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 March 31, 2022
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 May 2, 2022, there were 30,467,022 outstanding shares of the Registrant’s Common Stock.
Hanmi Financial Corporation and Subsidiaries Quarterly Report on Form 10-Q
Three Months Ended March 31, 2022
Table of Contents
Part I – Financial Information
Item 1.
Financial Statements
3
Consolidated Balance Sheets at March 31, 2022 (unaudited) and December 31, 2021
Consolidated Statements of Income for the three months ended March 31, 2022 and 2021 (unaudited)
4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and 2021 (unaudited)
5
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2022 and 2021 (unaudited)
6
Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 (unaudited)
7
Notes to Consolidated Financial Statements (unaudited)
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
38
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
54
Item 4.
Controls and Procedures
Part II – Other Information
Legal Proceedings
55
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
56
Signatures
57
2
Part I — Financial Information
Item 1. Financial Statements
Hanmi Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
March 31,
December 31,
2022
2021
(Unaudited)
Assets
Cash and due from banks
$
312,491
608,965
Securities available for sale, at fair value (amortized cost of $941,007 and $922,654 as of March 31, 2022 and December 31, 2021, respectively)
876,980
910,790
Loans held for sale, at the lower of cost or fair value
15,617
13,342
Loans receivable, net of allowance for credit losses of $71,512 and $72,557 as of March 31, 2022 and December 31, 2021, respectively
5,265,988
5,078,984
Accrued interest receivable
12,289
11,976
Premises and equipment, net
24,410
24,788
Customers' liability on acceptances
182
—
Servicing assets
7,202
7,080
Goodwill and other intangible assets, net
11,353
11,395
Federal Home Loan Bank ("FHLB") stock, at cost
16,385
Income tax assets
51,939
44,060
Bank-owned life insurance
55,149
54,905
Prepaid expenses and other assets
87,067
75,917
Total assets
6,737,052
6,858,587
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing
2,678,726
2,574,517
Interest-bearing
3,104,444
3,211,752
Total deposits
5,783,170
5,786,269
Accrued interest payable
966
1,161
Bank's liability on acceptances
Borrowings
125,000
137,500
Subordinated debentures ($136,800 and $224,100 face amount less unamortized discount and debt issuance costs of $7,833 and $9,094 as of March 31, 2022 and December 31, 2021, respectively)
128,967
215,006
Accrued expenses and other liabilities
77,315
75,234
Total liabilities
6,115,600
6,215,170
Stockholders' equity:
Preferred stock, $0.001 par value; authorized 10,000,000 shares; no shares issued as of March 31, 2022 and December 31, 2021
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,670,197 shares (30,468,458 shares outstanding) and 33,603,839 shares (30,407,261 shares outstanding) as of March 31, 2022 and December 31, 2021, respectively
33
Additional paid-in capital
581,337
580,796
Accumulated other comprehensive (loss) income, net of tax benefit of $19,208 and $3,421 as of March 31, 2022 and December 31, 2021, respectively
(44,819
)
(8,443
Retained earnings
210,788
196,784
Less treasury stock; 3,201,739 shares and 3,196,578 shares as of March 31, 2022 and December 31, 2021, respectively
(125,887
(125,753
Total stockholders' equity
621,452
643,417
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 March 31,
Interest and dividend income:
Interest and fees on loans receivable
53,924
50,614
Interest on securities
2,516
1,140
Dividends on FHLB stock
248
206
Interest on deposits in other banks
216
96
Total interest and dividend income
56,904
52,056
Interest expense:
Interest on deposits
2,013
3,958
Interest on borrowings
337
478
Interest on subordinated debentures
3,598
1,619
Total interest expense
5,948
6,055
Net interest income before credit loss expense
50,956
46,001
Credit loss (recovery) expense
(1,375
2,109
Net interest income after credit loss (recovery) expense
52,331
43,892
Noninterest income:
Service charges on deposit accounts
2,875
2,357
Trade finance and other service charges and fees
1,142
1,034
Gain on sale of Small Business Administration ("SBA") loans
2,521
4,125
Net gain on sales of securities
99
Other operating income
1,982
2,193
Total noninterest income
8,520
9,808
Noninterest expense:
Salaries and employee benefits
17,717
16,820
Occupancy and equipment
4,646
4,595
Data processing
3,236
2,926
Professional fees
1,430
1,447
Supplies and communications
665
757
Advertising and promotion
817
359
Other operating expenses
3,181
2,631
Total noninterest expense
31,692
29,535
Income before tax
29,159
24,165
Income tax expense
8,464
7,506
Net income
20,695
16,659
Basic earnings per share
0.68
0.54
Diluted earnings per share
Weighted-average shares outstanding:
Basic
30,254,212
30,461,681
Diluted
30,377,580
30,473,970
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
Other comprehensive income (loss), net of tax:
Unrealized gain on securities:
Unrealized holding (loss) gain arising during period
(52,163
(11,785
Less: reclassification adjustment for net gain included in net income
(99
Income tax benefit (expense) related to items of other comprehensive income
15,787
3,515
Other comprehensive income (loss), net of tax
(36,376
(8,369
Comprehensive income (loss)
(15,681
8,290
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the Three Months Ended March 31, 2022 and March 31, 2021
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 January 1, 2021
33,560,801
(2,842,966
30,717,835
578,360
3,076
114,621
(119,046
577,044
Restricted stock awards, net of forfeitures
24,380
Share-based compensation expense
598
Restricted stock surrendered due to employee tax liability
(4,682
(95
Repurchase of common stock
(55,000
(946
Cash dividends paid (common stock, $0.10/share)
(3,069
Change in unrealized gain (loss) on securities available for sale, net of income taxes
Balance at March 31, 2021
33,585,181
(2,902,648
30,682,533
578,958
(5,293
128,211
(120,087
581,822
Balance at January 1, 2022
33,603,839
(3,196,578
30,407,261
66,358
541
(5,161
(134
Cash dividends paid (common stock, $0.22/share)
(6,691
Balance at March 31, 2022
33,670,197
(3,201,739
30,468,458
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
6,568
3,850
Gain on sales of securities
Gain on sales of SBA loans
(2,521
(4,125
Origination of SBA loans held for sale
(31,853
(146,670
Proceeds from sales of SBA loans
32,098
126,690
Change in bank-owned life insurance
(244
(256
Change in prepaid expenses and other assets
(13,745
4,945
Change in income tax assets
7,908
3,554
Change in accrued expenses and other liabilities
2,062
(652
Net cash provided by (used in) operating activities
20,134
6,602
Cash flows from investing activities:
Purchases of securities available for sale
(52,475
(116,026
Proceeds from matured, called and repayment of securities
32,730
67,729
Proceeds from sales of securities available for sale
8,035
Purchases of loans receivable
(11,000
(298
Purchases of premises and equipment
(617
(1,011
Proceeds from sales of other real estate owned ("OREO")
589
Change in loans receivable, excluding purchases
(175,522
58,271
Net cash provided by (used in) investing activities
(206,884
17,289
Cash flows from financing activities:
Change in deposits
(3,099
234,815
Repayment of borrowings
(12,500
Proceeds from repurchased subordinated debentures
12,700
Redemption of subordinated debentures
(100,000
Cash paid for surrender of vested shares due to employee tax liability
Cash dividends paid
Net cash provided by (used in) financing activities
(109,724
230,705
Net increase (decrease) in cash and due from banks
(296,474
254,596
Cash and due from banks at beginning of year
391,849
Cash and due from banks at end of period
646,445
Supplemental disclosures of cash flow information:
Interest paid
6,143
8,267
Income taxes paid
129
125
Non-cash activities:
Transfer of loans receivable to other real estate owned
1
Income tax benefit related to items of other comprehensive income
Change in right-of-use asset obtained in exchange for lease liability
Notes to Consolidated Financial Statements (Unaudited)
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 by 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 March 31, 2022, 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, 2021 (the “2021 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 COVID-19 pandemic resulted in restrictions on travel and business activities which have yet to return to pre-pandemic levels. 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 2021 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
March 31, 2022
U.S. Treasury securities
18,953
(739
18,214
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities
618,459
(41,588
576,876
Collateralized mortgage obligations
93,324
(6,164
87,164
Debt securities
131,370
(6,746
124,624
Total U.S. government agency and sponsored agency obligations
843,153
9
(54,498
788,664
Municipal bonds-tax exempt
78,901
(8,799
70,102
Total securities available for sale
941,007
(64,036
December 31, 2021
15,457
(61
15,397
615,393
18
(7,906
607,505
95,153
41
(1,590
93,604
117,499
(1,603
115,896
828,045
59
(11,099
817,005
79,152
117
(881
78,388
922,654
177
(12,041
The amortized cost and estimated fair value of securities as of March 31, 2022 and December 31, 2021, 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
586
587
1,103
1,108
Over one year through five years
150,937
143,638
126,483
125,069
Over five years through ten years
37,129
35,043
51,338
50,770
Over ten years
752,355
697,712
743,730
733,843
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 March 31, 2022 and December 31, 2021, 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)
18,215
(27,111
409,085
86
(14,477
167,229
35
576,314
121
(4,544
69,210
19
(1,620
16,966
86,176
24
(5,057
97,814
20
(1,689
26,811
124,625
25
(36,712
576,109
(17,786
211,006
45
787,115
170
(46,250
664,426
149
875,432
194
8,391
(6,252
535,610
102
(1,654
59,457
11
595,067
113
(1,256
76,894
16
(334
12,548
89,442
(1,503
110,996
21
(100
4,900
22
(9,011
723,500
139
(2,088
76,905
15
800,405
154
68,548
17
(9,953
800,439
158
877,344
173
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 March 31, 2022, 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
During the three months ended March 31, 2022, there were no sale of securities. During the three months ended March 31, 2021, there were $0.1 million in net gains in earnings resulting from the sale of $8.0 million of securities previously recorded with $0.1 million unrealized gains in accumulated other comprehensive income.
Securities available for sale with market values of $30.1 million and $34.7 million as of March 31, 2022 and December 31, 2021, respectively, were pledged to secure borrowings from the Federal Reserve Bank (“FRB”) Discount Window.
10
At March 31, 2022, 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
990,716
970,134
Hospitality
718,721
717,692
Other (1)
1,974,091
1,919,033
Total commercial property loans
3,683,528
3,606,859
Construction
87,925
95,006
Residential/consumer loans
432,805
400,546
Total real estate loans
4,204,258
4,102,411
Commercial and industrial loans
633,107
561,831
Leases receivable
500,135
487,299
Loans receivable
5,337,500
5,151,541
Allowance for credit losses
(71,512
(72,557
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.
At March 31, 2022 and December 31, 2021, PPP loans totaling $1.5 million and $3.0 million, respectively, were included in commercial and industrial loans in the table above.
Accrued interest on loans was $10.5 million and $10.1 million at March 31, 2022 and December 31, 2021, respectively. Accrued interest at March 31, 2022 and December 31, 2021 included unpaid deferred interest receivable for loans currently or previously modified under the CARES Act of $2.7 million and $3.4 million, net of a $0 and $1.7 million valuation allowance, respectively.
At March 31, 2022 and December 31, 2021, loans of $2.32 billion and $2.30 billion, respectively, were pledged to secure advances from the FHLB.
Loans Held for Sale
The following is the activity for loans held for sale for the three months ended March 31, 2022 and 2021:
Real Estate
Commercial and
Industrial
Balance at beginning of period
6,954
6,388
Originations and transfers
20,164
11,689
31,853
Sales
(15,293
(14,284
(29,577
Principal paydowns and amortization
(1
Balance at end of period
11,825
3,792
March 31, 2021
8,042
526
8,568
Originations
16,283
130,387
146,670
(13,395
(109,169
(122,564
10,930
21,744
32,674
Loans held for sale was comprised of $15.6 million and $13.3 million of the guaranteed portion of SBA 7(a) loans at March 31, 2022 and December 31, 2021, respectively. All second draw PPP loans were sold by the third quarter of 2021. For the three months ended March 31, 2021, the Company recognized $2.5 million of gains on the sale of $108.5 million second draw PPP loans.
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 March 31, 2022 and 2021:
Leases
Receivable
48,890
12,418
11,249
72,557
Less loans charged off
530
58
247
835
Recoveries on loans receivable previously charged off
(197
(317
(423
(937
Provision (recovery) for credit losses
(2,202
267
788
(1,147
Ending balance
46,355
12,944
12,213
71,512
51,877
21,410
17,139
90,426
1,509
93
1,903
3,505
(273
(135
(507
7,121
(5,029
(1,128
964
57,762
16,387
14,243
88,392
12
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
Percentage
of Total
Allowance
Total Loans
Percentage of Total Loans
(dollars in thousands)
6,827
9.5
%
18.6
6,579
9.1
18.8
19,625
27.5
13.5
22,670
31.2
13.9
15,904
22.2
36.9
15,065
20.8
37.3
42,356
59.2
69.0
44,314
61.1
70.0
3,531
4.9
1.6
4,078
5.6
1.8
468
0.7
8.1
498
7.8
64.8
78.7
67.4
79.6
18.1
11.9
17.1
10.9
9.4
15.5
100.0
The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2022 and December 31, 2021, for which repayment is expected to be obtained through the sale of the underlying collateral.
Amortized Cost
1,708
1,917
482
499
2,190
2,416
951
982
3,141
3,398
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.
13
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.
14
Loans by Vintage Year and Risk Rating
Term Loans
Amortized Cost Basis by Origination Year (1)
2020
2019
2018
Prior
Revolving
Loans
Cost Basis
Risk Rating
Pass / Pass-Watch
459,277
1,036,000
664,427
462,571
365,194
517,843
44,192
3,549,504
Special Mention
19,530
16,932
9,720
21,746
18,266
1,702
87,896
Classified
858
5,875
17,228
22,167
46,128
Total commercial property
460,135
1,055,530
681,359
478,166
404,168
558,276
45,894
Pass / Pass Watch
1,147
63,764
602
65,513
22,412
Total construction
60,512
189,043
15,420
243
17,446
141,405
7,483
431,552
289
Total residential/consumer loans
142,658
520,936
1,288,807
680,449
462,814
382,640
659,248
51,675
4,046,569
40,967
110,597
23,131
47,092
521,794
1,308,337
697,381
478,409
421,614
723,346
53,377
Commercial and industrial loans:
198,803
152,230
51,415
34,109
14,216
12,567
135,207
598,547
8,808
13,853
4,703
2,997
30,361
283
738
3,049
4,199
Total commercial and industrial loans
161,038
48,245
14,345
18,008
141,253
Leases receivable:
68,511
222,018
69,739
86,682
38,946
8,126
494,022
1,050
492
3,175
1,123
273
6,113
Total leases receivable
223,068
70,231
89,857
40,069
8,399
Total loans receivable:
788,250
1,663,055
801,603
583,605
435,802
679,941
186,882
5,139,138
28,338
23,573
45,670
4,699
140,958
9,333
18,480
24,142
57,404
Total loans receivable
789,108
1,692,443
819,027
616,511
476,028
749,753
194,630
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.
2017
1,203,197
706,470
488,250
406,288
277,680
384,064
41,413
3,507,362
18,869
7,593
6,999
16,879
1,703
52,043
5,450
17,247
2,965
21,792
47,454
725,339
501,293
423,535
287,644
422,735
43,116
73,808
631
74,439
20,567
194,948
16,975
19,813
73,567
82,076
8,381
396,007
930
406
2,221
3,557
965
20,743
74,938
84,314
1,471,953
724,076
488,497
426,101
351,247
466,140
49,794
3,977,808
7,405
39,667
76,167
3,930
21,809
48,436
742,945
501,540
444,278
362,582
527,616
51,497
264,762
55,135
36,937
15,780
10,874
6,016
148,148
537,652
274
13,989
67
4,802
(5
19,127
708
145
886
3,291
5,052
55,412
51,634
15,925
10,960
11,704
151,434
239,738
79,400
101,460
47,485
10,683
1,388
480,154
716
981
3,575
1,328
347
198
7,145
240,454
80,381
105,035
48,813
11,030
1,586
1,976,453
858,611
626,894
489,366
372,804
473,544
197,942
4,995,614
19,143
21,582
7,472
44,469
1,698
95,294
984
9,733
18,720
4,296
22,893
60,633
1,977,169
878,738
658,209
509,016
384,572
540,906
202,931
Loans by Vintage Year and Payment Performance
Payment performance
Performing
554,596
3,679,848
Nonperforming
3,680
141,457
431,604
1,201
718,465
4,199,377
4,881
48,014
17,763
632,631
231
245
476
1,691,393
818,535
613,105
474,905
744,354
5,326,030
3,406
5,399
11,470
423,515
286,935
419,464
3,602,859
709
3,271
4,000
73,973
84,052
399,319
262
1,227
444,258
360,908
524,083
4,097,184
1,674
3,533
5,227
55,409
50,926
10,956
11,431
560,843
988
47,484
10,684
1,329
346
877,754
653,926
507,667
382,548
536,902
5,138,181
4,283
1,349
2,024
4,004
13,360
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
120
1,973,489
3,682,926
1,871
534
2,405
430,400
1,991
1,016
3,007
4,201,251
64
633,043
3,414
1,099
1,748
6,261
493,874
5,469
2,764
9,332
5,328,168
556
717,136
92
691
1,282
1,917,751
648
1,838
3,605,021
570
750
1,876
398,670
1,218
1,441
1,055
3,714
4,098,697
65
561,766
3,764
1,992
1,181
6,937
480,362
5,038
3,442
2,236
10,716
5,140,825
Individually Evaluated Loans
The Company reviews all loans on an individual basis when they do not share similar risk characteristics with loan pools.
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 March 31, 2022 and December 31, 2021.
Nonaccrual Loans
With
No Allowance for
Credit Losses
Allowance for
90 Days Still
1,676
296
1,972
3,384
950
251
4,334
547
470
1,188
4,925
5,528
5,942
1,918
1,745
2,082
3,663
4,645
582
980
1,172
5,973
5,825
7,535
The Company recognized $27,000 and $177,000 of interest income on nonaccrual loans for the three months ended March 31, 2022 and 2021, respectively.
The following table details nonperforming assets as of the dates indicated:
Nonaccrual loans
Loans receivable 90 days or more past due and still accruing
Total nonperforming loans receivable
Other real estate owned ("OREO")
675
Total nonperforming assets
12,145
14,035
OREO is included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021.
Troubled Debt Restructurings
As of March 31, 2022 and December 31, 2021, TDRs were $2.7 million and $2.9 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered to a borrower for economic or legal reasons related to the borrower’s financial difficulties.
The following table details TDRs as of March 31, 2022 and December 31, 2021:
Nonaccrual TDRs
Accrual TDRs
Deferral of
Principal
and Interest
Reduction
of Principal
Extension
of Maturity
Real estate loans
323
1,824
353
2,500
1,944
2,620
2,046
372
124
2,170
2,888
The following table presents the number of loans by class modified as TDRs 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)
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 March 31, 2022 and December 31, 2021, 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 months ended March 31, 2022 following modification. During the year ended December 31, 2021, no loans defaulted within the twelve-month period following modification.
Note 4 — Servicing Assets
The changes in servicing assets for the three months ended March 31, 2022 and 2021 were as follows:
Servicing assets:
6,212
Addition related to sale of SBA loans
667
450
Amortization
(545
(512
6,150
At March 31, 2022 and December 31, 2021, we serviced loans sold to unaffiliated parties in the amounts of $483.6 million and $473.5 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 $1.2 million and $1.3 million for the three months ended March 31, 2022 and 2021, respectively. 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 $545,000 and $512,000 for the three months ended March 31, 2022 and 2021, respectively.
The fair value of servicing rights was $8.1 million at March 31, 2022. The fair value at March 31, 2022 was determined using discount rates ranging from 9.0 percent to 10.6 percent and prepayment speeds ranging from 11.0 percent to 16.9 percent, depending on the stratification of the specific right. The fair value of servicing rights was $8.1 million at December 31, 2021. The fair value at December 31, 2021 was determined using discount rates ranging from 10.4 percent to 16.7 percent and prepayment speeds ranging from 10.2 percent to 12.8 percent, depending on the stratification of the specific right.
Note 5 — Income Taxes
The Company’s income tax expense was $8.5 million and $7.5 million, representing an effective income tax rate of 29.0 percent and 31.1 percent for the three months ended March 31, 2022 and 2021, respectively.
Management concluded that as of March 31, 2022 and December 31, 2021, a valuation allowance of $1.6 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. Net income tax assets were $51.9 million and $44.1 million as of March 31, 2022 and December 31, 2021, respectively.
As of March 31, 2022, the Company was subject to examination by various taxing authorities for its federal tax returns for the periods ending on or after December 31, 2018 through 2020 and state tax returns for the periods ending on or after December 31, 2017 through 2020. During the quarter ended March 31, 2022, 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.
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
(1,932
281
(1,900
313
Third-party originators intangible
7 years
483
(442
(432
51
Goodwill
N/A
11,031
Total intangible assets
13,727
(2,374
(2,332
The Company performed an impairment analysis on its goodwill and other intangible assets as of December 31, 2021 and determined there was no impairment. No triggering event has occurred subsequent to December 31, 2021 that would require a reassessment of goodwill and other intangible assets.
Note 7 — Deposits
Uninsured time deposits at or exceeding the FDIC insurance limit of $250,000 as of March 31, 2022 and December 31, 2021 were $167.5 million and $173.5 million, respectively.
The scheduled maturities of time deposits are as follows for the periods indicated:
At March 31, 2022
Time
Deposits of
$250,000
Other Time
Deposits
159,226
485,205
644,431
2023
39,722
144,555
184,277
2024
62,438
2025
265
2,084
2,349
2026 and thereafter
2,811
3,073
199,475
697,093
896,568
At December 31, 2021
206,478
672,821
879,299
1,522
40,564
42,086
60,854
1,919
2,184
2,503
2,765
208,527
778,661
987,188
Accrued interest payable on deposits was $1.0 million and $1.2 million at March 31, 2022 and December 31, 2021, respectively. Total deposits reclassified to loans due to overdrafts at March 31, 2022 and December 31, 2021 were $257,000 and $277,000, respectively.
Note 8 — Borrowings and Subordinated Debentures
At March 31, 2022, the Bank had no overnight advances and $125.0 million of term advances outstanding with the FHLB with a weighted average interest rate of 1.04 percent. At December 31, 2021, the Bank had no overnight advances and $137.5 million of term advances with the FHLB with a weighted average rate of 1.05 percent. Interest expense on borrowings for the three months ended March 31, 2022 and 2021 was $337,000 and $478,000, respectively.
Balance
Weighted
Average Rate
Overnight advances
0.00
Advances due within 12 months
50,000
1.63
1.62
Advances due over 12 months through 24 months
0.37
0.97
Advances due over 24 months through 36 months
25,000
1.22
37,500
0.40
Outstanding advances
1.04
1.05
23
The following is financial data pertaining to FHLB advances:
Weighted-average interest rate at end of period
Weighted-average interest rate during the period
1.17
Average balance of FHLB advances
130,556
145,277
Maximum amount outstanding at any month-end
162,500
The Bank maintains a secured credit facility with the FHLB, allowing the Bank to borrow on an overnight and term basis. The Bank had $2.32 billion and $2.30 billion of loans pledged as collateral with the FHLB as of March 31, 2022 and December 31, 2021, respectively. Remaining available borrowing capacity was $1.45 billion, subject to the FHLB statutory lending limit of $1.84 billion, and $1.61 billion at March 31, 2022 and December 31, 2021, respectively.
The Bank also had securities with market values of $30.1 million and $34.7 million at March 31, 2022 and December 31, 2021, respectively, pledged with the FRB, which provided $28.2 million and $32.8 million in available borrowing capacity through the Fed Discount Window as of March 31, 2022 and December 31, 2021, respectively.
On August 20, 2021, the Company issued $110.0 million of Fixed-to-Floating Subordinated Notes (“2021 Notes”) with a maturity date of September 1, 2031. The 2021 Notes have an initial fixed interest rate of 3.75 percent per annum, payable semiannually in arrears on March 1 and September 1 of each year, up to but excluding September 1, 2026. From and including September 1, 2026 and thereafter, the 2021 Notes will bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be the Three-Month Term SOFR) plus 310 basis points, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year. If the then current three-month term SOFR rate is less than zero, the three-month SOFR will be deemed to be zero. Debt issuance cost was $2.1 million, which is being amortized through the 2021 Notes’ maturity date. At both March 31, 2022 and December 31, 2021, the balance of the 2021 Notes included in the Company’s Consolidated Balance Sheet, net of issuance cost, was $108.0 million.
The Company issued $100.0 million of Fixed-to-Floating Subordinated Notes (“2017 Notes”) on March 21, 2017, with a maturity on March 30, 2027. The 2017 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 2017 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 2017 Notes’ maturity date.
On March 30, 2022, the Company redeemed its 2017 Notes. A portion of the redemption was funded with the proceeds from the Company’s August 20, 2021 subordinated debt offering. The redemption price for each of the 2017 Notes equaled 100 percent of the outstanding principal amount redeemed, plus any accrued and unpaid interest thereon. All interest accrued on the 2017 Notes ceased to accrue on and after March 30, 2022. Upon the redemption, the Company recognized a pre-tax charge of $1.1 million for the remaining unamortized debt issuance costs associated with the 2017 Notes.
At March 31, 2022 and December 31, 2021, the balance of 2017 Notes included in the Company’s Consolidated Balance Sheet, net of debt issuance cost, was $0 and $86.2 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 of three-month LIBOR plus 140 basis points thereafter. 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 March 31, 2022 and December 31, 2021, the balance of Subordinated Debentures included in the Company’s Consolidated Balance Sheets, net of discount of $5.9 million and $6.0 million, was $20.9 million and $20.8 million, respectively. The amortization of discount was $102,000 and $99,000 for the three months ended March 31, 2022 and 2021, 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, the weighted-average number of common shares includes the impact of unvested performance-based 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.
The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
(dollars in thousands, except per share amounts)
Basic EPS
Less: income allocated to unvested restricted stock
100
Income allocated to common shares
20,571
16,559
Weighted-average shares for basic EPS
Basic EPS (1)
Effect of dilutive stock options and unvested performance restricted stock
123,368
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 March 31, 2022 or 2021.
During the three months ended March 31, 2022, the Company issued 38,036 performance stock units to executive officers from the 2021 Equity Compensation plan fair valued at $955,000 on the grant date of March 23, 2022. During the three months ended March 31, 2021, the Company issued 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. These units have a three-year cliff vesting period and include dividend equivalent rights. Total performance stock units outstanding as of March 31, 2022 were 104,599 with an aggregate grant fair value of $2.0 million. As of March 31, 2022 and 2021, there were 104,599 and 66,563 performance stock units outstanding, respectively. In accordance with the treasury method, unvested performance stock units were included in the weighted average number of common shares for the diluted EPS calculation in the table above.
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 March 31, 2022, 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 must be met to avoid limitations on the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses. The Bank's capital conservation buffer was 6.19 percent and 6.70 percent and the Company's capital conservation buffer was 5.71 percent and 5.93 percent as of March 31, 2022 and December 31, 2021, respectively.
In March 2020, federal banking agencies 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.
The capital ratios of Hanmi Financial and the Bank as of March 31, 2022 and December 31, 2021 were as follows:
Minimum
Minimum to Be
Regulatory
Categorized as
Actual
Requirement
“Well Capitalized”
Ratio
Total capital (to risk-weighted assets):
Hanmi Financial
839,015
14.73
455,784
8.00
Hanmi Bank
806,922
14.19
455,023
568,778
10.00
Tier 1 capital (to risk-weighted assets):
666,887
11.71
341,838
6.00
744,794
13.09
341,267
Common equity Tier 1 capital (to risk-weighted assets)
645,954
11.34
256,378
4.50
255,950
369,706
6.50
Tier 1 capital (to average assets):
9.70
274,915
4.00
10.84
274,835
343,544
5.00
912,527
16.57
440,639
809,279
14.70
440,493
550,616
657,250
11.93
330,479
748,177
13.59
330,369
636,419
11.55
247,859
247,777
357,900
9.63
273,133
10.96
273,101
341,376
26
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.
27
Loans held for sale - Loans held for sale includes the guaranteed portion of SBA 7(a) 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 March 31, 2022 and December 31, 2021, 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 to sale or as circumstances require and the fair value adjustments are made to the asset based on its value prior to sale.
28
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of March 31, 2022 and December 31, 2021, 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:
858,766
Derivative financial instruments
4,468
4,395
895,393
1,379
1,360
29
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
As of March 31, 2022 and December 31, 2021, assets and liabilities measured at fair value on a non-recurring basis are as follows:
Inputs With No
With Identical
Collateral dependent loans (1)
Other real estate owned
Repossessed personal property
Collateral dependent loans (2)
Consisted of real estate loans of $3.1 million.
(2)
Consisted of real estate loans of $3.4 million.
30
The following table represents quantitative information about Level 3 fair value assumptions for assets measured at fair value on a non-recurring basis at March 31, 2022 and December 31, 2021:
Valuation
Techniques
Input(s)
Range (Weighted
Average)
Collateral dependent loans:
Market approach
Market data comparison
(25)% to 27% / 9%
(20)% to 0% / 0%
(4)% to 10% / 6%
(10)% to 10% / (3)%
(28)% to 23% / (6)%
(20)% to 20% / 0%
(19)% to 8% / 3%
(20)% to (5)% / (12)%
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.
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.
31
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 March 31, 2022, 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
16,948
Loans receivable, net of allowance for credit losses
5,208,194
Financial liabilities:
Noninterest-bearing deposits
Interest-bearing deposits
3,101,440
Borrowings and subordinated debentures
253,967
122,525
129,028
14,723
5,072,282
3,211,708
352,506
137,198
213,179
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.
32
The following table shows the distribution of total loan commitments as of the dates indicated:
Unusued commitments to extend credit
626,615
626,474
Standby letters of credit
46,669
49,287
Commercial letters of credit
46,617
39,261
Total commitments
719,901
715,022
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.
Activity in the allowance for credit losses related to off-balance sheet items was as follows for the periods indicated:
2,586
2,792
Provision expense (recovery) for credit losses
(228
(450
2,358
2,342
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 March 31, 2022, the outstanding balances for our right-of-use asset and lease liability were $44.5 million and $48.0 million, respectively. The outstanding balances of the right-of-use asset and lease liability were $46.3 million and $49.7 million, respectively, as of December 31, 2021.
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 March 31, 2022, future minimum rental commitments under these non-cancelable operating leases, with initial or remaining terms of one year or more, were as follows:
7,734
7,431
7,047
6,410
2026
5,175
Thereafter
18,885
Remaining lease commitments
52,682
Interest
(4,696
Present value of lease liability
47,986
Weighted average remaining lease terms for the Company's operating leases were 7.68 years and 7.85 years as of March 31, 2022 and December 31, 2021, respectively. Weighted average discount rates used for the Company's operating leases were 2.38 percent and 2.38 percent as of March 31, 2022 and December 31, 2021, respectively. Net lease expense recognized for both the three months ended March 31, 2022 and 2021 was $2.1 million. This included operating lease costs of $2.0 million for both the three months ended March 31, 2022 and 2021. Sublease income for operating leases was inconsequential for the three months ended March 31, 2022 and 2021.
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 $2.0 million for each of the three months ended March 31, 2022 and 2021.
Note 14 — Liquidity
As of March 31, 2022 and December 31, 2021, Hanmi Financial had $18.2 million and $94.9 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 March 31, 2022 and December 31, 2021, the Bank had $125.0 million and $137.5 million, respectively, of FHLB advances and $120.3 million and $141.8 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 March 31, 2022, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $1.67 billion and $1.45 billion, respectively, compared to $1.84 billion and $1.61 billion, respectively, as of December 31, 2021.
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 $28.2 million from the Federal Reserve Discount Window, to which the Bank pledged securities with a carrying value of $32.3 million, and had no borrowings as of March 31, 2022. 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 March 31, 2022.
34
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.
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 March 31, 2022 and December 31, 2021.
As of March 31, 2022
Derivative Assets
Derivative Liabilities
Notional Amount
Balance Sheet Location
Derivatives not designated as hedging instruments
Interest rate products
61,843
Other Assets
Other Liabilities
Total derivatives not designated as hedging instruments
As of December 31, 2021
61,968
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 three months ended March 31, 2022 and 2021.
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
150
The Company did not recognize any fee income from its derivative financial instruments for the three months ended March 31, 2022 nor 2021.
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of March 31, 2022 and December 31, 2021. 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
73
Offsetting of Derivative Liabilities
Gross Amounts of Recognized Liabilities
Net Amounts of Liabilities presented in the Consolidated Balance Sheets
Cash Collateral Provided
36
The Company has agreements with each of its derivative counterparties that contain a provision stating 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 March 31, 2022 and December 31, 2021, 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 $4.5 and $1.4 million, respectively. As of March 31, 2022, the Company had not posted any collateral with its counterparties related to these agreements and is adequately collateralized since its net asset position was $73,000 ($4.5 fair value of assets less $4.4 fair value of liabilities) as of March 31, 2022. As of December 31, 2021, the Company had posted no collateral related to these agreements and was adequately collateralized since its net asset position was $19,000 ($1.4 million fair value of assets less $1.4 million fair value of liabilities).
Note 16 — Subsequent Events
As of the date of issuance of these financial statements, no subsequent events were identified.
37
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 March 31, 2022. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 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 March 31, 2022 (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 and availability, plans and objectives of management for future operations, developments regarding our capital and strategic plans 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.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statements. 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; inflation; risks of natural disasters; the current or anticipated impact of military conflict, terrorism or other geopolitical events; a failure in or breach of our operational or security systems or infrastructure, including cyber-attacks; the failure to maintain current technologies; the 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; the ability to identify a suitable strategic partner or to consummate a strategic transaction; the adequacy of our allowance for credit losses; our 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 continued impact of the COVID-19 pandemic on our business and results of operation. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated. 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; if the economy worsens, loan delinquencies, problem assets, and foreclosures may increase 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; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; a material decrease in net income or a net loss over several quarters could result in the elimination or 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; Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs; a worsening of business and economic conditions or in the financial markets could result in an impairment of certain intangible assets such as goodwill or remaining assets; and the unanticipated loss or unavailability of key directors or employees due to the pandemic, which could harm our ability to operate our business or execute our business strategy, especially as we may not be successful in find and integrating suitable replacements.
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 2021 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. 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 or limitation 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 2021 Annual Report on Form 10-K. We had no significant changes in our accounting policies since the filing of our 2021 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 2021 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.
Executive Overview
Net income was $20.7 million, or $0.68 per diluted share, for the three months ended March 31, 2022 compared with $16.7 million, or $0.54 per diluted share, for the same period a year ago. The increase in net income for the 2022 first quarter reflected a net recovery of credit loss expense of $1.4 million for the three months ended March 31, 2022 compared with a net credit loss expense of $2.1 million for the same period a year ago. In addition, an increase of $5.0 million in net interest income favorably impacted results. These impacts were offset partially by a $2.2 million increase in noninterest expense and a $1.3 million decrease in noninterest income.
Other financial highlights include the following:
Cash and due from banks decreased $296.5 million to $312.5 million as of March 31, 2022 from $609.0 million at December 31, 2021, primarily as excess liquidity was used to fund strong loan production and the redemption of subordinated debentures.
Securities decreased $33.8 million to $877.0 million at March 31, 2022 from $910.8 million at December 31, 2021, attributable to the impact of after-tax unrealized losses from rising interest rates.
Loans receivable, before the allowance for credit losses, were $5.34 billion at March 31, 2022 compared with $5.15 billion at December 31, 2021
Deposits were $5.78 billion at March 31, 2022 compared with $5.79 billion at December 31, 2021.
Subordinated debentures and borrowings decreased $98.5 million to $254.0 million at March 31, 2022 from $352.5 million at December 31, 2021, primarily due to the redemption of the 2017 Notes.
39
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.
40
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)
5,231,672
4.18
4,843,825
4.24
Securities (2)
930,505
1.11
774,022
0.59
FHLB stock
6.14
5.10
Interest-bearing deposits in other banks
494,887
0.18
395,602
0.10
Total interest-earning assets
6,673,449
56,974
3.46
6,029,834
3.50
Noninterest-earning assets:
62,968
56,666
(73,177
(89,681
Other assets
229,952
233,146
6,893,192
6,229,965
Interest-bearing liabilities:
Demand: interest-bearing
124,892
0.06
102,980
0.05
Money market and savings
2,106,008
1,189
0.23
1,967,012
1,479
0.30
Time deposits
937,044
807
0.35
1,238,513
2,465
0.81
Total interest-bearing deposits
3,167,944
0.26
3,308,505
0.49
150,000
1.29
Subordinated debentures
213,171
6.75
119,040
5.44
Total interest-bearing liabilities
3,511,671
0.69
3,577,545
Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing
2,634,398
1,991,204
Other liabilities
88,367
80,060
Stockholders' equity
658,756
581,156
Net interest income (taxable equivalent basis)
51,026
Cost of deposits (3)
0.14
Net interest spread (taxable equivalent basis) (4)
2.77
2.81
Net interest margin (taxable equivalent basis) (5)
3.10
3.09
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.
(3)
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.
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.
March 31, 2022 vs March 31, 2021
Increases (Decreases) Due to Change In
Volume
4,031
(721
3,310
270
1,176
1,446
42
4,329
4,918
98
(388
(290
(497
(1,161
(1,658
(58
(83
(141
1,517
462
1,979
1,062
(1,169
(107
Change in net interest income
3,267
1,758
5,025
For the three months ended March 31, 2022 and 2021, net interest income, on a taxable equivalent basis, was $51.0 million and $46.0 million, respectively. The net interest spread and net interest margin, on a taxable equivalent basis, for the quarter ended March 31, 2022 were 2.77 percent and 3.10 percent, respectively, compared with 2.81 percent and 3.09 percent, respectively, for the same period in 2021. Interest and dividend income, on a taxable equivalent basis, increased $4.9 million, or 9.4 percent, to $57.0 million for the three months ended March 31, 2022 from $52.1 million for the same period in 2021 due to higher average interest-earning asset balances. Interest expense decreased $0.1 million, or 1.8 percent, to $5.9 million for the three months ended March 31, 2022 from $6.1 million for the same period in 2021 primarily due to a shift from time deposits into lower yielding deposit accounts and lower rates paid on interest-bearing deposits, offset by the increased interest expense associated with the issuance of the 2021 Notes and the $1.1 million charge for unamortized debt issuance costs related to the redemption of the 2017 Notes.
The average balance of interest earning assets increased $643.6 million, or 10.7 percent, to $6.67 billion for the three months ended March 31, 2022 from $6.03 billion for the three months ended March 31, 2021. The average balance of loans increased $387.8 million, or 8.0 percent, to $5.23 billion for the three months ended March 31, 2022 from $4.84 billion for the three months ended March 31, 2021 due mainly to strong loan production. The average balance of securities increased $156.5 million, or 20.2 percent, to $930.5 million for the three months ended March 31, 2022 from $774.0 million for the three months ended March 31, 2021. Interest-bearing deposits at other banks increased $99.3 million to $494.9 million for the three months ended March 31, 2021, as increased marketing efforts and proceeds from government aid programs and a decrease in consumer spending drove an increase in noninterest-bearing customer deposits.
The average yield on interest-earning assets, on a taxable equivalent basis, decreased 4 basis points to 3.46 percent for the three months ended March 31, 2022 from 3.50 percent for the three months ended March 31, 2021, mainly due to lower yields on loans. The average yield on loans decreased to 4.18 percent for the three months ended March 31, 2022 from 4.24 percent for the three months ended March 31, 2021, driven mainly by lower yields on commercial real estate loans. The average yield on securities, on a taxable equivalent basis, increased to 1.11 percent for the three months ended March 31, 2022 from 0.59 percent for the three months ended March 31, 2021 reflecting the rising market interest rate environment.
The average balance of interest-bearing liabilities decreased $65.9 million, or 1.8 percent, to $3.51 billion for the three months ended March 31, 2022 compared to $3.58 billion for the three months ended March 31, 2021. Average time deposit balances decreased $301.5 million offset by increases in the average balances of $139.0 million in money market and savings accounts and $94.1 million in subordinated debentures due to the 2021 Notes issued in August 2021.
The average cost of interest-bearing liabilities was 0.69 percent for both the three months ended March 31, 2022 and 2021. The average cost of subordinated debentures increased 130 basis points to 6.74 percent for the three months ended March 31, 2022 compared to 5.44 percent for the three months ended March 31, 2021 due to a pre-tax charge of $1.1 million for the remaining debt issuance costs for the 2017 Notes. The average cost of borrowings decreased by 24 basis points to 1.05 percent for the three months ended March 31, 2022 compared to 1.29 percent for the three months ended March 31, 2021. The average cost of deposits decreased by 23 basis points to 0.26 percent for the three months ended March 31, 2022 compared to 0.49 percent for the three months ended March 31, 2021.
Credit Loss Expense
For the first quarter of 2022, the Company recorded $1.4 million recovery of credit loss expense, comprised of a $1.1 million negative provision for loan losses, and a $228,000 negative provision for off-balance sheet items. For the same period in 2021, credit loss expense was $2.1 million, comprised of a loan loss provision of $1.0 million, a $2.1 million provision for an SBA guarantee repair loss, a $450,000 negative provision for off-balance sheet items and a $471,000 negative provision for losses on accrued interest receivable for loans currently or previously modified under the CARES Act. The recovery of credit loss expense for the three months ended March 31, 2022 as compared to the same period in 2021 resulted from a combination of overall improvements in asset quality and economic forecasts, as well as a net reduction in specific qualitative factors allocated to criticized hospitality loans impacted by the pandemic, offset by strong loan growth.
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)
Percent
518
21.98
108
10.44
Servicing income
734
846
(112
(13.24
)%
Bank-owned life insurance income
244
256
(12
(4.69
All other operating income
1,004
841
163
19.38
Service charges, fees & other
5,999
5,334
12.47
Gain on sale of SBA loans
1,671
850
50.87
Gain on sale of PPP loans
2,454
(2,454
(100.00
Legal settlement
250
(250
(1,288
(13.13
For the three months ended March 31, 2022, noninterest income was $8.5 million, a decrease of $1.3 million, or 13.1 percent, compared with $9.8 million for the same period in 2021. The decrease was mainly attributable to a $2.5 million decrease in gains on sale of PPP loans, partially offset by a $0.9 million increase in the gains of sale of SBA and a $0.5 million increase in service charges and fees, which was driven by updates to the Company’s business deposit account fee schedules and enhanced operational practices that increased fee collections.
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Noninterest Expense
The following table sets forth the components of noninterest expense for the periods indicated:
897
5.33
310
10.59
(17
(1.17
(92
(12.15
458
127.58
All other operating expenses
3,186
2,378
808
33.98
Subtotal
31,697
29,282
2,415
8.25
Other real estate owned expense (income)
221
(209
(94.57
Repossessed personal property expense (income)
(49
(153.13
2,157
7.30
For the three months ended March 31, 2022, noninterest expense was $31.7 million, an increase of $2.2 million, or 7.3 percent, compared with $29.5 million for the same period in 2021. Salaries and employee benefits increased $0.9 million primarily as a result of an increase in bonus and incentive expenses. A $0.5 million increase in advertising and promotion expense was primarily related to branding and promotional campaigns. All other operating expenses increased $0.8 million mainly due to loan related expenses (appraisal fees and real estate taxes paid).
Income Tax Expense
Income tax expense was $8.5 million and $7.5 million representing an effective income tax rate of 29.0 percent and 31.1 percent for the three months ended March 31, 2022 and 2021, respectively. The decrease in the effective tax rate for the three months ended March 31, 2022, compared to the same period in 2021 was principally due to a decrease of incremental tax charges related to the Company’s share-based compensation recognized as income tax expense.
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Financial Condition
As of March 31, 2022, our securities portfolio consisted of U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities, tax-exempt municipal bonds and, to a lesser extent, U.S. Treasury securities. 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 March 31, 2022 or December 31, 2021.
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, as of March 31, 2022:
After One
Year But
After Five
Years But
Within One
Year
Within Five
Years
Within Ten
After Ten
Yield
306
1.95
3,697
0.87
1,499
612,957
1.26
2.38
104
1.16
1,534
1.94
91,658
1.03
126,402
0.94
4,968
1.00
334
1.99
130,203
8,001
1.19
704,615
1.23
1.18
4,042
1.50
74,859
0.08
1.98
149,156
12,043
779,474
1.24
1.20
As of March 31, 2022 and December 31, 2021, loans receivable (excluding loans held for sale), net of deferred loan fees and costs, discounts and allowance for credit losses, were $5.27 billion and $5.08 billion, respectively. The increase primarily reflected $506.9 million in new loan production and $210.6 million in loan sales and payoffs, as well as amortization and other reductions of $108.0 million. Loan production primarily consisted of commercial real estate of $233.3 million, commercial and industrial loans of $98.4 million and residential mortgages of $61.0 million.
The table below shows the maturity distribution of outstanding loans as of March 31, 2022. 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
127,151
548,614
314,951
182,325
429,441
106,955
275,316
1,102,954
477,095
118,726
584,792
2,081,009
899,001
41,681
46,244
6,335
184
5,504
420,782
632,808
2,127,437
904,505
539,508
301,450
253,463
78,194
20,730
429,332
50,073
954,988
2,810,232
1,032,772
Loans with predetermined interest rates
345,769
2,057,439
255,627
157,099
2,815,934
Loans with variable interest rates
609,219
752,793
777,145
382,409
2,521,566
The table below shows the maturity distribution of outstanding loans with fixed or predetermined interest rates due after one year, as of March 31, 2022.
Within Three
After Three
183,135
272,027
72,147
527,309
137,877
96,275
7,221
241,373
253,083
627,186
108,909
16,368
1,005,546
574,095
995,488
188,277
1,774,228
27,286
2,918
140,731
143,820
601,498
995,542
191,195
1,945,334
19,560
11,508
14,359
45,427
176,763
252,568
479,404
797,821
1,259,618
2,470,165
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The table below shows the maturity distribution of outstanding loans with floating or variable interest rates (including hybrids) due after one year, as of March 31, 2022.
47,471
45,980
242,803
336,254
156,012
39,277
99,734
295,023
106,331
116,355
368,187
102,358
693,231
309,814
201,612
710,724
1,324,508
18,958
280,051
282,650
328,785
713,310
1,626,116
56,013
166,383
63,835
286,231
384,798
367,995
1,912,347
Industry
As of March 31, 2022, 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
1,725,288
32.3
765,072
14.3
Loans and leases 30 to 89 days past due and still accruing were 0.10 percent of loans and leases at March 31, 2022, compared with 0.11 percent at December 31, 2021.
At March 31, 2022 and December 31, 2021, there were no loans 90 days or more past due and still accruing.
Special mention loans were $141.0 million at March 31, 2022 compared with $95.3 million at December 31, 2021. The change reflects additions of $68.1 million and reductions (comprising upgrades, downgrades and payments) of $22.5 million.
Classified loans were $57.4 million at March 31, 2022 compared with $60.6 million at December 31, 2021. The change reflects additions of $2.8 million and reductions (comprising upgrades, payments, sales, and charge-offs) of $6.0 million.
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Activity in criticized loans was as follows for the periods indicated:
Additions
68,120
2,807
Reductions
(22,456
(6,036
76,978
140,169
146,226
60,083
(127,910
(139,619
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, management is not aware of any other loans as of March 31, 2022 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 borrowers may adversely affect a borrower’s ability to pay.
Nonperforming loans were $11.5 million at March 31, 2022, or 0.21 percent of loans, compared with $13.4 million at December 31, 2021, or 0.26 percent of the portfolio. The change reflects additions of $1.2 million and reductions (comprising upgrades, payments, sales, and charge-offs) of $3.1 million.
Nonperforming assets were $12.1 million at March 31, 2022, or 0.18 percent of total assets, compared with $14.0 million, or 0.21 percent, at December 31, 2021.
The Company reviews loans on an individual basis when the loan does not share similar risk characteristics with loan pools.
Individually evaluated loans were $11.5 million and $13.4 million as of March 31, 2022 and December 31, 2021, respectively, representing a decrease of $1.9 million, or 14.4 percent. Specific allowances associated with individually evaluated loans decreased $0.6 million to $2.2 million as of March 31, 2022 compared with $2.8 million as of December 31, 2021.
For the three months ended March 31, 2022, we restructured monthly payments for one loan, with a net carrying value of $92,000 at the time of modification, which was subsequently classified as a TDR. For the year ended December 31, 2021, no loans were restructured and 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.
48
As of March 31, 2022 and December 31, 2021, TDRs on accrual status were $92,000 consisting of reduction of principal and interest payments. The allowance for credit losses relating to these loans was inconsequential. There were no TDRs on accrual status as of December 31, 2021. As of March 31, 2022 and December 31, 2021, restructured loans on nonaccrual status were $2.6 million and $2.9 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 March 31, 2022 and December 31, 2021 reflected 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.
Management selected three loss methodologies for the collective allowance estimation. At March 31, 2022, the Company used the discounted cash flow (“DCF”) method to estimate allowances for credit losses for the commercial and industrial loan portfolio, the Probability of Default/Loss Given Default (“PD/LGD”) method for the commercial real estate, construction and residential real estate 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.
For the loans 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. Since reasonable and supportable forecasts of economic conditions are imbedded directly into the DCF model, qualitative adjustments are reduced but considered. For each of these loan segments, the Company applied an annualized historical PD/LGD using all available historical periods. The PD/LGD method incorporates a forecast into loss estimates using a qualitative adjustment.
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 March 31, 2022 and December 31, 2021, 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 $71.5 million at March 31, 2022 compared with $72.6 million at December 31, 2021. The allowance attributed to individually evaluated loans was $2.2 million at March 31, 2022 compared with $2.8 million at December 31, 2021. The allowance attributed to collectively evaluated loans was $69.3 million at March 31, 2022 compared with $69.8 million at December 31, 2021, 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:
Percentage of Total Allowance
37.0
69.1
78.8
11.8
49
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
1.34
1.41
Nonaccrual loans to loans
0.21
Allowance for credit losses to nonaccrual loans
623.47
543.09
Balance:
Nonaccrual loans at end of period
Nonperforming loans at end of period
As of March 31, 2022 and December 31, 2021, the allowance for credit losses related to off-balance sheet items, primarily unfunded loan commitments, was $2.4 million and $2.6 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 March 31, 2022.
The following table presents a summary of net charge-offs (recoveries) for the loan portfolio:
Average Loans
Net Charge-Offs (Recoveries)
Net Charge-Offs (Recoveries) to Average Loans (1)
Commercial real estate loans
3,752,658
335
0.04
407,967
(2
(0.00
578,583
(259
(0.18
492,464
(176
(0.14
(102
(0.01
3,369,821
1,237
0.15
334,873
723,343
(6
415,788
1,768
1.70
2,998
0.25
Annualized
For the three months ended March 31, 2022, gross charge-offs were $0.8 million, a decrease of $2.7 million, from $3.5 million for the same period in 2021 and gross recoveries were $0.9 million, an increase of $0.4 million, from $0.5 million for the three months ended March 31, 2021. Net loan recoveries were $0.1 million, or 0.01 percent of average loans, compared with net loan charge-offs of $3.0 million, or 0.25 percent of average loans, for the three months ended March 31, 2022 and 2021, respectively.
50
The following table shows the composition of deposits by type as of the dates indicated:
Demand – noninterest-bearing
46.3
44.5
Interest-bearing:
Demand
126,907
2.2
125,183
2,080,969
36.0
2,099,381
36.3
Uninsured time deposits of more than $250,000:
Three months or less
77,862
1.4
69,464
1.2
Over three months through six months
44,392
0.8
1.3
Over six months through twelve months
44,824
29,706
0.5
Over twelve months
398
0.0
549
Other time deposits
729,092
12.6
813,661
14.1
Total deposits were $5.78 billion and $5.79 billion as of March 31, 2022 and December 31, 2021, respectively, representing a decrease of $3.1 million, or 0.1 percent.
The decrease in deposits was primarily driven by a reduction in time deposits, offset by an increase in noninterest-bearing demand deposits. At March 31, 2022, the loan-to-deposit ratio was 92.3 percent compared with 89.0 percent at December 31, 2021. The increase in noninterest-bearing deposits reflects growth from new and existing customer relationships and other economic stimulus activities.
As of March 31, 2022, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $2.60 billion, of which $2.43 billion were demand deposits and money market and savings deposits and $167.5 million were time deposits. As of December 31, 2021, the aggregate amount of uninsured deposits was $2.63 billion, consisting of $2.46 billion in demand deposits and money market and savings deposits and $173.5 million in time deposits.
Borrowings and Subordinated Debentures
Borrowings mostly take the form of advances from the FHLB. At March 31, 2022 and December 31, 2021, total advances from the FHLB were $125.0 million and $137.5 million, respectively. The Bank had no overnight advances from the FHLB at both March 31, 2022 and December 31, 2021.
The weighted-average interest rate of all FHLB advances at March 31, 2022 and December 31, 2021 were 1.04 percent and 1.05 percent, respectively, and weighted-average interest rate of FHLB advances for the three months ended March 31, 2022 and December 31, 2021 were 1.05 percent and 1.17 percent, respectively. Average balances of FHLB advances for the three months ended March 31, 2022 and December 31, 2021 were $130.6 million and $145.3 million, respectively, with maximum amount outstanding at any month end during the three months period ended March 31, 2022 and December 31, 2021 of $137.5 million and $162.5 million, respectively. Interest expense on borrowings for the three months ended March 31, 2022 and 2021 was $337,000 and $478,000, respectively.
The following is a summary of contractual maturities greater than twelve months of FHLB advances:
FHLB of San Francisco
Outstanding advances over 12 months
75,000
0.65
87,500
0.73
Subordinated debentures were $129.0 million as of March 31, 2022 and $215.0 million as of December 31, 2021. The $86.0 million decrease in subordinated debentures was primarily due to the redemption of the 2017 Notes on March 30, 2022. Subordinated debentures are comprised of fixed-to-floating subordinated notes of $108.0 million and $194.2 million as of March 31, 2022 and December 31, 2021, respectively, and junior subordinated deferrable interest debentures of $20.9 million and $20.8 million as of March 31, 2022 and December 31, 2021, 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 March 31, 2022. 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.
Net Interest Income Simulation
Change in
1- to 12-Month Horizon
13- to 24-Month Horizon
Dollar
Change
300%
23,820
10.57
43,216
19.43
200%
15,965
7.08
28,990
13.04
100%
8,592
3.81
16,145
7.26
(100%)
(12,086
(5.36
%)
(24,853
(11.18
Economic Value of Equity (EVE)
150,525
18.78
111,620
13.92
62,588
7.81
(109,312
(13.64
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.
52
In response to the uncertainty surrounding the COVID-19 pandemic, the Board reduced the quarterly cash dividends paid on common stock beginning in the second quarter of 2020. Due to the continued stabilization of Company results and financial condition, the Board authorized an increase in the quarterly cash dividend to $0.12 per share for the second quarter of 2021. As the effects of the pandemic continued to subside and the Company’s results and financial condition improved, the Board again increased the dividend for the fourth quarter of 2021 to $0.20 per share and for the first quarter of 2022 to $0.22 per share. 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 April 1, 2022, after giving effect to the 2022 second quarter dividend declared by the Company, the Bank has the ability to pay dividends of approximately $83.5 million without the prior approval of the Commissioner of the DFPI.
At March 31, 2022, the Bank’s total risk-based capital ratio of 14.19 percent, Tier 1 risk-based capital ratio of 13.09 percent, common equity Tier 1 capital ratio of 13.09 percent and Tier 1 leverage capital ratio of 10.84 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 March 31, 2022, the Company's total risk-based capital ratio was 14.73 percent, Tier 1 risk-based capital ratio was 11.71 percent, common equity Tier 1 capital ratio was 11.34 percent and Tier 1 leverage capital ratio was 9.70 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 2021 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 2021 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 2021 Annual Report on Form 10-K.
Contractual Obligations
There have been no material changes to the contractual obligations described in our 2021 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.
53
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 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 March 31, 2022.
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 March 31, 2022 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
There have been no material changes in risk factors applicable to the Corporation from those described in “Risk Factors” in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
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 March 31, 2022, 659,972 shares remained available for future purchases under that stock repurchase program. The Company acquired 5,161 shares from employees in connection with the satisfaction of employee tax withholding obligations incurred through vesting of Company stock awards for the three months ended March 31, 2022.
The following table represents information with respect to repurchases of common stock made by the Company during the three months ended March 31, 2022:
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
January 1, 2022 - January 31, 2022
659,972
February 1, 2022 - February 28, 2022
March 1, 2022 - March 31, 2022
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
Exhibit
Document
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.
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 *
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, 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:
May 9, 2022
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)