Hanmi Almost Delivers

You can usually count on Korean banks to deliver the goods come earnings time. HanmiFinancial's (Nasdaq: HAFC  ) first-quarter results were strong enough for a 5% jump in stock price today, but I'm hesitant to jump on the bandwagon.

Let's start with the positive. Net income and earnings per share jumped 11% over last year, helped by an increase in net interest income and excellent expense control. The quarter's 39% efficiency ratio is one of the best I've seen out of any bank this quarter, and it's a testament to management's ability to keep overhead expenses in check. Net loans grew a healthy 19%, while asset quality remains strong, as customers steadily pay back those loans. Total assets were up 12% to $3.5 billion.

So far, so good. As I dug a little deeper, though, one item caught my attention. Deposit growth was fueled only by high-cost time deposits. Lower-cost savings and money market deposits actually dropped 22% and 13%, respectively, year over year. Time deposits now account for more than 50% of total deposits, compared with 42% in 2005. In fact, as this table shows, time deposits have been steadily rising for some time now.

Hanmi Deposit Mix

	Q4 '04	Q1'05	Q2 '05	Q3 '05	Q4 '05	Q1 '06
Time Deposits	41%	42%	45%	49%	51%	52%
Savings and MMA	30%	28%	26%	23%	23%	22%
Demand Deposits	29%	30%	30%	28%	26%	27%

Data provided by Capital IQ, a division of Standard & Poor's.

I understand that consumers will lean toward time deposits as interest rates rise, but I'd still like to see other deposits increase at similar rates. The higher costs of this deposit mix may eventually take a toll on Hanmi's net interest income.

Hanmi is the largest community bank catering to Korean-Americans. It competes with Center Financial (Nasdaq: CLFC  ) , Nara Bancorp (Nasdaq: NARA  ) , and Wilshire Bancorp (Nasdaq: WIBC  ) in Los Angeles and other regions with large Korean populations. Each of these companies has enjoyed outstanding success because of a growing Korean population and strong management. However, the competition for low-cost deposits among Korean-Americans and other ethnic groups seems absolutely brutal. These companies must compete not only against each other, but also against national players such as Bank of America that vie for the same customers.

Recent consolidation among the Chinese-American banks makes me wonder whether we'll see some M&A activity in the Korean banks. It's possible that two smaller banks could join forces, or that a larger regional might bid for one of these companies. It's always dangerous to play the "who will take over whom" game, but in banking, it's something you have to consider if the space gets too crowded.

I once thought that Center Financial and Nara were interesting plays in community banking, but the tough deposit environment has given me some doubts. Run-ups in each of these stocks has brought their share prices closer to fair value. I'll be taking a close look at first-quarter results for Nara and Center Financial over the next two days before I decide which, if any, of these Korean banks I still like.

Timely deposits of further Foolishness:

• A Closer Look at Bank Stocks
• Center Financial Goes Awry

Bank of America is a Motley Fool Income Investor recommendation. For more dividend-paying stocks you can take to the bank, try the newsletter service for free with a 30-day guest pass.

Fool financial editor Joseph Khattab holds no financial position in any of the companies mentioned.