Hanmi Financial Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless stated otherwise. Hanmi Financial is a bank holding company whose primary subsidiary, Hanmi Bank, conducts traditional deposit-taking, lending and investment activities. Dollar amounts below are in millions unless noted.
Financial results and condition
- Earnings: Net income was $15.2 million, down 31.0% from $22.0 million. Diluted EPS was $0.50, versus $0.72; return on average assets was 0.81% versus 1.21%, and return on average equity was 7.90% versus 12.19%.
- Interest revenue and margins: Interest and dividend income rose 14.1% to $99.6 million, but interest expense increased 66.2% to $48.9 million. Net interest income fell 12.4% to $50.7 million. Tax-equivalent net interest margin declined to 2.78% from 3.28%; net interest spread declined to 1.28% from 2.10%.
- Other income and expenses: Noninterest income was $7.7 million, down 7.2%, mainly reflecting lower other operating and SBA loan-sale income; mortgage loan sales contributed $0.4 million of gain. Noninterest expense rose 11.1% to $36.4 million, including higher compensation, professional fees, data processing and other operating costs.
- Credit costs: Credit loss expense was $0.2 million, compared with $2.1 million. Net loan charge-offs were $1.6 million, or 0.10% of average loans, broadly level as a proportion of average loans year over year. The allowance for credit losses was $68.3 million, 1.11% of loans, at March 31.
- Cash flow: Operating activities provided $30.0 million; investing activities used $9.5 million; financing activities used $66.8 million. Cash and due from banks decreased $46.3 million during the quarter to $256.0 million.
- Balance sheet and funding: Total assets were $7.51 billion, down from $7.57 billion at year-end; gross loans were $6.18 billion, slightly below $6.18 billion at year-end. Deposits rose 1.5% to $6.38 billion, while borrowings fell to $172.5 million from $325.0 million. Stockholders’ equity was $703.1 million.
- Liquidity and capital: The loan-to-deposit ratio was 96.9%, versus 98.4% at year-end. The Bank reported $1.33 billion of remaining FHLB borrowing capacity and $22.3 million available through the Federal Reserve Discount Window. The Bank’s total risk-based capital ratio was 14.50%, and its common equity Tier 1 ratio was 13.44%; the filing says the Bank remained well capitalized. Uninsured deposits totaled $2.56 billion.
Material changes and notable items
- Higher asset yields did not offset rising funding costs: average interest-earning asset yield increased to 5.47% from 4.96%, while average interest-bearing deposit cost increased to 4.16% from 2.73%. Management attributes the increases primarily to the higher-rate environment.
- Average interest-bearing deposits increased, including growth in money market, savings and time deposits; average noninterest-bearing demand deposits declined. Deposit growth helped fund a reduction in FHLB advances.
- Nonperforming loans declined to $14.0 million from $15.5 million at year-end; nonperforming assets were $14.1 million, or 0.19% of assets. Special-mention loans were $62.3 million and classified loans were $23.7 million at quarter-end.
- The securities available-for-sale portfolio had a fair value of $872.2 million against amortized cost of $978.6 million. Accumulated other comprehensive loss was $76.9 million, including quarter losses on securities and cash-flow hedges. Management reported no expected credit losses on the securities portfolio and said it had the ability and intent to hold the securities and did not expect to be required to sell them before recovery of cost.
- The Company entered into a $75.0 million interest-rate swap during Q1, in addition to a $100.0 million swap entered into in Q4 2023. Both are designated as cash-flow hedges, effective May 1, 2024, intended to hedge variable-rate loan pools against falling rates. Management estimates $1.7 million will be reclassified from accumulated OCI as a decrease to interest income over the next 12 months.
- The Company repurchased 100,000 shares during Q1 for $1.6 million at an average price of $15.92. Subsequent to quarter-end, the Board declared a $0.25-per-share dividend and authorized a new repurchase program for up to approximately 1.5 million shares, or 5% of outstanding shares.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management describes liquidity as adequate and the Bank as well capitalized, while noting that actual results may differ from estimates and forward-looking statements. Key risks include interest-rate movements and deposit pricing, liquidity and uninsured-deposit composition, competition for deposits and loans, real estate values, borrower performance and credit-loss estimates, economic conditions, regulatory changes, cyber and operational risks, and access to cost-effective funding.
Off-balance-sheet commitments totaled $912.5 million, primarily unused credit commitments, standby letters of credit and commercial letters of credit; the filing cautions that commitments may expire undrawn and do not necessarily represent future cash requirements. The Bank also had $120.0 million of FHLB letters of credit securing California public-fund deposits. Management says ordinary-course litigation is not expected to have a material adverse impact. No material change in risk factors or contractual obligations was reported.
Important facts for investors to verify
- Whether deposit pricing and funding costs stabilize, and the resulting trend in net interest margin and earnings.
- Trends in uninsured deposits, deposit concentration, loan-to-deposit ratio and actual use of available borrowing capacity.
- Credit performance by portfolio, particularly commercial real estate and equipment financing, and the specific allowance on the health-care C&I loan.
- The sensitivity of securities values, accumulated OCI and earnings to interest-rate changes, including assumptions underlying the Company’s rate-simulation scenarios.
- Execution and capital impact of the new share repurchase authorization and the continued $0.25 quarterly dividend.