UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2021
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From To
Commission File Number: 000-30421
HANMI FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
95-4788120
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
900 Wilshire Boulevard, Suite 1250
Los Angeles, California
90017
(Address of Principal Executive Offices)
(Zip Code)
(213) 382-2200
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
HAFC
Nasdaq Global Select Market
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of August 2, 2021, there were 30,696,546 outstanding shares of the Registrant’s Common Stock.
Hanmi Financial Corporation and Subsidiaries Quarterly Report on Form 10-Q
Three Months Ended June 30, 2021
Table of Contents
Part I – Financial Information
Item 1.
Financial Statements
3
Consolidated Balance Sheets at June 30, 2021 (unaudited) and December 31, 2020
Consolidated Statements of Income for the three and six months ended June 30, 2021 and 2020 (unaudited)
4
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020 (unaudited)
5
Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020 (unaudited)
6
Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 (unaudited)
8
Notes to Consolidated Financial Statements (unaudited)
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
43
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
61
Item 4.
Controls and Procedures
62
Part II – Other Information
Legal Proceedings
63
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
64
Item 5.
Other Information
Item 6.
Exhibits
65
Signatures
66
2
Part I — Financial Information
Item 1. Financial Statements
Hanmi Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
June 30,
December 31,
2021
2020
(Unaudited)
Assets
Cash and due from banks
$
697,789
391,849
Securities available for sale, at fair value (amortized cost of $866,204 as of June 30, 2021 and $749,458 as of December 31, 2020)
862,119
753,781
Loans held for sale, at the lower of cost or fair value
36,030
8,568
Loans receivable, net of allowance for credit losses of $83,372 as of June 30, 2021 and $90,426 as of December 31, 2020
4,736,720
4,789,742
Accrued interest receivable
14,397
16,363
Premises and equipment, net
26,225
26,431
Customers' liability on acceptances
1,907
1,319
Servicing assets
6,199
6,212
Goodwill and other intangible assets, net
11,504
11,612
Federal Home Loan Bank ("FHLB") stock, at cost
16,385
Income tax assets
41,208
42,704
Bank-owned life insurance
54,402
53,894
Prepaid expenses and other assets
73,970
83,028
Total assets
6,578,856
6,201,888
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing
2,354,671
1,898,766
Interest-bearing
3,275,159
3,376,242
Total deposits
5,629,830
5,275,008
Accrued interest payable
1,855
4,564
Bank's liability on acceptances
Borrowings
150,000
Subordinated debentures ($126,800 face amount less unamortized discount and debt issuance costs of $7,557 and $7,828 as of June 30, 2021 and December 31, 2020, respectively)
119,243
118,972
Accrued expenses and other liabilities
73,044
74,981
Total liabilities
5,975,879
5,624,844
Stockholders' equity:
Preferred stock, $0.001 par value; authorized 10,000,000 shares; no shares issued as of June 30, 2021 and December 31, 2020
—
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,617,311 shares (30,697,652 shares outstanding) as of June 30, 2021 and issued 33,560,801 shares (30,717,835 shares outstanding) as of December 31, 2020
33
Additional paid-in capital
579,595
578,360
Accumulated other comprehensive (loss) income, net of tax benefit of $1,226 as of June 30, 2021 and net of tax expense of $1,247 as of December 31, 2020
(2,859
)
3,076
Retained earnings
146,651
114,621
Less treasury stock; 2,919,659 shares as of June 30, 2021 and 2,842,966 shares as of December 31, 2020
(120,443
(119,046
Total stockholders' equity
602,977
577,044
Total liabilities and stockholders' equity
See Accompanying Notes to Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income (Unaudited)
(in thousands, except share and per share data)
Three Months Ended June 30,
Six Months Ended June 30,
Interest and dividend income:
Interest and fees on loans receivable
52,785
52,230
103,400
106,878
Interest on securities
1,404
3,225
2,544
6,880
Dividends on FHLB stock
242
203
448
492
Interest on deposits in other banks
176
78
272
411
Total interest and dividend income
54,607
55,736
106,664
114,661
Interest expense:
Interest on deposits
3,003
8,889
6,953
21,631
Interest on borrowings
447
760
933
1,256
Interest on subordinated debentures
1,585
1,645
3,204
3,357
Total interest expense
5,035
11,294
11,090
26,244
Net interest income before credit loss expense
49,572
44,442
95,574
88,417
Credit loss (recovery) expense
(3,327
24,594
(1,217
40,333
Net interest income after credit loss (recovery) expense
52,899
19,848
96,791
48,084
Noninterest income:
Service charges on deposit accounts
2,344
2,032
4,599
4,432
Trade finance and other service charges and fees
1,259
961
2,280
1,948
Gain on sale of Small Business Administration ("SBA") loans
3,508
7,633
1,154
Net gain on sales of securities
15,712
99
Other operating income
1,775
2,226
4,081
3,908
Total noninterest income
8,886
20,931
18,692
27,154
Noninterest expense:
Salaries and employee benefits
18,302
14,701
35,122
32,450
Occupancy and equipment
4,602
4,508
9,198
8,983
Data processing
2,915
2,804
5,841
5,473
Professional fees
1,413
1,545
2,860
3,460
Supplies and communications
733
858
1,489
1,639
Advertising and promotion
374
456
732
1,190
Other operating expenses
2,444
2,266
5,074
5,011
Total noninterest expense
30,783
27,138
60,316
58,206
Income before tax
31,002
13,641
55,167
17,032
Income tax expense
8,880
4,466
16,386
5,506
Net income
22,122
9,175
38,781
11,526
Basic earnings per share
0.72
0.30
1.26
0.38
Diluted earnings per share
Weighted-average shares outstanding:
Basic
30,442,993
30,426,967
30,452,320
30,447,984
Diluted
30,520,456
30,526,120
30,450,231
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
Other comprehensive income (loss), net of tax:
Unrealized gain on securities:
Unrealized holding gain arising during period
3,476
(493
(8,309
11,431
Less: reclassification adjustment for net gain included in net income
(15,712
(99
Income tax benefit (expense) related to items of other comprehensive income
(1,042
4,673
2,473
1,234
Other comprehensive income (loss), net of tax
2,434
(11,532
(5,935
(3,047
Comprehensive income
24,556
(2,357
32,846
8,479
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the Three Months Ended June 30, 2021 and June 30, 2020
Common Stock - Number of Shares
Stockholders' Equity
Accumulated
Additional
Other
Treasury
Total
Shares
Common
Paid-in
Comprehensive
Retained
Stock,
Stockholders'
Issued
Outstanding
Stock
Capital
Income (Loss)
Earnings
at Cost
Equity
Balance at April 1, 2020
33,448,214
(2,825,473
30,622,741
576,585
11,867
83,355
(118,882
552,958
Restricted stock awards, net of forfeitures
47,699
Share-based compensation expense
626
Restricted stock surrendered due to employee tax liability
(12,811
(120
Cash dividends declared (common stock, $0.12/share)
(3,671
Change in unrealized gain on securities available for sale, net of income taxes
Balance at June 30, 2020
33,495,913
(2,838,284
30,657,629
577,211
335
88,859
(119,002
547,436
Balance at April 1, 2021
33,585,181
(2,902,648
30,682,533
578,958
(5,293
128,211
(120,087
581,822
32,130
637
(17,011
(356
Repurchase of common stock
(3,682
Balance at June 30, 2021
33,617,311
(2,919,659
30,697,652
For the Six Months Ended June 30, 2021 and June 30, 2020
Balance at January 1, 2020
33,475,402
(2,675,778
30,799,624
575,816
3,382
100,552
(116,515
563,268
Adjustment related to adopting of new accounting standards
ASU 2016-13 (See Notes 1 and 3)
(12,167
Adjusted balance at January 1, 2020
88,385
551,101
20,511
1,395
(27,106
(291
(135,400
(2,196
Cash dividends declared (common stock, $0.36/share)
(11,052
Change in unrealized gain (loss) on securities available for sale, net of income taxes
Balance at January 1, 2021
33,560,801
(2,842,966
30,717,835
56,510
1,235
(21,693
(451
(55,000
(946
Cash dividends declared (common stock, $0.22/share)
(6,751
7
Consolidated Statements of Cash Flows (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
7,728
5,018
Credit loss expense
Gain on sales of securities
Gain on sales of SBA loans
(7,633
(1,154
Origination of SBA loans held for sale
(81,302
(30,139
Proceeds from sales of SBA loans
165,958
19,366
Change in bank-owned life insurance
(508
(552
Change in prepaid expenses and other assets
4,945
(34,408
Change in income tax assets
3,969
4,930
Change in accrued expenses and other liabilities
(1,188
23,324
Net cash provided by (used in) operating activities
130,669
23,927
Cash flows from investing activities:
Purchases of securities available for sale
(291,416
(615,454
Proceeds from matured, called and repayment of securities
162,622
108,444
Proceeds from sales of securities available for sale
8,035
495,566
Purchases of loans receivable
(1,532
Purchases of premises and equipment
(1,966
(2,279
Proceeds from disposition of premises and equipment
51
Proceeds from sales of other real estate owned ("OREO")
1,425
Change in loans receivable, excluding purchases
(48,571
(244,973
Net cash provided by (used in) investing activities
(171,403
(258,645
Cash flows from financing activities:
Change in deposits
354,822
510,819
Change in overnight borrowings
(15,000
Proceeds from borrowings
176,808
Cash paid for surrender of vested shares due to employee tax liability
Cash dividends paid
Net cash provided by (used in) financing activities
346,674
659,088
Net increase (decrease) in cash and due from banks
305,940
424,370
Cash and due from banks at beginning of year
121,678
Cash and due from banks at end of period
546,048
Supplemental disclosures of cash flow information:
Interest paid
13,799
28,804
Income taxes paid
11,511
Non-cash activities:
Transfer of loans receivable to other real estate owned
85
Change in right-of-use asset obtained in exchange for lease liability
17,333
Notes to Consolidated Financial Statements (Unaudited)
Three Months Ended June 30, 2021 and 2020
Note 1 — Organization and Basis of Presentation
Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we,” “us” or “our”) is a bank holding company whose primary subsidiary is Hanmi Bank (the “Bank”). Our primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money through the operation of the Bank.
In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial and its subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim periods ended June 30, 2021, but are not necessarily indicative of the results that will be reported for the entire year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The unaudited consolidated financial statements are prepared in conformity with GAAP and in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report on Form 10-K”).
The preparation of interim unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the unaudited financial statements and disclosures provided, and actual results could differ.
The outbreak of COVID-19 has resulted in restrictions on travel and business activities. As a result, the operations and business results of the Company could be materially adversely affected. The extent to which the COVID-19 crisis may impact business activity or financial results will depend on future developments, including new information which may emerge concerning the severity of the coronavirus and the actions required to contain the coronavirus or treat its impact, among others, which are highly uncertain and cannot be predicted. This uncertainty may impact the accuracy of our significant estimates, which includes the allowance for credit losses, the allowance for credit losses related to off-balance sheet items, and the valuation of intangible assets including deferred tax assets, goodwill, and servicing assets.
Descriptions of our significant accounting policies are included in Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in the 2020 Annual Report on Form 10-K.
Note 2 — Securities
The following is a summary of securities available for sale as of the dates indicated:
Gross
Estimated
Amortized
Unrealized
Fair
Cost
Gain
Loss
Value
June 30, 2021
U.S. Treasury securities
10,000
10
10,010
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities
614,310
320
(3,427
611,203
Collateralized mortgage obligations
101,576
255
(380
101,451
Debt securities
87,477
(416
87,065
Total U.S. government agency and sponsored agency obligations
803,363
579
(4,223
799,719
Municipal bonds-tax exempt
52,841
52,390
Total securities available for sale
866,204
589
(4,674
December 31, 2020
9,997
135
10,132
515,169
4,260
(188
519,241
133,632
186
(217
133,601
90,660
148
(1
90,807
739,461
4,594
(406
743,649
749,458
4,729
The amortized cost and estimated fair value of securities as of June 30, 2021 and December 31, 2020, by contractual or expected maturity, are shown below. Collateralized mortgage obligations are included in the table shown below based on their expected maturities. All other securities are included based on their contractual maturities.
Available for Sale
Fair Value
Within one year
13,375
13,381
13,305
13,435
Over one year through five years
82,444
82,176
139,876
140,100
Over five years through ten years
53,202
53,314
25,764
25,768
Over ten years
717,183
713,248
570,513
574,478
The following table summarizes debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded at June 30, 2021 and December 31, 2020, aggregated by major security type and length of time in a continuous unrealized loss position:
Holding Period
Less than 12 Months
12 Months or More
Number
of
Securities
(in thousands, except number of securities)
433,473
72
54,099
15
14
1
54,113
16
82,061
569,633
101
569,647
102
13
622,023
114
622,037
115
76,023
97,659
21
4,999
178,681
32
The Company evaluates its available-for-sale securities portfolio for impairment on a quarterly basis. This assessment takes into account the changes in the credit quality of these debt securities since acquisition and the likelihood of a credit loss occurring over the life of the securities. In the event that a credit loss is expected to occur in the future, an allowance is established and a corresponding credit loss is recognized. Based on this analysis, as of June 30, 2021, the Company determined that no credit losses are expected to be realized on the tax-exempt municipal bond portfolio. The remainder of the portfolio consists of U.S. Treasury obligations, U.S. government agency securities, and U.S. government sponsored agency securities, all of which have the backing of the U.S. government, and are therefore not expected to incur credit losses.
Realized gains and losses on sales of securities and proceeds from sales of securities were as follows for the periods indicated:
Gross realized gains on sales of securities
Gross realized losses on sales of securities
Net realized gains on sales of securities
Proceeds from sales of securities
There were no sales of securities during the three months ended June 30, 2021. During the three months ended June 30, 2020, there were $15.7 million in gains resulting from the sale of $495.6 million of securities previously recorded with $15.3 million in accumulated other comprehensive income.
During the six months ended June 30, 2021, there were $99,000 in gains resulting from the sale of $8.0 million of securities previously recorded with $142,000 unrealized gains in accumulated other comprehensive income. During the six months ended June 30, 2020, there were $15.7 million in net gains in earnings resulting from the sale of $495.6 million of securities previously recorded with $15.3 million unrealized gains in accumulated other comprehensive income.
11
Securities available for sale with market values of $40.5 million and $27.3 million as of June 30, 2021 and December 31, 2020, respectively, were pledged to secure borrowings from the Federal Reserve Bank (“FRB”) Discount Window.
At June 30, 2021, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies in an amount greater than 10 percent of shareholders’ equity.
Note 3 — Loans
Loans Receivable
Loans consisted of the following as of the dates indicated:
Real estate loans:
Commercial property
Retail
828,157
824,606
Hospitality
795,651
859,953
Other (1)
1,766,592
1,610,377
Total commercial property loans
3,390,400
3,294,936
Construction
61,614
58,882
Residential/consumer loans
348,730
345,831
Total real estate loans
3,800,744
3,699,649
Commercial and industrial loans
587,729
757,255
Leases receivable
431,619
423,264
Loans receivable
4,820,092
4,880,168
Allowance for credit losses
(83,372
(90,426
Loans receivable, net
(1)
Includes, among other types, mixed-use, apartment, office, industrial, gas stations, faith-based facilities and warehouse; all other property types represent less than one percent of total loans receivable.
The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act allows financial institutions to assist customers in dealing with financial hardship by (a) providing federal funding so that financial institutions can originate SBA loans to borrowers at a low interest rate under the Paycheck Protection Program (“PPP”) loans with eventual debt forgiveness should the borrower continue to meet certain criteria; and (b) allowing financial institutions to temporarily modify loan terms by deferring loan payments, loan fees, etc. without considering them Troubled Debt Restructurings (“TDRs”).
At June 30, 2021 and December 31, 2020, there were $144.1 million and $295.7 million, respectively, of PPP loans included in commercial and industrial loans in the table above. In addition, at June 30, 2021 and December 31, 2020, there were $72.3 million and $155.6 million, respectively, of loans modified under Section 4013 of the CARES Act.
Accrued interest on loans was $12.9 million and $15.2 million at June 30, 2021 and December 31, 2020, respectively. Accrued interest at June 30, 2021 and December 31, 2020 included unpaid deferred interest receivable for loans currently or previously modified under the CARES Act of $4.1 million and $7.5 million, net of a $680,000 and $1.7 million valuation allowance, respectively.
At June 30, 2021 and December 31, 2020, loans of $2.23 billion and $2.17 billion, respectively, were pledged to secure advances from the FHLB.
12
Loans Held for Sale
The following is the activity for loans held for sale for the three months ended June 30, 2021 and 2020:
Real Estate
Commercial and
Industrial
Balance at beginning of period
10,930
21,744
32,674
Originations and transfers
26,185
12,938
39,123
Sales
(24,022
(11,738
(35,760
Principal paydowns and amortization
(6
(7
Balance at end of period
13,092
22,938
June 30, 2020
Originations
12,661
5,281
17,942
Loans held for sale was comprised of $22.0 million and $8.6 million of the guaranteed portion of SBA 7(a) loans and $14.1 million and $0 in second draw PPP loans at June 30, 2021 and December 31, 2020, respectively. During the three months ended June 30, 2021, the Company recognized $203,000 of gains on the sale of $9.5 million second draw PPP loans. For the six months ended June 30, 2021, the Company recognized $2.7 million of gains on the sale of $118.1 million second draw PPP loans.
The following is the activity for loans held for sale for the six months ended June 30, 2021 and 2020:
Commercial and Industrial
8,042
526
42,468
38,834
81,302
(37,417
(16,416
(53,833
Principal payoffs and amortization
2,943
3,077
6,020
19,155
10,984
30,139
(9,432
(8,780
(18,212
(5
Allowance for Credit Losses
The following table details the information on the allowance for credit losses by portfolio segment as of and for the three months ended June 30, 2021 and 2020:
Leases
Receivable
57,762
16,387
14,243
88,392
Less loans charged off
271
1,200
1,471
Recoveries on loans receivable previously charged off
(180
(174
(209
(563
Provision for credit losses
5,087
(8,231
(968
(4,112
Ending balance
63,029
8,059
12,284
83,372
Individually evaluated
270
1,216
3,209
4,695
Collectively evaluated
62,759
6,843
9,075
78,677
28,832
9,112
39,583
3,771,912
586,090
422,507
4,780,509
39,132
11,588
15,780
66,500
91
438
1,044
1,573
(98
(60
(114
(272
17,279
2,178
1,674
21,131
56,418
13,388
16,524
86,330
2,809
123
2,262
5,194
53,609
13,265
14,262
81,136
3,632,432
730,399
462,811
4,825,642
49,582
13,771
8,456
71,809
3,582,850
716,628
454,355
4,753,833
The following table details the information on the allowance for credit losses by portfolio segment as of and for the six months ended June 30, 2021 and 2020:
Leases Receivable
51,876
21,410
17,140
90,426
1,509
365
3,102
4,976
(453
(273
(344
(1,070
12,209
(13,259
(2,098
(3,148
36,435
16,206
8,767
61,408
Adjustment related to adoption of ASU 2016-13
14,028
(2,497
5,902
17,433
Adjusted balance as of January 1, 2020
50,463
13,709
14,669
78,841
14,233
12,589
2,224
29,046
(156
(144
(488
20,032
12,124
3,891
36,047
The table below illustrates the allowance for credit losses by loan portfolio segment and each loan portfolio segment as a percentage of total loans.
Allowance Amount
Total Loans
Percentage of Total Loans
4,496
17.2
%
4,855
16.9
36,166
16.5
28,801
17.6
13,129
36.7
13,991
33.0
53,791
70.4
47,647
67.5
8,489
1.3
2,876
1.2
749
7.2
1,353
7.1
78.9
75.8
12.2
15.5
8.9
8.7
100.0
The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of June 30, 2021 and December 31, 2020, for which repayment is expected to be obtained through the sale of the underlying collateral.
Amortized Cost
6,135
6,330
8,641
20,612
458
8,410
15,234
35,352
10,046
24,854
1,702
2,867
26,982
63,073
41
63,114
Loan Quality Indicators
As part of the on-going monitoring of the quality of our loans portfolio, we utilize an internal loan grading system to identify credit risk and assign an appropriate grade (from 0 to 8) for each loan in our portfolio. A third-party loan review is performed at least on an annual basis. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:
Pass and Pass-Watch: Pass and Pass-Watch loans, grades (0-4), are in compliance with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or defined weaknesses as defined under “Special Mention,” “Substandard” or “Doubtful.” This category is the strongest level of the Bank’s loan grading system. It consists of all performing loans with no identified credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans.
Special Mention: A Special Mention loan, grade (5), has potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses may result in deterioration of the repayment of the debt and result in a Substandard classification. Loans that have significant actual, not potential, weaknesses are considered more severely classified.
Substandard: A Substandard loan, grade (6), has a well-defined weakness that jeopardizes the liquidation of the debt. A loan graded Substandard is not protected by the sound worth and paying capacity of the borrower, or of the value and type of collateral pledged. With a Substandard loan, there is a distinct possibility that the Bank will sustain some loss if the weaknesses or deficiencies are not corrected.
Doubtful: A Doubtful loan, grade (7), is one that has critical weaknesses that would make the collection or liquidation of the full amount due improbable. However, there may be pending events which may work to strengthen the loan, and therefore the amount or timing of a possible loss cannot be determined at the current time.
Loss: A loan classified as Loss, grade (8), is considered uncollectible and of such little value that their continuance as active bank assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans classified as Loss will be charged off in a timely manner.
Under regulatory guidance, loans graded special mention or worse are considered criticized loans, and loans graded substandard or worse are considered classified loans.
Loans by Vintage Year and Risk Rating
Term Loans
Amortized Cost Basis by Origination Year (1)
2019
2018
2017
Prior
Revolving
Loans
Cost Basis
Risk Rating
Pass / Pass-Watch
473,896
815,959
498,159
448,016
316,594
644,736
51,004
3,248,364
Special Mention
6,391
16,488
2,052
3,055
48,203
1,120
77,309
Classified
5,495
21,496
4,595
33,141
64,727
Total commercial property
822,350
520,142
471,564
324,244
726,080
52,124
Pass / Pass Watch
9,476
29,345
38,821
12,747
Total construction
22,793
77,142
22,757
254
28,284
104,611
101,458
7,483
341,989
930
379
2,884
4,193
2,229
319
2,548
Total residential/consumer loans
29,214
107,219
104,661
560,514
868,061
498,413
476,300
421,205
746,194
58,487
3,629,174
2,982
3,434
63,834
94,249
6,824
43,506
77,321
874,452
520,396
500,778
431,463
853,534
59,607
Commercial and industrial loans:
119,307
205,706
39,765
19,031
13,969
10,664
128,019
536,461
429
3,446
4,685
8,038
8,624
55
2,303
27,580
14,571
205
553
6,317
2,042
23,688
Total commercial and industrial loans
119,736
209,152
59,021
27,274
23,146
17,036
132,364
Leases receivable:
103,420
97,760
132,502
67,887
19,069
1,869
502
5,541
2,015
636
418
Total leases receivable
98,262
138,043
69,902
19,705
2,287
Total loans receivable:
783,241
1,171,527
670,680
563,218
454,243
758,727
186,506
4,588,142
9,837
21,173
11,020
12,058
63,889
3,423
121,829
25,607
23,716
8,013
50,241
110,121
Total loans receivable
783,670
1,181,866
717,460
597,954
474,314
872,857
191,971
17
2016
920,876
513,962
479,221
343,659
418,361
459,367
31,283
3,166,729
13,680
2,484
8,630
1,671
14,971
11,907
53,343
3,528
7,303
4,712
21,351
37,840
130
74,864
934,556
519,974
495,154
350,042
454,683
509,114
31,413
33,415
613
34,028
27,997
962
37,123
127,987
82,124
54,003
7,353
337,549
829
537
2,782
5,078
2,259
301
644
38,053
131,075
82,962
57,429
982,288
515,537
516,344
471,646
500,485
513,370
38,636
3,538,306
9,560
2,500
15,508
14,689
58,421
6,971
46,506
38,484
102,922
995,968
521,549
533,207
481,117
562,499
566,543
38,766
406,486
73,159
54,110
17,834
4,464
9,910
146,722
712,685
6,950
4,509
4,436
1,110
31
1,074
18,557
890
5,115
9,465
4,380
1,519
4,644
26,013
413,436
78,558
63,661
28,409
8,875
12,503
151,813
113,712
165,242
91,408
30,405
10,096
1,167
412,030
452
5,728
3,137
876
804
237
11,234
114,164
170,970
94,545
31,281
10,900
1,502,486
753,938
661,862
519,885
515,045
524,447
185,358
4,663,021
20,630
6,993
13,996
3,610
15,539
15,763
76,978
10,146
15,555
17,312
51,690
40,240
4,774
140,169
1,523,568
771,077
691,413
540,807
582,274
580,450
190,579
Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision. Certain prior period amounts have been reclassified to conform to current period presentation.
18
Loans by Vintage Year and Payment Performance
Payment performance
Performing
471,543
321,945
711,316
3,373,316
Nonperforming
2,299
14,764
17,084
51,568
105,836
104,342
347,028
1,383
500,757
427,781
828,405
3,682
25,129
58,200
23,371
14,078
16,753
573,654
821
3,903
9,068
283
14,075
1,181,364
711,098
592,015
460,928
847,027
4,768,073
6,362
5,939
13,386
25,830
52,019
19
519,582
495,132
347,656
437,230
499,410
3,264,849
392
22
2,386
17,453
9,704
30,087
129,670
82,661
56,785
343,481
1,405
2,350
521,157
533,185
477,326
519,891
556,195
3,642,358
3,791
42,608
10,348
57,291
77,668
59,726
19,002
12,227
742,747
3,935
9,407
276
14,508
1,523,116
764,067
684,319
526,733
538,862
569,589
190,449
4,797,135
7,010
7,094
14,074
43,412
10,861
83,033
(2)
At June 30, 2021, of the $72.3 million of loans modified in accordance with the provision of the CARES Act, $22.9 million were pass and pass-watch, $36.7 million were special mention, and $12.7 million were classified. At December 31, 2020, of the $155.6 million of loans modified in accordance with the provision of the CARES Act, $99.9 million were pass and pass-watch, $31.3 million were special mention, and $24.4 million were classified.
20
The following is an aging analysis of loans, disaggregated by loan class, as of the dates indicated:
30-59
Days
Past Due
60-89
90 Days
or More
Current
Accruing
1,766,134
3,389,942
2,022
560
2,582
346,148
1,018
3,040
3,797,704
47
12,446
12,497
575,232
3,664
709
2,271
6,644
424,975
3,711
2,735
15,735
22,181
4,797,911
11,076
848,877
731
1,609,646
11,807
3,283,129
12,807
46,075
4,693
461
564
5,718
340,113
13,268
12,371
30,332
3,669,317
282
27
12,487
12,796
744,459
4,051
1,786
4,675
10,512
412,752
9,026
15,081
29,533
53,640
4,826,528
Loans 90 days or more past due and still accruing were $12.4 million as of June 30, 2021 and represented two film tax-credit loans previously included in nonaccrual loans. At June 30, 2021, these loans were well secured and in the process of collection. Subsequent to the end of the second quarter, the Company collected payments of $4.6 million, including accrued interest, representing the full payoff of one of these loans, and $5.4 million, representing the partial paydown of the other. The Company expects to collect the remaining amounts due on the second loan prior to the end of the third quarter. No loans were 90 days or more past due and accruing interest as of December 31, 2020. In addition, $36.0 million and $53.4 million of loans past due less than 90 days were classified as nonaccrual at June 30, 2021 and December 31, 2020, respectively.
At June 30, 2021 and December 31, 2020, currently modified loans under the CARES Act were $72.3 million and $155.6 million, respectively. Of the currently modified loans, $260,000 were 30-59 days past due, no loans were 60-89 days past due, and $28,000 were 90 days or more past due at June 30, 2021, and all loans were current at December 31, 2020. For loans previously modified under the CARES Act, $887,000 were 30-59 days past due, $388,000 were 60-89 days past due, and $1.8 million were 90 days or more past due at June 30, 2021 and $4.9 million were 30-59 days past due, $1.7 million were 60-89 days past due, and $13.9 million were 90 days or more past due at December 31, 2020.
Individually Evaluated Loans
The Company reviews all loans on an individual basis when they do not share similar risk characteristics with loan pools.
The following is a summary of interest foregone on nonaccrual loans for the periods indicated:
Interest income that would have been recognized had individually evaluated loans performed in accordance with their original terms
1,091
1,386
2,848
2,998
Less: Interest income recognized on individually evaluated loans
(136
(287
(1,085
Interest foregone on individually evaluated loans
955
878
2,561
1,913
There were no commitments to lend additional funds to borrowers whose loans are included above.
Nonaccrual Loans and Nonperforming Assets
The following table represents the amortized cost basis of loans on nonaccrual status and loans past due 90 days and still accruing as of June 30, 2021 and December 31, 2020.
Nonaccrual Loans
With
No Allowance for
Credit Losses
Allowance for
90 Days Still
1,581
727
2,308
16,357
28,105
133
1,496
7,877
29,473
10,100
6,331
20,611
2,236
909
3,145
29,178
56,382
58
14,450
2,318
8,916
58,758
24,275
The following table details nonperforming assets as of the dates indicated:
Nonaccrual loans
39,573
Loans receivable 90 days or more past due and still accruing
Total nonperforming loans receivable
Other real estate owned ("OREO")
712
2,360
Total nonperforming assets
52,731
85,393
OREO is included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020.
23
Troubled Debt Restructurings
As of June 30, 2021 and December 31, 2020, total TDRs were $14.7 million and $25.0 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise been considered, to the borrower for economic or legal reasons related to the borrower’s financial difficulties. In addition, the concession granted must result in a reduction in the borrower’s payment for a period of three months or more in order to be classified as a TDR.
The following table details TDRs as of June 30, 2021 and December 31, 2020:
Nonaccrual TDRs
Accrual TDRs
Deferral of
Principal
and Interest
Reduction
of Principal
Extension
of Maturity
Real estate loans
419
3,070
10,455
13,944
574
26
3,203
14,077
601
1,095
3,334
12,492
16,921
513
67
7,290
7,870
144
56
60
3,478
17,065
71
7,346
7,930
The following table presents the number of loans by class modified as troubled debt restructurings that occurred during the periods indicated, with their pre- and post-modification recorded amounts.
Three Months ended
Twelve Months ended
Number of
Pre-
Modification
Recorded
Investment
Post-
(in thousands except for number of loans)
4,479
3,676
Six Months ended
All TDRs are individually analyzed using one of three criteria: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent. At June 30, 2021 and December 31, 2020, the allowance resulting from the individual evaluation of TDRs was inconsequential.
A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. No loans defaulted during the three and six months ended June 30, 2021 following modification. During the year ended December 31, 2020, one loan for $398,000 defaulted within the twelve-month period following modification. The allowance for credit losses resulting from this defaulted loan was inconsequential.
24
Note 4 — Servicing Assets
The changes in servicing assets for the three months ended June 30, 2021 and 2020 were as follows:
Servicing assets:
6,150
6,727
Addition related to sale of SBA loans
707
Amortization
(658
(540
6,187
The changes in servicing assets for the six months ended June 30, 2021 and 2020 were as follows:
6,956
1,157
354
(1,170
(1,123
At June 30, 2021 and December 31, 2020, we serviced loans sold to unaffiliated parties in the amounts of $432.8 million and $429.4 million, respectively. These represented loans that have been sold for which the Bank continues to provide servicing. These loans are maintained off-balance sheet and are not included in the loans receivable balance. All of the loans serviced were SBA loans.
The Company recorded servicing fee income of $1.1 million and $1.2 million for the three months ended June 30, 2021 and 2020, respectively. The Company recorded servicing fee income of $2.3 million and $2.3 million for each of the six months ended June 30, 2021 and 2020. Servicing fee income, net of the amortization of servicing assets, is included in other operating income in the consolidated statements of income. Amortization expense was $658,000 and $540,000 for the three months ended June 30, 2021 and 2020, respectively, and $1.2 million and $1.1 million for the six months ended June 30, 2021 and 2020, respectively.
The fair value of servicing rights was $7.9 million at June 30, 2021. Fair value at June 30, 2021 was determined using discount rates ranging from 6.9 percent to 8.4 percent and prepayment speeds ranging from 11.2 percent to 18.1 percent, depending on the stratification of the specific right. The fair value of servicing rights was $6.9 million at December 31, 2020. Fair value at December 31, 2020 was determined using discount rates ranging from 9.3 percent to 12.2 percent and prepayment speeds ranging from 11.8 percent to 19.1 percent, depending on the stratification of the specific right.
Note 5 — Income Taxes
The Company’s income tax expense was $8.9 million and $4.5 million representing an effective income tax rate of 28.6 percent and 32.7 percent for the three months ended June 30, 2021 and 2020, respectively. The Company’s income tax expense was $16.4 million and $5.5 million representing an effective income tax rate of 29.7 percent and 32.3 percent for the six months ended June 30, 2021 and 2020, respectively.
Management concluded that as of June 30, 2021 and December 31, 2020, a valuation allowance of $4.4 million was appropriate against certain state net operating loss carry forwards and certain tax credits. For all other deferred tax assets, management believes it was more likely than not that these deferred tax assets will be realized principally through future taxable income and reversal of existing taxable temporary differences. The net deferred tax asset was $40.4 million and $41.4 million as of June 30, 2021 and December 31, 2020, respectively. The net current tax asset was $811,000 and $1.0 million as of June 30, 2021 and December 31, 2020, respectively.
As of June 30, 2021, the Company was subject to examination by various taxing authorities for its federal tax returns for the years ending December 31, 2017 through 2019 and state tax returns for the years ending December 31, 2016 through 2019.
25
During the quarter ended June 30, 2021, there was no material change to the Company’s uncertain tax positions. The Company does not expect its unrecognized tax positions to change significantly over the next twelve months.
The CARES Act includes provisions for tax payment relief, significant business incentives, and certain corrections to the 2017 Tax Cuts and Jobs Act, or the Tax Act. The tax relief measures for entities includes a five-year net operating loss carry back, increases in interest expense deduction limits, accelerates alternative minimum tax credit refunds, provides payroll tax relief, and provides a technical correction to allow accelerated deductions for qualified improvement property. ASC Topic 740, Income Taxes, requires the effect of changes in tax law be recognized in the period in which new legislation is enacted. The enactment of the CARES Act was not material to the Company’s income taxes for the three months ended June 30, 2021, and is not expected to have a material impact on its financial statements for the full year ending December 31, 2021.
On December 27, 2020, the U.S. enacted the Consolidated Appropriations Act, 2021 (the “Act”) that provides additional tax relief to individuals and businesses affected by the coronavirus pandemic. We considered the provisions of the Act and determined they do not have a material impact to our overall income taxes.
Note 6 — Goodwill and other Intangibles
The third-party originators intangible of $483,000 and goodwill of $11.0 million were recorded as a result of the acquisition of a leasing portfolio in 2016. The core deposit intangible of $2.2 million was recognized for the core deposits acquired in a 2014 acquisition. The Company’s intangible assets were as follows for the periods indicated:
Period
Carrying
Amount
Net
Core deposit intangible
10 years
2,213
(1,822
390
(1,746
467
Third-party originators intangible
7 years
483
(401
82
(369
Goodwill
N/A
11,031
Total intangible assets
13,727
(2,223
(2,115
The Company performed an impairment analysis on its goodwill and other intangible assets as of
December 31, 2020 and determined there was no impairment. No triggering event has occurred subsequent to December 31, 2020 that would require a reassessment of goodwill and other intangible assets.
Note 7 — Deposits
Time deposits of $250,000 or more at June 30, 2021 and December 31, 2020 were $263.2 million and $311.8 million, respectively. Time deposits at or exceeding the FDIC insurance limit of $250,000 as of June 30, 2021 and December 31, 2020 were $225.2 million and $265.6 million, respectively.
The scheduled maturities of time deposits are as follows for the periods indicated:
At June 30, 2021
Time
Deposits of
$250,000
Other Time
Deposits
184,175
427,150
611,325
2022
77,978
360,386
438,364
2023
810
30,851
31,661
2024
31,254
2025 and thereafter
264
3,256
3,520
263,227
852,897
1,116,124
At December 31, 2020
296,455
825,677
1,122,132
14,315
115,832
130,147
22,881
23,685
5,382
2,089
2,353
311,838
971,861
1,283,699
Accrued interest payable on deposits was $1.9 million and $4.6 million at June 30, 2021 and December 31, 2020, respectively. Total deposits reclassified to loans due to overdrafts at June 30, 2021 and December 31, 2020 were $128,000 and $241,000, respectively.
Note 8 — Borrowings and Subordinated Debentures
At June 30, 2021, the Bank had no overnight advances and $150.0 million of term advances outstanding with the FHLB with a weighted average interest rate of 1.20 percent. At December 31, 2020, the Bank had no overnight advances and $150.0 million of term advances with the FHLB with a weighted average rate of 1.40 percent. The Bank had no outstanding borrowings with the Federal Reserve Bank (“FRB”) under the Paycheck Protection Program Lending Facility (“PPPLF”) as of June 30, 2021 or December 31, 2020. Interest expense on borrowings for the three months ended June 30, 2021 and 2020 was $447,000 and $760,000, respectively. Interest expense on borrowings for the six months ended June 30, 2021 and 2020 was $933,000 and $1.3 million, respectively.
Balance
Weighted
Average Rate
(dollars in thousands)
Overnight advances
0.00
Advances due within 12 months
50,000
1.59
1.61
Advances due over 12 months through 24 months
1.63
1.62
Advances due over 24 months through 36 months
0.37
0.97
Outstanding advances
1.20
1.40
The following is financial data pertaining to FHLB advances:
Weighted-average interest rate at end of period
Weighted-average interest rate during the period
1.24
1.42
Average balance of FHLB advances
150,006
156,601
Maximum amount outstanding at any month-end
300,000
The Bank maintains a secured credit facility with the FHLB, allowing the Bank to borrow on an overnight and term basis. The Bank had $2.23 billion and $2.17 billion of loans pledged as collateral with the FHLB as of June 30, 2021 and December 31, 2020, respectively. Remaining available borrowing capacity was $1.37 billion, subject to the FHLB statutory lending limit of $1.65 billion, and $1.44 billion at June 30, 2021 and December 31, 2020, respectively.
The Bank also had securities with market values of $40.5 million and $27.3 million at June 30, 2021 and December 31, 2020, respectively, pledged with the FRB, which provided $38.5 million and $26.3 million in available borrowing capacity through the Fed Discount Window as of June 30, 2021 and December 31, 2020, respectively.
The Company issued Fixed-to-Floating Subordinated Notes (“Notes”) of $100.0 million on March 21, 2017, with a final maturity on March 30, 2027. The Notes have an initial fixed interest rate of 5.45 percent per annum, payable semiannually on March 30 and September 30 of each year. From and including March 30, 2022 and thereafter, the Notes bear interest at a floating rate equal to the then current three-month LIBOR, as calculated on each applicable date of determination, plus 3.315 percent payable quarterly. If the then current three-month LIBOR is less than zero, three-month LIBOR will be deemed to be zero. Debt issuance cost was $2.3 million, which is being amortized through the Note’s maturity date. At June 30, 2021 and December 31, 2020, the balance of Notes included in the Company’s Consolidated Balance Sheet, net of debt issuance cost, was $98.6 million and $98.5 million, respectively.
The Company assumed Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) as a result of an acquisition in 2014 with an unpaid principal balance of $26.8 million and an estimated fair value of $18.5 million. The $8.3 million discount is being amortized to interest expense through the debentures’ maturity date of March 15, 2036. A trust was formed in 2005 which issued $26.0 million of Trust Preferred Securities (“TPS”) at a 6.26 percent fixed rate for the first five years and a variable rate at the three-month LIBOR plus 140 basis points thereafter and invested the proceeds in the Subordinated Debentures. The Company may redeem the Subordinated Debentures at an earlier date if certain conditions are met. The TPS will be subject to mandatory redemption if the Subordinated Debentures are repaid by the Company. Interest is payable quarterly, and the Company has the option to defer interest payments on the Subordinated Debentures from time to time for a period not to exceed five consecutive years. At June 30, 2021 and December 31, 2020, the balance of Subordinated Debentures included in the Company’s Consolidated Balance Sheets, net of discount of $6.2 million and $6.4 million, was $20.6 million and $20.4 million, respectively. The amortization of discount was $99,000 and $96,000 for the three months ended June 30, 2021 and 2020, respectively, and $198,000 and $192,000, for the six months ended June 30, 2021 and 2020, respectively.
Note 9 — Earnings Per Share
Earnings per share (“EPS”) is calculated on both a basic and a diluted basis. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that then shared in earnings, excluding common shares in treasury. For diluted EPS, weighted-average number of common shares includes the impact of unvested restricted stock under the treasury method.
Unvested restricted stock containing rights to non-forfeitable dividends are considered participating securities prior to vesting and have been included in the earnings allocation in computing basic and diluted EPS under the two-class method.
28
The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
Basic EPS
Less: income allocated to unvested restricted stock
175
295
80
Income allocated to common shares
21,947
9,120
38,486
11,446
Weighted-average shares for basic EPS
Basic EPS (1)
Effect of dilutive stock options and unvested performance restricted stock
77,463
73,800
2,247
Diluted EPS
Weighted-average shares for diluted EPS
Diluted EPS (1)
Per share amounts may not be able to be recalculated using net income and weighted-average shares presented above due to rounding.
There were no anti-dilutive stock options outstanding for the three months ended June 30, 2021 or 2020, respectively.
During the six months ended June 30, 2021, the Company issued an additional 42,626 performance stock units to executive officers from the 2013 Equity Compensation plan fair valued at $784,000 on the grant date of March 24, 2021. No such grants were issued during the three months ended June 30, 2021. These units have a three-year cliff vesting period and include dividend equivalent rights. Total performance stock units outstanding as of June 30, 2021 was 66,563 with an aggregate grant fair value of $1.0 million. As of June 30, 2020, there were no performance stock units outstanding.
Note 10 — Regulatory Matters
Federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 4.0 percent.
In order for banks to be considered “well capitalized,” federal bank regulatory agencies require a minimum ratio of qualifying total capital to risk-weighted assets of 10.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 8.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require depository institutions to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 5.0 percent.
At June 30, 2021, the Bank’s capital ratios exceeded the minimum requirements for the Bank to be considered “well capitalized” and the Company exceeded all of its applicable minimum regulatory capital ratio requirements.
A capital conservation buffer of 2.5 percent became effective on January 1, 2019, and must be met to avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The Bank's capital conservation buffer was 7.25 percent and 6.86 percent and the Company's capital conservation buffer was 6.30 percent and 5.93 percent as of June 30, 2021 and December 31, 2020, respectively.
In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC announced an interim final rule to delay the impact on regulatory capital arising from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company and the Bank adopted the capital transition relief over the permissible five-year period.
29
The capital ratios of Hanmi Financial and the Bank as of June 30, 2021 and December 31, 2020 were as follows:
Minimum
Minimum to Be
Regulatory
Categorized as
Actual
Requirement
“Well Capitalized”
Ratio
Total capital (to risk-weighted assets):
Hanmi Financial
775,558
15.53
399,535
8.00
Hanmi Bank
761,376
15.25
399,459
499,323
10.00
Tier 1 capital (to risk-weighted assets):
614,177
12.30
299,651
6.00
698,715
13.99
299,594
Common equity Tier 1 capital (to risk-weighted assets)
593,550
11.88
224,739
4.50
224,696
324,560
6.50
Tier 1 capital (to average assets):
9.57
256,626
4.00
10.89
256,611
320,763
5.00
743,091
15.21
390,884
726,532
14.86
391,114
488,893
583,076
11.93
293,163
665,058
13.60
293,336
562,647
11.52
219,872
220,002
317,780
9.49
245,882
665,059
10.83
245,736
307,170
30
Note 11 — Fair Value Measurements
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:
•
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 - Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.
We record securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, impaired loans, OREO, and core deposit intangible, are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument below:
Securities available for sale - The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve, prepayment speeds, and default rates. Level 1 securities include U.S. Treasury securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 securities primarily include U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities as well as municipal bonds in markets that are active. In determining the fair value of the securities categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security held as of each reporting date. The broker-dealers use prices obtained from nationally recognized pricing services to value our fixed income securities. The fair value of the municipal securities is determined based on pricing data provided by nationally recognized pricing services. We review the prices obtained for reasonableness based on our understanding of the marketplace, and also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. Level 3 securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available, which necessitates the use of significant unobservable inputs.
Derivatives – The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
Loans held for sale - Loans held for sale includes the guaranteed portion of SBA 7(a) loans and second draw PPP loans carried at the lower of cost or fair value. Management obtains quotes, bids or pricing indication sheets on all or part of the loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication
sheets are indicative of the fact that cost is lower than fair value. At June 30, 2021 and December 31, 2020, the entire balance of loans held for sale was recorded at its cost. We record loans held for sale on a nonrecurring basis with Level 2 inputs.
Nonperforming loans – Nonaccrual loans receivable and loans 90-days past due and still accruing interest are considered nonperforming for reporting purposes and are measured and recorded at fair value on a non-recurring basis. All nonperforming loans with a carrying balance over $250,000 are individually evaluated for the amount of impairment, if any. Nonperforming loans with a carrying balance of $250,000 or less are evaluated collectively. However, from time to time, nonrecurring fair value adjustments to collateral dependent nonperforming loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement.
OREO - Fair value of OREO is based primarily on third party appraisals, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Appraisals are required annually and may be updated more frequently as circumstances require and the fair value adjustments are made to OREO based on the updated appraised value of the property.
Other repossessed assets – Fair value of equipment from leasing contracts is based primarily on a third party valuation service, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Valuations are required at the time the asset is repossessed and may be subsequently updated periodically due to the Company’s short-term possession of the asset prior it is sale or as circumstances require and the fair value adjustments are made to the asset based on its value prior to sale.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of June 30, 2021 and December 31, 2020, assets and liabilities measured at fair value on a recurring basis are as follows:
Level 1
Level 2
Level 3
Significant
Observable
Quoted Prices in
Inputs with No
Active Markets
Active Market
for Identical
with Identical
Unobservable
Characteristics
Inputs
Total Fair Value
Assets:
Securities available for sale:
852,109
Derivative financial instruments
586
562
1,088
1,149
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
As of June 30, 2021 and December 31, 2020, assets and liabilities measured at fair value on a non-recurring basis are as follows:
Inputs With No
With Identical
Collateral dependent loans (1)
26,728
Other real estate owned
Repossessed personal property
445
Collateral dependent loans (2)
857
Consisted of real estate loans of $26.7 million.
Consisted of real estate loans of $63.1 million and commercial and industrial loans of $41,000.
34
The following table represents quantitative information about Level 3 fair value comments for assets measured at fair value on a non-recurring basis at June 30, 2021 and December 31, 2020:
Valuation
Techniques
Input(s)
Range (Weighted
Average)
Collateral dependent loans:
Market approach
Market data comparison
(45)% to 23% / (22)%
(66)% to21% / (54)%
(20)% to 10% / (10)%
1,703
(20)% to 8% / (15)%
(53)% to 15% / (23)%
(3)
(45)% to 35% / 14%
(55)% to 34% / 15% (1)
(20)% to 12% / (8)%
(13)% to 15% / 6% (1)
Commercial lines of credit
(9)% to 15% / 6% (1)
(35)% to 15% / (14)%
Appraisal reports utilize a combination of valuation techniques including a market approach, where prices and other relevant information generated by market transactions involving similar or comparable properties are used to determine the appraised value. Appraisals may include an ‘as is’ and ‘upon completion’ valuation scenarios. Adjustments are routinely made in the appraisal process by third-party appraisers to adjust for differences between the comparable sales and income data. Adjustments also result from the consideration of relevant economic and demographic factors with the potential to affect property values. Also, prospective values are based on the market conditions which exist at the date of inspection combined with informed forecasts based on current trends in supply and demand for the property types under appraisal. Positive adjustments disclosed in this table represent increases to the sales comparison and negative adjustment represent decreases.
35
No discount weighted average range available given primary valuation methodology is via discounted cash flow analysis (DCF) for going concern properties.
The equipment is usually too low in value to use a professional appraisal service. The values are determined internally using a combination of auction values, vendor recommendations and sales comparisons depending on the equipment type. Some highly commoditized equipment, such as commercial trucks have services that provide industry values.
ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured on a recurring basis or non-recurring basis are discussed above.
The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825), among other provisions, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Other than certain financial instruments for which we have concluded that the carrying amounts approximate fair value, the fair value estimates shown below are based on an exit price notion as of June 30, 2021, as required by ASU 2016-01. The financial instruments for which we have concluded that the carrying amounts approximate fair value include, cash and due from banks, accrued interest receivable and payable, and noninterest-bearing deposits. The fair values of off-balance sheet items are based upon the difference between the current value of similar loans and the price at which the Bank has committed to make the loans.
The estimated fair values of financial instruments were as follows:
Financial assets:
Securities available for sale
Loans held for sale
39,104
Loans receivable, net of allowance for credit losses
4,724,677
Financial liabilities:
Noninterest-bearing deposits
Interest-bearing deposits
3,275,592
Borrowings and subordinated debentures
269,243
150,799
120,635
36
9,270
4,755,302
3,380,179
268,972
151,714
118,809
Note 12 — Off-Balance Sheet Commitments
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to the risk involved with on-balance sheet items.
The Bank’s exposure to losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, was based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-producing or borrower-occupied properties.
The following table shows the distribution of undisbursed loan commitments as of the dates indicated:
Commitments to extend credit
552,773
453,900
Standby letters of credit
53,453
47,169
Commercial letters of credit
44,890
54,547
Total undisbursed loan commitments
651,116
555,616
The allowance for credit losses related to off-balance sheet items is maintained at a level believed to be sufficient to absorb current expected lifetime losses related to these unfunded credit facilities. The determination of the allowance adequacy is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities.
37
Activity in the allowance for credit losses related to off-balance sheet items was as follows for the periods indicated:
2,342
2,885
2,792
2,397
(335
Adjusted balance
2,062
Provision expense (income) for credit losses
1,301
3,462
851
4,285
3,643
6,347
Note 13 — Leases
The Company enters into leases in the normal course of business primarily for financial centers, back-office operations locations, business development offices, information technology data centers and information technology equipment. The Company’s leases have remaining terms ranging from one to thirteen years, some of which include renewal or termination options to extend the lease for up to five years.
The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. In addition, the Company has elected to account for any non-lease components in its real estate leases as part of the associated lease component. The Company has also elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company’s balance sheet.
Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the term of the lease. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term.
As of June 30, 2021, the outstanding balances for our right-of-use asset and lease liability were $47.4 million and $50.4 million, respectively. The outstanding balances of the right-of-use asset and lease liability were $52.2 million and $54.0 million, respectively, as of December 31, 2020.
In determining the discount rates, since most of our leases do not provide an implicit rate, we used our incremental borrowing rate provided by the FHLB of San Francisco based on the information available at the commencement date to calculate the present value of lease payments.
At June 30, 2021, future minimum rental commitments under these non-cancelable operating leases, with initial or remaining terms of one year or more, were as follows:
7,370
7,171
6,699
6,319
2025
5,702
Thereafter
22,716
Remaining lease commitments
55,975
Interest
(5,541
Present value of lease liability
50,434
38
Weighted average remaining lease terms for the Company's operating leases were 8.39 years and 8.75 years as of June 30, 2021 and December 31, 2020, respectively. Weighted average discount rates used for the Company's operating leases were 2.42 percent and 2.43 percent as of June 30, 2021 and December 31, 2020, respectively. Net lease expense recognized for the three months ended June 30, 2021 and 2020 was $2.0 million and $2.0 million, respectively. For each of the six months ended June 30, 2021 and 2020, net lease expense recognized was $4.1 million. This included operating lease costs of $1.9 million for each of the three months ended June 30, 2021 and 2020. For the six months ended June 30, 2021 and 2020, operating lease costs were $3.9 million. Sublease income for operating leases was inconsequential for the three and six months ended June 30, 2021 and 2020.
Cash paid and included in cash flows from operating activities for amounts used in the measurement of the lease liability of the Company's operating leases was $1.9 million and $3.9 million for each of the three and six months ended June 30, 2021 and 2020.
Note 14 — Liquidity
As of June 30, 2021 and December 31, 2020, Hanmi Financial had $6.0 million and $17.3 million, respectively, in cash on deposit with its bank subsidiary. Management believes that Hanmi Financial, on a stand-alone basis, had adequate liquid assets to meet its current debt obligations.
The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash flow requirements of our customers who wish either to withdraw funds or to draw upon credit facilities to meet their cash needs. Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances and brokered deposits. As of June 30, 2021 and December 31, 2020, the Bank had $150.0 million of FHLB advances and $168.5 million and $193.7 million, respectively, of brokered deposits.
We monitor the sources and uses of funds on a regular basis to maintain an acceptable liquidity position. The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 30.0 percent of its assets. As of June 30, 2021, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $1.65 billion and $1.37 billion, respectively, compared to $1.73 billion and $1.44 billion, respectively, as of December 31, 2020.
The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged by the Bank, and the FHLB may adjust the advance rates for qualifying collateral upwards or downwards from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans, leases and securities, and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.
As a means of augmenting its liquidity, the Bank had an available borrowing source of $38.5 million from the Federal Reserve Discount Window, to which the Bank pledged securities with a carrying value of $40.5 million, and had no borrowings as of June 30, 2021. The Bank also maintains a line of credit for repurchase agreements up to $100.0 million. The Bank also had three unsecured federal funds lines of credit totaling $115.0 million with no outstanding balances as of June 30, 2021.
Note 15 — Derivatives and Hedging Activities
The Company’s derivative financial instruments consist entirely of interest rate swap agreements between the Company and its customers and other third party counterparties. The Company enters into “back-to-back swap” arrangements whereby the Company executes interest rate swap agreements with its customers and acquires an offsetting swap position from a third party counterparty. These derivative financial statements are accounted for at fair value, with changes in fair value recognized in the Company’s Consolidated Statements of Income.
39
The table below presents the fair value of the Company’s derivative financial instruments as well as their location on the Balance Sheet as of June 30, 2021 and December 31, 2020.
As of June 30, 2021
Derivative Assets
Derivative Liabilities
Notional Amount
Balance Sheet Location
Derivatives not designated as hedging instruments
Interest rate products
66,615
Other Assets
Other Liabilities
Total derivatives not designated as hedging instruments
As of December 31, 2020
66,904
The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement for the three and six months ended June 30, 2021 and 2020.
Derivatives Not Designated as Hedging Instruments under Subtopic 815-20
Location of Gain or (Loss) Recognized in Income on Derivative
Amount of Gain or (Loss) Recognized in Income on Derivative
Other income
(64
The Company did not recognize any fee income from its derivative financial instruments for the three and six months ended June 30, 2021. Fee income recognized from the Company's derivative financial instruments for the three and six months ended June 30, 2020 was $512,000.
40
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 2021 and December 31, 2020. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The derivative assets are located within the prepaid and other assets line item on the Consolidated Balance Sheets and the derivative liabilities are located within the accrued expenses and other liabilities line item on the Consolidated Balance Sheets.
Offsetting of Derivative Assets
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Assets
Gross Amounts Offset in the Consolidated Balance Sheets
Net Amounts of Assets presented in the Consolidated Balance Sheets
Financial Instruments
Cash Collateral Received
Net Amount
Derivatives
Offsetting of Derivative Liabilities
Gross Amounts of Recognized Liabilities
Net Amounts of Liabilities presented in the Consolidated Balance Sheets
Cash Collateral Provided
1,150
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. In addition, these agreements may also require the Company to post additional collateral should it fail to maintain its status as a well- or adequately- capitalized institution.
As of June 30, 2021 and December 31, 2020, the fair value of derivatives in a net asset position for counterparty transactions, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $586,000 and $1.1 million, respectively. As of June 30, 2021, the Company had received $530,000 of collateral from its counterparties related to these agreements and is adequately collateralized since its net asset position was $24,000 ($586,000 fair value of assets less $562,000 fair value of liabilities) as of June 30, 2021. As of December 31, 2020, the Company had posted $1.2 million of collateral related to these agreements and was essentially over-collateralized since its net liability position was $61,000 ($1.1 million fair value of assets less $1.1 million fair value of liabilities). If the Company had breached any of the provisions described above at June 30, 2021 or December 31, 2020, it could have been required to settle its obligations under the agreements at their termination value of $0 and $1.1 million, respectively.
Note 16 — Subsequent Events
On May 26, 2021, the stockholders of the Company approved the 2021 Equity Compensation Plan (the “2021 Plan”), which authorizes the granting of an additional 1,200,000 shares. The 2021 Plan supersedes the prior 2007 and 2013 Equity Compensation Plans. Any shares from these prior plans, which were authorized but not yet issued as of May 26, 2021, automatically became available for future issuance under the 2021 Plan.
42
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis of our results of operations and financial condition as of and for the three months ended June 30, 2021. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report on Form 10-K”) and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the period ended June 30, 2021 (this “Report”).
Forward-Looking Statements
Some of the statements contained in this Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this Report other than statements of historical fact are “forward–looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial position and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs, plans and objectives of management for future operations, and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, strategies, outlook, needs, plans, objectives or achievements to differ from those expressed or implied by the forward-looking statement. These factors include the following: failure to maintain adequate levels of capital and liquidity to support our operations; the effect of potential future supervisory action against us or Hanmi Bank; the effect of our rating under the Community Reinvestment Act and our ability to address any issues raised in our regulatory exams; general economic and business conditions internationally, nationally and in those areas in which we operate; volatility and deterioration in the credit and equity markets; changes in consumer spending, borrowing and savings habits; availability of capital from private and government sources; demographic changes; competition for loans and deposits and failure to attract or retain loans and deposits; fluctuations in interest rates and a decline in the level of our interest rate spread; risks of natural disasters; a failure in or breach of our operational or security systems or infrastructure, including cyber-attacks; the failure to maintain current technologies; inability to successfully implement future information technology enhancements; difficult business and economic conditions that can adversely affect our industry and business, including competition, fraudulent activity and negative publicity; risks associated with Small Business Administration loans; failure to attract or retain key employees; our ability to access cost-effective funding; fluctuations in real estate values; changes in accounting policies and practices; the imposition of tariffs or other domestic or international governmental policies impacting the value of the products of our borrowers; changes in governmental regulation, including, but not limited to, any increase in Federal Deposit Insurance Corporation insurance premiums; the ability of Hanmi Bank to make distributions to Hanmi Financial Corporation, which is restricted by certain factors, including Hanmi Bank’s retained earnings, net income, prior distributions made, and certain other financial tests; ability to identify a suitable strategic partner or to consummate a strategic transaction; adequacy of our allowance for credit losses; credit quality and the effect of credit quality on our credit losses expense and allowance for credit losses; changes in the financial performance and/or condition of our borrowers and the ability of our borrowers to perform under the terms of their loans and other terms of credit agreements; our ability to control expenses; changes in securities markets; and risks as it relates to cyber security against our information technology infrastructure and those of our third party providers and vendors.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and whether the gradual reopening of businesses will result in a meaningful increase in economic activity. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause credit loss expense to increase; our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend; our cyber security risks are increased as the result of an increase in the number of employees working remotely; we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs; potential goodwill impairment charges could result if acquired assets and operations are adversely affected and remain at reduced levels; due to recent legislation and government action limiting foreclosure of real property and reduced governmental capacity to effect business transactions and property transfers, we may have more difficulty taking possession of collateral supporting our loans, which may negatively impact our ability to minimize our losses, which could adversely impact our financial results; and we face litigation, regulatory enforcement and reputation risk as a result of our participation in the Paycheck Protection Program (“PPP”) and the risk that the Small Business Administration may not fund some or all PPP loan guaranties. Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
For additional information concerning risks we face, see “Part II, Item 1A. Risk Factors” in this Report and “Item 1A. Risk Factors” in Part I of the 2020 Annual Report on Form 10-K. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, except as required by law.
COVID-19
The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments placed restrictions on gatherings and business activities. Various state governments and federal agencies have required lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and passed legislation that provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. As it relates to Bank customers and employees, the Company continues to follow COVID-19 mandates and restrictions issued by governmental authorities.
Critical Accounting Policies
We have established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Our significant accounting policies are described in the Notes to consolidated financial statements in our 2020 Annual Report on Form 10-K. We had no significant changes in our accounting policies since the filing of our 2020 Annual Report on Form 10-K.
Certain accounting policies require us to make significant estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities, and we consider these critical accounting policies. For a description of these critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in our 2020 Annual Report on Form 10-K. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of the Company’s Board of Directors.
44
Executive Overview
Net income was $22.1 million, or $0.72 per diluted share, for the three months ended June 30, 2021 compared with $9.2 million, or $0.30 per diluted share, for the same period a year ago. The increase in net income for the 2021 second quarter primarily reflects a net recovery of credit losses for the three months ended June 30, 2021 compared with a net credit loss for the same period a year ago, as well as higher net interest income, driven principally by lower interest expense. These impacts were offset partially by a decrease in non-interest income and higher noninterest expense.
For the six months ended June 30, 2021, net income was $38.8 million, or $1.26 per diluted share, compared with $11.5 million, or $0.38 per diluted share, for the same period a year ago. The increase in net income for the six months ended June 30, 2021 reflects a net recovery of credit losses for the six months ended June 30, 2021 compared with a net credit loss for the same period a year ago, as well as higher net interest income, and higher gains on sale of “Small Business Administration (“SBA”) loans. These impacts were offset partially by a $15.7 million prior year gain on sales of securities and higher noninterest expense.
Other financial highlights include the following:
Cash and due from banks increased $305.9 million to $697.8 million as of June 30, 2021 from $391.8 million at December 31, 2020, primarily from a higher volume of noninterest-bearing deposits, reflecting proceeds from PPP loans and other government assistance programs, as well as an increase in our marketing efforts.
Securities increased $108.3 million to $862.1 million at June 30, 2021 from $753.8 million at December 31, 2020, primarily from excess liquidity, which was invested mainly in tax-exempt municipal bonds.
Loans receivable, before allowance for credit losses, were $4.82 billion at June 30, 2021 compared with $4.88 billion at December 31, 2020.
Deposits were $5.63 billion at June 30, 2021 compared with $5.28 billion at December 31, 2020. The increase reflects principally a $455.9 million increase in noninterest-bearing deposits.
Results of Operations
Net Interest Income
Our primary source of revenue is net interest income, which is the difference between interest derived from earning assets, and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes in the level and mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. Net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on loans receivable are affected principally by changes to interest rates, the demand for loans receivable, the supply of money available for lending purposes, and other competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve.
45
The following table shows the average balance of assets, liabilities and stockholders’ equity; the amount of interest income, on a tax-equivalent basis, and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. All average balances are daily average balances.
Three Months Ended
Average
Income /
Yield /
Expense
Rate
Interest-earning assets:
Loans receivable (1)
4,753,297
52,787
4.45
4,680,048
4.49
Securities (2)
812,805
0.69
589,932
2.19
FHLB stock
5.93
Interest-bearing deposits in other banks
659,934
0.11
386,956
0.08
Total interest-earning assets
6,242,421
54,609
3.51
5,673,321
3.95
Noninterest-earning assets:
61,560
69,667
(88,049
(66,926
Other assets
220,779
219,383
6,436,711
5,895,445
Interest-bearing liabilities:
Demand: interest-bearing
112,252
0.05
92,676
Money market and savings
2,032,102
1,298
0.26
1,677,081
2,309
0.55
Time deposits
1,136,903
1,682
0.59
1,458,351
6,562
1.81
Total interest-bearing deposits
3,281,257
3,228,108
1.11
150,091
1.19
342,437
0.89
Subordinated debentures
119,170
5.32
118,583
5.55
Total interest-bearing liabilities
3,550,518
0.57
3,689,128
1.23
Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing
2,223,172
1,589,668
Other liabilities
67,771
68,311
Stockholders' equity
595,250
548,338
Net interest income (taxable equivalent basis)
49,574
Cost of deposits (3)
0.22
0.74
Net interest spread (taxable equivalent basis) (4)
2.94
2.72
Net interest margin (taxable equivalent basis) (5)
3.19
3.15
Loans receivable include loans held for sale and exclude the allowance for credit losses. Nonaccrual loans receivable are included in the average loans receivable balance.
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
Represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits.
(4)
Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
(5)
Represents net interest income as a percentage of average interest-earning assets.
46
The table below shows changes in interest income (on a tax equivalent basis) and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.
June 30, 2021 vs June 30, 2020
Increases (Decreases) Due to Change In
Volume
950
(393
557
921
(2,742
(1,821
98
1,935
(3,062
(1,127
(2
410
(1,421
(1,011
(1,203
(3,677
(4,880
(518
(313
(68
(1,296
(4,963
(6,259
Change in net interest income
3,231
1,901
5,132
For the three months ended June 30, 2021 and 2020, net interest income, on a taxable equivalent basis, was $49.6 million and $44.4 million, respectively. The net interest spread and net interest margin, on a taxable equivalent basis, for the quarter ended June 30, 2021 were 2.94 percent and 3.19 percent, respectively, compared with 2.72 percent and 3.15 percent, respectively, for the same period in 2020. Interest and dividend income, on a taxable equivalent basis, decreased $1.1 million, or 2.0 percent, to $54.6 million for the three months ended June 30, 2021 from $55.7 million for the same period in 2020 as the impact of the lower rate environment was offset partially by higher loan and security balances. Interest expense decreased $6.3 million, or 55.4 percent, to $5.0 million for the three months ended June 30, 2021 from $11.3 million for the same period in 2020 primarily due to a shift from time deposits into lower yielding deposit accounts and lower rates paid on all interest-bearing deposits.
The average balance of interest earning assets increased $569.1 million, or 10.0 percent, to $6.24 billion for the three months ended June 30, 2021 from $5.67 billion for the three months ended June 30, 2020. The average balance of loans increased $73.2 million, or 1.6 percent, to $4.75 billion for the three months ended June 30, 2021 from $4.68 billion as of June 30, 2020 due mainly to new loan production. The average balance of securities increased $222.9 million, or 37.8 percent, to $812.8 million for the three months ended June 30, 2021 from $589.9 million as of June 30, 2020. Interest-bearing deposits at other banks increased $273.0 million to $659.9 million as of June 30, 2020, as increased marketing efforts and proceeds from government aid programs drove an increase in noninterest-bearing customer deposits.
The average yield on interest-earning assets, on a taxable equivalent basis, decreased 44 basis points to 3.51 percent for the three months ended June 30, 2021 from 3.95 percent for the three months ended June 30, 2020, mainly due to lower yields on securities and higher balances of lower yielding deposits at other banks. The average yield on loans decreased to 4.45 percent for the three months ended June 30, 2021 from 4.49 percent for the three months ended June 30, 2020, primarily due to the continued decrease in market interest rates commencing in the first quarter of 2020. The average yield on securities, on a taxable equivalent basis, decreased to 0.69 percent for the three months ended June 30, 2021 from 2.19 percent for the three months ended June 30, 2020, attributable to the sale of most of the portfolio during second quarter 2020 and subsequently reinvesting into a portfolio of lower yielding securities due to the continued decline in market interest rates.
The average balance of interest-bearing liabilities decreased $138.6 million, or 3.8 percent, to $3.55 billion as of June 30, 2021 compared to $3.69 billion for the three months ended June 30, 2020, as an increase in money market and savings balances
was more than offset by a decline in time deposits. The average cost of interest-bearing liabilities decreased by 66 basis points to 0.57 percent for the three months ended June 30, 2021 from 1.23 percent for the three months ended June 30, 2020. The decrease was due to lower market interest rates and a shift away from time deposits to lower-rate money market and savings accounts.
The following table shows: the average balance of assets, liabilities and stockholders’ equity; the amount of interest income, on a tax-equivalent basis, and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. All average balances are daily average balances.
4,798,311
103,399
4.35
4,599,222
4.67
793,521
0.64
606,821
2.27
5.52
6.05
528,498
0.10
245,734
0.34
6,136,715
106,663
5,468,162
4.22
59,127
83,782
(88,860
(63,990
227,436
212,595
6,334,418
5,700,549
107,642
0.07
87,805
0.09
1,999,737
2,776
0.28
1,682,047
7,088
0.85
1,187,427
4,148
0.70
1,490,548
14,504
1.96
3,294,806
6,961
0.43
3,260,400
1.33
150,046
923
236,548
1.07
119,105
5.38
118,513
5.67
3,563,957
11,088
0.63
3,615,461
1.46
2,107,828
1,461,682
74,391
69,259
588,242
554,147
95,575
0.92
2.88
2.76
3.14
3.25
48
4,304
(7,783
(3,479
1,642
(5,978
(4,336
(44
(415
(139
6,222
(14,220
(7,998
(10
1,142
(5,454
(4,312
(2,489
(7,867
(10,356
(511
178
(333
(170
(153
(1,833
(13,323
(15,156
8,055
(897
7,158
For the six months ended June 30, 2021 and 2020, net interest income, on a taxable equivalent basis, was $95.6 million and $88.4 million, respectively. The net interest spread and net interest margin, on a taxable equivalent basis, for the six months ended June 30, 2021 were 2.88 percent and 3.14 percent, respectively, compared with 2.76 percent and 3.25 percent, respectively, for the same period in 2020. Interest and dividend income, on a taxable equivalent basis, decreased $8.0 million, or 7.0 percent, to $106.7 million for the six months ended June 30, 2021 from $114.7 million for the same period in 2020 as the impact of the lower rate environment was partially offset by higher loan and securities balances. Interest expense decreased $15.2 million, or 57.7 percent, to $11.1 million for the six months ended June 30, 2021 from $26.2 million for the same period in 2020 primarily due to a shift from time deposits of into lower yielding deposit accounts and lower rates paid on deposits.
The average balance of interest earning assets increased $668.6 million, or 12.2 percent, to $6.14 billion as of June 30, 2021 from $5.47 billion for the six months ended June 30, 2020. The average balance of loans increased $199.1 million, or 4.3 percent, to $4.80 billion for the six months ended June 30, 2021 from $4.60 billion for the six months ended June 30, 2020. The increase in the average balance of loans was due mainly to new loan production driven by PPP loans. The average balance of securities increased $186.7 million, or 30.8 percent, to $793.5 million for the six months ended June 30, 2021 from $606.8 million for the six months ended June 30, 2020. Interest-bearing deposits at other banks increased $282.8 million to $528.5 million as of June 30, 2021, as increased marketing efforts and proceeds from government aid programs drove an increase in non-interest bearing customer deposits.
The average yield on interest-earning assets, on a taxable equivalent basis, decreased 71 basis points to 3.51 percent for the six months ended June 30, 2021 from 4.22 percent for the six months ended June 30, 2020, mainly due to declining market rates beginning in the first quarter of 2020. The average yield on loans decreased to 4.35 percent for the six months ended June 30, 2021
49
from 4.67 percent for the six months ended June 30, 2020, primarily due to the continued decrease in market interest rates commencing in the first quarter of 2020. The average yield on securities, on a taxable equivalent basis, decreased to 0.64 percent for the six months ended June 30, 2021 from 2.27 percent for the six months ended June 30, 2020, attributable to the sale of most of the portfolio during the second quarter of 2020 and subsequently reinvesting into a portfolio of lower-yielding securities due to the continued decline in market interest rates.
The average balance of interest-bearing liabilities decreased $51.5 million, or 1.4 percent, to $3.56 billion for the six months ended June 30, 2021 compared to $3.62 billion as of June 30, 2020, as an increase in money market and savings balances was more than offset by a decline in time deposit balances. The average cost of interest-bearing liabilities decreased by 83 basis points to 0.63 percent for the six months ended June 30, 2021 from 1.46 percent for the six months ended June 30, 2020. The decrease was due to lower market interest rates and a shift away from time deposits to low-interest money market and savings accounts.
Credit Loss Expense
For the second quarter of 2021, the Company recorded a $3.3 million recovery of credit loss expense, comprised of a $4.1 million recovery for loan losses and a $516,000 reduction in the allowance for accrued interest receivable for loans current or previously modified under the CARES Act, offset partially by a $1.3 provision for off-balance sheet items. For the same period in 2020, credit loss expense was $24.6 million, comprised of a loan loss provision of $21.1 million and provision for off-balance sheet items of $3.5 million, reflecting unfavorable adjustments to assumptions about unemployment and economic activity and higher levels of unused commitments.
For the six months ended June 30, 2021, the Company recorded a $1.2 million recovery of credit loss expense, comprised of a $3.1 million recovery for loan losses and a $1.0 million reduction in the allowance for accrued interest receivable for current or previously modified loans, offset partially by a $2.1 million provision for an SBA guarantee repair loss, and a $851,000 provision for off-balance sheet items. For the same period in 2020, credit loss expense was $40.3 million, comprised of a loan loss provision of $36.0 million and provision for off-balance sheet items of $4.3 million, reflecting unfavorable adjustments to assumptions about unemployment and economic activity and higher levels of unused commitments.
See also “Allowance for Credit Losses and Allowance for Credit Losses Related to Off-Balance Sheet Items” for further details.
Noninterest Income
The following table sets forth the various components of noninterest income for the periods indicated:
Increase
(Decrease)
312
298
Servicing income
540
855
(315
Bank-owned life insurance income
252
(24
All other operating income
908
(187
Service charges, fees & other
5,303
5,219
84
Gain on sale of SBA loans
3,305
Gain on sale of PPP loans
Legal settlement
75
(12,045
For the three months ended June 30, 2021, noninterest income was $8.9 million, a decrease of $12.0 million, or 57.5 percent, compared with $20.9 million for the same period in 2020. The decrease was primarily attributable to a prior year $15.7 million gain on sale of securities, offset partially by $3.3 million in gains on sale of SBA loans for the three months ended June 30, 2021.
50
167
332
1,416
(30
508
(45
1,862
1,939
(77
10,635
10,288
347
3,822
2,657
(15,613
325
(8,462
For the six months ended June 30, 2021, noninterest income was $18.7 million, a decrease of $8.5 million, or 31.2 percent, compared with $27.2 million for the same period in 2020. The decrease was primarily attributable to a prior year $15.7 million gain on sale of securities, offset partially by $3.8 million in increase in gain on sale of SBA loans and $2.7 million in gain on sale of PPP loans for the six months ended June 30, 2021.
Noninterest Expense
The following table sets forth the components of noninterest expense for the periods indicated:
3,601
94
111
(132
(125
(82
All other operating expenses
2,607
2,457
150
Subtotal
30,946
27,329
3,617
Other real estate owned expense (income)
(47
(191
Repossessed personal property expense (income)
(116
3,645
For the three months ended June 30, 2021, noninterest expense was $30.8 million, an increase of $3.6 million, or 13.4 percent, compared with $27.1 million for the same period in 2020. Salaries and benefits increased $3.6 million, primarily related to a $2.1 million decrease in capitalized loan origination costs in 2021 driven by prior year originations of PPP loans and higher current year expense for bonus and incentives of $1.6 million.
2,672
215
368
(600
(150
(458
4,984
5,398
(414
60,226
58,593
1,633
174
(189
363
(84
(198
2,110
For the six months ended June 30, 2021, noninterest expense was $60.3 million, an increase of $2.1 million, or 3.6 percent, compared with $58.2 million for the same period in 2020. Salaries and benefits increased $2.7 million, primarily related to a $1.1 million decrease in capitalized loan origination costs in 2021 driven by prior year originations of PPP loans and higher current year expense for bonus and incentives of $2.5 million, partially offset by lower wages and salaries expense of $518,000.
Income Tax Expense
Income tax expense was $8.9 million and $4.5 million representing an effective income tax rate of 28.6 percent and 32.7 percent for the three months ended June 30, 2021 and 2020, respectively. The decrease in the effective tax rate for the three months ended June 30, 2021, compared to the same period in 2020 was principally due to a decrease of incremental tax charges related to the Company’s share-based compensation recognized as income tax expense.
Income tax expense was $16.4 million and $5.5 million representing an effective income tax rate of 29.7 percent and 32.3 percent for the six months ended June 30, 2021 and 2020, respectively. The decrease in the effective tax rate for the six months ended June 30, 2021, compared to the same period in 2020 was principally due to a decrease of incremental tax charges related to the Company’s share-based compensation recognized as income tax expense.
Financial Condition
As of June 30, 2021, our securities portfolio consisted of U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities and, to a lesser extent, U.S. Treasury securities and tax-exempt municipal bonds. Most of these securities carry fixed interest rates. Other than holdings of U.S. government agency and sponsored agency obligations, there were no securities of any one issuer exceeding 10 percent of stockholders’ equity as of June 30, 2021 or December 31, 2020.
52
The following table summarizes the contractual maturity schedule for securities, at amortized cost, and their cost weighted average yield, which is calculated using amortized cost as the weight and tax-equivalent book yield, as of June 30, 2021:
After One
Year But
After Five
Years But
Within One
Year
Within Five
Years
Within Ten
After Ten
Yield
2.67
1,160
2.02
2,699
1.29
610,451
745
1.13
100,267
0.56
74,985
0.66
1.06
78,248
13,237
710,718
0.91
1.27
11,160
2.61
0.68
763,559
0.94
53
As of June 30, 2021 and December 31, 2020, loans receivable (excluding loans held for sale), net of deferred loan fees and costs, discounts and allowance for credit losses, were $4.74 billion and $4.79 billion, respectively. The slight decrease primarily reflects $603.9 million in loan sales and payoffs, including $153.0 million in PPP loan forgiveness, as well as amortization and other reductions of $242.3 million, offset partially by $813.6 million in new loan production, including $81.3 million in loans held for sale.
During the six months ended June 30, 2021, total loan production consisted of $289.2 million in commercial real estate loans, $105.0 million in leases receivable, $141.7 million in commercial and industrial loans, $198.5 million in SBA loans and $79.3 million in residential/consumer loans.
The table below shows the maturity distribution of outstanding loans as of June 30, 2021. In addition, the table shows the distribution of such loans between those with floating or variable interest rates and those with fixed or predetermined interest rates.
Year but
Years but
Within
Fifteen
After
163,255
521,720
143,182
263,681
491,046
40,924
227,337
1,058,665
368,631
111,959
654,273
2,071,431
552,737
60,926
688
6,056
4,819
337,585
721,255
2,072,389
557,556
449,544
394,091
116,157
77,481
20,590
377,797
33,232
1,135,936
2,566,343
668,269
Loans with predetermined interest rates
634,590
1,663,034
161,551
80,664
2,539,839
Loans with variable interest rates
501,346
903,309
506,718
368,880
2,280,253
Industry
As of June 30, 2021, the loan portfolio included the following concentrations of loans to one type of industry that were greater than 10.0 percent of loans receivable outstanding:
Percentage of
Balance as of
Lessor of nonresidential buildings
1,479,669
30.7
856,551
17.8
54
Loans and leases 30 to 89 days past due and still accruing were 0.09 percent of loans and leases at June 30, 2021, compared with 0.19 percent at December 31, 2020.
At June 30, 2021, loans 90 days or more past due and still accruing were $12.4 million representing two film tax credit loans previously included in nonaccrual loans. At June 30, 2021, these loans were well secured and in the process of collection. Subsequent to the end of the second quarter, the Company collected payments of $4.6 million, including accrued interest, representing the full payoff of one of these loans, and $5.4 million representing the partial paydown of the other. The Company expects to collect the remaining amounts due on the second loan prior to the end of the third quarter. No loans were 90 days or more past due and still accruing at December 31, 2020.
Special mention loans were $121.8 million at June 30, 2021 compared with $77.0 million at December 31, 2020. The change reflects additions of $83.3 million and reductions (comprising upgrades, downgrades and payments) of $38.4 million. At June 30, 2021 and December 31, 2020, special mention loans included $70.8 million and $49.1 million, respectively, of loans identified as adversely affected by the pandemic.
Classified loans were $110.1 million at June 30, 2021 compared with $140.2 million at December 31, 2020. The change reflects additions of $39.3 million and reductions (comprising upgrades, payments, sales, and charge-offs) of $69.4 million. At June 30, 2021 and December 31, 2020, classified loans included $63.3 million and $54.0 million, respectively, of loans identified as adversely affected by the COVID-19 pandemic.
Nonperforming Assets
Nonperforming loans consist of loans receivable on nonaccrual status and loans 90 days or more past due and still accruing interest. Nonperforming assets consist of nonperforming loans and OREO. Loans are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless we believe the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on nonaccrual status earlier, depending upon the individual circumstances surrounding the loan's delinquency. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Nonaccrual loans may be restored to accrual status when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans not meeting the criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means, or vacant bank properties for which their usage for operations has ceased and management intends to offer for sale.
Except for nonaccrual loans and loans modified under the CARES Act set forth below, management is not aware of any other loans as of June 30, 2021 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan or lease repayment terms, or any known events that would result in a loan or lease being designated as nonperforming at some future date. Management cannot, however, predict the extent to which a deterioration in general economic conditions, real estate values, increases in general rates of interest, or changes in the financial condition or business of borrower may adversely affect a borrower’s ability to pay.
Nonperforming loans were $52.0 million at June 30, 2021, or 1.08 percent of loans, compared with $83.0 million at December 31, 2020, or 1.70 percent of the portfolio. The change reflects additions of $3.4 million loans and reductions (comprising upgrades, payments, sales, and charge-offs) of $34.4 million. At June 30, 2021 and December 31, 2020, nonperforming loans included $20.3 million and $33.0 million, respectively, of loans adversely affected by the pandemic.
Nonperforming assets were $52.7 million at June 30, 2021, or 0.80 percent of total assets, compared with $85.4 million, or 1.38 percent, at December 31, 2020.
Loans modified under the CARES Act declined by $83.3 million to $72.3 million at June 30, 2021 from $155.6 million at December 31, 2020. At June 30, 2021, all modified loans are making interest only or other reduced payments that are less than the contractually required amount. At December 31, 2020, 13.6 percent, or $21.1 million, were not making payments. Of the modified loan portfolio, at June 30, 2021, 50.7 percent were special mention and 17.6 percent were classified, compared with 20.1 percent and 15.7 percent at December 31, 2020, respectively. In addition, 7.0 percent and 4.6 percent were on nonaccrual status at June 30, 2021 and December 31, 2020, respectively.
The Company reviews loans on an individual basis when the loan does not share similar risk characteristics with loan pools.
Individually evaluated loans were $39.6 million and $91.0 million as of June 30, 2021 and December 31, 2020, respectively, representing a decrease of $51.4 million, or 56.5 percent. Specific allowances associated with individually evaluated loans decreased $9.4 million to $4.7 million as of June 30, 2021 compared with $14.1 million as of December 31, 2020.
For the three and six months ended June 30, 2021, there were no loans restructured which were subsequently classified as TDRs. For the year ended December 31, 2020, we restructured monthly payments for five loans, with a net carrying value of $4.5 million at the time of modification, which we subsequently classified as TDRs. Temporary payment structure modifications included, but were not limited to, extending the maturity date, reducing the amount of principal and/or interest due monthly, and/or allowing for interest only monthly payments for six months or less.
As of June 30, 2021 and December 31, 2020, TDRs on an accrual status were $601,000 and $7.9 million, respectively, most of which were deferral of principal or principal or interest reductions. The allowance for credit losses relating to these loans was inconsequential. As of June 30, 2021 and December 31, 2020, restructured loans on nonaccrual status were $14.1 million and $17.1 million, respectively, and the allowance for credit losses relating to these loans, respectively, was inconsequential.
Allowance for Credit Losses and Allowance for Credit Losses Related to Off-Balance Sheet Items
The Company’s estimate of the allowance for credit losses at June 30, 2021 and December 31, 2020 reflects losses expected over the remaining contractual life of the assets based on historical, current, and forward-looking information. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.
For all loan pools utilizing the DCF method, the Company determined that four quarters represented a reasonable and supportable forecast period and reverted to a historical loss rate over twelve quarters on a straight-line basis. For each of these loan segments, the Company applied an annualized historical Probability of Default/Loss Given Default (“PD/LGD”) using all available historical periods. Since reasonable and supportable forecasts of economic conditions are imbedded directly into the DCF model, qualitative adjustments are reduced but considered. The PD/LGD method incorporates a forecast into loss estimates using a qualitative adjustment.
Management selected three loss methodologies for the collective allowance estimation. At June 30, 2021, the Company used the discounted cash flow (“DCF”) method to estimate allowances for credit losses for the commercial and industrial loan portfolio, the PD/LGD method for the commercial property, construction and residential property portfolios, and the Weighted Average Remaining Maturity (“WARM”) method to estimate expected credit losses for equipment financing agreements and the equipment lease receivables portfolio. Loans that do not share similar risk characteristics are individually evaluated for allowances.
The Company applied an expected loss ratio based on internal historical losses adjusted as appropriate for qualitative factors when applying the WARM method.
As of June 30, 2021 and December 31, 2020, the Company relied on the economic projections from Moody’s Analytics Economic Scenarios and Forecasts to inform its loss driver forecasts over the four-quarter forecast period. For all loan pools, the Company utilizes and forecasts the national unemployment rate as the primary loss driver.
To adjust the historical and forecast periods to current conditions, the Company applies various qualitative factors derived from market, industry or business specific data, changes in the underlying portfolio composition, trends relating to credit quality, delinquency, nonperforming and adversely rated leases, and reasonable and supportable forecasts of economic conditions.
The allowance for credit losses was $83.4 million at June 30, 2021 compared with $90.4 million at December 31, 2020. The allowance attributed to individually evaluated loans was $4.7 million at June 30, 2021 compared with $14.1 million at December 31, 2020. The allowance attributed to collectively evaluated loans was $78.7 million at June 30, 2021 compared with $76.4 million at December 31, 2020, and considered the impact of changes in macroeconomic assumptions including an improving
unemployment rate for the subsequent four quarters. The Company recognizes the inherent uncertainties in the estimate of the allowance for credit losses and the effect the COVID-19 pandemic may have on borrowers.
The following table reflects our allocation of the allowance for credit losses by loan category as well as the loans receivable for each loan category to total loans, including related percentages:
The following table sets forth certain ratios related to our allowance for credit losses at the dates presented:
As of
Ratios:
Allowance for credit losses to loans receivable
1.73
1.85
Nonaccrual loans to loans
0.82
1.70
Allowance for credit losses to nonaccrual loans
210.68
108.90
Balance:
Nonaccrual loans at end of period
Nonperforming loans at end of period
As of June 30, 2021 and December 31, 2020, the allowance for credit losses related to off-balance sheet items, primarily unfunded loan commitments, was $3.6 million and $2.8 million, respectively. The Bank closely monitors the borrower’s repayment capabilities, while funding existing commitments to ensure losses are minimized. Based on management’s evaluation and analysis of portfolio credit quality and prevailing economic conditions, we believe these allowances were adequate for current expected lifetime losses in the loan portfolio and off-balance sheet exposure as of June 30, 2021.
57
The following table presents a summary of net charge-offs (recoveries) for the loan portfolio:
Six Months Ended
Average Loans
Net Charge-Offs (Recoveries)
Net Charge-Offs (Recoveries) to Average Loans (1)
3,725,117
(0.02
)%
3,714,962
1,056
0.06
613,548
97
668,142
92
0.03
414,632
991
0.96
415,207
2,758
3,906
0.16
3,578,363
(0.00
3,585,250
0.79
620,423
378
0.24
526,528
12,445
4.73
481,262
0.77
487,444
2,036
0.84
28,558
Annualized
For the three months ended June 30, 2021, gross charge-offs were $1.5 million, a decrease of $102,000, from $1.6 million for the same period in 2020 and recoveries were $563,000, an increase of $291,000, from $272,000 for the three months ended June 30, 2020. Net loan charge-offs were $908,000, or 0.08 percent of average loans, compared with $1.3 million, or 0.11 percent of average loans, for the three months ended June 30, 2021 and 2020, respectively.
For the six months ended June 30, 2021, gross charge-offs were $5.0 million, a decrease of $24.1 million, or 82.9 percent, from $29.0 million for the same period in 2020 and recoveries were $1.1 million, an increase of $582,000, from $488,000 for the three months ended June 30, 2020. Net loan charge-offs were $3.9 million, or 0.16 percent of average loans, compared with $28.6 million, or 1.24 percent of average loans, for the six months ended June 30, 2021 and 2020, respectively.
The following table shows the composition of deposits by type as of the dates indicated:
Percent
Demand – noninterest-bearing
41.8
36.0
Interest-bearing:
Demand
113,893
2.0
100,617
1.9
2,045,143
36.3
1,991,926
37.8
Uninsured time deposits of more than $250,000:
Three months or less
68,261
134,543
2.6
Over three months through six months
98,415
1.8
70,011
Over six months through twelve months
57,408
1.0
52,401
Over twelve months
1,144
0.0
8,633
0.2
Other time deposits
890,896
15.8
1,018,111
19.3
Total deposits were $5.63 billion and $5.28 billion as of June 30, 2021 and December 31, 2020, respectively, representing an increase of $354.8 million, or 6.7 percent.
Growth was primarily driven by an increase in noninterest-bearing demand deposits and to a lesser extent increases in money market and savings deposits and interest-bearing demand deposits, partially offset by a reduction in time deposits. At June 30, 2021, the loan-to-deposit ratio was 85.6 percent compared with 92.5 percent at December 31, 2020. The increase in noninterest-bearing deposits reflects growth from new and existing customer relationships as well as increases from second draw PPP loans and other economic stimulus activities.
As of June 30, 2021, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $2.35 billion, of which $2.12 billion were demand deposits and money market and savings deposits and $225.2 million were time deposits. As of December 31, 2020, the aggregate amount of uninsured deposits was $2.09 billion, consisting of $1.82 billion in demand deposits and money market and savings deposits and $265.6 million in time deposits.
Borrowings and Subordinated Debentures
Borrowings mostly take the form of advances from the FHLB. At June 30, 2021 and December 31, 2020, advances from the FHLB were $150.0 million. At June 30, 2021 and December 31, 2020, the Bank had $150.0 million in term advances and no overnight advances from the FHLB.
The following is a summary of contractual maturities greater than twelve months of FHLB advances:
FHLB of San Francisco
Outstanding advances over 12 months
100,000
1.00
1.30
The weighted-average interest rate at June 30, 2021 and December 31, 2020 were 1.20 percent and 1.40 percent, respectively, and weighted-average interest rate for the six months ended June 30, 2021 and December 31, 2020 were 1.24 percent and 1.42 percent, respectively. Average balances of FHLB advances for the three months ended June 30, 2021 and December 31, 2020 were $150.0 million and $156.6 million, respectively, with maximum amount outstanding at any month end during the three months period ended June 30, 2021 and December 31, 2020 of $150.0 million and $300.0 million, respectively. Interest expense on borrowings for the three months ended June 30, 2021 and 2020 was $447,000 and $760,000, respectively. Interest expense on borrowings for the six months ended June 30, 2021 and 2020 was $933,000 and $1.3 million, respectively.
Subordinated debentures were $119.2 million as of June 30, 2021 and $119.0 million as of December 31, 2020. Subordinated debentures are comprised of fixed-to-floating subordinated notes of $98.6 million and $98.5 million as of June 30, 2021 and December 31, 2020, respectively, and junior subordinated deferrable interest debentures of $20.6 million and $20.4 million as of June 30, 2021 and December 31, 2020, respectively. See “Note 8 – Borrowings and Subordinated Debentures” to the consolidated financial statements for more details.
Interest Rate Risk Management
The spread between interest income on interest-earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and interest rate changes substantially affect our financial performance. We emphasize capital protection through stable earnings. In order to achieve stable earnings, we prudently manage our assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits established within our guidelines.
The Company performs simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated below) as of June 30, 2021. The Company compares this stress simulation to policy limits, which specify the maximum tolerance level for net interest income exposure over a 1- to 12-month and a 13- to 24- month horizon, given the basis point adjustment in interest rates reflected below.
59
Net Interest Income Simulation
Change in
1- to 12-Month Horizon
13- to 24-Month Horizon
Dollar
Percentage
Change
300%
34,781
17.29
48,566
24.29
200%
23,056
11.46
32,381
16.19
100%
11,839
5.89
8.64
(100%)
(8,442
(4.20
%)
(13,355
(6.68
Economic Value of Equity (EVE)
162,899
32.84
120,742
24.34
72,409
14.60
(135,893
(27.40
The estimated sensitivity does not necessarily represent our forecast, and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including the nature and timing of interest rate levels including yield curve shape, prepayments on loans receivable and securities, pricing strategies on loans receivable and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions, including how customer preferences or competitor influences might change.
Capital Resources and Liquidity
Capital Resources
Historically, our primary source of capital has been the retention of operating earnings. In order to ensure adequate capital levels, the Board regularly assesses projected sources and uses of capital, expected loan growth, anticipated strategic actions (such as stock repurchases and dividends), and projected capital thresholds under adverse and severely adverse economic conditions. In addition, the Board considers the Company’s access to capital from financial markets through the issuance of additional debt and securities, including common stock or notes, to meet its capital needs.
In response to the uncertainty surrounding the COVID-19 pandemic, the Board reduced the quarterly cash dividends paid on common stock during the last two quarters of 2020. For the third and fourth quarters of 2020, cash dividends paid were $0.08 per share, down from $0.12 per share and $0.24 per share in the second and first quarters of 2020, respectively. The Board believed these actions were the most prudent course of action as it continued to monitor the results of operations and financial condition of the Company. Due to the continued stabilization of Company results and financial condition, the Board authorized an increase in the quarterly cash dividend during the first three quarters of 2021. Cash dividends for the first, second, and third quarter of 2021 were $0.10 per share, $0.12 per share and $0.12 per share, respectively, The Board expects to continue to re-evaluate the level of quarterly dividends in subsequent quarters.
The Company’s ability to pay dividends to shareholders depends in part upon dividends it receives from the Bank. California law restricts the amount available for cash dividends to the lesser of a bank’s retained earnings or net income for its last three fiscal years (less any distributions to shareholders made during such period). Where the above test is not met, cash dividends may still be paid, with the prior approval of the Department of Financial Protection and Innovation (“DFPI”), in an amount not exceeding the greatest of: (1) retained earnings of the bank; (2) net income of the bank for its last fiscal year; or (3) the net income of the bank for its current fiscal year. As of July 1, 2021, after giving effect to the 2021 third quarter dividend declared by the Company, the Bank has the ability to pay $5.3 million of dividends without the prior approval of the Commissioner of the DFPI.
At June 30, 2021, the Bank’s total risk-based capital ratio of 15.25 percent, Tier 1 risk-based capital ratio of 13.99 percent, common equity Tier 1 capital ratio of 13.99 percent and Tier 1 leverage capital ratio of 10.89 percent, placed the Bank in the “well capitalized” category pursuant to capital rules, which is defined as institutions with total risk-based capital ratio equal to or greater than 10.00 percent, Tier 1 risk-based capital ratio equal to or greater than 8.00 percent, common equity Tier 1 capital ratios equal to or greater than 6.50 percent, and Tier 1 leverage capital ratio equal to or greater than 5.00 percent.
At June 30, 2021, the Company's total risk-based capital ratio was 15.53 percent, Tier 1 risk-based capital ratio was 12.30 percent, common equity Tier 1 capital ratio was 11.88 percent and Tier 1 leverage capital ratio was 9.57 percent.
For a discussion of implemented changes to the capital adequacy framework prompted by Basel III and the Dodd- Frank Wall Street Reform and Consumer Protection Act, see our 2020 Annual Report on Form 10-K.
Liquidity
For a discussion of liquidity for the Company, see Note 14 - Liquidity included in the notes to unaudited consolidated financial statements in this Report and Note 22 – Liquidity in our 2020 Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
For a discussion of off-balance sheet arrangements, see Note 12 - Off-Balance Sheet Commitments included in the notes to unaudited consolidated financial statements in this Report and “Item 1. Business - Off-Balance Sheet Commitments” in our 2020 Annual Report on Form 10-K.
Contractual Obligations
There have been no material changes to the contractual obligations described in our 2020 Annual Report on Form 10-K.
Recently Issued Accounting Standards Not Yet Effective
FASB ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, On March 12, 2020, the FASB issued ASU 2020-04 to ease the potential burden in accounting for reference rate reform. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.
The new guidance provided several optional expedients that reduce costs and complexity of accounting for reference rate reform, including measures to simplify or modify accounting issues resulting from reference rate reform for contract modifications, hedges, and debt securities.
The amendments are effective for all entities from the beginning of an interim period that includes the issuance date of ASU 2020-04. An entity may elect to apply the amendments prospectively through December 31, 2022.
The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures regarding market risks in Hanmi Bank’s portfolio, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk Management” and “- Capital Resources” in this Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management is responsible for the disclosure controls and procedures of the Corporation. Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be so disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2021.
Changes in Internal Control over Financial Reporting
There were no changes in the Corporation's internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended June 30, 2021 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Part II — Other Information
Item 1. Legal Proceedings
From time to time, Hanmi Financial and its subsidiaries are parties to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of Hanmi Financial and its subsidiaries. In the opinion of management, the resolution of any such issues would not have a material adverse impact on the financial condition, results of operations, or liquidity of Hanmi Financial or its subsidiaries.
Item 1A. Risk Factors
In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 as filed with the SEC. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.
Our Needs to Improve rating under The Community Reinvestment Act may restrict our operations and limit our ability pursue certain strategic opportunities.
On July 21, 2021, Hanmi Bank (the “Bank”), the wholly-owned bank subsidiary of Hanmi Financial Corporation (the “Company”), received a Community Reinvestment Act (“CRA”) rating from the Federal Deposit Insurance Corporation (the “FDIC”) of “Needs to Improve” for the period March 29, 2018 to May 3, 2021. A “Needs to Improve” rating results in restrictions on certain expansionary activities, including certain mergers and acquisitions and the establishment and relocation of bank branches. The rating will also result in a loss of expedited processing of applications to undertake certain activities. A “Needs to Improve” rating could have an impact on the Bank’s relationships with certain states, counties, municipalities or other public agencies to the extent applicable law, regulation or policy limits, restricts or influences whether such entity may do business with a bank that has a below “Satisfactory” rating.
These restrictions, among others, will remain in place at least until the Bank’s next CRA rating is publicly released by the FDIC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On January 24, 2019, the Company announced a stock repurchase program that authorized the repurchase of up to 5 percent of its outstanding shares or approximately 1.5 million shares of common stock. As of June 30, 2021, 934,600 shares remained available for future purchases under that stock repurchase program. Shortly following the federal proclamation declaring a national emergency concerning the COVID-19 outbreak, Hanmi suspended its share repurchase program, however, this program was reinstated in February 2021. In addition to the shares noted in the table below, during the six months ended June 30, 2021, the Company acquired 21,693 shares from employees in connection with the satisfaction of employee tax withholding obligations incurred through vesting of Company stock awards.
The following table represents information with respect to repurchases of common stock made by the Company during the three months ended June 30, 2021:
Purchase Date:
Average Price
Paid Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Program
Maximum Shares That
May Yet Be Purchased
Under the Program
April 1, 2021 - April 30, 2021
934,600
May 1, 2021 - May 31, 2021
June 1, 2021 - June 30, 2021
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
Exhibit
Document
10.1
Hanmi Financial Corporation 2021 Equity Compensation Plan (incorporated by reference to Appendix A to the proxy statement for the Annual Meeting of Stockholders filed with the Securities and Exchange Commission on April 16, 2021 (File No. 000-30421))
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document *
101.SCH
Inline XBRL Taxonomy Extension Schema Document *
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document *
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document *
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document *
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document *
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in Inline XBRL
*
Attached as Exhibit 101 to this report are documents formatted in Inline XBRL (Extensible Business Reporting Language).
†
Constitutes a management contract or compensatory plan or arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Hanmi Financial Corporation
Date:
August 6, 2021
By:
/s/ Bonita I. Lee
Bonita I. Lee
President and Chief Executive Officer (Principal Executive Officer)
/s/ Romolo C. Santarosa
Romolo C. Santarosa
Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer)