Hanmi Financial Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparisons are primarily with 2017. Hanmi Financial is a bank holding company whose principal subsidiary, Hanmi Bank, provides community and business banking across multiple U.S. states.
Financial performance and condition
- Revenue and earnings: Total revenues were $258.9 million, up 6.7% from $242.7 million. Net interest income was $181.0 million, versus $176.8 million. Net income rose 5.9% to $57.9 million; diluted EPS was $1.79, compared with $1.69.
- Margins and returns: Net interest margin declined to 3.57% from 3.82%, as funding costs rose faster than asset yields. Efficiency ratio increased to 57.20% from 54.28%. Return on average assets was 1.08% (1.10% in 2017); return on average equity was 10.07% (9.97%).
- Cash flow: Operating activities provided $76.6 million, investing activities used $311.6 million, and financing activities provided $236.5 million. Cash and cash equivalents ended the year at $155.4 million, up $1.6 million.
- Balance sheet and liquidity: Total assets were $5.50 billion, up from $5.21 billion. Net loans and leases were $4.57 billion, up 6.9%; deposits were $4.75 billion, up 9.2%. Noninterest-bearing deposits fell to 27.1% of deposits from 30.2%. The Bank reported $351.3 million of brokered deposits and $729.4 million of remaining FHLB borrowing capacity.
- Debt and capital: Year-end FHLB advances were $55.0 million, down from $150.0 million; subordinated debentures were $117.8 million. The Bank’s total risk-based capital ratio was 14.19%, and its Tier 1 leverage ratio was 11.67%; regulators classified it as well-capitalized.
- Credit quality: Nonperforming assets were $16.2 million, or 0.29% of assets, versus $17.8 million, or 0.34%, in 2017. Net charge-offs increased to $3.1 million from $2.2 million. The allowance for loan and lease losses was $32.0 million, or 0.70% of loans and leases.
Material changes versus 2017
- Interest income increased 11.3%, but interest expense rose 64.2%; the cost of interest-bearing liabilities increased to 1.55% from 1.04%.
- Noninterest income declined 26.6% to $24.5 million, mainly due to lower SBA loan-sale gains, lower gains on acquired credit-impaired loan dispositions, and a securities loss. SBA loan-sale gains were $5.0 million versus $8.7 million.
- The loan-loss provision increased to $4.0 million from $831,000. Classified loans decreased to $29.5 million from $31.2 million, while 30–89-day delinquent loans rose to $10.7 million from $8.6 million.
- Net income improved despite pretax income declining to $84.0 million from $95.3 million, largely because income tax expense fell to $26.1 million from $40.6 million. The 2017 expense included a one-time deferred-tax remeasurement charge related to the Tax Cuts and Jobs Act; the lower federal rate also benefited 2018.
- The Company repurchased 1.6 million shares for $36.1 million under a buyback program completed in 2018. Cash dividends declared increased to $0.96 per share from $0.80.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings, revenue, loan-growth, or margin guidance. Management discusses sensitivity to interest rates, credit quality, funding costs, and economic conditions but does not provide a quantified forecast.
- Management expects CECL, scheduled for adoption in 2020, to increase the allowance and reduce shareholders’ equity and regulatory capital ratios; the impact was still under evaluation. The Company estimated approximately $50 million of right-of-use assets upon adoption of the lease standard in 2019, without a material balance-sheet impact expected.
- Credit and concentration risks include real estate-focused lending, Southern California exposure, and loans to lessors of nonresidential buildings ($1.38 billion; 29.9% of gross loans) and hospitality borrowers ($849.3 million; 18.5%). The filing also cites interest-rate, deposit-funding, cybersecurity, regulatory, natural-disaster, and borrower economic risks.
- The available-for-sale securities portfolio had a net unrealized loss of $8.5 million at year-end, versus $3.2 million in 2017; management reported no other-than-temporary impairment. Accumulated other comprehensive loss increased to $6.1 million.
- A new repurchase authorization for up to approximately 1.5 million shares was announced on January 24, 2019. The filing reports no material pending legal proceeding and no subsequent event requiring recognition other than this authorization.
- KPMG issued unqualified opinions on the consolidated financial statements and on the effectiveness of internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth and deposit growth can continue without further deterioration in the net interest margin or deposit mix, particularly given rising deposit costs and brokered deposits.
- Whether the allowance remains adequate as charge-offs and delinquencies rise, and how concentrations in commercial real estate, hospitality, and equipment leasing perform.
- The ultimate CECL transition effect on the allowance, retained earnings, and regulatory capital.
- Whether unrealized securities losses, interest-rate movements, or liquidity needs could lead to realized losses or additional funding costs.
- How capital returns, including the 2019 repurchase authorization and dividends, affect capital buffers and liquidity.