have a material adverse effect. The filing reported no material expected effect from tax examinations or the CARES Act’s tax provisions.
Important facts for investors to verify
- Whether COVID-related payment deferrals translate into delinquencies, nonperforming loans, charge-offs or additional allowance needs, particularly in hospitality, food service, retail and commercial real estate.
- The assumptions behind the $7.4 million COVID-specific allowance component and the broader CECL forecasts, including the expected economic recovery and collateral values.
- Progress in remediating the IT-control material weakness and whether disclosure controls are subsequently assessed as effective.
- Deposit trends, use and cost of FHLB borrowings, available borrowing capacity, and the sustainability of liquidity and capital under stress.
- Future dividends, earnings and margin performance; the filing gives no quantitative forward guidance and states that outcomes remain uncertain.