Hanmi Financial Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are primarily with FY 2018. Hanmi Financial is a bank holding company whose principal subsidiary, Hanmi Bank, provides community banking, with a substantial focus on small and midsize businesses and commercial real estate lending.
Financial performance and condition
Unless noted otherwise, amounts are in millions of dollars.
| Metric | FY 2019 / year-end 2019 | FY 2018 / year-end 2018 |
|---|---|---|
| Total revenue | $274.3 | $258.9 |
| Net interest income | $175.9 | $181.0 |
| Net interest margin, taxable-equivalent | 3.37% | 3.57% |
| Provision for loan and lease losses | $30.2 | $4.0 |
| Net income | $32.8 | $57.9 |
| Diluted earnings per share | $1.06 | $1.79 |
| Assets | $5,538.2 | $5,502.2 |
| Loans and leases, net | $4,548.7 | $4,568.6 |
| Deposits | $4,699.0 | $4,747.2 |
| Stockholders’ equity | $563.3 | $552.6 |
- Profitability and costs: Net income fell 43.3%. Noninterest income rose 12.4% to $27.6 million, including a $1.3 million securities-sale gain and $1.2 million gain on sale of bank premises. Noninterest expense rose 7.1% to $125.9 million, including a $1.7 million bank-premises impairment loss. The efficiency ratio increased to 61.89% from 57.20%.
- Cash flow: Operating activities provided $58.8 million; investing activities used $44.5 million; financing activities used $47.9 million. Cash and due from banks declined $33.7 million to $121.7 million. The filing reports net cash flows but does not provide a separate free-cash-flow measure.
- Credit quality: Nonperforming loans and leases rose to $63.8 million from $15.5 million; nonperforming assets were 1.15% of assets versus 0.29%. The allowance for loan and lease losses increased to $61.4 million, or 1.33% of loans, from $32.0 million, or 0.70%. Net charge-offs were $0.7 million, down from $3.1 million.
- Debt and liquidity: FHLB advances were $90.0 million, up from $55.0 million; subordinated debentures were $118.4 million. The Bank had $878.4 million of remaining FHLB borrowing capacity, plus $29.6 million available at the Federal Reserve Discount Window and $115.0 million in unused unsecured federal-funds lines. Brokered deposits were $264.2 million, down from $351.3 million.
- Capital and shareholder returns: The Bank’s total risk-based capital ratio was 14.64%, CET1 ratio 13.39%, and Tier 1 leverage ratio 11.56%; the Bank was categorized as well capitalized. The common dividend was $0.96 per share, while the dividend payout ratio rose to 90.57%. The company repurchased 375,000 shares for $7.4 million in 2019.
Material changes versus FY 2018
- Net interest income declined $5.1 million as interest expense grew faster than interest income. The average cost of interest-bearing liabilities rose to 1.99% from 1.55%, despite the average yield on earning assets increasing to 4.73% from 4.62%.
- The $30.2 million loan-loss provision, up $26.2 million, was driven chiefly by a troubled $39.7 million borrower relationship placed on nonaccrual and impaired status, with a $22.6 million specific allowance at year-end. A $10.7 million branded-hotel construction loan was also classified.
- Classified loans and leases increased to $94.0 million from $29.5 million. Total troubled debt restructurings rose to $56.3 million from $10.3 million.
- Deposits declined $48.3 million, largely reflecting a $199.1 million decrease in time deposits of $100,000 or more; growth in noninterest-bearing demand and money-market/savings deposits partly offset the decline. Loans and leases were broadly stable overall, with portfolio mix shifting toward commercial and industrial loans and equipment leases.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no earnings or revenue guidance. Hanmi expected to adopt CECL in the first quarter of 2020. Its preliminary expected allowance coverage was 1.63%–1.88% of loans and leases, compared with 1.33% at year-end 2019; adoption was expected to require a material allowance adjustment and an after-tax charge to retained earnings. The filing does not state a clear dollar estimate for that adjustment.
- Internal controls: Management and the auditor identified a material weakness in IT general controls, specifically user access and segregation of duties over certain systems supporting financial reporting. Management reported no resulting financial-statement misstatements and received an unqualified opinion on the financial statements, but the auditor issued an adverse opinion on internal control over financial reporting. Management expected remediation before the end of 2020. A separate weakness concerning review of collateral values for impaired loans was reported remediated by year-end.
- Concentrations and key risks: Loans to lessors of nonresidential buildings were $1.33 billion (28.9% of loans and leases); hospitality exposure was $942.6 million (20.4%). The filing highlights commercial real estate concentration, Southern California exposure, interest-rate and funding risk, borrower credit risk, cybersecurity and vendor risks, regulatory compliance, and natural disasters. COVID-19 was identified as a potential risk to future performance; its impact was not quantified.
- Other matters: The filing reports no legal proceedings expected to have a material adverse effect and no subsequent events requiring recognition or disclosure through issuance. It notes a $3.9 million aggregate death benefit for designated beneficiaries under split-dollar agreements.
Most important facts for investors to verify
- Current status and recovery outlook for the $39.7 million troubled relationship and the $10.7 million hotel construction credit, including collateral values, specific reserves and subsequent payment performance.
- Whether nonperforming, classified and restructured loans continued to rise after year-end, particularly in commercial real estate, hospitality and construction.
- The actual CECL transition allowance, retained-earnings impact and effect on regulatory capital after adoption.
- Remediation and independent testing of the IT access and segregation-of-duties material weakness, and whether any deficiencies or misstatements emerge.
- Deposit retention, funding costs, brokered-deposit reliance, borrowing capacity and net interest margin trends as interest rates and market conditions change.