Hanmi's Financial Flexibility Will Not Allow It To Do Splits

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About: Hanmi Financial Corporation (HAFC)
by: Dakota Bartell
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Summary

Decreasing net income.

Decreasing net interest margin.

Hanmi may not be as financially flexible as they need to be.

Overview

Hanmi Financial Corp HAFC, is a bank holding company. Their primary market is Korean-Americans and other ethnic groups living in communities across several states including Washington, California, Colorado, Illinois, New York, Virginia, Texas, and Georgia. They operate over 40 full-service branches, and they provide everything from SBA to residential and industrial loans.

Hanmi's most recent earnings call was October 18th. Closing October 24th the stock has decreased 8.58%.

Books

Hanmi saw their revenue increase 0.4% going from Q2 to Q3 and 10.7% on a year over year basis. This was met with increases in interest expenses of 13.5% and 17.4% for the quarterly and yearly basis respectively. This means that the net interest margin has decreased because the interest expenses has risen faster than the interest revenues, making the bank less efficient.

On a quarter over quarter basis, Hanmi saw their net income decrease 7.25% to $13.1 million. This was caused by the decrease in net interest margin causing a decrease in return on assets. On a year over year basis, Hanmi saw a 6.0% drop in net income, this also being a product of a lower net interest margin.

The quarter saw a sharp increase in deposits of almost $182 million, this was met with a decrease in assets of $39 million. This decreased their deposit to loan ratio from 1.24 to 1.17. The lower that ratio is, the less the bank is getting out of each deposit they are bringing in. Hanmi is currently above 1.0 which means they are funding all their loans over the 1.0 mark through other borrowings like federal funds, borrowing from other banks, and their own retained earnings.

The decrease can be concerning, however, Hanmi does have some room to spare before they start having more deposits than loans. This is something for investors to watch, but not something to sell the stock over.

Valuation

Price to Earnings

Hanmi currently has a price to earnings of 13.3. This is below both their sector (Financial) and industry (Pacific) price to earning averages which are 15.8 and 19.8 respectively. This can be justified because of the lower efficiencies and the lower net income of the bank. Investors will see future income as less safe therefore lowering the P/E ratio.

Divident Yield

Hanmi currently has a dividend yield of 3.21%. This is in-line with their sector, but below their industry average, which are 3.24% and 2.19% respectively.

Hanmi's 12 month payout ratio is 29.44%. As companies mature, their payout ratio's tend to increase. Hanmi just started their dividend payouts in the third quarter of 2013. With decreasing net incomes, investors should expect the dividend payout ratio to be maintained, when in the course of declining incomes will also start to decrease. In the worst case scenario, the payout ratio itself may start to decline as well.

Risks

Hanmi Financial may not be able to translate deposits in assets quickly, as seen over the quarter. An investor could also make an assumption of the reverse; If there is a run on the bank, will they have enough flexibility to withstand the decrease in deposits. Both of these are risks unto the bank. Either losing efficiencies by not using deposits to earn interest revenue, or becoming insolvent because of not having the cash on hand to cover withdrawals.

Conclusion

Company Rating

I rate this company as a C (See my instablog for ratings sheet). Their earnings on a quarter over quarter and year over year basis are declining. However, they have been able to become less dependent on FHLB loans and more dependent on their own deposits, but this has resulted in a lower net interest margin.

Decisions to better the company

Increase loan production. Increasing loan production will be a cure all for Hanmi. Whether through origination or secondary market purchases, this will allow Hanmi to use more of their deposits/borrowings to produce interest revenue and raise their net interest margin. Bring in more deposits, and try to become less dependent on FHLB borrowings and borrowings from other banks, this should also help contribute to a higher net interest margin and thus higher net incomes for the bank.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.