Hanmi Financial: Attractively Valued With A Positive Outlook On Topline Growth (NASDAQ:HAFC)

After a phenomenal year, the earnings of Hanmi Financial Corporation (NASDAQ: HAFC) will likely dip this year because of an increase in net provision expense. On the other hand, economic factors will likely lift the loan portfolio, which will, in turn, support the bottom line. Further, the presence of liquid assets on Hanmi’s books, and a conducive deposit mix will expand the margin amid a rising interest-rate environment. Overall, I’m expecting Hanmi Financial to report earnings of $2.63 per share in 2022, down 18% year-over-year. Despite the dip, the earnings will likely remain much higher than the pre-pandemic level. The year-end target price suggests a significant upside from the current market price. Therefore, I am adopting a buy rating on Hanmi Financial.

Broad-based Economic Growth to Support Loan Book Expansion

Hanmi Financial Corporation’s loan portfolio has grown by mid-single-digit percentages in most of the previous years. The company can easily achieve similar loan growth this year due to the economic recovery. Hanmi Financial’s operations are widespread and geographically diverse, covering multi-ethnic markets from California to New York. As a result, the national economic metrics are a good gauge of upcoming loan demand. The GDP growth rate was quite robust in the last quarter, while the unemployment rate was close to the pre-pandemic level in January. The nationwide economic recovery will likely drive loan growth this year.

Further, Hanmi Financial has made significant investments in talent and technology, including its digital platform. These investments should help loan growth in the coming quarters. Moreover, there is now only a small amount of Paycheck Protection Program (“PPP”) loans that remains to be forgiven. According to details given in the earnings release, PPP loans outstanding totaled $3.0 million at the end of December 2021, representing just 0.1% of total loans. Therefore, their forgiveness this year will barely move the needle.

Considering these factors, I’m expecting the loan portfolio to increase by 6% by the end of December 2022 from the end of 2021. Meanwhile, deposits will likely grow in line with loans. The following table shows my balance sheet estimates.

	FY17	FY18	FY19	FY20	FY21	FY22E
Financial Position
Net Loans	4,273	4,569	4,549	4,790	5,079	5,391
Growth of Net Loans	12.1%	6.9%	(0.4)%	5.3%	6.0%	6.1%
Other Earning Assets	602	601	657	762	924	981
Deposits	4,349	4,747	4,699	5,275	5,786	6,141
Borrowings and Sub-Debt	267	173	208	269	353	374
Common Equity	562	553	563	577	643	697
Book Value Per Share ($)	17.4	17.2	18.3	19.1	21.1	22.9
Tangible BVPS ($)	17.1	16.9	17.9	18.7	20.7	22.5
Source: SEC Filings, Author’s Estimates(In USD million unless otherwise specified)

Balance Sheet Positioning to Boost the Margin

As deposit growth outpaced loan growth last year, Hanmi Financial ended up with a substantial cash position on its books. The company deployed some of the excess cash and cash equivalents in the fourth quarter of 2021, but the cash balance was still quite excessive at the year-end. It’s better to have liquid assets on books than assets locked in at fixed rates ahead of an interest rate hike. Hanmi Financial can move this excess cash into higher-yielding securities and loans once the Federal Reserve increases the federal funds rate target. However, given that most financial institutions are sitting on excess liquidity, the impact of a rate hike may be lagged. There will be heightened competition in the market to deploy excess cash, which may create pricing pressure.

Another factor that will help the margin in a rising interest-rate environment is a large amount of non-interest-bearing deposits. Hanmi Financial successfully increased its non-interest-bearing deposits to 44.5% of total deposits by 2021 end from 36.0% at the end of 2020. The high proportion of non-interest-bearing deposits will keep the average deposit cost sticky when interest rates increase.

However, the loan portfolio is not as well-positioned as the deposit mix. Around 72% of the loan portfolio is made up of commercial real estate loans, which are commonly based on fixed rates. Therefore, the repricing of the portfolio will likely be drawn out and slow. The management’s interest-rate sensitivity analysis given in the third quarter’s 10-Q filing also shows a similar result. According to that analysis, a 100-basis points increase in interest rates can boost the net interest income by 6.54% in the first year, and 9.68% in the second year of the rate hike.

Considering these factors, I’m expecting the margin to remain almost unchanged in the first half of 2022 from 2.96% in the last quarter of 2021. For the second half of the year, I’m expecting the margin to increase by eight basis points.

Provision Expense to Remain Below Normal

Hanmi Financial reversed a large part of its previous provisioning last year. Further provisioning reversals cannot be ruled out as the loan loss reserves appear at an excessive level relative to the portfolio’s credit risk. Allowances made up 1.41% of total loans, while non-performing loans made up just 0.26% of total loans at the end of December 2021, as mentioned in the earnings release. The management also mentioned in the conference call that it expects additional recoveries, but it expects future recoveries to be smaller in magnitude.

Considering these factors, I’m expecting the provision expense, net of reversals, in 2022 to be higher compared to 2021 but below the pre-pandemic average. I’m expecting the provision expense to make up around 0.18% of total loans in 2022, as opposed to an average of 0.25% of total loans from 2017 to 2019.

Expecting Earnings to Remain Above the Pre-Pandemic Level

The higher net provision expense will likely drag earnings on a year-over-year basis. Nevertheless, the earnings for 2022 will likely be much higher than the pre-pandemic level because of strong topline growth. The economic recovery will likely boost loan growth, which will in turn increase the revenue for this year. Moreover, the sticky deposit cost and a large balance of liquid assets will benefit the topline amid a rising interest-rate environment. Overall, I’m expecting the company to report earnings of $2.63 per share in 2022, down 18% year-over-year. The following table shows my income statement estimates.

	FY17	FY18	FY19	FY20	FY21	FY22E
Income Statement
Net interest income	177	181	176	181	195	211
Provision for loan losses	1	4	30	45	(24)	10
Non-interest income	33	25	28	43	40	41
Non-interest expense	114	118	126	119	124	133
Net income – Common Sh.	55	58	33	42	98	80
EPS – Diluted ($)	1.69	1.81	1.06	1.39	3.22	2.63
Source: SEC Filings, Author’s Estimates(In USD million unless otherwise specified)

Actual earnings may differ materially from estimates because of the risks and uncertainties related to the COVID-19 pandemic and the timing of an interest rate hike.

Attractive Total Expected Return Calls for a Buy Rating

Hanmi Financial slashed its quarterly dividend from $0.24 per share to $0.08 per share in 2020. Since then, the company has gradually increased the quarterly dividend to $0.22 per share. The current dividend level and earnings estimate suggest a payout ratio of 34% for 2022, which is below the five-year average of 49%. Due to the below-average implied payout ratio, there is a chance that Hanmi Financial will return to a dividend of $0.24 per share this year. However, to be on the safe side, I’m not assuming any change in the dividend level for 2022. The quarterly dividend of $0.22 per share implies a dividend yield of 3.3%, using the February 18 closing price.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Hanmi Financial. The stock has traded at an average P/TB ratio of 1.21 in the past, as shown below.

	FY17	FY18	FY19	FY20	FY21	Average
T. Book Value per Share ($)	17.1	16.9	17.9	18.7	20.7
Average Market Price ($)	30.1	27.1	20.7	11.2	19.4
Historical P/TB	1.76x	1.61x	1.16x	0.60x	0.94x	1.21x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple with the forecast tangible book value per share of $22.5 gives a target price of $27.3 for the end of 2022. This price target implies a 1.8% upside from the February 18 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

P/TB Multiple	1.01x	1.11x	1.21x	1.31x	1.41x
TBVPS – Dec 2022 ($)	22.5	22.5	22.5	22.5	22.5
Target Price	22.8	25.0	27.3	29.5	31.8
Market Price	26.8	26.8	26.8	26.8	26.8
Upside/(Downside)	(15.0)%	(6.6)%	1.8%	10.2%	18.6%
Source: Author’s Estimates

The stock has traded at an average P/E ratio of around 13.3x in the past, as shown below.

	FY17	FY18	FY19	FY20	FY21	Average
Earnings per Share ($)	1.69	1.81	1.06	1.39	3.22
Average Market Price ($)	30.1	27.1	20.7	11.2	19.4
Historical P/E	17.7x	15.0x	19.5x	8.1x	6.0x	13.3x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple with the forecast earnings per share of $2.63 gives a target price of $34.9 for the end of 2022. This price target implies a 30.2% upside from the February 18 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple	11.3x	12.3x	13.3x	14.3x	15.3x
EPS 2022 ($)	2.63	2.63	2.63	2.63	2.63
Target Price ($)	29.7	32.3	34.9	37.5	40.2
Market Price ($)	26.8	26.8	26.8	26.8	26.8
Upside/(Downside)	10.6%	20.4%	30.2%	40.1%	49.9%
Source: Author’s Estimates

Equally weighting the target prices from the two valuation methods gives a combined target price of $31.1, which implies a 16.0% upside from the current market price. Adding the forward dividend yield gives a total expected return of 19.3%. Hence, I’m adopting a buy rating on Hanmi Financial.