Hanmi Financial Corporation — Q1 2019 Form 10-Q
Business and reporting period. Hanmi Financial is a bank holding company whose primary operations are conducted through Hanmi Bank, including deposit-taking, lending and investment activities. This unaudited report covers the three months ended March 31, 2019; comparisons are primarily with Q1 2018 or December 31, 2018, as applicable. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparison |
|---|---|---|
| Interest and dividend income | $62.4 million | $55.1 million in Q1 2018 |
| Net interest income | $44.9 million | $44.9 million in Q1 2018; taxable-equivalent NII was $45.0 million versus $45.1 million |
| Net interest margin | 3.52% | 3.70% in Q1 2018 |
| Noninterest income | $6.3 million | $6.1 million in Q1 2018 |
| Noninterest expense | $29.1 million | $29.8 million in Q1 2018 |
| Provision for loan and lease losses | $1.1 million | $649,000 in Q1 2018 |
| Net income / diluted EPS | $14.7 million / $0.48 | $14.9 million / $0.46 in Q1 2018 |
| Operating cash flow | $22.4 million provided | $18.5 million provided in Q1 2018 |
| Cash and due from banks | $169.8 million | $155.4 million at December 31, 2018 |
| Total assets / stockholders’ equity | $5.57 billion / $564.3 million | $5.50 billion / $552.6 million at December 31, 2018 |
| Deposits | $4.82 billion | $4.75 billion at December 31, 2018 |
| Loans and leases, gross / net | $4.58 billion / $4.54 billion | Gross $4.60 billion / net $4.57 billion at December 31, 2018 |
| Borrowings / subordinated debentures | No FHLB advances outstanding / $117.9 million | $55.0 million FHLB advances / $117.8 million at December 31, 2018 |
Material changes and key drivers
- Net income decreased $183,000, or 1.2%, year over year, while diluted EPS rose to $0.48 from $0.46, alongside fewer weighted-average shares.
- Interest income rose with higher average loan balances and yields, but interest expense increased 72.5% to $17.5 million, largely as deposit costs and time-deposit balances increased. The net interest margin declined 18 basis points.
- Noninterest expense fell 2.3%, chiefly because salaries and benefits declined $3.0 million following branch closures and staff-related cost reductions. Other operating expense increased $1.1 million.
- Noninterest income increased modestly, with a $725,000 securities-sale gain versus a $428,000 net securities-sale loss in Q1 2018. SBA loan-sale gains declined $522,000.
- Deposits grew 1.5% from year-end, while net loans and leases declined 0.6%. Management reported a 94.9% loan-to-deposit ratio, down from 96.9% at year-end.
- Nonperforming loans and leases rose to $40.0 million from $15.5 million at year-end; nonperforming assets increased to $40.7 million from $16.2 million. The increase mainly reflected a newly nonaccrual $25.0 million commercial loan relationship affected by a business interruption. A specific $3.0 million allowance was established for it.
- The allowance for loan and lease losses was $32.9 million, or 0.72% of loans and leases, versus $32.0 million and 0.70% at year-end. The allowance equaled 82.16% of nonperforming loans, down from 206.85% a year earlier. Net charge-offs were $195,000, compared with net recoveries of $85,000 in Q1 2018.
Liquidity, capital, risks and unusual items
- Management stated that the Company and Bank had adequate liquidity. The Bank had $753.7 million of remaining FHLB borrowing capacity, $29.5 million available through the Federal Reserve Discount Window, and $115.0 million in unsecured federal funds lines, all with no outstanding balances. Brokered deposits were $348.4 million.
- The Bank remained well capitalized: total risk-based capital was 14.37%, common equity Tier 1 was 13.64%, and Tier 1 leverage was 11.88%. The Company’s corresponding ratios were 14.17%, 11.52%, and 10.39%.
- Interest-rate simulations estimated that a 100-basis-point rate decrease would reduce net interest income by 3.17% over 1–12 months and 6.20% over 13–24 months; management cautioned that simulations are not forecasts and depend on assumptions.
- Q1 income tax expense included a $400,000 provision associated with the settlement of California tax audits for 2008 and 2009; the Company paid $900,000 in connection with the settlement. The effective tax rate was 30.0%, up from 27.8%.
- The Company adopted the new lease accounting standard on January 1, 2019, recognizing $40.9 million of right-of-use assets and lease liabilities at adoption. At quarter-end, the balances were $39.3 million and $39.5 million, respectively.
- A January 2019 repurchase program authorized purchases of up to approximately 1.5 million shares, or 5% of shares outstanding. No shares were repurchased under the program in Q1; shares withheld for employee taxes are separate.
- Management provided no specific earnings or operating guidance in the filing. It identified risks including economic and real-estate conditions, credit quality, funding and deposit competition, interest-rate changes, regulation, SBA lending, concentration exposure, and cybersecurity risks involving vendors. The company was implementing the expected-credit-loss standard (CECL) and was still evaluating its financial-statement impact.
- Management reported no material change in previously disclosed risk factors, no material litigation expected to adversely affect the Company, and no material change in internal control over financial reporting. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Developments, repayment prospects and collateral support for the $25.0 million nonaccrual commercial relationship, and whether nonperforming loans continue to rise.
- Future provision needs and allowance coverage if criticized, classified or nonperforming credit exposures increase.
- Deposit pricing, time-deposit mix, brokered-deposit use and net interest margin trends as funding costs change.
- The realized impact of CECL adoption, including any material change to credit-loss estimates or capital.
- Whether management uses the authorized share-repurchase program and how repurchases affect capital and liquidity.
- Actual results versus the filing’s interest-rate sensitivity assumptions and the performance of its real-estate and hospitality lending concentrations.