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, 2024
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 April 30, 2024, there were 30,387,062 outstanding shares of the Registrant’s Common Stock.
Hanmi Financial Corporation and Subsidiaries Quarterly Report on Form 10-Q
Three Months Ended March 31, 2024
Table of Contents
Part I – Financial Information
Item 1.
Financial Statements
3
Consolidated Balance Sheets at March 31, 2024 (unaudited) and December 31, 2023
Consolidated Statements of Income for the three months ended March 31, 2024 and 2023 (unaudited)
4
Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2024 and 2023 (unaudited)
5
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2024 and 2023 (unaudited)
6
Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023 (unaudited)
7
Notes to Consolidated Financial Statements (unaudited)
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
55
Item 4.
Controls and Procedures
Part II – Other Information
Legal Proceedings
56
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
57
Signatures
58
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,
2024
2023
(Unaudited)
Assets
Cash and due from banks
$
256,038
302,324
Securities available for sale, at fair value (amortized cost of $978,580 and $967,031 as of March 31, 2024 and December 31, 2023, respectively)
872,190
865,739
Loans held for sale, at the lower of cost or fair value
3,999
12,013
Loans receivable, net of allowance for credit losses of $68,270 and $69,462 as of March 31, 2024 and December 31, 2023, respectively
6,109,570
6,112,972
Accrued interest receivable
23,032
23,371
Premises and equipment, net
21,952
21,959
Customers' liability on acceptances
161
625
Servicing assets
6,890
7,070
Goodwill and other intangible assets, net
11,074
11,099
Federal Home Loan Bank ("FHLB") stock, at cost
16,385
Income tax assets
35,863
35,226
Bank-owned life insurance
56,639
56,335
Prepaid expenses and other assets
98,253
105,223
Total assets
7,512,046
7,570,341
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing
1,933,060
2,003,596
Interest-bearing
4,443,000
4,276,978
Total deposits
6,376,060
6,280,574
Accrued interest payable
38,007
39,306
Bank's liability on acceptances
Borrowings
172,500
325,000
Subordinated debentures ($136,800 and $136,800 face amount less unamortized discount and debt issuance costs of $6,635 and $6,788 as of March 31, 2024 and December 31, 2023, respectively)
130,165
130,012
Accrued expenses and other liabilities
92,053
92,933
Total liabilities
6,808,946
6,868,450
Stockholders’ equity:
Preferred stock, $0.001 par value; authorized 10,000,000 shares; no shares issued as of March 31, 2024 and December 31, 2023
—
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,957,284 shares (30,276,358 shares outstanding) and 33,918,035 shares (30,368,655 shares outstanding) as of March 31, 2024 and December 31, 2023, respectively
34
Additional paid-in capital
587,687
586,912
Accumulated other comprehensive loss, net of tax benefit of $31,401 and $29,058 as of March 31, 2024 and December 31, 2023, respectively
(76,890
)
(71,928
Retained earnings
326,526
319,048
Less treasury stock; 3,680,926 shares and 3,549,380 shares as of March 31, 2024 and December 31, 2023, respectively
(134,257
(132,175
Total stockholders’ equity
703,100
701,891
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
Interest and dividend income:
Interest and fees on loans receivable
91,674
80,923
Interest on securities
4,955
4,025
Dividends on FHLB stock
361
289
Interest on deposits in other banks
2,604
2,066
Total interest and dividend income
99,594
87,303
Interest expense:
Interest on deposits
45,638
25,498
Interest on borrowings
1,655
2,369
Interest on subordinated debentures
1,646
1,583
Total interest expense
48,939
29,450
Net interest income before credit loss expense
50,655
57,853
Credit loss expense
227
2,133
Net interest income after credit loss expense
50,428
55,720
Noninterest income:
Service charges on deposit accounts
2,450
2,579
Trade finance and other service charges and fees
1,414
1,258
Gain on sale of Small Business Administration ("SBA") loans
1,482
1,869
Other operating income
2,387
2,630
Total noninterest income
7,733
8,336
Noninterest expense:
Salaries and employee benefits
21,585
20,610
Occupancy and equipment
4,537
4,412
Data processing
3,551
3,253
Professional fees
1,893
1,335
Supplies and communications
601
676
Advertising and promotion
907
833
Other operating expenses
3,371
1,672
Total noninterest expense
36,445
32,791
Income before tax
21,716
31,265
Income tax expense
6,552
9,274
Net income
15,164
21,991
Basic earnings per share
0.50
0.72
Diluted earnings per share
Weighted-average shares outstanding:
Basic
30,119,646
30,347,325
Diluted
30,430,745
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in thousands)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss):
Unrealized holding gain (loss) on available for sale securities
(5,098
13,607
Unrealized gain (loss) on cash flow hedges
(2,207
Unrealized gain (loss)
(7,305
Income tax benefit (expense) related to other comprehensive income items
2,343
(3,681
Other comprehensive income (loss), net of tax
(4,962
9,926
Total comprehensive income
10,202
31,917
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the Three Months Ended March 31, 2024 and 2023
Common Stock - Number of Shares
Stockholders' Equity
Accumulated
Additional
Other
Treasury
Total
Shares
Common
Paid-in
Comprehensive
Retained
Stock,
Stockholders'
Issued
Outstanding
Stock
Capital
Loss
Earnings
at Cost
Equity
Balance at January 1, 2023
33,708,234
(3,222,613
30,485,621
33
583,410
(88,985
269,542
(126,485
637,515
Stock options exercised
50,000
(35,273
14,727
822
(1,003
(181
Issuance of awards pursuant to equity incentive plans, net of forfeitures
69,567
Share-based compensation expense
652
Shares surrendered to satisfy tax liability upon vesting of equity awards
(11,392
(115
Repurchase of common stock
(3,236
Cash dividends paid (common stock, $0.25/share)
(7,623
Change in unrealized gain (loss) on securities available for sale, net of income taxes
Balance at March 31, 2023
33,827,801
(3,272,514
30,555,287
584,884
(79,059
283,910
(127,603
662,165
Balance at January 1, 2024
33,918,035
(3,549,380
30,368,655
39,249
775
(31,546
(490
(100,000
(1,592
(7,686
(3,394
Change in unrealized gain (loss) on cash flow hedge, net of income taxes
(1,568
Balance at March 31, 2024
33,957,284
(3,680,926
30,276,358
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31,
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
1,604
1,742
Amortization of servicing assets - net
694
634
Gain on sales of SBA loans
(1,482
(1,869
Origination of SBA loans held for sale
(17,632
(25,316
Proceeds from sales of SBA loans
26,555
30,954
Gain on sales of mortgage loans
(443
Change in bank-owned life insurance
(304
(270
Change in prepaid expenses and other assets
5,564
(3,000
Change in income tax assets
1,707
8,585
Valuation adjustment on servicing assets
(384
Change in accrued interest payable and other liabilities
(2,446
276
Net cash provided by operating activities
29,983
36,128
Cash flows from investing activities:
Purchases of securities available for sale
(38,424
(29,504
Proceeds from matured, called and repayment of securities
26,233
17,499
Purchases of loans receivable
(10,198
Proceeds from sales of mortgage loans
30,427
Purchases of premises and equipment
(794
(617
Change in loans receivable, excluding purchases
(16,729
(14,773
Net cash used in investing activities
(9,485
(27,395
Cash flows from financing activities:
Change in deposits
95,486
32,966
Change in borrowings
(152,500
Proceeds from exercise of stock options
Cash paid for employee vested shares surrendered due to employee tax liability
(1,118
(1,594
Cash dividends paid
Net cash provided by (used in) financing activities
(66,784
25,047
Net increase (decrease) in cash and due from banks
(46,286
33,780
Cash and due from banks at beginning of year
352,421
Cash and due from banks at end of period
386,201
Supplemental disclosures of cash flow information:
Interest paid
50,238
16,730
Income taxes paid
175
334
Non-cash activities:
Change in right-of-use asset obtained in exchange for lease liability
(1,873
(145
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 period ended March 31, 2024. 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. Operating results for the three-month period ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ended December 31, 2024 or for any other period. The interim information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 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.
Recently Issued Accounting Standards Not Yet Effective
Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures: In December 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-09 to enhance the transparency and usefulness of income tax disclosures primarily related to income tax rate reconciliation and income taxes information. The amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024. The adoption of ASU 2023-09 is not expected to have material effect on the Company’s operating results or financial condition.
ASU 2023-07, Segment Reporting (Topic 280): Segment Reporting: In November 2023, FASB issued ASU 2023-07 to provide updates that improve reportable segment disclosure requirements, primarily through enhanced disclosures on significant segment expenses. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2024. The adoption of ASU 2023-07 is not expected to have material effect on the Company’s operating results or financial condition.
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
Value
March 31, 2024
U.S. Treasury securities
88,407
21
(1,124
87,304
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential
489,714
226
(65,267
424,673
Mortgage-backed securities - commercial
59,603
(12,383
47,220
Collateralized mortgage obligations
131,756
107
(10,128
121,735
Debt securities
132,236
(7,420
124,816
Total U.S. government agency and sponsored agency obligations
813,309
333
(95,198
718,444
Municipal bonds-tax exempt
76,864
(10,422
66,442
Total securities available for sale
978,580
354
(106,744
December 31, 2023
86,355
173
(1,040
85,488
504,544
481
(62,697
442,328
59,973
(11,982
47,991
106,823
237
(9,649
97,411
132,215
(7,590
124,625
803,555
718
(91,918
712,355
77,121
(9,225
67,896
967,031
891
(102,183
The amortized cost and estimated fair value of securities as of March 31, 2024 and December 31, 2023, 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
76,125
75,255
62,521
61,828
Over one year through five years
156,571
148,475
169,176
160,983
Over five years through ten years
90,497
82,423
83,720
77,608
Over ten years
655,387
566,037
651,614
565,320
9
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, 2024 or December 31, 2023, 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)
(159
43,837
13
(965
31,489
11
75,326
24
(88
16,344
(65,179
395,536
118
411,880
126
15
(268
38,790
10
(9,860
63,898
25
102,688
35
26
(356
55,134
18
(94,842
631,470
184
686,604
202
19
(515
98,971
31
(106,229
729,401
214
828,372
245
(57
21,024
(983
32,449
53,473
(11
2,324
(62,686
411,417
413,741
123
(38
7,074
(9,611
63,610
70,684
(49
9,398
(91,869
647,643
183
657,041
190
(106
30,422
14
(102,077
747,988
213
778,410
The Company evaluates its available for sale securities portfolio for impairment on a quarterly basis. The Company did not recognize unrealized losses in income because it has the ability and the intent to hold and does not expect to be required to sell these securities until the recovery of their cost basis. The quarterly impairment 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, 2024, the Company determined that no credit losses were 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.
Securities available for sale with market values of $23.8 million and $24.8 million as of March 31, 2024 and December 31, 2023, respectively, were pledged to secure borrowings from the Federal Reserve Bank (“FRB”) Discount Window.
At March 31, 2024, 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% of shareholders’ equity.
Note 3 — Loans
Loans Receivable
Loans consisted of the following as of the dates indicated:
Real estate loans:
Commercial property
Retail
1,091,059
1,107,360
Hospitality
740,160
740,519
Office
575,847
574,981
Other (1)
1,367,395
1,366,534
Total commercial property loans
3,774,461
3,789,394
Construction
104,216
100,345
Residential (2)
970,362
962,661
Total real estate loans
4,849,039
4,852,400
Commercial and industrial loans (3)
774,851
747,819
Equipment financing agreements
553,950
582,215
Loans receivable
6,177,840
6,182,434
Allowance for credit losses
(68,270
(69,462
Loans receivable, net
Accrued interest on loans was $19.5 million and $19.8 million at March 31, 2024 and December 31, 2023, respectively.
At March 31, 2024 and December 31, 2023, loans with carrying values of $2.45 billion and $2.36 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 following periods:
Real Estate
Commercial and Industrial
Three months ended March 31, 2024
Balance at beginning of period
8,792
3,221
Originations and transfers
9,614
8,018
17,632
Sales
(16,900
(8,687
(25,587
Principal paydowns and amortization
(52
(7
(59
Balance at end of period
1,454
2,545
Three months ended March 31, 2023
3,775
4,268
8,043
16,387
8,929
25,316
(19,781
(9,918
(29,699
(2
(6
(8
379
3,273
3,652
The following table presents loans purchased by portfolio segment for the following periods:
Commercial real estate
274
Commercial and industrial
9,924
Residential real estate
10,198
Allowance for Credit Losses
The following table details the information on the allowance for credit losses by portfolio segment for the following periods:
Equipment Financing Agreements
45,499
10,257
13,706
69,462
Charge-offs
(155
(1,968
(2,123
Recoveries
46
423
527
Credit loss expense (recovery)
(2,961
1,676
1,689
404
Ending balance
42,584
11,836
13,850
68,270
44,026
15,267
12,230
71,523
(412
(210
(1,616
(2,238
68
235
480
783
(151
41
2,291
2,181
43,531
15,333
13,385
72,249
The table below presents the allowance for credit losses by portfolio segment as a percentage of the total allowance for credit losses and loans by portfolio segment as a percentage of the aggregate investment of loans receivable as of:
Allowance Amount
Percentage of Total Allowance
Total Loans
Percentage of Total Loans
(dollars in thousands)
10,095
14.8
%
17.7
10,264
17.9
11,668
17.1
12.0
15,534
22.4
3,740
5.5
9.3
3,024
4.4
8,270
12.1
22.1
8,663
12.4
33,773
49.5
61.1
37,485
54.0
61.3
2,611
3.8
1.7
2,756
4.0
1.6
Residential
6,200
9.1
15.7
5,258
7.5
15.6
62.4
78.5
65.5
Commercial and industrial loans
17.3
12.5
20.3
9.0
19.7
9.4
100.0
12
The following table represents the amortized cost basis of collateral-dependent loans by class of loans, for which repayment is expected to be obtained through the sale of the underlying collateral, as of:
1,530
299
338
2,147
305
2,446
2,173
1
2,174
3,927
5,178
6,373
7,352
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 1 to 8) for each loan in our portfolio. Third-party loan reviews are conducted annually on a sample 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 (1-4), are in compliance with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or defined weaknesses as defined under “Special Mention”, “Substandard” or “Doubtful.” This category is the strongest level of the Bank’s loan grading system. It consists of all performing loans with no identified credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans.
Special Mention: A Special Mention loan, grade (5), has potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses may result in deterioration of the repayment of the debt and result in a Substandard classification. Loans that have significant actual, not potential, weaknesses are considered more severely classified.
Substandard: A Substandard loan, grade (6), has a well-defined weakness that jeopardizes the liquidation of the debt. A loan graded Substandard is not protected by the sound worth and paying capacity of the borrower, or of the value and type of collateral pledged. With a Substandard loan, there is a distinct possibility that the Bank will sustain some loss if the weaknesses or deficiencies are not corrected.
Doubtful: A Doubtful loan, grade (7), is one that has critical weaknesses that would make the collection or liquidation of the full amount due improbable. However, there may be pending events which may work to strengthen the loan, and therefore the amount or timing of a possible loss cannot be determined at the current time.
Loss: A loan classified as Loss, grade (8), is considered uncollectible and of such little value that their continuance as active bank assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans classified as Loss will be charged off in a timely manner.
Under regulatory guidance, loans graded special mention or worse are considered criticized loans, and loans graded substandard or worse are considered classified loans.
Loans by Vintage Year and Risk Rating
Term Loans
Amortized Cost Basis by Origination Year (1)
2022
2021
2020
Prior
RevolvingLoansAmortizedCost Basis
Risk Rating
`
Pass / Pass-Watch
109,310
614,621
978,263
847,463
567,561
578,221
46,941
3,742,380
Special Mention
4,399
3,979
3,252
5,628
967
1,409
19,634
Classified
1,573
1,197
9,677
12,447
Total commercial property
115,282
983,439
850,715
573,189
588,865
48,350
YTD gross charge-offs
YTD net charge-offs (recoveries)
(5
(41
(46
49,902
26,003
75,905
28,311
Total construction
52,132
256,261
369,965
156,338
12,510
117,129
5,777
970,112
250
Total residential
6,027
211,344
896,885
1,348,228
1,003,801
580,071
695,350
52,718
4,788,397
31,563
1,659
48,195
217,316
1,353,404
1,035,364
585,699
705,994
54,377
Commercial and industrial loans:
97,014
98,018
161,227
76,197
17,368
19,615
287,010
756,449
403
13,595
99
14,121
96
258
4,281
Total commercial and industrial loans
97,417
174,918
17,467
19,897
290,937
29
155
(34
97
Equipment financing agreements:
35,518
198,213
190,684
88,306
19,607
14,681
547,009
846
3,613
1,729
216
537
6,941
Total equipment financing agreements
199,059
194,297
90,035
19,823
15,218
1,364
400
170
1,968
1,207
310
164
1,545
Total loans receivable:
343,876
1,193,116
1,700,139
1,168,304
617,046
729,646
339,728
6,091,855
4,802
17,574
5,727
991
62,316
4,906
10,472
23,669
Total loans receivable
350,251
1,193,962
1,722,619
1,201,596
622,989
741,109
345,314
1,490
44
2,123
1,333
159
(191
1,596
2019
683,819
986,822
858,821
572,950
378,067
238,400
30,236
3,749,115
4,400
3,997
3,271
5,670
711
2,310
1,406
21,765
3,065
1,080
4,899
5,578
3,892
18,514
691,284
991,899
866,991
578,620
384,356
244,602
31,642
411
627
(81
322
72,039
28,306
290,196
375,712
158,618
12,656
217
119,736
5,025
962,160
500
119,737
5,525
1,046,054
1,362,534
1,017,439
585,606
378,284
358,136
35,261
4,783,314
31,577
1,906
50,571
3,893
18,515
1,053,519
1,367,611
1,053,915
591,276
384,573
364,339
37,167
315
177,864
169,209
84,198
31,348
9,971
12,920
242,044
727,554
14,578
102
65
(1
14,744
329
79
174
4,939
5,521
178,193
183,787
31,450
10,050
13,159
246,982
17
110
410
6,120
6,657
101
(6,621
6,090
(432
215,670
211,228
101,622
24,340
18,832
3,192
574,884
392
4,171
1,945
365
401
7,331
216,062
215,399
103,567
24,705
19,233
3,249
178
3,944
3,267
386
799
232
8,806
3,744
2,858
244
(114
7,160
1,439,588
1,742,971
1,203,259
641,294
407,087
374,248
277,305
6,085,752
18,575
5,772
2,375
1,905
65,315
3,786
5,251
6,844
6,058
4,124
31,367
1,447,774
1,766,797
1,241,680
647,431
413,856
380,747
284,149
3,961
797
909
858
16,090
3,749
2,851
647
351
(6,823
7,043
Loans by Vintage Year and Payment Performance
Payment performance
Performing
113,709
983,314
587,509
3,771,407
Nonperforming
125
1,356
3,054
215,743
1,353,279
704,638
4,845,985
174,904
19,809
770,822
88
4,029
348,678
1,718,867
1,199,867
622,773
739,128
341,387
6,163,816
3,752
1,981
14,024
16
689,449
866,841
384,275
243,819
3,786,545
1,835
150
81
2,849
962,660
1,051,684
1,053,765
384,492
363,555
4,849,550
784
2,850
31,415
13,066
242,134
742,514
93
4,848
5,305
18,844
574,896
389
7,319
1,445,218
1,762,626
1,239,585
647,031
413,386
379,813
279,301
6,166,960
2,556
2,095
470
934
15,474
The following is an aging analysis of loans, including loans on nonaccrual status, disaggregated by loan class, as of:
30-59DaysPast Due
60-89DaysPast Due
90 Daysor MorePast Due
TotalPast Due
Current
757
1,090,302
2,950
366
574
3,890
1,363,505
3,707
4,647
3,769,814
2,190
1,410
3,600
966,762
5,897
1,776
8,247
4,840,792
3,989
4,096
770,755
7,452
1,994
3,924
13,370
540,580
13,456
7,759
4,498
25,713
6,152,127
632
1,106,728
22
172
740,347
592
1,365,942
1,224
1,396
3,787,998
521
336
961,803
1,745
486
23
2,254
4,850,146
76
120
5,374
742,445
7,138
2,134
4,551
13,823
568,392
8,959
2,740
9,752
21,451
6,160,983
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, 2024 and December 31, 2023.
Nonaccrual LoansWithNo Allowance forCredit Losses
Nonaccrual LoansWithAllowance forCredit Losses
LoansPast Due90 Days StillAccruing
TotalNonperformingLoans
437
598
292
2,148
2,164
2,601
453
663
6,278
3,264
10,760
1,717
321
2,038
488
323
2,360
489
2,361
5,213
92
570
6,749
8,144
7,330
The Company recognized $9,000 and $104,000 of interest income on nonaccrual loans for the three months ended March 31, 2024 and 2023, respectively.
The following table details nonperforming assets as of the dates indicated:
Nonaccrual loans
Total nonperforming loans receivable
Other real estate owned (“OREO”)
117
Total nonperforming assets
14,141
15,591
OREO of $0.1 million is included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023.
Loan Modifications
No loans were modified to borrowers experiencing financial difficulty during the three months ended March 31, 2024 or during the three months ended March 31, 2023.
Note 4 — Servicing Assets
The changes in servicing assets for the three months ended March 31, 2024 and 2023 were as follows:
7,176
Addition related to sale of SBA loans
514
615
Amortization
(694
(635
Change in valuation allowance
385
7,541
At March 31, 2024 and December 31, 2023, we serviced loans sold to unaffiliated parties of $536.0 million and $539.6 million, respectively. These represented loans that were 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 $1.3 million for each of the three months ended March 31, 2024 and 2023. 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 $0.7 million and $0.6 million for the three months ended March 31, 2024 and 2023, respectively.
The fair value of servicing rights was $8.3 million at March 31, 2024 and was determined using discount rates ranging from 11.1% to 22.2% and prepayment speeds ranging from 11.4% to 20.5%, depending on the stratification of the specific right. The fair value of servicing rights was $7.7 million at December 31, 2023 and was determined using discount rates ranging from 14.4% to 24.7% and prepayment speeds ranging from 12.2% to 19.7%, depending on the stratification of the specific right.
Note 5 — Income Taxes
The Company’s income tax expense was $6.6 million and $9.3 million, representing an effective income tax rate of 30.2% and 29.7% for the three months ended March 31, 2024 and 2023, respectively.
Management concluded that as of March 31, 2024 and December 31, 2023, a valuation allowance of $1.9 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 these deferred tax assets will be realized principally through future taxable income and reversal of existing taxable temporary differences. Net deferred tax assets were $35.9 million and $35.2 million as of March 31, 2024 and December 31, 2023, respectively.
As of March 31, 2024, the Company was subject to examination by various taxing authorities for its federal tax returns for the periods ended after December 31, 2019 and state tax returns for the periods ended after December 31, 2018. During the quarter ended March 31, 2024, 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.
20
Note 6 — Goodwill and other Intangibles
The third-party originator's intangible of $0.5 million and goodwill of $11.0 million were recorded as a result of the acquisition of an equipment financing agreements 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:
AmortizationPeriod
GrossCarryingAmount
AccumulatedAmortization
NetCarryingAmount
Core deposit intangible
10 years
2,213
(2,170
43
(2,145
Third-party originator's intangible
7 years
483
(483
Goodwill
N/A
11,031
Total intangible assets
13,244
13,727
(2,628
The Company performed an impairment analysis in the first quarter of 2024 and determined there was no impairment as of March 31, 2024. No triggering event occurred as of, or subsequent to March 31, 2024, that would require a reassessment of goodwill and other intangible assets.
Note 7 — Deposits
The scheduled maturities of time deposits are as follows for the periods indicated:
TimeDeposits MoreThan $250,000
Other TimeDeposits
At March 31, 2024
835,582
1,246,625
2,082,207
2025
158,310
250,112
408,422
2026
263
3,754
4,017
2027
807
2028 and thereafter
308
994,155
1,501,606
2,495,761
At December 31, 2023
995,830
1,444,509
2,440,339
3,928
6,205
10,133
3,142
3,405
572
418
1,000,021
1,454,846
2,454,867
Accrued interest payable on deposits was $37.9 million and $39.2 million at March 31, 2024 and December 31, 2023, respectively. Total deposits reclassified to loans due to overdrafts at March 31, 2024 and December 31, 2023 were $1.5 million and $1.6 million, respectively.
Note 8 — Borrowings and Subordinated Debentures
At March 31, 2024, the Bank had $60.0 million of open advances and $112.5 million of term advances at the FHLB with a weighted average interest rate of 5.69% and 3.91%, respectively. At December 31, 2023, the Bank had $212.5 million of open advances and $112.5 million of term advances at the FHLB with a weighted average rate of 5.70% and 2.77%, respectively. Interest expense on borrowings for the three months ended March 31, 2024 and 2023 was $1.7 million and $2.4 million, respectively.
OutstandingBalance
WeightedAverage Rate
Open advances
60,000
5.69
212,500
5.70
Advances due within 12 months
3.33
37,500
0.40
Advances due over 12 months through 24 months
25,000
4.44
12,500
1.90
Advances due over 24 months through 36 months
4.32
62,500
4.37
Outstanding advances
4.53
4.69
The following is financial data pertaining to FHLB advances:
Weighted-average interest rate at end of period
Weighted-average interest rate during the period
4.10
3.48
Average balance of FHLB advances
162,418
197,390
Maximum amount outstanding at any month-end
187,500
450,000
The Bank maintains a secured credit facility with the FHLB, allowing the Bank to borrow on an overnight and term basis. The Bank had pledged $2.45 billion and $2.36 billion of loans at carrying values as collateral with the FHLB as of March 31, 2024 and December 31, 2023, respectively. The remaining available borrowing capacity was $1.33 billion and $1.09 billion at March 31, 2024 and December 31, 2023, respectively.
The Bank also had securities pledged with the FRB with market values of $23.8 million and $24.8 million at March 31, 2024 and December 31, 2023, respectively. The pledged securities provided $22.3 million in available borrowing capacity through the Fed Discount Window as of March 31, 2024, and $23.2 million in available borrowing capacity through the Fed Discount Window and the Bank Term Funding Program (“BTFP”) as of December 31, 2023.
On August 20, 2021, the Company issued $110.0 million of Fixed-to-Floating Subordinated Notes (“2031 Notes”) with a maturity date of September 1, 2031. The 2031 Notes have an initial fixed interest rate of 3.75% 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 2031 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 2031 Notes’ maturity date. At March 31, 2024 and December 31, 2023, the balance of the 2031 Notes included in the Company’s Consolidated Balance Sheet, net of issuance cost, was $108.4 million and $108.3 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% fixed rate for the first five years and a variable rate of three-month LIBOR plus 140 basis points thereafter and invested the proceeds in the Subordinated Debentures. Beginning September 15, 2023, the variable rate on the TPS changed to three-month SOFR plus 166 basis points, representing the credit spread of 140 basis points and a 26 basis point adjustment to convert three-month LIBOR to three-month SOFR. The rate on the TPS at March 31, 2024 was 6.99%. 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, 2024 and December 31, 2023, the balance of Subordinated Debentures included in the Company’s Consolidated Balance Sheets, net of discount of $5.0 million and $5.1 million, was $21.8 million and $21.7 million, respectively. The amortization of discount was $106,000 and $104,000 for the three months ended March 31, 2024 and 2023, 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 stock units (“PSUs”) 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
Income allocated to common shares
15,072
21,874
Weighted-average shares for basic EPS
Basic EPS (1)
Effect of dilutive stock options and unvested performance stock units
83,420
Diluted EPS
Weighted-average shares for diluted EPS
Diluted EPS (1)
On a weighted-average basis, options to purchase 61,000 and 31,034 shares of common stock were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2024 and 2023, respectively, because their effect would have been anti-dilutive. There were 91,732 of and no anti-dilutive unvested PSUs outstanding for the three months ended March 31, 2024 and 2023, respectively.
No PSUs were awarded to executive officers during the three months ended March 31, 2024. During the three months ended March 31, 2023, the Company issued 52,450 PSUs to executive officers from the 2021 Equity Compensation Plan with a fair value of $1.1 million on the grant date of March 10, 2023. These units have a three-year cliff vesting period and include dividend equivalent rights. Total PSUs outstanding as of March 31, 2024 were 91,732 with an aggregate grant fair value of $2.1 million. Total PSUs outstanding as of March 31, 2023 were 157,049 with an aggregate grant fair value of $3.1 million.
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% and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%. 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%.
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% and a minimum ratio of Tier 1 capital to risk-weighted assets of 8.0%. 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%.
At March 31, 2024, 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% 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 6.50% and 6.27% and the Company's capital conservation buffer was 6.40% and 6.20% as of March 31, 2024 and December 31, 2023, 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, 2024 and December 31, 2023 were as follows:
Minimum
Minimum to Be
Regulatory
Categorized as
Actual
Requirement
“Well Capitalized”
Amount
Ratio
Total capital (to risk-weighted assets):
Hanmi Financial
958,173
15.20
504,319
8.00
Hanmi Bank
914,061
14.50
504,340
630,425
10.00
Tier 1 capital (to risk-weighted assets):
781,521
12.40
378,239
6.00
847,409
13.44
378,255
Common equity Tier 1 capital (to risk-weighted assets)
759,752
12.05
283,680
4.50
283,691
409,776
6.50
Tier 1 capital (to average assets):
10.36
301,758
4.00
11.29
300,334
375,417
5.00
947,286
14.95
506,891
904,153
14.27
506,741
633,426
773,179
12.20
380,168
840,046
13.26
380,056
751,516
11.86
285,126
285,042
411,727
10.37
298,277
11.32
296,948
371,185
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:
Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.
We record securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, impaired loans, OREO, and core deposit intangible, are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument below:
Securities available for sale - The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve, prepayment speeds, and default rates. Level 1 securities include U.S. Treasury securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 securities primarily include U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities as well as municipal bonds in markets that are active. In determining the fair value of the securities categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security held as of each reporting date. The broker-dealers use prices obtained from nationally recognized pricing services to value our fixed income securities. The fair value of the municipal securities is determined based on pricing data provided by nationally recognized pricing services. We review the prices obtained for reasonableness based on our understanding of the marketplace, and also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. Level 3 securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available, which necessitates the use of significant unobservable inputs.
Derivatives – The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
Loans held for sale - Loans held for sale includes the guaranteed portion of SBA 7(a) loans 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, 2024 and December 31, 2023, 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, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, and result in 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.
Servicing assets - On a quarterly basis, the Company utilizes a third party service to evaluate servicing assets related to loans sold to unaffiliated parties with servicing retained, and result in a Level 3 classification. Servicing assets are assessed for impairment or increased obligation based on fair value at each reporting date.
Other repossessed assets – Fair value of equipment from equipment financing agreements 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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of March 31, 2024 and December 31, 2023, 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:
784,886
Derivative financial instruments
6,459
8,318
780,251
6,245
5,920
27
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
As of March 31, 2024 and December 31, 2023, assets and liabilities measured at fair value on a non-recurring basis are as follows:
Inputs With No
With Identical
Collateral dependent loans (1)
4,410
Other real estate owned
Repossessed personal property
1,288
Collateral dependent loans (2)
1,305
28
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, 2024 and December 31, 2023:
ValuationTechniques
UnobservableInput(s)
Range (WeightedAverage)
Collateral dependent loans:
Market approach
Adjustments to market data
(30)% to 35% / (3)%
(1)
(25)% to 25% / 8%
1,964
(2)
0% to 5% / 4%
(3)
5% to 20% / 15%
(30)% to 35% / (1)%
(6)% to 1% / (2)%
(15)% to 3% / (6)%
(20)% to 55% / (2)%
(10)% to 5% / (2)%
ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured on a recurring basis or non-recurring basis are discussed above.
The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current
market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825), among other provisions, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Other than certain financial instruments for which we had concluded that the carrying amounts approximate fair value, the fair value estimates shown below were based on an exit price notion as of March 31, 2024, as required by ASU 2016-01. The financial instruments for which we had concluded that the carrying amounts approximate fair value include, cash and due from banks, accrued interest receivable and payable, and noninterest-bearing deposits.
The estimated fair values of financial instruments were as follows:
Carrying
Financial assets:
Securities available for sale
Loans held for sale
4,109
Loans receivable, net of allowance for credit losses
6,011,407
Financial liabilities:
Noninterest-bearing deposits
Interest-bearing deposits
4,437,547
Borrowings and subordinated debentures
302,665
171,201
131,361
12,238
6,007,975
4,271,711
455,012
323,491
128,229
The methods and assumptions used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value are explained below:
Cash and due from banks – The carrying amounts of cash and due from banks approximate fair value due to the short-term nature of these instruments (Level 1).
Securities – The fair value of securities, consisting of securities available for sale, is generally obtained from market bids for similar or identical securities, from independent securities brokers or dealers, or from other model-based valuation techniques described above (Level 1 and 2).
Loans held for sale – Loans held for sale, representing the guaranteed portion of SBA loans, are carried at the lower of aggregate cost or fair market value, as determined based upon quotes, bids or sales contract prices (Level 2).
30
Loans receivable, net of allowance for credit losses – The fair value of loans receivable is estimated based on the discounted cash flow approach. To estimate the fair value of the loans, certain loan characteristics such as account types, remaining terms, annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances are considered. Additionally, the Company’s prior charge-off rates and loss ratios as well as various other assumptions relating to credit, interest, and prepayment risks are used as part of valuing the loan portfolio. Subsequently, the loans were individually evaluated by sorting and pooling them based on loan types, credit risk grades, and payment types. Consistent with the requirements of ASU 2016-01, the fair value of the Company's loans receivable is considered to be an exit price notion as of March 31, 2024 (Level 3).
The fair value of collateral dependent loans is estimated based on the net realizable fair value of the collateral or the observable market price of the most recent sale or quoted price from loans held for sale. The Company does not record loans at fair value on a recurring basis. Nonrecurring fair value adjustments to collateral dependent loans are recorded based on the current appraised value of the collateral (Level 3).
Accrued interest receivable – The carrying amount of accrued interest receivable approximates its fair value (Level 1).
Noninterest-bearing deposits – The fair value of noninterest-bearing deposits is the amount payable on demand at the reporting date (Level 2).
Interest-bearing deposits – The fair value of interest-bearing deposits, such as savings accounts, money market checking, and certificates of deposit, is estimated based on discounted cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).
Borrowings and subordinated debentures – Borrowings consist of FHLB advances, subordinated debentures and other borrowings. Discounted cash flows based on current market rates for borrowings with similar remaining maturities are used to estimate the fair value of borrowings (Level 2 and 3).
Accrued interest payable – The carrying amount of accrued interest payable approximates its fair value (Level 1).
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 its 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.
Some of the commitments to fund existing loans, lines of credit and letters of credit are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. As of March 31, 2024, the Bank was obligated on $120.0 million of letters of credit to the FHLB of San Francisco, which were being used as collateral for $120.0 million in public fund deposits from the State of California.
The following table shows the distribution of total loan commitments as of the dates indicated:
Unused commitments to extend credit
792,769
813,960
Standby letters of credit
83,772
83,725
Commercial letters of credit
35,929
33,140
Total commitments
912,470
930,825
The allowance for credit losses related to off-balance sheet items was 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 was 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:
2,474
3,114
Credit loss recovery
(177
(48
2,297
3,066
Note 13 — Leases
The Company enters into leases in the normal course of business primarily for bank branch offices, 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 month to nine years and nine months, some of which include renewal or termination options to extend the lease for up to seven 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.
32
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, 2024, the outstanding balances for our right-of-use asset and lease liability were $40.0 million and $44.0 million, respectively. The outstanding balances of the right-of-use asset and lease liability were $42.4 million and $46.4 million, respectively, as of December 31, 2023. The right-of-use asset is reported in prepaid expenses and other assets line item and lease liability is reported in accrued expenses and other liabilities line item on the Consolidated Balance Sheets.
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, 2024, future minimum rental commitments under these non-cancelable operating leases, with initial or remaining terms of one year or more, were as follows:
8,439
7,550
6,669
6,593
2028
5,833
Thereafter
13,618
Remaining lease commitments
48,702
Interest
(4,716
Present value of lease liability
43,986
Net lease expense recognized for the three months ended March 31, 2024 and 2023 was $2.2 million and $2.0 million, respectively. This included operating lease costs of $2.2 million and $2.1 million for the three months ended March 31, 2024 and 2023, respectively. Sublease income for operating leases was immaterial for both the three months ended March 31, 2024 and 2023.
Weighted average remaining lease terms for the Company's operating leases were 6.72 years and 6.82 years as of March 31, 2024 and December 31, 2023, respectively. Weighted average discount rates used for the Company's operating leases were 2.99% and 2.98% as of March 31, 2024 and December 31, 2023, respectively.
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 $2.2 million and $2.1 million for the three months ended March 31, 2024 and 2023, respectively.
Note 14 — Liquidity
As of March 31, 2024, Hanmi Financial had $6.7 million in cash on deposit with its bank subsidiary and $34.3 million of U.S. Treasury securities at fair value. As of December 31, 2023, the Company had $7.5 million in cash on deposit with its bank subsidiary and $32.4 million of U.S. Treasury securities at fair value. 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 its 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, brokered deposits as well as State of California time deposits. As of March 31, 2024 and December 31, 2023, the Bank had $172.5 million and $325.0 million of FHLB advances, $43.3 million and $58.3 million of brokered deposits, respectively, and $120.0 million of State of California time deposits as of March 31, 2024 and December 31, 2023.
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% of its assets. As of March 31, 2024 and December 31, 2023, the total borrowing capacity available, based on pledged collateral was $1.63 and $1.54 billion, respectively.
The remaining available borrowing capacity was $1.33 billion and $1.09 billion as of March 31, 2024 and December 31, 2023, respectively.
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, equipment financing agreements 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 $22.3 million from the Federal Reserve Discount Window, to which the Bank pledged securities with a carrying value of $28.1 million, with no borrowings as of March 31, 2024. 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, 2024 or December 31, 2023.
Note 15 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivative
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.
Derivatives Designated as Hedging Instruments - Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. Such derivatives were used to hedge the variable cash flows associated with existing variable-rate assets. During the fourth quarter of 2023, the Company entered into a $100.0 million notional interest rate swap designated as a cash flow hedge, with an effective date of May 1, 2024 and a maturity date of May 1, 2026, to hedge a pool of Prime-indexed loans against falling rates. The principal balance of the loan pool designated for the Prime-indexed loans was $152.9 million as of March 31, 2024. During the first quarter of 2024, the Company entered into a $75.0 million notional interest rate swap designated as a cash flow hedge, with an effective date of May 1, 2024 and a maturity date of May 1, 2026, to hedge a pool of one-month SOFR-indexed loans against falling rates. The principal balance of the loan pool designated for the SOFR-indexed loans was $103.5 million as of March 31, 2024.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest income in the same period(s) during which the hedged transaction affects earnings. Management evaluated the effectiveness of the Company’s derivatives designated as cash flow hedges at inception and at the balance sheet date and determined they are effective. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate asset. During the next 12 months, the Company estimates that an additional $1.7 million will be reclassified as a decrease to interest income.
Derivatives Not Designated as Hedging Instruments
The Company also enters into 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 classification on the Balance Sheet as of March 31, 2024 and December 31, 2023.
As of March 31, 2024
Derivative Assets
Derivative Liabilities
Notional Amount
Balance Sheet Location
Derivatives not designated as hedging instruments
Interest rate products
103,918
Other Assets
Other Liabilities
6,417
Total derivatives not designated as hedging instruments
Derivatives designated as hedging instruments
175,000
1,901
Total derivatives designated as hedging instruments
As of December 31, 2023
104,571
5,939
100,000
306
The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income as of March 31, 2024 and December 31, 2023.
Derivatives in Subtopic 815-20 Hedging Relationships
Amount of Gain or (Loss) Recognized in OCI on Derivative
Amount of Gain or (Loss)Recognized in OCI IncludedComponent
Amount of Gain or (Loss)Recognized in OCI ExcludedComponent
Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Included Component
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Excluded Component
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products
Interest Income
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 months ended March 31, 2024 and 2023.
Derivatives Not Designated as HedgingInstruments 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
(128
No fee income was recognized from its derivative financial instruments for the three months ended March 31, 2024, compared to $0.6 million for the three months ended March 31, 2023.
36
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of March 31, 2024 and December 31, 2023. 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
4,558
Offsetting of Derivative Liabilities
Gross Amounts of Recognized Liabilities
Net Amounts of Liabilities presented in the Consolidated Balance Sheets
Cash Collateral Provided
284
5,731
230
5,636
37
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, 2024 and December 31, 2023, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $0. As of March 31, 2024 and December 31, 2023, no collateral was provided related to these agreements.
Note 16 — Subsequent Events
Cash Dividend
On April 25, 2024, the Company announced that the Board of Directors of the Company declared a quarterly cash dividend of $0.25 per share to be paid on May 22, 2024 to stockholders of record as of the close of business on May 6, 2024.
Share Repurchase
In addition to the share repurchases completed during the first quarter of 2024, the Company announced on April 25, 2024 that the Board of Directors has adopted a new stock repurchase program under which the Company may repurchase up to 5% of its outstanding shares, or approximately 1.5 million shares of its common stock. The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. Repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The repurchase program does not obligate the Company to purchase any particular number of shares.
38
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, 2024. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 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, 2024 (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 condition 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, financial condition, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statements. These factors include the following:
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 2023 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.
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 the consolidated financial statements in our 2023 Annual Report on Form 10-K. We had no significant changes in our accounting policies since the filing of our 2023 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 2023 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
Financial results include the following:
As of or for the Three Months Ended March 31,
(dollars in thousands, except per share data)
Earnings per diluted share
Dividends per share
0.25
Return on average assets
0.81
1.21
Return on average stockholders’ equity
7.90
12.19
Net income was $15.2 million, or $0.50 per diluted share, for the three months ended March 31, 2024 compared to $22.0 million, or $0.72 per diluted share, for the same period a year ago. The decrease in net income was driven by decreases in net interest income and noninterest income of $7.2 million and $0.6 million, respectively, and a $3.7 million increase in noninterest expense, offset by decreases in credit loss expense of $1.9 million and $2.7 million in income tax expense. Credit loss expense for the first quarter of 2024 was $0.2 million compared to $2.1 million for the first quarter of 2023. Credit loss expense for the first quarter of 2024 included a $0.4 million provision for loan losses, offset by a $0.2 million recovery for off-balance sheet items. Credit loss expense for the first quarter of 2023 included a $2.2 million provision for loan losses, offset by a $0.1 million recovery for off-balance sheet items.
Other financial highlights include the following:
Loans receivable, gross
Securities available for sale, at fair value
Deposits
40
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 market 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.
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.
March 31, 2023
Average
Income /
Yield /
Balance
Expense
Rate
Interest-earning assets:
Loans receivable (1)
6,137,888
5,944,399
5.51
Securities (2)
969,520
2.07
980,712
1.67
FHLB stock
8.87
7.16
Interest-bearing deposits in other banks
201,724
5.19
192,902
4.34
Total interest-earning assets
7,325,517
5.47
7,134,398
4.96
Noninterest-earning assets:
58,382
65,088
(69,106
(71,452
Other assets
244,700
239,121
7,559,493
7,367,155
Interest-bearing liabilities:
Demand: interest-bearing
86,401
0.14
109,391
0.11
Money market and savings
1,815,085
16,553
3.67
1,453,569
7,315
2.04
Time deposits
2,507,830
29,055
4.66
2,223,615
18,154
3.31
Total interest-bearing deposits
4,409,316
4.16
3,786,575
2.73
268,056
3.58
Subordinated debentures
130,088
5.06
129,483
4.89
Total interest-bearing liabilities
4,701,822
4.19
4,184,114
2.85
Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing
1,921,189
2,324,413
Other liabilities
164,524
127,112
Stockholders’ equity
771,958
731,516
Net interest income
Cost of deposits (3)
2.90
1.69
Net interest spread (taxable equivalent basis) (4)
1.28
2.10
Net interest margin (taxable equivalent basis) (5)
2.78
3.28
42
The table below shows changes in interest income 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, 2024 vs March 31, 2023
Increases (Decreases) Due to Change In
Volume
3,316
7,435
10,751
976
930
70
72
113
425
538
3,385
8,906
12,291
1,895
7,343
9,238
2,492
8,409
10,901
(922
208
(714
63
3,466
16,023
19,489
Change in net interest income
(7,117
(7,198
For the three months ended March 31, 2024 and 2023, net interest income was $50.7 million and $57.9 million, respectively. The net interest spread and net interest margin, on a taxable equivalent basis, for the quarter ended March 31, 2024, were 1.28% and 2.78%, respectively, compared to 2.10% and 3.28%, respectively, for the same period in 2023. Interest and dividend income increased $12.3 million, or 14.1%, to $99.6 million for the three months ended March 31, 2024 from $87.3 million for the same period in 2023, primarily due to higher average interest-earning asset yields and an increase in the average balance of loans. Interest expense increased $19.5 million, or 66.2%, to $48.9 million for the three months ended March 31, 2024 from $29.5 million for the same period in 2023 primarily due to increases in deposit rates and average deposit balances and, to a lesser extent, an increase in the cost of borrowings. The increases in average interest-earning asset yields and deposit and borrowing rates were due to the rising interest rate environment.
The average balance of interest earning assets increased $191.1 million, or 2.7%, to $7.33 billion for the three months ended March 31, 2024, from $7.13 billion for the three months ended March 31, 2023. The average balance of loans increased $193.5 million, or 3.3%, to $6.14 billion for the three months ended March 31, 2024, from $5.94 billion for the three months ended March 31, 2023. The average balance of securities decreased $11.2 million, or 1.1%, to $969.5 million for the three months ended March 31, 2024, from $980.7 million for the three months ended March 31, 2023. The average balance of interest-bearing deposits at other banks increased $8.8 million, or 4.6%, to $201.7 million for the three months ended March 31, 2024, from $192.9 million for the three months ended March 31, 2023.
The average yield on interest-earning assets, on a taxable equivalent basis, increased 51 basis points to 5.47% for the three months ended March 31, 2024, from 4.96% for the three months ended March 31, 2023. The average yield on loans increased to 6.00% for the three months ended March 31, 2024, from 5.51% for the three months ended March 31, 2023. The average yield on securities, on a taxable equivalent basis, increased to 2.07% for the three months ended March 31, 2024, from 1.67% for the three months ended March 31, 2023. The average yield on interest-bearing deposits in other banks increased 85 basis points to 5.19% for the three months ended March 31, 2024, from 4.34% for the three months ended March 31, 2023. The increased yields were primarily due to increases in market interest rates.
The average balance of interest-bearing liabilities increased $517.7 million, or 12.4%, to $4.70 billion for the three months ended March 31, 2024 compared with $4.18 billion for the three months ended March 31, 2023. The average balances of time deposits and money market and savings accounts increased $284.2 million and $361.5 million, respectively, offset partially by decreases in interest-bearing demand deposits and borrowings of $23.0 million and $105.6 million, respectively.
The average cost of interest-bearing liabilities was 4.19% and 2.85% for the three months ended March 31, 2024 and 2023, respectively. The average cost of interest-bearing deposits increased 143 basis points to 4.16% for the three months ended March 31, 2024, compared with 2.73% for the three months ended March 31, 2023. The average cost of time deposits increased 135 basis points to 4.66% for the three months ended March 31, 2024 compared with 3.31% for the three months ended March 31, 2023. The average cost of money market and savings accounts increased 163 basis points to 3.67% for the three months ended March 31, 2023 compared with 2.04% for the three months ended March 31, 2023.The average cost of subordinated debentures increased 17 basis points to 5.06% for the three months ended March 31, 2024 compared with 4.89% for the three months ended March 31, 2023. The average cost of borrowings increased 52 basis points to 4.10% for the three months ended March 31, 2024 compared with 3.58% for the three months ended March 31, 2023. The increased costs were primarily due to increases in market interest rates.
Credit Loss Expense
For the first quarter of 2024, the Company recorded $0.2 million of credit loss expense, comprised of a $0.4 million provision for loan losses, offset by a $0.2 million recovery for off-balance sheet items. For the same period in 2023, the Company recorded $2.1 million of credit loss expense, comprised of a $2.2 million credit loss provision for loan losses, offset by a $0.1 million recovery for off-balance sheet items. The credit loss expense for the three months ended March 31, 2024 was mainly attributed to a $1.9 million specific allowance on a $3.9 million nonperforming commercial and industrial loan in the health-care industry, and $1.6 million in net charge-offs, offset by a $3.1 million decrease in the allowance for quantitative and qualitative considerations. The decrease in the allowance for quantitative and qualitative considerations was primarily attributable to a reduction of loss rates in the commercial real estate hospitality industry. The credit loss expense for the three months ended March 31, 2023 was mainly attributed to a specific reserve allocation of $2.5 million on a nonperforming commercial and industrial loan in the health-care industry, offset by loan recoveries of $5.0 million.
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
(129
(5.00
)%
156
Servicing income
712
742
(30
(4.04
Bank-owned life insurance income
304
270
12.59
All other operating income
928
1,618
(690
(42.65
Service charges, fees & other
5,808
6,467
(659
(10.19
Gain on sale of SBA loans
(387
(20.71
Gain on sale of mortgage loans
443
100.00
(603
(7.23
For the three months ended March 31, 2024, noninterest income was $7.7 million, a decrease of $0.6 million, or 7.2%, compared to $8.3 million for the same period in 2023, due primarily to a decrease in all other operating income. The $0.7 million decrease in all other operating income was mainly attributed to a $0.6 million decrease in swap fee income. During the first quarter of 2024, the Company sold $29.7 million of residential loans and recognized a net gain of $0.4 million. The gain on sale of mortgage loans was partially offset by the reduction in gain on sale of SBA loans compared to the same period in 2023, due to lower sales volume of $4.1 million and a reduction in trade premiums of 62 basis points from 7.85% to 7.23%.
Noninterest Expense
The following table sets forth the components of noninterest expense for the periods indicated:
975
4.73
2.83
298
9.16
558
41.80
(75
(11.09
74
8.88
All other operating expenses
3,160
1,957
1,203
61.47
Subtotal
36,234
33,076
3,158
9.55
Other real estate owned expense
(201
223
(110.95
Repossessed personal property expense (income)
189
(84
273
(325.00
3,654
11.14
For the three months ended March 31, 2024, noninterest expense was $36.4 million, an increase of $3.7 million, or 11.1%, compared with $32.8 million for the same period in 2023. Salaries and employee benefits increased $1.0 million due to higher salaries, group insurance, share-based compensation expense and a decrease in capitalized loan origination costs from lower loan originations. Professional fees increased $0.6 million due to higher consulting, accounting and legal expenses. All other operating expenses increased $1.2 million mainly due to a higher FDIC assessment of $0.3 million and the reversal of a $0.4 million SBA impairment adjustment in the first quarter of 2023. The change in OREO expense was due to a $0.3 million reimbursement of expenses received during the three months ended March 31, 2023. The change in repossessed personal property expense was due to a $0.3 million loss on sale of lease assets.
Income Tax Expense
Income tax expense was $6.6 million and $9.3 million representing an effective income tax rate of 30.2% and 29.7% for the three months ended March 31, 2024 and 2023, respectively.
Financial Condition
As of March 31, 2024, 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 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% of stockholders’ equity as of March 31, 2024 or December 31, 2023.
Securities increased $6.5 million to $872.2 million at March 31, 2024 from $865.7 million at December 31, 2023, mainly attributed to $38.4 million in securities purchases, offset by $26.2 million in paydowns and maturities.
45
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, 2024:
After OneYear But
After FiveYears But
Within OneYear
Within FiveYears
Within TenYears
After TenYears
Yield
41,132
3.95
47,275
3.94
0.00
2.99
3.03
22,601
0.35
467,080
1.63
4,107
3.72
4,384
0.84
51,112
1.57
1.66
166
1.27
353
2.63
131,237
3.55
3.54
30,705
2.08
101,531
1.14
1.36
34,825
2.27
106,101
1.13
22,954
0.38
649,429
2.06
32,655
44,209
1.32
1.34
75,957
3.18
153,376
1.99
55,609
2.22
693,638
2.01
2.11
As of March 31, 2024 and December 31, 2023, loans receivable (excluding loans held for sale), net of deferred loan fees and costs, discounts and allowance for credit losses, were $6.11 billion. For the three months ended March 31, 2024, there was $234.0 million in new loan production and $10.2 million in SBA loan purchases, offset partially by $141.6 million in loan sales and payoffs, and amortization and other reductions of $97.0 million. Loan production consisted of commercial real estate loans of $60.1 million, residential mortgages of $53.1 million, commercial and industrial loans of $50.8 million, equipment financing agreements of $39.2 million and SBA loans of $30.8 million.
The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses as of March 31, 2024. 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.
After OneYear butWithinThreeYears
After ThreeYears butWithinFiveYears
After FiveYears butWithinFifteenYears
AfterFifteenYears
150,284
311,361
360,865
218,920
49,629
233,654
193,201
201,905
95,599
15,801
54,535
342,603
150,388
21,239
7,082
169,203
473,436
471,263
208,393
45,100
607,676
1,320,601
1,184,421
544,151
117,612
63,437
38,788
1,991
5,193
133
4,290
960,676
676,306
1,359,459
1,186,545
548,441
1,078,288
309,891
241,011
98,652
125,297
32,340
203,635
300,864
17,111
1,018,537
1,804,105
1,586,061
690,849
Loans with predetermined interest rates
482,612
1,260,548
978,530
58,522
262,591
3,042,803
Loans with variable interest rates
535,925
543,557
607,531
632,327
815,697
3,135,037
The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses, with fixed or predetermined interest rates, as of March 31, 2024.
After OneYear butWithin ThreeYears
After ThreeYears butWithin FiveYears
119,432
279,343
198,809
1,557
599,376
86,408
133,332
103,528
697
323,965
25,608
264,095
91,734
381,437
105,980
378,570
270,490
28,954
5,218
789,212
337,428
1,055,340
664,561
31,208
5,453
2,093,990
1,569
2,523
257,138
261,300
367,308
1,055,410
33,731
2,383,601
82,964
1,503
13,105
7,680
105,252
The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses, with floating or variable interest rates (including hybrids), as of March 31, 2024.
30,852
32,018
162,057
217,363
49,395
491,685
147,246
59,868
98,377
94,902
416,194
28,927
78,508
58,653
194,409
63,223
94,866
200,772
179,439
39,881
578,181
270,248
265,260
519,859
512,943
112,159
1,680,469
35,126
3,624
1,767
703,538
709,062
308,998
304,048
521,983
514,710
2,465,436
226,927
239,509
85,548
117,617
669,601
Industry
As of March 31, 2024, the loan portfolio included the following concentrations of loans to one type of industry that were greater than 10.0% of loans receivable outstanding:
Percentage of
Balance as of
Lessor of nonresidential buildings
1,718,496
27.8
744,054
47
Loans 30 to 89 days past due and still accruing were $15.8 million at March 31, 2024, compared with $10.3 million at December 31, 2023, attributable mainly to an increase of $2.7 million in past due residential loans and the addition of a $3.0 million commercial real estate industrial loan, offset by payoffs and other reductions of $0.2 million.
At March 31, 2024 and December 31, 2023, there were no loans 90 days or more past due and still accruing interest.
Activity in criticized loans was as follows for the periods indicated:
Additions
671
3,631
Reductions
(3,670
(11,329
79,013
46,192
766
13,808
(15,439
(12,713
64,340
47,287
Special mention loans were $62.3 million and $65.3 million at March 31, 2024 and December 31, 2023, respectively. The $3.0 million decrease included upgrades to pass loans of $1.5 million, downgrades to classified loans of $0.8 million, and paydowns and payoffs of $1.4 million, offset by downgrades from pass loans of $0.7 million. The upgrades to pass loans were primarily attributable to a $1.5 million retail loan and downgrades to classified consisted of two SBA commercial real estate retail loans for $0.8 million. The $14.7 million decrease in the first quarter of 2023 included downgrades to classified loans of $10.0 million, and payoffs of $4.6 million.
Classified loans were $23.7 million and $31.4 million at March 31, 2024 and December 31, 2023, respectively. The $7.7 million decrease was primarily driven by paydowns and payoffs of $9.4 million, and charge-offs of $1.9 million, offset by new downgrades to classified loans of $3.6 million. The paydowns and payoffs during the three months ended March 31, 2024 were mainly attributed to payoffs of a $4.7 million commercial real estate industrial loan and a $1.2 million commercial real estate office loan, and a $0.9 million paydown on a previously mentioned nonperforming commercial and industrial loan in the health-care industry. The $1.1 million increase in the first quarter of 2023 was primarily driven by the downgrade of one loan in the amount of $10.0 million, offset by loan upgrades of $8.8 million.
Nonperforming Assets
Nonperforming loans consist of nonaccrual loans 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, which generally occurs after sustained payment of six months. Interest income is recognized on the accrual basis for loans not meeting the criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means.
Except for nonaccrual loans, management is not aware of any other loans as of March 31, 2024 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 repayment terms, or any known events that would result in a loan being designated as nonperforming at some future date.
Nonaccrual loans were $14.0 million and $15.5 million as of March 31, 2024 and December 31, 2023, respectively, representing a decrease of $1.5 million, or 9.4%. The decrease in nonaccrual loans resulted from payoffs, paydowns, and upgrades
48
of $4.8 million, offset by additions to nonperforming loans of $3.3 million. The additions to nonperforming loans consisted of equipment financing agreements of $2.6 million and two SBA loans for $0.7 million. As of March 31, 2024 and December 31, 2023, 1.25% of equipment financing agreements were on nonaccrual status. As of March 31, 2024 and December 31, 2023, all loans 90 days or more past due were classified as nonaccrual.
The $14.0 million of nonperforming loans as of March 31, 2024 had individually evaluated allowances of $5.3 million, compared to $15.5 million of nonperforming loans with individually evaluated allowances of $3.4 million as of December 31, 2023.
Nonperforming assets were $14.1 million at March 31, 2024, or 0.19% of total assets, compared to $15.6 million, or 0.21%, at December 31, 2023. Additionally, not included in nonperforming assets were repossessed personal property assets associated with equipment finance agreements of $1.3 million at March 31, 2024 and December 31, 2023.
Individually Evaluated Loans
The Company reviews loans on an individual basis when the loan does not share similar risk characteristics with loan pools. Individually evaluated loans are measured for expected credit losses based on the present value of expected cash flows discounted at the effective interest rate, the observable market price, or the fair value of collateral.
Individually evaluated loans were $14.0 million and $15.4 million as of March 31, 2024 and December 31, 2023, respectively, representing a decrease of $1.4 million, or 9.2%. Specific allowances associated with individually evaluated loans increased $1.9 million to $5.3 million as of March 31, 2024 compared with $3.4 million as of December 31, 2023, mainly attributed to a $1.9 million specific reserve allocation on a commercial and industrial loan in the health-care industry.
No loans were modified to borrowers with financial difficulties during the three months ended March 31, 2024 or 2023. A borrower is experiencing financial difficulties when there is a probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. The Company may modify loans to borrowers experiencing financial difficulties by providing principal forgiveness, a term extension, an other-than-insignificant payment delay, or an interest rate reduction.
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, 2024 and December 31, 2023 reflected losses expected over the remaining contractual life of assets based on historical, current, and forward-looking information. The contractual term does not consider extensions, renewals or modifications.
Management selected three loss methodologies for the collective allowance estimation. At March 31, 2024, 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 property, construction and residential property portfolios, and the Weighted Average Remaining Maturity (“WARM”) method to estimate expected credit losses for equipment financing agreements. Loans that do not share similar risk characteristics are individually evaluated for allowances.
For all 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. For each of these loan segments, the Company applied an annualized historical PD/LGD using all available historical periods. Since reasonable and supportable forecasts of economic conditions are embedded directly into the DCF model, qualitative adjustments are considered but were minimal.
For each of the loan segments identified above, the Company applied an annualized historical PD/LGD using all available historical periods. The PD/LGD method incorporates a forecast of economic conditions into loss estimates using a qualitative adjustment.
For loan pools utilizing the PD/LGD method, the Company used historical periods that included an economic downturn to derive historical losses for better alignment in the estimation of expected losses under the PD/LGD method. The Company relied on Frye-Jacobs modeled LGD rates for loan segments with insufficient historical loss data. The Frye-Jacobs model provides a means of applying an LGD rate in the event that limited to no loss data is available. The PD/LGD method incorporates a forecast into loss estimates using a qualitative adjustment.
The Company used the WARM method to estimate expected credit losses for the equipment financing agreements portfolio. The Company applied an expected loss ratio based on internal historical losses adjusted as appropriate for qualitative factors.
49
As of March 31, 2024 and December 31, 2023, the Company relied on the economic projections from Moody’s 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, delinquent and nonperforming loans and adversely-rated equipment financing agreements, and reasonable and supportable forecasts of economic conditions.
The following table reflects our allocation of the allowance for credit losses by loan category as well as the amount of loans in each loan category, including related percentages:
The following table sets forth certain ratios related to our allowance for credit losses at the dates presented:
As of
Ratios:
Allowance for credit losses to loans receivable
1.11
1.12
Nonaccrual loans to loans
0.23
Allowance for credit losses to nonaccrual loans
486.81
448.89
Balance:
Nonaccrual loans at end of period
Nonperforming loans at end of period
The allowance for credit losses was $68.3 million and $69.5 million at March 31, 2024 and December 31, 2023, respectively. The allowance attributed to individually evaluated loans was $5.3 million and $3.4 million as of March 31, 2024 and December 31, 2023, respectively. The allowance attributed to collectively evaluated loans was $63.0 million and $66.1 million as of March 31, 2024 and December 31, 2023, respectively, and considered the impact of changes in macroeconomic assumptions, normalized interest rate forecasts for the subsequent four quarters, and a net reduction in specific qualitative factors allocated to criticized hospitality loans impacted by the pandemic.
As of March 31, 2024 and December 31, 2023, the allowance for credit losses related to off-balance sheet items, primarily unfunded loan commitments, was $2.3 million and $2.5 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, 2024.
50
The following table presents a summary of gross charge-offs and recoveries for the loan portfolio:
Gross charge-offs
Gross recoveries
Net (charge-offs) recoveries
(1,596
(1,455
For the three months ended March 31, 2024, gross charge-offs decreased $0.1 million from the same period in 2023. Gross recoveries, for the three months ended March 31, 2024 decreased $0.3 million from the same period in 2023. Gross charge-offs for the three months ended March 31, 2024 and 2023 primarily consisted of equipment financing agreements charge-offs of $2.0 million and $1.6 million, respectively.
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
3,875,439
Residential loans
978,908
710,440
(97
(0.05
573,101
(1,545
(1.08
(0.10
3,800,499
(0.04
780,833
0.03
760,835
0.01
602,232
(1,136
(0.75
Net loan charge-offs were $1.6 million, or 0.10% of average loans, and $1.5 million, or 0.10% of average loans, for the three months ended March 31, 2024 and 2023, respectively.
The following table shows the composition of deposits by type as of the dates indicated:
Demand – noninterest-bearing
30.2
31.9
Interest-bearing:
Demand
87,374
1.4
87,452
1,859,865
29.2
1,734,659
27.6
Uninsured amount of time deposits more than $250,000:
Three months or less
105,953
186,321
3.0
Over three months through six months
125,310
2.0
201,085
3.2
Over six months through twelve months
402,935
6.3
222,683
3.6
Over twelve months
38,706
0.6
70,932
1.1
All other insured time deposits
1,822,857
28.6
1,773,846
28.2
51
Total deposits were $6.38 billion and $6.28 billion as of March 31, 2024 and December 31, 2023, respectively, representing an increase of $95.5 million, or 1.5%. The increase in deposits was primarily driven by a $125.2 million increase in money market and savings deposits and a $40.9 million increase in time deposits, partially offset by a $70.5 decline in noninterest-bearing demand deposits. The changes in deposit composition were primarily due to the increase in deposit rates. At March 31, 2024, the loan-to-deposit ratio was 96.9% compared to 98.4% at December 31, 2023.
As of March 31, 2024, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $2.56 billion. The aggregate amount of uninsured time deposits was $672.9 million. Other uninsured deposits, such as demand and money market and savings deposits were $1.89 billion. In addition, $1.15 billion of total uninsured deposits were in accounts with balances of $5.0 million or more at March 31, 2024. As of December 31, 2023, the aggregate amount of uninsured deposits was $2.52 billion. The aggregate amount of uninsured time deposits was $681.0 million. Other uninsured deposits, such as demand, money market and savings deposits were $1.84 billion. In addition, $1.09 billion of total uninsured deposits were in accounts with balances of $5.0 million or more at December 31, 2023.
The Bank’s wholesale funds historically consisted of FHLB advances, brokered deposits as well as State of California time deposits. As of March 31, 2024 and December 31, 2023, the Bank had $172.5 million and $325.0 million of FHLB advances, and $43.3 million and $58.3 million of brokered deposits, respectively, and $120.0 million of State of California time deposits, as of March 31, 2024 and December 31, 2023.
Borrowings and Subordinated Debentures
Borrowings mostly take the form of FHLB advances. At March 31, 2024 and December 31, 2023, FHLB advances were $172.5 million and $325.0 million, respectively. FHLB open advances were $60.0 million and $212.5 million at March 31, 2024 and December 31, 2023, respectively. For the same periods, term advances were $112.5 million. Funds from deposit growth not used to fund loan production were used to pay off borrowings.
The weighted-average interest rate of all FHLB advances at March 31, 2024 and December 31, 2023 was 4.53% and 4.69%, respectively.
The FHLB maximum amount outstanding at any month end during each of the year-to-date periods ended March 31, 2024 and December 31, 2023 was $187.5 million and $450.0 million, respectively.
The following is a summary of contractual maturities of FHLB advances greater than twelve months:
FHLB of San Francisco
WeightedAverageRate
Outstanding advances over 12 months
75,000
3.96
52
Subordinated debentures were $130.2 million and $130.0 million as of March 31, 2024 and December 31, 2023, respectively. Subordinated debentures are comprised of fixed-to-floating subordinated notes of $108.4 million and $108.3 million as of March 31, 2024 and December 31, 2023, respectively, and junior subordinated deferrable interest debentures of $21.8 million and $21.7 million as of March 31, 2024 and December 31, 2023, respectively. See “Note 8 – Borrowings and Subordinated Debentures” to the consolidated financial statements for more details.
Stockholders’ equity was $703.1 million and $701.9 million as of March 31, 2024 and December 31, 2023, respectively. First quarter net income, net of $7.7 million of dividends paid, added $7.5 million to stockholders' equity for the period, which was partially offset by a $3.4 million increase in unrealized after-tax losses on securities available for sale due to changes in interest rates, and a $1.6 million increase in unrealized after-tax losses on cash flow hedges. In addition, the Company repurchased 100,000 shares of common stock during the quarter at an average share price of $15.92 for a total cost of $1.6 million. At March 31, 2024, 309,972 shares remain under the Company's share repurchase program.
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, 2024. 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
1- to 12-Month Horizon
13- to 24-Month Horizon
Change in Interest
Dollar
Percentage
Rates (Basis Points)
Change
300
3,974
1.78
6,748
2.53
200
2,191
0.98
1.17
100
1,720
0.77
2,838
1.06
-100
(3,009
(1.35
%)
(5,793
(2.17
-200
(7,338
(3.28
(14,829
(5.56
-300
(12,621
(5.64
(26,885
(10.08
Economic Value of Equity (EVE)
(13,191
(1.93
(6,910
(1.01
3,948
0.58
(20,535
(3.01
(61,535
(9.01
(122,449
(17.93
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 timing and magnitude of interest rate changes, prepayments on loans receivable and securities, pricing strategies on loans receivable and deposits, and replacement of asset and liability cash flows.
53
The key assumptions, based upon loans receivable, securities and deposits, are as follows:
Conditional prepayment rates*:
Deposit rate betas*:
NOW, savings, money market demand
Time deposits, retail and wholesale
* Balance-weighted average
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.
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 greater 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. The Company paid dividends of $7.7 million ($0.25 per share) for the three months ended March 31, 2024 and $30.5 million ($1.00 per share) for the year 2023. As of April 1, 2024, the Bank has the ability to pay dividends of approximately $161.0 million, after giving effect to the $0.25 dividend declared on April 25, 2024, for the second quarter of 2024, without the prior approval of the Commissioner of the DFPI.
At March 31, 2024, the Bank’s total risk-based capital ratio of 14.50%, Tier 1 risk-based capital ratio of 13.44%, common equity Tier 1 capital ratio of 13.44% and Tier 1 leverage capital ratio of 11.29% 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%, Tier 1 risk-based capital ratio equal to or greater than 8.00%, common equity Tier 1 capital ratios equal to or greater than 6.50%, and Tier 1 leverage capital ratio equal to or greater than 5.00%.
At March 31, 2024, the Company's total risk-based capital ratio was 15.20%, Tier 1 risk-based capital ratio was 12.40%, common equity Tier 1 capital ratio was 12.05% and Tier 1 leverage capital ratio was 10.36%.
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 2023 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 2023 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 2023 Annual Report on Form 10-K.
Contractual Obligations
There have been no material changes to the contractual obligations described in our 2023 Annual Report on Form 10-K.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures regarding market risks, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk Management” 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, 2024.
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, 2024 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, 2023.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
On January 24, 2019, the Company announced a stock repurchase program that authorized the repurchase of up to 5% of its outstanding shares or approximately 1.5 million shares of common stock. As of March 31, 2024, 309,972 shares remained available for future purchases under that stock repurchase program. The program has no scheduled expiration date and the Board of Directors has the right to suspend or discontinue the program at any time.
As disclosed in Note 16, “Subsequent Events,” on April 25, 2024, the Company announced that the Board of Directors has adopted a new stock repurchase program under which the Company may repurchase up to 5% of its outstanding shares, or approximately 1.5 million shares of its common stock. The program has no scheduled expiration date and the Board of Directors has the right to suspend or discontinue the program at any time.
The following table represents information with respect to repurchases of common stock made by the Company during the three months ended March 31, 2024:
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, 2024 - January 31, 2024
17.19
7,000
402,972
February 1, 2024 - February 29, 2024
15.82
93,000
309,972
March 1, 2024 - March 31, 2024
15.92
The Company acquired 31,546 shares from employees in connection with the satisfaction of employee tax withholding obligations incurred through the vesting of Company stock awards for the three months ended March 31, 2024. Shares withheld to cover income taxes upon the vesting of stock awards are repurchased pursuant to the terms of the applicable plan and not under the Company's repurchase program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Securities Trading Plans of Directors and Executive Officers
During the three months ended March 31, 2024, none of our directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Hanmi securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
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.
31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document *
101.SCH
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents *
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, 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 3, 2024
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)